[Senate Hearing 117-956]
[From the U.S. Government Publishing Office]
S. Hrg. 117-956
THE HEALTH OF THE DEFENSE INDUSTRIAL BASE
=======================================================================
HEARING
before the
COMMITTEE ON ARMED SERVICES
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
APRIL 26, 2022
__________
Printed for the use of the Committee on Armed Services
[GRAPHI(S) NOT AVAILABLE IN TIFF FORMAT]
Available via: http: //www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
59-761 PDF WASHINGTON : 2025
COMMITTEE ON ARMED SERVICES
JACK REED, Rhode Island, Chairman
JEANNE SHAHEEN, New Hampshire JAMES M. INHOFE, Oklahoma
KIRSTEN E. GILLIBRAND, New York ROGER F. WICKER, Mississippi
RICHARD BLUMENTHAL, Connecticut DEB FISCHER, Nebraska
MAZIE K. HIRONO, Hawaii TOM COTTON, Arkansas
TIM KAINE, Virginia MIKE ROUNDS, South Dakota
ANGUS S. KING, Jr., Maine JONI ERNST, Iowa
ELIZABETH WARREN, Massachusetts THOM TILLIS, North Carolina
GARY C. PETERS, Michigan DAN SULLIVAN, Alaska
JOE MANCHIN III, West Virginia KEVIN CRAMER, North Dakota
TAMMY DUCKWORTH, Illinois RICK SCOTT, Florida
JACKY ROSEN, Nevada MARSHA BLACKBURN, Tennessee
MARK KELLY, Arizona JOSH HAWLEY, Missouri
TOMMY TUBERVILLE, Alabama
Elizabeth L. King, Staff Director
John D. Wason, Minority Staff Director
(ii)
C O N T E N T S
----------
April 26, 2022
Page
The Health of the Defense Industrial Base........................ 1
Member Statements
Statement of Senator Jack Reed................................... 1
Statement of Senator James Inhofe................................ 3
Witness Statements
Lord, The Honorable Ellen M., Former Under Secretary of Defense 4
for Acquisition and Sustainment.
Berteau, David J., President and Chief Executive Officer, 7
Professional Services Council.
Quorum
Military Nominations Pending with the Senate Armed Services 6
Committee Which are Proposed for the Committee's Consideration
on April 26, 2022..
Questions for the Record......................................... 46
(iii)
THE HEALTH OF THE DEFENSE INDUSTRIAL
BASE
----------
TUESDAY, APRIL 26, 2022
United States Senate,
Committee on Armed Services,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m. in room
SD-G50, Dirksen Senate Office Building, Senator Jack Reed
(Chairman of the Committee) presiding.
Committee Members present: Senators Reed, Gillibrand,
Blumenthal, Hirono, Kaine, King, Manchin, Rosen, Kelly, Inhofe,
Wicker, Rounds, Ernst, Tillis, Scott, Blackburn, Hawley, and
Tuberville.
OPENING STATEMENT OF SENATOR JACK REED
Chairman Reed. Good morning. The Committee meets today to
receive testimony on the health of the defense industrial base
(DIB). I would like to welcome our distinguished witnesses and
I thank them for joining us.
Ms. Ellen Lord is the former Under Secretary of Defense for
Acquisition and Sustainment. She has more than 30 years of
experience in the defense industry, including serving as
President and CEO of Textron Systems, Inc., and as a senior
advisor to several defense policy research institutions.
Mr. David Berteau is the President and CEO of the
Professional Services Council. He served during the Obama
administration as Assistant Secretary of Defense for Logistics
and Materiel Readiness, and previously as Senior Vice President
and Director at the Center for Strategic and International
Studies.
We are grateful to have such accomplished experts with us
to discuss this important problem.
The United States industrial base is core to our national
security. America's capacity for technological innovation and
manufacturing has ensured that our military is the finest in
the world, with benefits felt well beyond the military sphere.
From the internet to GPS to the microelectronics in our phones
and computers, many of the technologies gained from investments
in our defense industrial base regularly contribute to our
broader national well-being.
This industrial advantage, however, is not a given. It must
be nurtured and maintained through careful investments and
strong leadership from both the public and private sector. The
urgency around this issue has never been clearer. As Russia
continues its onslaught against Ukraine and China calculates
extensive geostrategic ambitions, we have to make sure our
defense industrial base is able to adapt, scale, and outpace
our competitors in the 21st century.
With that in mind there are a number of challenges for the
health of our industry. To begin, I am concerned by the impact
of the long-term trend in consolidation of private companies
participating in defense research, development, and
acquisition, especially since the Cold War drawdown in the
1990s. Competition within the defense industry is vital to
fostering innovation, delivering products and services in a
timely and efficient manner, and keeping costs in check.
However, in the last three decades the defense sector has
consolidated substantially, transitioning from 51 aerospace and
defense prime contractors down to just 5. That has unintended
consequences on costs, barriers to entry for new companies,
displacement of established technologies with new, innovative
capabilities, and the overall buying power of the Federal
Government. I am interested in the witnesses' thoughts on how
we can better address the factors affecting consolidation,
including tensions over data rights and intellectual property,
and how to better leverage small business programs to grow the
overall pool of providers in the industrial base.
Further, the COVID-19 pandemic has exposed the brutal
nature of international supply chains. It is clear that we need
to protect our domestic supply of critical components, such as
microelectronics, that may be interrupted in times of
emergency. I understand the Defense Department plans to take
steps to ensure supply chain resilience for several priority
sectors, including casting and forgings, missiles and
munitions, energy storage and batteries, strategic and critical
materials, and microelectronics. I would ask our witnesses to
share what steps they think the Department should take to
protect these sectors and encourage a domestic supply of
critical components.
More broadly, the procurement and acquisition practice of
the Department of Defense (DOD) and the Federal Government are
often convoluted, poorly communicated, and burdened with
inertia that makes contracting with private industry far too
difficult. As America confronts threats around the globe that
are evolving at unprecedented speeds, we must find a way to
better identify our defense needs, communicate them, and
deliver them in a timely manner. This is being tested right now
as we work to backfill our stockpiles following the enormous
transfer of weapons to Ukraine. The lack of responsive and
rapidly scalable production capacity for consumable systems
like Stinger and Javelin missiles highlights issues with our
planning factors and manufacturing flexibility for long-lead
items needed in short order, with little to no advanced
warning. I would ask for our witnesses thoughts on how we might
overcome these challenges.
Finally, a highly skilled workforce is necessary for
designing, engineering, and employing the game-changing
technologies of the future. As we seek to keep pace with our
strategic competitors, it is imperative that we invest in
facilities, training, and education to support our defense
industrial base workforce. I hope our witnesses will discuss
what steps the Department could take to ensure that people who
pursue STEM education and careers want to work in areas that
support the defense industrial base.
Thank you again to our witnesses. I look forward to your
testimonies. Now let me recognize the ranking member, Senator
Inhofe.
STATEMENT OF SENATOR JAMES INHOFE
Senator Inhofe. Thank you, Mr. Chairman. I appreciate your
explaining some of the COVID activities. I happen to be
enjoying the after-effects of COVID right now at about 80
percent, so be forgiving. I really want to join you in
welcoming our guests, both of whom I do know. However, I know
Ellen Lord better, and we have worked on a lot of things in the
past, so I feel very good about what we are doing today.
I know our Members have a lot of questions so I have a
brief opening statement, and I have a longer version I will be
submitting for the record. This hearing is very timely, and I
join the Chairman in welcoming both witnesses.
Last month we received the classified version of the Biden
administration's new 2022 NDS, which we continue to analyze.
However, I do believe the new strategy does expand our
understanding of the scope of the threat of the Chinese
Communist Party and what will be required to maintain
deterrence against them.
The problem does not seem to be one of strategy but rather
providing the full budget needed to implement it. The budget
simply does not deliver the real growth our military needs,
especially with the historic inflation that we are
experiencing. Which brings me to today's hearing. I am hoping
to better understand what our defense industrial base is seeing
and dealing with and how we can help them, whether through
legislative authorities or additional funding.
We have two great witnesses, as I have already said, and I
am looking forward to hearing from them.
Thank you, Mr. Chairman.
Chairman Reed. Thank you, Senator Inhofe, and we appreciate
your continued leadership despite your still recovering. I very
much appreciate it.
Let me now recognize Secretary Lord, please, and you might
want to pull that microphone as close as you can.
[The prepared statement of Senator James Inhofe follows:]
Thank you, Mr. Chairman. I join you in welcoming our
witnesses.
For four years, this Committee has been using the 2018
National Defense Strategy (NDS) and the Commission report as
our roadmap for the resources and tools we need to meet the
threats we face. Both documents have helped accelerate change
at the Pentagon.
Last month, we received the classified version of the Biden
administration's new 2022 NDS, which we continue to analyze.
But I can tell you this document expands our understanding of
the scope of the threat from the Chinese Communist Party, and
what will be required to maintain deterrence against them.
The problem does not seem to be one of strategy, but rather
providing the full budget needed to implement it. The budget
simply doesn't deliver the real growth our military needs--
especially with the historic inflation we're experiencing.
Which brings me to today's hearing. I am hoping to better
understand what our defense industrial base is seeing and
dealing with and how we can help them--whether through
legislative authorities or additional funding.
In the 20th century, our defense industrial represented a
unique comparative advantage. From the arsenal of democracy in
World War II to the technological feats of the Cold War, our
ability to harness American ingenuity for deterrence played a
decisive role in world events.
Today, the arsenal of democracy is a husk of its former
self. While many companies still use equipment from the early
Cold War, the weapons and equipment they manufacture have
fundamentally changed, as has the workforce.
We have far too many single points of failure. We have
brittle supply chains. We have hundreds of production contracts
at minimum sustaining rates. We have persistent funding
shortfalls across the board, but particularly in our workforce
development.
Over the past decade, many new burdens have been asked of,
demanded, and even mandated on these companies and their
employees. From sequestration to a pandemic, an increasingly
assertive China, Russia's new invasion of Ukraine, record
inflation, and more.
In particular, our attempts to arm Ukraine have laid bare
many of our vulnerabilities, from insufficient munitions stocks
to slow production times and incredible bureaucratic hurdles,
especially when it comes to doing business with allies and
partners.
The defense industrial base is at the core of our national
security. I am eager to discuss with our witnesses these
specific challenges and how our defense industrial base has
responded.
We need to rebuild our defense industrial base. I hope
today's hearing will help us understand what more Congress can
do to help ensure that our defense industrial base gets all the
resources it needs to remain resilient and able to meet the
capability and capacity needs of our men and women in uniform
who go into harm's way. Thank you, Mr. Chairman.
STATEMENT OF THE HONORABLE ELLEN M. LORD, FORMER
UNDER SECRETARY OF DEFENSE FOR ACQUISITION AND
SUSTAINMENT
Ms. Lord. Chairman Reed, Ranking Member Inhofe, and Members
of the Committee, thank you for the opportunity to discuss the
health of the defense industrial base.
I represent myself here today with my perspective informed
by 33 years working in a variety of leadership positions within
a global, multi-industry conglomerate, and 3\1/2\ years serving
as a political appointee reporting to the Secretary of Defense,
in addition to my current activities, which include serving on
the boards of a publicly traded company, a venture capital-
owned company, and a privately held company, advising a wide
range of companies from new space to emerging biotech, and
participating as a senior fellow at Johns Hopkins Applied
Physics Lab.
My engagements focus on the intersection of national
security and industry. I believe our national security and
economic security are tightly coupled. Our collective
experience as a Nation during the onset and peak of COVID-19
demonstrated that we need to understand the provenance of our
supply chains, the necessity of being able to surge
manufacturing of critical products and delivering services, and
to apply our technical innovation potential to mortal threats.
Industry and government successfully partnered during the
pandemic to collectively battle a virus, because both shared a
common understanding of the threat, the steps needed to survive
individually and collectively, and the need for speed. We were
willing to take risk. Today we, as a Nation, fear near-peer
strategic competitors with enormous ambitions that have been
clearly articulated over the past decade and are now being
acted upon, with Russia's invasion of Ukraine the most recent
example.
Our ability to deter aggression that violates our country's
values and principles requires a strong government-industry
partnership. It is a choice for a company to do business with
DOD. It is a choice for an individual to work for a defense
contractor. It is a choice for a startup to focus on applying
their emerging technologies to national security challenges. It
is a choice for individual investors or fund managers to risk
their money on a Department of Defense contractor. In order for
business to survive and flourish there must be a clear demand
signal and a fast pace of predictable development, production,
and sustainment.
Technology innovation is now predominantly driven by the
commercial sector, and DOD must accelerate its adoption of
business practices that enable rapid testing and fielding of
new capability. Many authorities that have been provided by
recent NDAAs [National Defense Authorization Act] have been
translated to policy and implementation guidance by the
Department. These authorities need to be exercised so that the
acquisition process moves at the speed of relevance. It
requires leadership, from both Congress and DOD, to ensure that
the DOD workforce embraces the imperative to conduct business
in a manner that encourages patriotic individuals and companies
to participate in our national security ecosystem, versus
driving them away through frustration over slow decision-making
and acquisition ambiguity.
Appropriations must allow flexibility to adjust to
technical innovations with reprogramming that meets our
warfighting needs, not only of our Nation but of our allies and
partners. Disruptive market conditions, such as inflation, must
be dealt with at the top-line budget level instead of slogging
through the bureaucracy of each contract being adjusted by
individual contracting officers at each geographic location.
Our Ukraine experience has shown how we can hope to carry
our policy, to provide specific munitions to support, and then
realize that we have not provided funding to keep manufacturing
lines hot and supply chains intact, and will therefore have
significant delays in shipping desired quantities of specific
weapons systems. We have an opportunity to regenerate our
capacity and throughput by leveraging our national
manufacturing capability, but by also modifying our
releasability and exportability regulations to allow our
National Technological Industrial Base, NTIB, partners to
establish indigenous capability to produce critical munitions
and guided weapons.
We should use the data published in the 13806 Industrial
Base Report in 2018, to identify sole-source supplies of
critical supply chain items to begin to build our supply chain
resilience.
I am hopeful that the Executive and Legislative branches
can partner now to not only maintain our current defense
industrial base but also to rapidly implement requirements and
acquisition practices that allow us, as a Nation, to move at
the speed of relevance and smartly embrace risk.
I will submit this statement for the record, and I look
forward to your questions.
Chairman Reed. Thank you very much, Secretary Lord.
Since a quorum is now present I ask the committee to
consider a list of 1,652 pending military nominations. All of
these nominations have been before the committee the required
length of time.
Is there a motion to favorably report the list of 1,652
pending military nominations to the Senate?
Voice. So moved.
Chairman Reed. Is there a second?
Voice. Second.
Chairman Reed. All in favor, say aye.
[Chorus of ayes.]
[The information referred to follows:]
MILITARY NOMINATIONS PENDING WITH THE SENATE ARMED SERVICES
COMMITTEE WHICH ARE PROPOSED FOR THE COMMITTEE'S CONSIDER-
ATION ON APRIL 26, 2022.
1. BG Douglas A. Schiess, USAF to be major general (Reference No.
950)
2. BG Douglas A. Schiess, USAF to be brigadier general (Reference
No. 951)
3. In the Marine Corps there are 315 appointments to the grade of
lieutenant colonel (list begins with Jeremy D. Adams) (Reference No.
1433)
4. In the Marine Corps there is 1 appointment to the grade of
lieutenant colonel (Jon C. Peterson) (Reference No. 1631)
5. In the Marine Corps there is 1 appointment to the grade of
lieutenant colonel (Andrew E. Cheatum) (Reference No. 1633)
6. In the Marine Corps there is 1 appointment to the grade of
major (Christopher J. Voss) (Reference No. 1636)
7. In the Marine Corps there are 2 appointments to the grade of
major (Dustin E. Guerpo) (Reference No. 1637)
8. In the Air Force Reserve there are 21 appointments to be
brigadier general (list begins with Christopher M. Blomquist)
(Reference No. 1717)
9. In the Air Force there are 60 appointments to the grade of
lieutenant colonel (list begins with Michael A. Armstrong) (Reference
No. 1732)
10. In the Air Force there are 30 appointments to the grade of
brigadier general (list begins with Kirsten G. Aguilar) (Reference No.
1784)
11. Brig Gen Rebecca R. Vernon, USAF, to be major general and
Deputy Judge Advocate General of the Air Force (Reference No. 1850)
12. LTG Randy A. George, USA to be general and Vice Chief of Staff
of the Army (Reference No. 1900)
13. LTG Andrew P. Poppas, USA to be general and Commanding
General, US Army Forces Command (Reference No. 1901)
14. MG Sean C. Bernabe, USA to be lieutenant general and
Commanding General, III Corps and Fort Hood (Reference No. 1902)
15. LTG Duke Z. Richardson, USAF to be general and Commander, Air
Force Materiel Command (Reference No. 1904)
16. LTG Mary F. O'Brien, USAF to be lieutenant general and
Director for Command, Control, Communications, and Computers/Cyber;
Chief Information Officer, J-6, Joint Staff (Reference No. 1906)
17. LTG Brian S. Robinson, USAF to be lieutenant general and
Commander, Air Education and Training Command (Reference No. 1908)
18. MG Randall Reed, USAF to be lieutenant general and Deputy
Commander, Air Mobility Command (Reference No. 1909)
19. LTG David S. Nahom, USAF to be lieutenant general and
Commander, Alaskan Command, US Northern Command; Commander, Eleventh
Air Force, Pacific Air Forces; and Commander, Alaskan North American
Aerospace Defense Region (Reference No. 1910)
20. LTG Tom D. Miller, USAF to be lieutenant general and Deputy
Chief of Staff for Logistics, Engineering, and Force Protection,
Headquarters US Air Force (Reference No. 1911)
21. Col. Amy D. Holbeck, ANG to be brigadier general (Reference
No. 1912)
22. Col. David N. Unruh, ANG to be brigadier general (Reference
No. 1913)
23. MG Dimitri Henry, USMC to be lieutenant general and Director
of Intelligence, J-2, Joint Staff (Reference No. 1914)
24. In the Air Force there are 7 appointments to the grade of
lieutenant colonel (list begins with Jonathan P. Dietz) (Reference No.
1917)
25. In the Air Force there are 3 appointments to the grade of
major (list begins with Alan K. Chan) (Reference No. 1918)
26. In the Air Force there is 1 appointment to the grade of major
(Alec S. Williams) (Reference No. 1920)
27. In the Army Reserve there is 1 appointment to the grade of
colonel (Derwin Brayboy) (Reference No. 1922)
28. In the Army there are 383 appointments to the grade of
lieutenant colonel (list begins with Yonatan S. Abebie) (Reference No.
1927)
29. In the Army there are 461 appointments to the grade of
lieutenant colonel (list begins with David H. Aamidor) (Reference No.
1928)
30. In the Army there are 245 appointments to the grade of
lieutenant colonel (list begins with Michael S. Abbott) (Reference No.
1929)
31. In the Army there are 27 appointments to the grade of
lieutenant colonel (list begins with Rachell H. Baca) (Reference No.
1930)
32. In the Army there is 1 appointment to the grade of lieutenant
colonel (Charles J. Bulva) (Reference No. 1931)
33. In the Army there is 1 appointment to the grade of lieutenant
colonel (David L. Armeson) (Reference No. 1932)
34. In the Navy there are 74 appointments to the grade of captain
and below (list begins with Joseph L. Campbell) (Reference No. 1934)
35. In the Space Force there are 2 appointments to the grade of
lieutenant colonel (list begins with Matthew B. Christensen) (Reference
No. 1935)
_______________________________________________________________________
TOTAL: 1,652
Chairman Reed. The motion carries. Thank you very much.
Now let me recognize Secretary Berteau.
STATEMENT OF DAVID J. BERTEAU, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, PROFESSIONAL SERVICES COUNCIL
Mr. Berteau. Thank you very much, Mr. Chairman and Senator
Inhofe, and thanks to all the Members for being here.
I really want to commend this Committee for tackling this
issue so early in the process where you would have time to
really develop your thinking and I think reflect it not only as
you develop the fiscal year 2023 NDAA but perhaps dealing with
some issues that may not even be able to wait that long. So I
really want to commend you for doing that.
I appear before you today, obviously, as the President and
CEO of a trade association, the Professional Services Council,
but more importantly, what I say here today is my own opinion,
not necessarily representative of my organization, and it draws
on a little more than four decades of experience in this
business, both inside the Pentagon, with industry, and as you
mentioned, at a think tank and in academia.
I have a lot in my written statement. I would like to ask
that it be submitted for the record.
Chairman Reed. Without objection.
Mr. Berteau. I did omit one preposition, which I would like
to insert before it goes into the record. I happen to be an
English major and I should catch my own errors, but I did not
do it in time there.
The points that I would like to make right now, though, and
then get to your questions, to me, my experience tells me there
are a few key elements of that partnership that Secretary Lord
mentioned between government and industry that is so vital to
our success, not only now but in the future. I would just like
to highlight those for a moment.
The first, to me, is that companies and their workers--and
I did not realize this when I was first in the Pentagon--are as
committed to national security and to support DOD missions as
the folks inside the business are as well, the civilians and
military themselves. Of course, many of them came from that. It
is that mission commitment that I see drives those companies
every day.
Now that is a very important key element, but there is a
second key element, and that is they live in a world that is
governed by the economic laws of supply and demand. You
mentioned, for example, we have gone from 51 major prime
manufacturers in defense to down to 5. We are actually moving
back up to 6 or 7 now, I think, which is one of the sometimes
potential benefits of consolidation. But the reality is that is
driven as much by how much DOD is buying as it is by what the
companies need to do, from a business point of view, and in the
end, you know, the size and economic vitality of the industry
is determined by how much DOD buys.
Another key element, I think, is the timelines. For a
company to bid and win work with DOD, whether it is in
products, major weapons systems, or in the 50 percent of
defense contracts that goes into services, which includes RDT&E
[Research, Development, Test, and Evaluation] and it includes
all the sustainment and support necessary to keep those systems
going, the timelines can be 3 to 4 years long. In order to be
successful, the company has to predict what DOD is going to
need, what they are putting in their budget now, before it
comes to Congress, what comes out of Congress, and then
ultimately what gets apportioned and allocated out of OMB
[Office of Management and Budget] and through the Comptroller
down to the programs. So they have to predict what that is
going to be, they have to invest in that years in advance, and
then they have to maintain that investment until such time as
the contract is awarded.
This is lengthy. It is hard enough even if the rest of it
were easy. But the rest of it is not because it is hard to do
business with the Federal Government. The Federal Government
legitimately has a lot of additional requirements with which
companies have to comply, that the commercial world, that you
mentioned, that does all the innovation, does not necessarily
have to meet. So that is an added layer. Those are some of the
key elements, if you will. My statement goes into more detail
on that. It also talks a bit about the DOD competition report
that was issued a couple of months ago.
I also close out with some comments on the impacts of
Ukraine, where I think we have a lot of lessons that--you know,
the Army likes to talk about lessons learned, but we used to
also say they are actually just lessons documented, not
necessarily learned, because we seem to come back and learn
them over and over again. I think we are gathering a lot of
lessons out of Ukraine but we have yet to implement those. My
statement offers that DOD is moving more slowly than it should
be on everything from replenishment as well as implementing
some of those key lessons learned, including the importance of
logistics and sustainment to deterrence going forward.
There is also a significant impact of inflation, and I
would suggest to you that we cannot really wait for the fiscal
year 2023 budget to be fixed to address that. I actually do not
know what inflation is going to be a year from now, but we do
know what it is right now, and we have companies operating with
5 or 6 percent margin on their contracts and 8 or 10 percent
growth in wages, and over the long run that is not going to be
sustainable, so we have to figure out some ways to address
that.
Then, finally, the impacts of COVID-19 seem to be
regularizing, but there is still some enormous impacts, not
only on supply chain but also on the workforce. So in
conclusion, I have got a number of recommendations in my
statement. I am happy to go over those. I think the timing of
this hearing is really tremendous, and I commend you and the
entire committee for doing this.
Thank you, sir.
[The prepared statement of Mr. David Berteau follows:]
Prepared Statement by Mr. David Berteau
Chairman Reed, Ranking Member Inhofe, and Members of the Committee,
thank you for the invitation to testify this morning on the vital topic
of the defense industrial base (the DIB) and its importance to the
success of Department of Defense (DOD) missions.
I speak today on behalf of the Professional Services Council (PSC),
our more than 400 member companies, and their hundreds of thousands of
employees across the Nation. PSC represents the full range and
diversity of the government contracting sector, with companies of all
sizes, doing all types of work, and serving every cabinet department
and agency of the Federal Government. I also speak on behalf of their
government customers, because a key PSC goal is to help the Federal
Government become a smarter customer and a better buyer. The diversity
of functions performed and the business size of PSC members gives us
unique perspectives on the DIB and on changes in government policies
and practices that will lead to better support for DOD's missions and
America's security.
I appear before you not just as the head of PSC but also as a
person with more than 40 years of experience on these issues from all
sides, including two stints inside the Pentagon as well as with
industry, at a think tank, in academia, and now in my seventh year at
PSC. I have seen what works and what does not.
My statement includes:
comments on the DOD-industry partnership;
DIB statistics, including data on recent trends in DOD
contract spending; and
observations on the impacts of the war in Ukraine, of
inflation, and of COVID-19.
My statement concludes with some observations and recommendations,
focused on priorities and criteria for you to keep in mind as your
committee develops the Fiscal Year 2023 National Defense Authorization
Act and considers programs, policies, and funding that impact the DIB.
the vital partnership of government and industry
For centuries, one of America's great national security strengths
has been the dynamic partnership of government and the private sector.
This partnership is vital in the core meaning of that word: our way of
life depend on the continuing success of that partnership.
In DOD, contractors provide a wide range of goods and services to
the warfighter and to the components and agencies of the Department.
These contractor contributions are essential maintain national
security, and the government benefits from a strong, diversified
national interest business base to support its current and emerging
requirements.
Based on my long experience, here are some key elements of that
partnership. I hope that you can keep these in mind as you move forward
to address the challenges we face today and in the future.
1. Companies and their workers are committed to national security and
to support DOD missions across the board.
From the most recently hired worker to the top of the company, DOD
contractors are fully committed to supporting the missions and
functions of the department. The partnership works best when DOD works
with companies to address and solve challenges, not in an ``us vs.
them'' approach, but together as ``we.''
We witness this Commitment to mission over and over. Here are two
examples.
When the COVID-19 pandemic hit in March of 2020, and
businesses across America shut down, defense contractors kept working.
On the factory floor, maintaining ships at sea, in classified
facilities, etc., their workers kept on working. In fact, associations
like PSC worked with DOD to provide company workers with the necessary
documents to keep going to work. Citing DHS guidance about the
essential workforce, the Under Secretary of Defense for Acquisition and
Sustainment issued a letter that tens of thousands of contractor
workers used to enable them to travel to and work on site when others
were shut down.
During the drawdown in Afghanistan last spring and
summer, contractors stayed on the job even as the security committed to
them in their contracts disappeared.
2. The defense industrial base is governed by the economic laws of
supply and demand.
Industry's ability to provide defense-unique goods and services
depends entirely on DOD demand. For large parts of the defense
industrial base, DOD is the largest--and sometimes the only--customer.
When that is the case, the size and economic viability of the
industrial base will be determined by how much DOD buys.
Recently, DOD issued a report, entitled: ``State of Competition
within the Defense Industrial Base,'' \1\ in response to Executive
Order 14036: Promoting Competition in the American Economy. \2\ The
report criticized defense industry for excessive consolidation but
failed to acknowledge the department's own role in that consolidation.
For example, the report noted that only 3 prime contractors produce
tactical missiles in the U.S. today but failed to note that DOD does
not buy enough missiles to keep more companies in business. PSC, in
conjunction with the National Defense Industrial Association, produced
a short paper that addresses shortcomings of this report, and I would
be glad to provide it to the Committee for the record, should you so
desire.
---------------------------------------------------------------------------
\1\ https://media.defense.gov/2022/Feb/15/2002939087/-1/-1/1/STATE-
OF-COMPETITION-WITHIN-THE-DEFENSE-INDUSTRIAL-BASE.PDF
\2\ https://www.federalregister.gov/documents/2021/07/14/2021-
15069/promoting-competition-in-the-american-economy.
---------------------------------------------------------------------------
In addition, even where there is an opportunity for companies that
do business outside of DOD, defense-unique requirements of the
government impose costs and constraints that make companies less
competitive in the commercial marketplace. From security clearance
delays to operating on obsolete data systems to complying with
reporting requirements that no commercial company has to face,
companies in the defense industrial base are tied inexorably to the DOD
market.
Finally, with more than 11 million open jobs across the U.S and
only 6 million people looking for work, defense companies are competing
for workers who can command higher salaries, without the delays
required for security clearances, and with flexibility in work
locations and conditions that are hard for contractors to match (often
because contracts restrict a company's flexibility in such matters).
While there is no accurate way to count, discussions with our member
companies lead me to conclude that tens of thousands of vacant billets
exist today, and they grow harder to fill with each passing month of
economic recovery. Unlike in other economic matters, increased demand
is not producing the needed increase in supply. Instead, it is
contributing to wage inflation, which I will address in a subsequent
section of this statement.
3. Federal contracting processes are complex, with voluminous
regulations, and often reflect competing priorities that are
not mutually compatible.
Government contracting is among the most highly structured and
controlled elements of the U.S. economy. It consistently prioritizes
compliance more than it rewards results. The contracting process is
managed by people who often are unconnected to the benefits from the
goods and services delivered by contractors. For example, contracting
officers (and other officials) are evaluated by the percentage of
contract dollars that are awarded to small businesses, but they are not
scored on how well those companies actually perform on the contracts
they receive.
4. Companies have to earn enough to stay in business. They compete for
funds with the rest of the commercial marketplace in a global
economy.
No company is entitled to a contract, and they must provide a
competitive return on investment for the funds they need to stay in
business. Government rules generally dictate payment for work only as
or after it is completed. Companies have to fund themselves in advance
of government invoice payments, and to obtain those funds, they must
provide a competitive rate of return.
5. The success of contractors depends on their ability to predict the
future needs of DOD, to invest resources in being ready to meet
those needs when contract bids are solicited, and to maintain
the commitments in those bids for the months (or years) that it
takes DOD to award the contract.
DOD awards contracts based on proposals submitted by bidding
companies, using criteria specified in advance by the government. Those
bids include commitments to technical and operational performance, key
personnel, and cost, all frozen at the time the bid is submitted. No
matter how long it takes DOD to evaluate those bids, companies are
expected (at their own cost) to keep available all the resources in the
bid, from technology to workers, at the submitted price, no matter what
is happening in the overall economy.
As one member company CEO told me, ``I don't need to go to the
casino to gamble. I gamble every time I submit a bid on a government
contract.''
Let me turn now to the dimensions and characteristics of the
defense industrial base.
defense industrial base statistics
One measure of the defense industrial base is the amount of funds
obligated for contracts. In fiscal year 2021, the most recent full year
of data, PSC calculates that DOD contract obligations totaled $408
billion. This amount was roughly equally split between contracts for
products ($194 billion) and those for services ($214 billion). Overall,
contract obligations were 9% lower in fiscal year 2021 than in fiscal
year 2020, due largely to a decline in contracts for COVID (including
vaccine development) and for support of Afghanistan.
The table below includes contract obligations for fiscal year 2020
and fiscal year 2021 (note that overall appropriations, including OCO
funds, were nearly identical for both fiscal years).
DOD Contract Obligations for Products and Services, Fiscal Year 2020 to Fiscal Year 2021
----------------------------------------------------------------------------------------------------------------
Contract Category Fiscal Year 2020 Fiscal Year 2021
----------------------------------------------------------------------------------------------------------------
Products.................................................... $220 billion $194 billion
----------------------------------------------------------------------------------------------------------------
Services.................................................... $229 billion $214 billion
----------------------------------------------------------------------------------------------------------------
Total....................................................... $449 billion $408 billion
----------------------------------------------------------------------------------------------------------------
The fiscal year 2021 decline in contract obligations was the first
such decline since fiscal year 2015, which was at the tail end of the
impact from the fiscal year 2013 sequestration of DOD funds. This trend
may reflect a one-time decline; preliminary first quarter fiscal year
2022 contract obligations are slightly higher than for the same quarter
in fiscal year 2021, even though funding under Continuing Resolutions
was at the same level as in fiscal year 2021. With the enactment of
fiscal year 2022 appropriations, we expect later this year to see
increases in fiscal year 2022 contract obligations commensurate with
the increase on DOD authorizations and appropriations.
Declining Numbers of Prime Contractors
Another measure of the DIB is the number of companies that
participate as prime contractors or subcontractors. A recent report
from the Center for Strategic and International Studies \3\ cited the
drop in overall numbers of companies with one or more prime contracts
from DOD, from more than 60,000 in 2009 to roughly 41,000 in 2020.
Experience tells us, though, that those numbers alone are not the full
story.
---------------------------------------------------------------------------
\3\ https://csis-website-prod.s3.amazonaws.com/s3fs-public/
publication/
220329_Sanders_DefenseAcquisitionTrends_2021_0.pdf?n_gpAQf5972Vi6KlWfAS4
mN9iOrK1CIh.
---------------------------------------------------------------------------
The vast majority of those companies (more than 25,000 in 2020) are
small businesses, and their contracts are frequently awarded through
various programs that ``set aside'' awards only for eligible small
businesses. This does help keep small businesses going, until they
outgrow their eligibility for those ``set-aside'' contracts. PSC
analysis shows that once such companies ``graduate'' from small-
business status, their success in winning DOD contracts drops
precipitously. In other words, DOD and federal small business policies
and practices punish growth rather than rewarding it. This is not the
way to attract more companies to do business with DOD.
What happens to small businesses that graduate? They become mid-
sized companies instead of small ones, and the same CSIS study shows
that the decline in mid-sized businesses is roughly the same as for
small businesses. Even large companies are fewer in number than at the
peak in 2009.
In addition, neither the CSIS report nor any publicly-available
data from DOD tells us the actual number of contracts. It is my belief,
based on anecdotal evidence, that two dynamics are at play here.
One is that DOD may be awarding fewer contracts overall. There is
inconsistency in counting and reporting contracts into the publicly-
available data, which makes it hard to compare from year to year. In
addition, classified contracts are not part of that data (and are
excluded from the CSIS report and from PSC's own analysis).
The second is that DOD contracts are often awarded to companies
eligible under a set of contracts known as GWACs, or government-wide
acquisition contracts. Many of these contracts limit the number of
companies eligible to receive awards and offer few opportunities for
new companies to gain a spot on any given GWAC. This makes the job of
the contracting officer easier but does little to increase the number
of bidders.
Why has this happened, and what does it mean? How many companies
does DOD need in the industrial base? While beyond the scope of this
hearing, more analysis could be valuable here, but there are two other
elements of the defense industrial base that may matter more.
Subcontractors
Neither DOD nor any other agency tracks the number of
subcontractors. DOD estimated in 2019 that up to 300,000 companies
performed subcontract work for DOD in areas that would be covered by
cybersecurity requirements. No one knows whether or to what extent the
companies that no longer receive prime contracts are still in the
defense industrial base as subcontractors. Efforts to increase supply
chain resiliency will rely on layers of subcontractors, yet DOD knows
little about these companies and even less about what makes doing
business with DOD more attractive.
Non-traditional Contracts
In addition, DOD has increasingly turned to Other Transaction
Authority, or OTA, for work done by the industrial base. Such work is
under an OT agreement, not a contract, and is not captured in the data.
No one knows the extent to which work under such agreements offset the
apparent decline in the overall number of companies.
the real question
The real question is what policies and regulations are needed so
that the defense industrial base can meet national security needs,
today and in the future.
To help answer that question, let's look at three specific
challenges.
Impacts of Ukraine
Even before Russia invaded Ukraine on February 24, 2022, DOD was
drawing down stocks of weapon systems and supplies and providing them
to Ukrainian forces. The pace of that support continues to increase,
with the president announcing additional support last week and
preparing to ask Congress to authorize more. The nature and purposes of
such support is evolving and will continue to change, which makes
analysis complicated.
Three big questions arise for industry:
1) How will depleted stocks be replenished or replaced?
2) What else will be needed?
3) Who pays for this?
Public reports indicate, for example, that fully one third of the
available stock of Javelin anti-tank weapons have already been drawn
down for Ukraine, in barely two months. It's apparent that stocks will
not last for long at that pace, and to the best of my knowledge, no
contracts have been awarded for replenishment of any items being
supplied to Ukraine or to allies to replace their own contributions to
Ukraine.
What else will be needed? That information is not broadly available
to industry today, although some programs have begun discussions with
some companies. Who will pay for the up-front costs of increasing
production capacity or even reopening closed production lines? As of
now, there is no line item for such funding and no proposal that I have
seen. Indeed, thanks to delays in submitting budget justification
material coupled with the submission of Unfunded Priority Lists from
DOD components, as I write this, we know more about what is NOT in the
fiscal year 2023 budget than the details of what IS in it.
DOD did, however, issue a Request for Information (RFI) last week
for ``Weapons Systems or Commercial Capabilities for Ukraine Security
Assistance,'' with responses due May 6. This is a step, albeit belated,
in the right direction, but it seems apparent that it may be easier to
deplete stocks of weapon systems and munitions than it is to restore
them.
This is not a new problem. We saw it during my last tour in DOD,
where the use rate for certain munitions (HARM missiles, for instance)
was far in excess of current production capacity to replace them, and
the lead time for increasing production was years, not months. I am not
privy to current assessments, but it is likely that today's supply
chain constraints have made those time lines longer, not shorter.
Workforce and Replenishment
In addition, replenishment faces a problem today that did not exist
in 2015 for Afghanistan or the counter-ISIS campaign, and that is a
shortage of workers for nearly every defense contractor. My statement
already covered this issue more broadly, but if action is not taken
soon, this shortage of workers will diminish industry's ability to
respond to the increased demands resulting from Ukraine assistance.
The impact of inflation on supplies, components, energy, and wages
further complicates the issues of replenishment. Let me turn now from
Ukraine to that second challenge.
Impacts of Inflation
There are three separate challenges with the return of higher rates
of inflation: wage and price inflation today, recovering cost increases
on existing contracts, and addressing possible inflation shortfalls in
the fiscal year 2023 DOD budget proposal.
1) Wage and Price Inflation
Defense companies are in a bind. Existing contracts, whether of a
fixed-price or cost-reimbursable nature, offer little room for them to
recover the increased costs from wage inflation or the increase in
prices for material and components, including energy and
transportation. Because inflation has been so low and stable for so
long, fewer existing contracts include what's known as an EPA, a clause
that permits Economic Price Adjustments. Absent such a clause,
contractors have a harder time making the case for DOD to cover their
increased costs. However, even with such a clause, programs may claim
that they don't have the funds to cover these increased costs.
This is particularly a problem for companies providing services.
Such contracts are often so competitive that margins for successful
bidders are in the low single digits. A company that realizes a 4% or
5% fee on a contract simply cannot absorb the wage cost growth of 8% or
10% that we are seeing today.
DOD's public response to this has been to note that, to date, it
has received few requests for equitable adjustments, known as REAs.
While that may be true at this time, this does not mean there is no
problem. Rather, companies faced with uncompensated cost growth must
first document the situation and discuss it with their program office
before submitting an REA.
In addition, the REA process requires companies to submit requests
rapidly, often within 30 days of incurring the unanticipated cost, but
there is no timeline for the government to respond to those requests. I
have seen DOD take a year or more to reach a decision on an REA, and
even then only a part (or none) of the costs are paid.
Finally, the breadth of the inflation problem cannot be addressed
one contract at a time, which is the preferred approach of the current
policy. We need a faster way to deal with this. PSC believes that DOD
should issue broad agency-wide guidance that reminds programs and
contracting officers of their affirmative responsibility to maintain
the long-term viability of the industrial base and to increase the
flexibility that programs have to cover such cost growth.
2) Existing Contracts and Availability of fiscal year 2022 Funds
Even though DOD's fiscal year 2022 appropriations was signed by the
president just over a month ago, its funding levels did not provide for
coverage of 8% inflation. If I were still in DOD, rather than saying
that we don't yet see a problem because few requests have been
received, I would try to get in front of this problem by estimating the
additional funding needed to cover this cost growth and looking at ways
to meet those costs. Perhaps DOD is doing that, but to date we have
seen no requests for the information they would need for such
estimates. Absent action, this problem will get worse. Companies that
cannot recover their costs will not be able to stay in business for
long.
3) fiscal year 2023 Inflation
DOD in testimony before this Committee has already undertaken to
explain their approach to inflation estimates in the fiscal year 2023
budget. While this is a real challenge both for DOD and for this
Committee, it is important to recognize that addressing inflation in
fiscal year 2023 will not fix the current problems.
Impacts of COVID-19
The third challenge facing the defense industrial base includes the
impacts of COVID-19. As I mentioned previously, defense industry
stepped up from day one of the pandemic. Companies kept going as the
rest of business shut down. They provided for the health and safety of
their workers and their families and households, including testing and
vaccinations as well as changes to workplaces. The cost for these
provisions were not recoverable under existing contracts and in many
cases were completely absorbed by the companies themselves.
One action taken by Congress was significantly beneficial. Known as
Section 3610 (because that was the section number of the 2020 CARES Act
provision), it provided the authority for agencies (subject to the
availability of funds) to reimburse companies for retaining essential
workers even when COVID-19 prevented them from accessing workplaces.
Tens of thousands of workers were retained as a result of this
provision, at no additional cost to the taxpayers. The intelligence
community and civilian agencies also used the same authority.
That authority, unfortunately, has been allowed to expire. Last
year, this Committee considered but ultimately did not include language
that would have provided such authority on a stand-by basis, making it
available for DOD to use if needed. PSC urges the Committee to take
another look at such language and include it in the fiscal year 2023
NDAA.
In addition, executive branch actions regarding COVID-19 continue
to impact the ability of industrial base companies to meet the
requirements of their contracts and to hire and retain necessary
workers. While the contractor vaccine mandate in unenforceable under a
federal district court injunction, the FAR clause remains in effect.
Were the injunction to be revised or reversed, that clause would be
immediately effective. Every government contractor worries about what
that would mean for their workers and their contracts. No company can
tell a prospective employee what the requirements might be in the
future.
An additional complication arises under COVID-19 with regard to
access to facilities. Unlike the enjoined FAR clause, which applies
government-wide, the requirements for access to government facilities
is completely decentralized to each facility and often to individual
offices within a facility. On any given day, a company's worker can
face changes in requirements for vaccination status, attestation, or
proof. Masking requirements are dictated by the COVID risk designation
of the county as reported by the CDC to be low, medium, or high. For
now, few counties are medium or high, but that can change rapidly and
without advance notice. All of this makes it hard for companies to know
whether their employees and subcontractors will be able to access their
workplaces.
I am not suggesting that this needs a legislative fix, but I am
suggesting that it makes it harder for companies to manage their
workforce and to meet the needs of their DOD customers. To date, there
has been no coordinated action to address this complex challenge.
additional observations and recommendations
PSC offers the Committee a number of additional proposals for
consideration in the fiscal year 2023 National Defense Authorization
Act that could support the ability of the defense industrial base to
meet DOD's needs, including:
1) Reinforce real competition where it can thrive.
Half of DOD contract dollars go to services, and what was once a
product is often now procured as a service. From data storage to
satellite launches, DOD does not need ownership to benefit. This $200+
billion services market offers unrealized potential for DOD. For
example, 70 percent of DOD system costs are in life-cycle support,
sustainment and operations, yet there are too few opportunities for
real competition.
This is in part due to the lack of transparency surrounding the
long term needs of the Department. Requiring DOD to provide Congress
with additional, publicly available information would benefit DOD and
the industrial base. Accordingly, PSC recommends that Congress require
DOD to include in Operations and Maintenance (O&M) budget justification
documents an unclassified budget display for the total amount projected
for each subactivity group for the future-years defense program. I will
tell you that, when I was the Assistant Secretary of Defense for
Logistics, this information would have helped me do my job, and if
Congress had required it, I would have had it for internal use as well.
In addition, excessive focus on low bids reduces real competition.
Past legislation by this Committee required DOD to use Low Price
Technically Acceptable (LPTA) contracts only when clearly justified,
but reports from our member companies indicate a lack of compliance
with the statute in this area.
Finally, DOD should emphasize competing on results rather than
price. This would support innovation, encourage improvements in systems
and processes, creates jobs, and better meet warfighter needs.
2) Reduce Procurement Administrative Lead Times (PALT).
Long procurement administrative lead times can prevent the
government from accessing the solutions it needs when it needs them and
can limit the participation of companies in the defense industrial
base. The fiscal year 2018 NDAA required DOD to measure and track PALT
with a goal of reducing lead times, but we believe PALT is increasing.
Reducing PALT should be a priority for the government to improve
acquisition timelines and also to attract and retain innovative
companies. PSC believes this Committee can call attention to DOD's need
to implement that fiscal year 2018 language.
conclusion
There are a number of additional challenges that merit attention,
and I would be happy to discuss any or all of them during this hearing.
In closing, though, and on behalf of PSC and our members, I thank you
for your time and consideration of these matters. As always, PSC is
available at your convenience to address any questions or concerns the
Committee has, now and in the future. I will try to answer any
questions you may have, and I look forward to continuing to work with
the Committee on all of these important industrial base challenges.
Chairman Reed. Thank you very much, Mr. Secretary. Thank
you both for excellent testimony, and, you know, I concur. We
have, I think, neglected our industrial base. We assumed it
would always be there, and we are now discovering it is not
quite there because of many different factors.
Just to give you an opportunity again, both of you, to
highlight what you think are some of the most critical problems
and steps that we should take, and I will start with Secretary
Lord.
Ms. Lord. I think the most urgent issue we have right now
is the rising inflation numbers. This has impact today. It is
going to have more impact tomorrow. What does it mean? It means
that fixed-price contracts will not be completed as they were
bid because there was not the assumption that there would be 8,
9, 10, 11, you know, percent inflation, and rising. It is not
only labor costs, it is material costs. I would like to submit
for the record some data I have from a variety of companies,
talking about price increases for materials.
There are also enormous cost increases in transportation.
So this is putting not only fixed-price contracts at risk but
it also impacts cost-plus contracts because everything is more
expensive and we are not going to be able to get everything
done.
Now that is for existing contracts. What happens when
industry is trying to negotiate with DOD for forward-looking
contracts? It is both in the government and industry's best
interest to have multi-year contracts. However, how can you
negotiate a 3- or 5-year contract when you do not understand
what inflation is going to do and when there has not been a
mechanism for quickly addressing cost growth?
Equitable adjustment clauses and so forth have fallen out
of a lot of contracts because we have not seen inflation, but
requests for equitable adjustment take an enormous amount of
time and effort to gather data for, through all the different
levels of the supply chain, and then work through the
Department.
So I personally think the most significant thing Congress
could do is to authorize and appropriate increases to the 2022
budget right now to make up for inflation so that we are not
continuing to impact readiness and modernization, and then
think very hard about what to do in 2023. If you leave it to
individual contract officers to do this we will not get it done
in time, before we see a downward spiral in our capability.
Chairman Reed. Thank you. Secretary Berteau?
Mr. Berteau. Thank you, Senator. I would echo the
importance of inflation and the ability to cover costs for
inflation, but it is also important to look at what the root
causes are, and half of this inflation is in the workforce. It
is not actually the fault of the government that there are not
enough workers to go around to fill the needs that are there.
I did a brief informal survey of our member companies
before appearing before you today, and there are tens of
thousands of vacant jobs that they have under contract today,
committed to perform, and they cannot either recruit or retain
or, in many cases, get timely clearance for workers to be able
to get into those jobs. This is not so much about a loss of
money, although, of course, they probably care about that, but
from my perspective it is work not being done that does need to
be done.
We saw the impact of COVID here, as well, where you had a
lot of the intelligence agencies went into a 50 percent on, 50
percent off. I asked them, for example, ``Okay, so if you are
actually getting all the work done with only 50 percent of the
people"--because we had to be at least six feet apart, right,
and the SCIFs are not built for that, I said--"either something
is not getting done or you did not need all those people in the
first place. Which is it?'' And, of course, they said,
``Neither. We do need all those people, and the work still is
getting done.'' That may be true in the short term but it is
not sustainable over the long term.
I think, though, that there is an underlying element that
really comes into play. Everything just takes us so long, and
the threat from China does not give us the luxury of time. Ten
years ago, I delivered a report to this Committee on the pivot
to Asia, and what we said in that report was we have got 8 to
10 years to stay ahead. Well, those 10 years are gone, Senator,
and we did not use them very well in that regard. It takes us
today 3 years to do what China can do in 3 days, in terms of
deciding, resourcing, and getting started on something that
needs to be done, particularly bringing new technology into
play. Those, I think, are the critical aspects that we need to
address.
Chairman Reed. Thank you. Just a follow-up question, Mr.
Berteau, because I have heard the same thing from businesses
all over my state of Rhode Island. They just cannot get the
people. Did your members indicate what they think the reason
is?
Mr. Berteau. We actually just completed, or we are
finishing up this morning, our annual conference. We were at
the Greenbrier in West Virginia, and I drove back. I have got
my water bottle still with me here. It is a great attraction to
come to this room from the Greenbrier, I must say.
Senator Manchin. Good decision.
Chairman Reed. Senator Manchin is now doing handstands.
Mr. Berteau. But we had a panel on this yesterday on what
is being done, and we actually had experts from the Society of
Human Resource Management, from academics who are researching
this as well. There are so many tools available to us now and
we are trying them all. Whether we are making a dent in it or
not it is too hard to tell.
We are seeing a very interesting trend, though, that the
academics reported yesterday, of what I would call transition
remorse, so the Great Resignation, when people left for more
money, or perhaps the ability to work from home when they did
not before. Six months later we are starting to see maybe there
is more to the job than just working from home and getting paid
more. Maybe actually the mission matters, contributing
something. Whether this is has a long-term benefit for us is
too soon to tell, but there is hope there.
Chairman Reed. Thank you very much, both of you.
Let me now recognize Senator Inhofe.
Senator Inhofe. Thank you, Mr. Chairman, and I think we
covered that pretty well, and Mrs. Lord, in terms of the
inflation and the effect that it has, and a lot of people do
not really understand that. Is there anything after the
comments that were made by Mr. Berteau that you would want to
add on that particular issue?
Ms. Lord. I would just quickly say, Senator, that I think
we have two huge challenges. One is embracing risk and the
other is moving more quickly. So there are an enormous number
of authorities that the Congress has given DOD over the past 5
years or so to more rapidly acquire, to get capability
downrange into warfighters' hands. Those have been translated
to both policy and implementation guidance.
However, it takes strong leadership to encourage the
Department to use those to be able to move more quickly. So the
tools are there, but I believe the leadership is required to
hold the Department accountable for showing how they are using
other transactional authorities, middle tier of acquisition and
these other things.
Senator Inhofe. Okay. That is good. One of my major
concerns is key munitions. I would ask you, Ms. Lord, how has
the experience of supplying munitions to Ukraine highlighted
about our munitions supply chain. Can you specifically explain
the challenges of Stinger missile production and what more
should be done to shore up this production line, and what other
investments in our munitions industrial base are warranted to
ensure this does not happen again?
Ms. Lord. Thank you, Senator. The Stinger, which is a
ground-to-air-launched missile, shoulder-launched, which we
have sent, probably given public domain information, a quarter
of our stocks to Ukraine on, is an issue where we cannot,
within the next couple of years, produce more because we have a
problem with the government not paying to maintain production
capacity. When that happens, you have test equipment become
obsolete and not work. You have supply chains with links broken
in them. Especially if we had key elements of that supply chain
supplied by now adversarial countries we have to reconstitute
that.
We have a challenge in proactively planning to be able to
produce these key weapons. Even with the Javelin, which we do
have a hot production line right now, we are still 5 years out
to probably developing all the munitions we need.
So I think the real issue here is how do we make sure that
we have a resilient supply chain to be able to produce the
munitions we need, as a Nation and also for our partners and
allies.
There are a couple of answers to that, and one, I would
say, is to begin to think about our releasability and
exportability regulations. We have been very, very conservative
with what we allow our closest allies to receive, in terms of
technical information and manufacturing capability. We know
that we do not have enough munitions. They end up being the
bill payer, usually. We could look at countries like Australia
that have capacity, that have throughput, that have the budget
to develop indigenous capability, and work more closely with
them to make sure we have the munitions we need and our allies
and partners do as well.
Senator Inhofe. Do you think that we might be criticized
for maybe holding too much from some of our allies?
Ms. Lord. Absolutely. General Hyten, retired General Hyten
and I used to co-chair quite a few committees, and we would
lament this. I think there has to be a demand signal from
Congress to not only DOD but State Department, to say that we
need to be a little bit more pragmatic about the three, four
levels of technology innovation behind where we are now, that
we are still not exporting. Huge opportunity there to make up
some of these shortfalls, leveraging others' manufacturing
capability.
Senator Inhofe. That is good. Very good. Thank you, Mr.
Chairman.
Chairman Reed. Thank you, Senator Inhofe.
Senator Gillibrand, please.
Senator Gillibrand. Thank you, Mr. Chairman. Does DOD still
intend to implement the Cybersecurity Maturity Model
Certification 2.0 (CMMC 2.0) requirements next year, and are
you receiving feedback from the companies in the defense
industrial base addressing whether the CMMC 2.0 will aid their
cybersecurity posture?
Mr. Berteau. Let me take that first, Senator, and then Ms.
Lord. We were collaborators on 1.0 from opposite sides of the
table, but now we both sit over here.
DOD is moving forward. The requirements are in the early
stages of the rulemaking process, and so we anticipate a
revised Defense Federal Acquisition Regulation Supplement to
come out. We have heard various estimates that it could be as
early as late this spring or as late as a year from now. One of
the problems or concerns that we have raised from the beginning
is the threat is not waiting for this implementation, if you
will, and every day that threat grows.
I do think, though, that an important element that is
missing from here--and there is a National Institute of
Standards and Technology standard, 800-171, which is the basis
of that cybersecurity regulation--that almost every company I
know and participates in the defense business today at the
prime contractor level, whether large, medium, or small, is
already investing and has a plan on record for compliance with
and meeting those standards. The real question is, do those
standards go far enough in order to protect us against the
evolving threat, and nobody really knows the answer to that.
In the meantime, of course, there is an existing
regulation, but its use has been suspended. It is not being
incorporated in the contracts. But many companies are already
complying with that. What we do not know is what is the next
standard we are going to have to comply with, what is the
timeline in which the flag will go down and you have got to be
in compliance, and what can you do now to be ready for that
when you do not know what it is you are going to have to meet,
what standard you are going to have to meet.
So there is still a lot of ambiguity there, but a lot of
people are moving forward anyway.
Senator Gillibrand. Thank you. What aspects of the Federal
Government's contracting process do you recommend adapting to
better facilitate rapid acquisition and emerging technologies,
and do you believe that certain defense programs should be
excluded from the Federal acquisition regulations altogether?
Related, over the past few years, DOD has used other
transaction authority contracts or OTAs [Other Transaction
Authority] to develop prototypes with industry for emerging
technologies to speed the acquisition process, and how has this
contracting method been received by the DIB, and should we
expand the use of this authority?
Then final and related, I just returned from a trip to
India and Nepal, and these countries would love to acquire
United States-produced helicopters and other weaponry. The
challenges is that it just takes too long, and so it is so
cumbersome to create any acquisition fluidity with these
countries, that it is easier to buy from Russia, or not in
those cases, but China. I think we have to understand that our
cumbersome nature in acquisitions is highly problematic from
the way we project power worldwide, but also so that our
warfighters can have the most lethal and most effective
technology possible.
So you can answer those questions in whichever order you
think is best.
Ms. Lord. I think that is target-rich, Senator. So let me
begin here by saying that Congress has written law that allows
DOD to go fast, and that has been translated into policy and
implementation guidance, meaning there are procedures there.
Where we have lagged is making sure that we actually train the
acquisition workforce on how to use these and that we encourage
what I call creative compliance. We have a very risk-averse
workforce that is extremely concerned about media attention or
congressional hearings pointing out when things did not go
well. This is leading to a group that does not want to do
anything other than what there is precedent for before.
So I think we need to encourage and train to use things, as
you talk about, the other transaction authority. That is huge,
because you do not have a key requirement there. You just sort
of say what you need, and you can move quickly. I think we need
to give the entirety of the budgets for OTAs right up front and
let people move fast. That is how the Defense Innovation Unit
does, and they have been able to work very well with commercial
entities.
I see we are out of time here, but I will take that for the
record because I think there are many more things we could do.
Mr. Berteau. Mr. Chair, if I could add just one thing. I
know we are over time.
Chairman Reed. Go ahead, sir.
Mr. Berteau. Senator, I think that it is important from our
perspective to acknowledge that speed does matter a lot here,
but we need to be able to do it not just for a few but for
everything, and other transactions is very useful as far as it
goes, but if you can do it for some you really need to be able
to do it for all.
This committee, in the fiscal year 2018 NDAA, put in
statute for a DOD to define and measure how long it takes, what
is the procurement lead time. One of PSC's [Professional
Services Council's] initiatives for this year is we think you
ought to take a look at how well they are doing, because we
think they are actually losing ground since you required them
to do that, rather than gaining ground. I think the spotlight
of illumination will help speed things up as well.
Chairman Reed. Thank you, Senator Gillibrand.
Senator Wicker, please.
Senator Wicker. Thank you, Mr. Chairman. Secretary Lord, do
you have anything you would like to add to the answer to
Senator Gillibrand's question with regard to what industry is
asking us for, with regard to technologies being too hard to
develop, taking too long, and costing too much to procure?
Ms. Lord. Thank you, Senator. Yes, I would. I actually
spent all day Saturday in Cambridge, Massachusetts, with a
number of Harvard Business School and Kennedy School and MIT
grad students, and a handful of private equity firms, talking
about putting resources, money, into emerging technologies at
new companies. The biggest concern there is that manufacturing
contracts are not being handed out quickly enough. We have a
long process of going through cooperative research and
development agreements, some very small, small business
contracts. But we just need to get out there and start putting
things on contract. We can do that through the middle tier of
acquisition as well as using OTAs. I think that the Congress
demanding metrics, as David was saying, will drive that
behavior.
Right now, with not as many politicals in the seats at DOD,
we do not have a strong demand signal to modernize our
practices, and we are not training people to utilize them. I
think it is very, very important for a virtuous business cycle
here and to get these new developments fielded, because capital
markets are going to play out. There is going to be
consolidation. What is not happening is the new companies
coming up quickly and gaining speed to cross that valley of
death from a few prototypes to actual fielded solutions.
So middle tier of acquisition, for instance, just to
explain that, says if you have a commercial capability or a
fielded military system, that just through an incremental
investment could really give us a step function change in
capability, then we do not have to go through the Joint Staff's
requirements process that can take up to 2 years. What we can
do is get the leaders of military services, the Secretaries, or
the leaders of agencies to document that they do have that
requirement, and then we can move out on middle tier of
acquisition very quickly.
So that is one that I think, during your posture hearings
this spring, that you might want to ask the services and
agencies about.
Senator Wicker. Okay. Let me shift to what we are trying to
do to help the Ukrainians, and I will ask both of you this. How
are we doing replenishing our own supplies with those of our
allies, and how long can we keep this up, providing weapons at
the current rate? Secretary Lord, you go first, and then we
will take Mr. Berteau.
Ms. Lord. I think that we are rapidly--we are using what we
have that we can give away, and the trouble is that we have a
2- to 5-year lag to bring those stocks back. We have that
because we have not invested, as a Nation, in the
infrastructure, the equipment, and the tooling to have the
capacity and throughput. If you are in industry, if you do not
have a clear and consistent demand signal, you cannot justify
the capital investment without a certain return. So no board of
directors is going to okay that.
So I think one of the tools that Congress has, that was
used to great effect during COVID, is the Defense Production
Act Title III. So if you could provide the funds to get over
that barrier, to overcome that activation energy, if you will,
for the infrastructure--for buildings, for equipment, for
tooling--then we could more rapidly come back.
Senator Wicker. Mr. Berteau, that sounds like a real
problem for our efforts to help our friends in Ukraine win this
war.
Mr. Berteau. It is definitely a problem, and I think we
have yet to see a single contract in place to start that
replenishment. Discussions are going on, but there is no
definition of what the requirement is yet, because we still do
not know how far we are going to draw down. We are drawing
down, I have seen, in some cases, as much as a third of our
available stocks--that means not forward deployed but available
for that--in less than 2 months. If we are one-third down in
less than 2 months, and we keep that rate up, that is only 6
months.
There is no way a contract is going to deliver replacements
in less than that time, even if we started today. We are
behind, and you guys should push them to hurry up.
Ms. Lord. If I may, I will say the Army has a UFR [unfunded
request] over here, UFR Number 24, that is looking at doing
exactly this.
Senator Wicker. Thank you, Mr. Chairman.
Chairman Reed. Thank you, Senator Wicker.
Senator Blumenthal, please.
Senator Blumenthal. Thank you, Mr. Chairman. I suggested to
the Secretary of Defense just about 2 weeks ago, before our
recess. He sat in the place you are now that we should, in
fact, invoke the Defense Production Act. He said that it would
be under consideration. I think we have lost the luxury of time
here. The closet is bare. Just to give you one example, the
United States military has probably dispensed about one-third
of its Javelin anti-tank missiles to Ukraine, one-third of our
supply given to them. To ramp up from the United States
military's current buy of about 1,000 missiles per year to
maximum production of the Javelins would take about 1 year, and
replenishing United States stocks of those weapons would
require 32 months.
Unless the President invokes the Defense Production Act, to
prioritize deliveries of components to the manufacturer, to
give that demand signal, we will run out of these key arms, not
only Javelin missiles but Stinger missiles. We are now
providing Howitzers and armed personnel carriers. The cupboard
is empty, or it will be very, very shortly, unless the
President invokes the Defense Production Act to provide that
demand signal on an expedited basis.
The Secretary of Defense has warned that we are in for a
long fight. The Chairman of the Joint Chiefs of Staff, sitting
where you are now, said it will be a long slog. But the
decisions we make now will determine the outcome, because these
weapons will not magically appear, for us, for our allies, or
Ukraine. We need to replenish the stocks of our allies as well
as our own, and provide more for Ukraine.
So I think the challenge is extraordinarily daunting, and
it requires this kind of major commitment. So I would like to
know, Ms. Lord, whether you think right now we should invoke
the Defense Production Act.
Ms. Lord. There are a few different titles in the Defense
Production Act. Title I talks about DO [delivery order] ratings
and DX [direct exchange] ratings. Everything that the Defense
Department puts on contract basically gets a DO rating that
brings it ahead of any other commercial item. The most critical
items get DX ratings, which pull those items in front of the
other defense goods. So often some of our long-lead nuclear
materials and so forth, go there.
Frankly, we have overused this to the point where it is
becoming less meaningful, because if everything has a DX
rating, nothing does, and the challenge is that we have not
funded, over the years, industry to maintain the supply chains
to get even 50-cent diodes sometimes. It is not big-dollar
items. There just is not the manufacturing capacity there.
So I think DX ratings need to be used judiciously, but I
think DPA Title III, which allows the Department to move money
to industry to actually make the capital investments or train
the workforce or develop the supply chain is where you can
really move the needle on this issue. So again----
Senator Blumenthal. If I can just interrupt, because I am
going to be out of time, moving the needle requires moving the
money. It is a question of investing the resources. To its
great credit, the Navy's fiscal year 2023 budget requests over
$750 million to invest in the submarine industrial base and
train the workforce. I have been urging for years that we need
to make this investment. Twenty, thirty million dollars is what
we have included in past budgets. Seven hundred fifty million
marks a major leap forward, and it is desperately needed to
train and retain our engineering and shipyard workforce.
But if we were to devote the kind of resources that we did
to COVID, or earlier, in our major conflicts--World War II, the
Korean War--moving the needle requires moving money and making
the investment. Would you agree?
Ms. Lord. Absolutely.
Senator Blumenthal. Thank you. Thank you, Mr. Chairman.
Mr. Berteau. Mr. Chairman, if I could add one thing.
Chairman Reed. Of course, sir.
Mr. Berteau. I think your key point there, it is important
to stress we need to start now, even if we are not going to
finish now, and there are two key signals here. One is to the
supply chain, not just to the prime manufacturer. The other is
to the workforce, because as I mentioned, there are a lot of
gaps in that workforce. They will not come back. They will not
sign up unless they see the long-term possibility of the
commitment there. So the faster we get started, the faster we
will get the supply chain in place and start rebuilding the
workforce to be able to do the work, even if it does not
necessarily accelerate the endpoint. You have got to start now.
Chairman Reed. Thank you very much.
Senator Ernst, please.
Senator Ernst. Yes. Thank you, Mr. Chair, and thank you
both for coming in front of the committee today. This has been
a very, very good and necessary discussion.
Ms. Lord, I would like to start with you, please. You
brought up the middle-tier acquisition as well as the valley of
death, and I would like to dive a little bit more into that,
because as you said, the middle tier of acquisition was brought
online to help rapidly develop some of the prototypes within an
acquisition program and deliver those combat capabilities to
the warfighter much faster.
So how should the Department direct employment of the
middle-tier acquisition strategy, especially when it comes to
our combatant commanders? Are those COCOMs [combatant command],
are they using this tool effectively right now, in your view?
Ms. Lord. Thank you for the question. COCOMs do not have
acquisition authority. They generate the demand signal. They
are the ones, obviously, in their AORs [area of
responsibilities] that understand what is required. They must
go back to the military services and work through them. I think
what we are seeing right now is leadership of the military
services perhaps are not totally aware of all of the mechanisms
they have to very rapidly acquire, and they need to exercise
those authorities they have.
So I think a better-informed COCOM can go and speak to a
service and ask specifically for what they need and how to go
about and get it, and that gets back to the issue of training
the workforce. I think that is one area where the committee
could help by asking the Department what they are doing to
train the workforce and what they are doing in terms of keeping
metrics to look at the utilization of MTAs [major training
area] and how that has helped to rapidly field.
Senator Ernst. Good. No, and I appreciate that, because
then that was going to be my question. How can the COCOMs,
those commanders, then leverage the middle-tier acquisition? So
just having effectively trained people at the service branch
level, you think, and just knowing how to ask the right
question from the COCOM perspective. Is that correct then?
Ms. Lord. Yes. I think it is being a smart customer, if you
will. You do not only tell your supplier what you need but how
you need to get it, and then hold them accountable for that.
Again, middle tier of acquisition is somewhat a new muscle that
is being exercised in the Department, and it takes a number of
reps and sets for that to be comfortable, and to do it over and
over. Human nature being what it is, unless leadership is
demanding that that new muscle be used, it probably will not
be.
Senator Ernst. So that is an area that we really need to
work on then, because it is a tool, and existing tool already,
that we have available to us, for rapid fielding.
You brought up the valley of death as well. So as you are
talking about training and the professionals that need to have
the appropriate training, do you believe that the acquisition
professionals that we have at DOD are effectively trained to
utilize that middle tier of acquisition and make sure that new
technologies that are being developed do not die in that valley
of death?
Ms. Lord. No. I believe that there is enormous opportunity
to look at lessons learned, as we talked about before, and get
experiential learning from those PEOs [Program Executive
Officers] that really did use middle tier of acquisition, and
for those users, the warfighters that benefitted from that. I
think we need to communicate, communicate, communicate about
how effective it was, and do a little bit of what we started a
few years ago at the Defense Acquisition University, where we
licensed TED talks, and we had TEDx talks, and we had actual
warfighters and PEOs stand up and say they problem they had and
how they solved it, in very meaningful, realistic ways, versus
having people on transmit mode only, with PowerPoints, you
know, drilling people to sleep, basically, at Fort Belvoir.
We need to get this experiential learning and really
require people to apply that learning in a meaningful way, and
then go back and see how the user benefitted from that.
Senator Ernst. Thank you. I will yield back just the little
bit of time that I have left, but I think that is an important
point, is that we provide lots of different authorities across
the board. But unless that user knows how to access and utilize
those types of authorities we are not any further ahead. So
thank you very much.
Mr. Berteau. If I could add something to that, just
briefly.
Chairman Reed. Yes, sir.
Mr. Berteau. I think, Senator, you have got a very
important point there. There are success stories. Rarely do
those success stories get a hearing before this Committee. I
know, from my experience, the times I have been brought up over
the 40 years to praise me for good work are much fewer than the
times I have been brought up to criticize me for having bought
something we did not need, that it turned out we did.
But there is a real good example of that. The Army has just
issued its contract for, I think they call it the Squad Attack
Weapon. Mr. Chairman, I think we used to call it a rifle, and
they used the middle-tier acquisition authority to do it, and
they are really proud of the fact that it only took them 2
years from requirement to contract award. Now 2 years is way
too long for many of the things we are looking at, but it is a
remarkable set of progress.
I would urge this Committee to look for opportunities to
illuminate and praise successes where people are actually
implementing it well, and give them the credit for doing that.
It would go a long way to helping others do that and take the
risks to do it themselves.
Chairman Reed. Thank you, sir.
With that let me recognize Senator Hirono, please.
Senator Hirono. Thank you, Mr. Chairman. We have covered a
lot of ground, I think, in this hearing. Frankly the DOD
acquisition process has been a challenge, an ongoing challenge
in all the years that I have served on this Committee, and I
think it is going to continue to be an ongoing challenge with
workforce issues and supply chain issues, and now with the war
in Ukraine, replenishing our munitions supply.
So listening to the two of you, what one or two things do
you think that we need to do immediately in order to address
whatever, in your view, would be the major acquisition issue
that we should deal with?
Secretary Lord, you can start.
Ms. Lord. I think, Senator, it all comes down to speed, and
I think if you were in a business and you had these kinds of
concerns you would have monthly accountability as to what the
targets were to reach and what your deviation from that target
was, and why. So I think you might want to look, given the
conflicts in the Ukraine, what are the top 10 weapon systems
that you are concerned about, understand current inventories,
understand what it is going to take to ramp up production, what
the top three inhibitors to that are, and then just follow that
to understand progress and what tools are being used to solve
that.
Mr. Berteau. Senator, if I could----
Senator Hirono. Go ahead.
Mr. Berteau. There are two things, I think, in addition to
speed, although speed is vital here in today's environment. One
is to focus on results and outcomes rather than inputs. So much
of our acquisition process is only focused on inputs--labor
categories, labor hours, costs from the front end--rather than
are you going to get the results you need.
This is not easy, because defining results you are looking
for is hard, especially if you are looking at new technology
and what it is going to bring to you. We will see an example of
a contract that says, I know you are going to develop
something, you, the commercial world, that I am going to need 3
years from now. How much is it going to cost me today to buy it
3 years from now? We cannot answer that question, obviously.
The second thing is in addition to focusing on outcomes is
to, in fact, encourage people to take risks, and actually not
punish them when they have gambled a little bit. One of our
CEOs said to me, ``I do not need to go to the casino to gamble.
I gamble every time I submit a proposal, because I do not know
what is going to happen, and I do not know whether I am going
to make money or lose money on it.'' We need to have a place
where it is okay to take risks.
Senator Hirono. Frankly, I think that is a big order to
encourage risk-taking, because we have set up systems--and I
would say particularly in the acquisition space--that is
intended also to--well, it is to make sure that we are not
overspending, and yet we see, in just about every platform,
that there are delays. In building our ships, for example,
major delays. So on that, easier said than done, and even
regarding speed.
Secretary Lord, I liked the idea that we should just be
very specific about what are the top 10 weapon systems that we
need to replenish, and maybe identify the issues and get going
with that, because at least that is something specific. The
entire acquisition system is not intended to provide speed.
By the way, we created the Office of Cost Assessment and
Program Evaluation (CAPE). Mr. Berteau, maybe this is yet
another entity that focuses more on inputs rather than on
outcomes. But what is CAPE's role, if any, in the acquisition
process? Are they not supposed to analyze whether a system is
needed, whether a ship is needed, make the input analysis and
provide guidance on what should be done?
Mr. Berteau. They are supposed to do that. This is actually
another success story that I think would benefit from some
illumination. Since we took the old Office of Program
Assessment and Evaluation and made it the director of CAPE, one
of the requirements has been that their cost estimates, the
independent cost estimate that they do for a weapon system
before it goes into even low-grade initial production or into
full production, is, in fact, the baseline that DOD will use
unless the services can prove they have got something better.
In almost every case, CAPE comes in higher. In almost every
case, that is what ends up in the budget. In almost every case,
it is closer to the reality than what the optimistic projection
was.
This has been a huge success story, because it has led,
over the last decade, to a lot less under-funding. You got the
benefit of this during your time as A&S and AT&L before that.
It is a big success story, but it needs the reinforcement from
this Committee with budget requests, so that you recognize the
validity of those independent cost estimates as well.
The one place where they are short is in sustainment costs.
That is where 70 percent of the cost occurs, and we still do
not pay much attention to that at the upfront, and yet that is
what eats us alive once a system is delivered and fielded.
Senator Hirono. I think that is interesting that you
consider CAPE to be a success story. Would you agree with that,
Secretary Lord?
Ms. Lord. I think for what they do they are. It is
necessary but not sufficient, and where we have issues is the
fact that when you do development, it is called ``development''
because it is not totally predictable. What we do is we do not
allow reprogramming and line items to be moved around in a
portfolio approach, so we get very caught up, I think, in
funding things that are perhaps not as critical now as they
were when we passed the budget. So I think that lack of
flexibility during the execution phase is particularly
problematical.
But I think there are, in addition to keeping the metrics,
some easy things that could be done tomorrow that would really
help our readiness and even help out in the Ukraine. So I know
we are out of time, but if we have the opportunity with another
question that would be great to talk about.
Mr. Berteau. Senator, let me be clear. Their success is on
the CA, the cost assessment end. They are not nearly as good at
the point that you raised also in your question, the program
evaluation, what are the options. That has actually gone down,
but the cost analysis has gone up.
Senator Hirono. Thank you.
Chairman Reed. Thank you, Senator Hirono.
Senator Tuberville, please.
Senator Tuberville. Thank you, Mr. Chairman. Thank you very
much for being here today.
You know, I am a big believer in the power of innovation
from small and medium-sized businesses. You know, a few weeks
ago a constituent of mine contacted me to share his support for
my priority to help employee-owned companies, called ESOPs. We
all know that. This individual was a proud employee of a small
business that was bought by one of the five prime defense
contractors. He shared that following the sale the company's
rates to the government tripled, the company's mentality
shifted from ingenuity and vision to big paychecks and a woke
agenda, which distracted the employees from their mission of
supporting the warfighter.
Unfortunately, this is not an isolated situation. In last
year's NDAA, I championed a provision to extend small business
benefits to 100 percent ESOPs, which would give them more
runway to become medium-sized businesses and compete with the
giants of the industry.
Both of you, can you share with me your thoughts on that
effort and any other ideas you have for helping small
businesses, defense contractors?
Ms. Lord. I do not think that small business contractors
have the time to go through our traditional, formal DOD
processes, so that is where these OTAs and middle tier of
acquisition can be utilized. I think the reason that many of
them end up being acquired is because they cannot have a
virtuous business cycle through getting enough business to grow
themselves. So what I would say is we need to put more focus on
making sure we are flowing dollars quickly to small, innovative
businesses, because that is where 95 percent of our innovation
comes from. So we have to hold the Department accountable for
handing out those contracts and then definitizing them and
moving the money, because often a contract will be announced
but then there is this huge pause before the money flows.
Mr. Berteau. Senator, we hear this same story, not
necessarily just from ESOPs, although I have worked for a
couple of ESOPs in my life and they have a very interesting
dynamic of motivating and rewarding employees. So I think there
is some positive benefit there. But I think that the story that
you hear is not unique.
There are two things that I think would be useful for this
Committee to spend its time on this year. One is the
reauthorization of the Small Business Innovation Research
authority that has expired. I do not know whether DOD has
submitted a legislative proposal to extend that, but I think
there is an opportunity for you to improve that act and
particularly focus on something that has come up, that you
mentioned earlier, which is the migration of a good idea into
actually using it, which would benefit many in that regard.
PSC was actually instrumental in the first passage of that
act. I was in the Department at that time so I did not give
them any credit for it at all, but they deserved a lot of
credit for doing it. That is one thing that you can do.
The second, I think, is a much more difficult thing, which
is what happens inside the contracts. I think there it depends
on the incentives that you give to the programs and the
contracting officers. Again, from my perspective, if you are
focusing on outcomes, you are going to focus a whole lot less
on what the rate ought to be and what the return is, and
getting the results in place. If you start rewarding companies
for delivering results as opposed to effort you are going to
have a big, positive result in that.
Senator Tuberville. How can the DOD provide small
businesses with the necessary insight and cybersecurity support
to successfully contribute to our national security? Small
businesses--they do not have the money that these big
corporations have for cybersecurity.
Ms. Lord. I think there are a couple of ways we could go
about that. One, there are some resources inside of the
Department to help and mentor on that. What is a minimal,
viable cybersecurity posture, if you will? Secondly, I think
that is one of the ways that small companies can partner with
larger companies, with a mentor protegee type arrangement,
which actually benefits not only the small company but the
large company.
So I think there are mechanisms to do it, and we need to
look at how that would really benefit the small companies.
Mr. Berteau. There are two cybersecurity options, one of
which Ms. Lord started during her time there, which is can DOD
provide the framework--the servers, the security structure--so
that a small business can operate without having to own it
themselves? Of course, part of the problem is you give up some
of your privacy if you are participating in a government-
operated. The second is whether or not large contractors can
provide that structure for their small business subcontractors.
So they do not actually have to buy the small business. You can
actually subcontract with the small business. Those are both
very good ideas and worth pursuing.
Part of the problem, though, is the government employees do
not get credit for small business jobs that are subcontractors.
They only get credit in their annual performance review for
small business dollars that are primes. I think what we ought
to do is figure out a way to give--because a small business job
is a small business job, and innovation can come as a
subcontractor as well as a prime contractor. I would like to
see something that rewards the government for all those small
business jobs, not just some of them.
Senator Tuberville. One more quick question. In the past 2
months, the United States sent more Stinger missiles to Ukraine
than we have manufactured in the last 20 years. The Stinger
program is in its eighth restart. I will repeat. Eight times we
have restarted this program. This missile has not been
modernized in 30 years. What mistakes have we made and
mismanaged in this munitions program? Just real quick.
Ms. Lord. We have not kept a hot production line. It is the
lumpy nature of the funding.
Mr. Berteau. I think we do have a path now to upgrade the
Stinger. I believe it will be here in something like 2026 or
2027. I would suggest that our mistake was we should have done
that 8 years ago.
Senator Tuberville. Thank you, Mr. Chairman.
Chairman Reed. Thank you, Senator Tuberville.
Senator King, please.
Senator King. Thank you, Mr. Chair, and thanks to both of
you for your extraordinary service to the country.
Both of you touched on this, I think, in your opening
statement, but we have not heard much about it since, and that
is workforce. I had occasion to talk to the leadership of--we
have two major defense facilities in Maine, the Portsmouth
Naval Shipyard, which, by the way, is in Maine, and Bath Iron
Works. Both of them are having serious workforce problems, as
are virtually every business in the country. One commentator
said, ``We have a demographic asteroid heading for us, and we
are not adequately taking account of it.''
What worries me is that the obvious solution is
immigration. Every legal path to coming into this country is
drastically down--green cards, visas, refugees, asylees--and
right now we have 11 million empty jobs in the country. There
are 6 million unemployed people. So that means if every single
unemployed person took a job we would still have a shortfall of
5 million jobs.
It seems to me--and I understand the politics of
immigration. It has been difficult in this country for 150
years, but we ought to be able to figure out how many people do
we need to avoid this demographic disaster and keep our
industries, the defense industry being one of them, operating,
and figure out a rational immigration policy to match the need
to the supply.
Secretary Lord, do you agree with me that we have got a
serious workforce problem, and the fertility rate is not going
to solve it. We need to have new people.
Ms. Lord. Senator King, I absolutely agree with you, and I
think the whole issue of clearances and allowing people to come
in and work on defense items is an area ripe for the
application of some of our emerging technologies. I think it
would be fantastic to see Congress put something in the next
NDAA about applying artificial intelligence and machine
learning to looking at the data and getting at this. Perhaps
that way we could not only forward the state of the technology
through applying it but also apply it to a real-world problem
that, frankly, we are swamped by the data and the numbers to
deal with.
Senator King. We should realize that the fact that we are a
country that people want to come to is an advantage. There are
countries where they have to lock their people in to keep them
from leaving. People from around the world want to come here,
and given the demographic changes that are coming upon us,
which is a lower birth rate, the low replacement, if we do not
have people coming from somewhere else we are sunk.
Ms. Lord. Well, a good place to start might be with
colleges and universities, undergraduate and graduate programs,
where yes, we do have some bad actors from adversarial
competitor nations. However, we send an incredible amount of
intellectual capital out of this country at the end of many of
those degrees.
Senator King. I completely agree, but I hope that this is
something that the Congress can come to, and I would suggest a
way to approach it is to say, okay, how many legal immigrants
do we need and what is a rational system in order to ensure
that we have that continuous flow in order to support. Because
our industrial base, if they cannot hire people, they are not
going to be able to build the ships and the airplanes and what
we need.
Mr. Berteau. Senator, may I make one suggestion on that?
Senator King. Please.
Mr. Berteau. It is a supply and demand issue, and you have
tried to address it at the accurate level, and I think that is
essential. We are not going to solve this problem by people our
age continuing to work longer and longer. But I also think that
there are some immediate tasks that this Committee and the
Congress should look at with respect, particularly, to the
defense industrial base workforce.
We have a number of provisions that we have developed at
PSC with some of our sister associations. We will be providing
them to the Congress shortly, to fix this. But the most
important thing is for the costs that companies need to incur
to hire and retain the workers they have now, needs to be
covered in their contracts, and right now, in many cases, it is
not.
Senator King. Absolutely. But one of the reasons that we
have got the problem is, again, supply and demand. If there are
not enough workers you have got to pay them more, and that is
going to throw the economics out of whack.
One quick question on a different subject. It seems to me
that with the industrial base, one of the important things is
not necessarily what the government buys but how it buys it.
For example, multi-year procurement. Secretary Lord, I believe
that multi-year procurement is something that the government,
that we can do around here, that would vastly support and
encourage investment and maintain the industrial base. I think
you used the term ``lumpy.'' I love that term. If we do things
in a lumpy way, industry cannot respond because you cannot turn
these large facilities off and on.
Ms. Lord. That is correct, and, in fact, if there is a
multi-year contract it drives certainty. It allows the industry
partner to put their internal research and development as well
as capital investments into the area in which the government is
buying. It allows employees to say this is a good place to work
because I know that the job will be here for at least 5 years,
or whatever it might be, with options. It also saves the
government an enormous amount of money because the cost and
time to renegotiate these contracts is non-trivial. You want to
get all the terms and conditions up front and then have options
there.
But there is going to be less and less inclination to do
those multi-years if inflation is running rampant and no one
knows how to predict it and industry cannot recoup losses they
might have.
Senator King. Industry is not going to make those
investments that they need to make in the capital unless they
have some assured stream of income.
Ms. Lord. Correct.
Senator King. Thank you. Thank you, Mr. Chairman.
Chairman Reed. Thank you, Senator King.
Senator Blackburn, please.
Senator Blackburn. Thank you, Mr. Chairman.
Ms. Lord, I want to ask you about the vaccine mandate and
the effect that that had when it was extended to our government
contractors, and the impact that that had. You know, Senator
King is asking about workforce, and I know with the government
contractors people could not test weekly. That was not an
option. It was just you get the shot or you are going to lose
your job, and we have time-sensitive programs, like the
Columbia-class submarine. So talk a little bit about that
vaccine mandate and that impact.
Ms. Lord. Certainly. I think when it came out, the vaccine
mandate, there was a short-term benefit because people came
back to work. However, I think long-term it is problematical
because for many different reasons some people do not want to
be vaccinated. It also puts an incredible burden on the
employer to monitor who is vaccinated, who is not, why they are
not, is that an acceptable reason. This is all overhead that
these companies did not plan on.
Senator Blackburn. It disadvantages many of our specialty
vendors who are small businesses. Correct?
Ms. Lord. Absolutely. It puts this huge, bureaucratic
burden, which is one more reason, as I said in my opening
statement, people have choices, investors have choices,
companies have choices whether or not to work in national
security. The vaccine mandate is one thing that nudged a few
people out the door and kept many, many from entering.
Senator Blackburn. I know recently Deputy Secretary Hicks
had voiced concern about the diminishment of small businesses
that were competing, and we need them for innovation,
especially as we look at the realm of cybersecurity. Is that
correct?
Ms. Lord. We absolutely do, and we have to make it easy and
accessible for them to become part of our defense industrial
base, and with many of the things we do in government one size
does not fit all.
Senator Blackburn. I think you are so right on that, and,
of course, in Tennessee we have Arnold Engineering, which is
Air Force. We have Fort Campbell, which is Army. You also have
your Special Ops forces there. Down at Millington we have the
Naval Air Station. We have Oak Ridge, one of our national labs.
So this one-size-fits-all vaccine mandate has really
complicated the environment for some of our most innovative
companies who can solve some of the issues that we have,
especially when you need to avail yourselves of technology in
order to move into hypersonics, to provide the protections, and
to have that competitive environment.
So talk to me. As you respond, bring in the DIB, and talk
to me about what is being done there to foster that competitive
environment.
Ms. Lord. I agree that we have a challenge, and I think a
big part of this is being agile and quick to adapt. So using
your vaccine mandate example, perhaps that was the right thing
at one time, but you have to look at the environment around you
and adapt to that. I think we have to be more adaptive with the
defense industrial base. Because companies are not going to be
here to supply our warfighters with the kit they need downrange
and the services they need if they cannot make sufficient
margin to be able to reinvest in research and development and
capital investment and so forth.
Especially the emerging technology companies that have
choices in terms of what they can do. They could go work on
commercial items. But thankfully many of them want to deal with
national security items. We have to make sure that we get them
on contract quickly and we check out what they have. We get it
out in the field and see what works and what does not.
Senator Blackburn. Well, and I think that that is vitally
important to do.
I want to ask you this. I think it was Senator Gillibrand
that talked earlier about the cumbersome process for
acquisitions. How many purchasing agents, procurement agents,
acquisition personnel do you have, and have you been able to
pull them into kind of a standard, best practice operating
procedure that has seemed to elude the DOD?
Ms. Lord. Yeah. So obviously there are tens of thousands of
them. I have been out of the DOD for over a year so I do not
know the exact number. However, I will say we have pockets of
excellence, whether it be the Rapid Capabilities Offices or DIU
or other people. They do not have special authorities. What
they have are the best and the brightest, a clear communication
path to leadership, and the ability to move quickly. What we
have to do is scale that across DOD.
Senator Blackburn. I am over time. I have got some
questions I will submit for the record. Thank you.
Thank you, Mr. Chairman.
Chairman Reed. Thank you, Senator.
Let me now recognize Senator Kelly, please.
Senator Kelly. Thank you, Mr. Chairman. Ms. Lord, as a
former Under Secretary of Defense for Acquisition and
Sustainment you understand how vital semiconductor production
is to our military capability to respond to many of the global
threats that we face. Semiconductors are essential to a wide
range of national defense systems, yet semiconductor
manufacturing capacity located in the United States has dropped
from a high of about 40 percent in the 1990s to less than 13
percent today, while China is investing heavily to try to
dominate this industry. We also have the added complexity of
China's interest in, at some point, repatriating or bringing
back Taiwan and what that would mean to semiconductor capacity.
That is why last year I negotiated and helped pass a $52
billion plan to boost semiconductor manufacturing production
here in the United States, including in my home state of
Arizona. This plan passed both the House and the Senate, and
hopefully we are going to get this, the differences in the
legislation, resolved through conference negotiations, and get
this across the finish line soon. It is vitally important to
our national security.
In your view, how does the semiconductor shortage
contribute to the global challenges we face, and what more can
be done to overcome the problems associated with a global
semiconductor shortage?
Ms. Lord. The global semiconductor shortage has enormous
ramifications for the Department of Defense, because almost
everything produced uses them. First of all, we have to make
sure that our systems are secure. In other words, they are not
calling China or somewhere else with information.
But the real challenge here is that most of the
intellectual property for these semiconductors actually
originates in the United States, but for a variety of reasons--
some of them environmental laws, some of them labor laws, some
of them cost competitiveness of final units--we have offshored,
over time, to the point where we are no longer in control of
those supply chains, even the most fundamental, lower-level
items such as the rare earth elements. We can get them out of
the ground but to date they are very dirty processes to make
them usable, and they go in not only semiconductors but lots of
other things.
So we, as a Nation, need to prioritize those manufacturing
processes that give us the key elements. Unless we really take
the legislation and look at the industrial base and invest in
it to get the infrastructure, the equipment, the tooling, and
training the workforce, we are not going to be able to control
our destinies here. There is more to be done than one companies
can just do and justify in its business cycle.
So I am not a big fan of government getting very involved
in industry, but I believe this is a national emergency, and
this is a place where we need to make that investment to be
able to control our destiny.
Senator Kelly. I agree, and, you know, inexplicably it is
not just the manufacturing. In the case of semiconductors we
manufacture here we often send them overseas, China, to test
them.
Ms. Lord. Yeah, test and evaluation as well as packaging.
Two very important parts of that chain, and you are absolutely
correct. Those test systems are highly engineered, complex
systems.
Senator Kelly. Well, I just recently returned from a
meeting with our partners in Europe and Asia, speaking directly
with international leaders in Germany and other countries. This
underscored the opportunity we have to rebuild our global
supply chains and strengthen our security partnerships in the
process.
So Ms. Lord, one of the countries that I visited was India,
which I understand you have some expertise as you are the Vice
Chair of the United States-India Business Council. From my
recent discussions I believe there is a willingness to
strengthen United States-India security in industry
partnerships. What thoughts do you have on how we can
accomplish that, and do you agree this will also benefit United
States strategic interests at a time when Russia is looking to
shore up their own ties with India?
Ms. Lord. India has enormous opportunities but also
enormous challenges. We have never been able to get the
overarching security agreements with India that we would hope.
We have challenges with things like the S-400 being on
contract, and so forth. Additionally, the challenge of doing
business, I can tell you, in India, is enormous because of the
offset requirements there, to be able to provide local
business.
So enormous potential, but I would say the opportunity and
the challenge is to work with the Indian Government to
streamline policies and procedures, make them consistent so
that it is a predictable venue for United States business and
United States Government to invest in.
Senator Kelly. I agree, and, you know, the opportunity we
have there is enormous right now, and their ties to the Russian
Government, Russian military through their Russian hardware
that they have purchased, two-thirds of the Indian military
force consists of Russian hardware, which, as a lot of us
expected, did not perform well on the battlefield. So this is
an opportunity for us to build some ties through the sale of
some of our military equipment, which I would like to see.
So thank you. I am over time, so my apologies, Mr.
Chairman. I do have some other questions I want to submit for
the record.
Chairman Reed. Thank you, Senator Kelly. Senator Hawley,
please.
Senator Hawley. Thank you, Mr. Chairman. Thanks to both the
witnesses for being here.
Mr. Berteau, if I could just start with you. Some of our
country's largest service firms, including Deloitte, McKinsey,
I think, others, maintain a very significant presence in China,
even as they are pursuing and executing contracts with the
Department of Defense. Should we be concerned about that?
Mr. Berteau. The upfront optics of that are obviously not
very attractive at all, and so the real operative question is
what are the protections in place that we need to have in order
to preserve any risk from coming out of that. In the case of
some of these companies, they are actually a foreign-owned
company, in that they have a full, dedicated protection against
foreign ownership control and interest. The policies are there.
The procedures are there. The structures are there. The
execution and implementation is what has to be monitored very,
very carefully in that regard.
Partnership companies like those present challenges to us
across the board. I do believe that DOD has the national
security procedures and processes in place, and structures. It
is the execution and monitoring that becomes absolutely
critical in that regard. We have firewalls. We have to make
sure they are clear and high. I know you wrestle with those
every day internally.
Senator Hawley. Should it be a conflict of interest for a
company like Deloitte, let us say, or McKinsey, to do work for
the Chinese Government and/or its proxies while also doing work
for the Department of Defense?
Mr. Berteau. We have looked at the legislation that has
been introduced in this body on that regard and we think there
are some very serious concerns that do need to be addressed
there. But we also need to make sure that America can still get
the capability and competence of the workers we need as well.
So it is that balancing act that becomes critical there. I am
not sure if it is directly a conflict of interest. There is
definitely a conflict, there is definitely interest, but there
may be a better way of getting at it.
Senator Hawley. Yeah. Well, this is pretty concerning, I
would say. Let me just ask you. I mean, you are the head of the
Professional Services Council. What advice would you give to
companies like Deloitte that are doing business in China,
including with the Chinese Government and its proxies, despite
the threat that government, its proxies, and the Chinese
Communist Party pose to this Nation?
Mr. Berteau. We are actually looking, and we are working on
a white paper of what it is that those companies need to do
better in order to bring the kind of comfort that you need to
have out of that. I do not have something ready to deliver to
you today, but we will be happy to take that.
Senator Hawley. Yeah. Fair enough. Thank you.
Ms. Lord, let me ask you about the Stingers issue, which
Senator Tuberville raised a little bit ago. Obviously, Stingers
are in high demand in Ukraine. They may well be in high demand
in Taiwan. We need, of course, to maintain a robust supply
ourselves. You said that you think one of the problems here is
we have not kept a hot production line. What do we need to do
now to accelerate production of the Stingers, and other similar
capabilities that we are going to need for frontline states
like Ukraine and Taiwan but that we are also going to need for
ourselves, all at the same time?
Ms. Lord. In order to have production you need facilities,
equipment, tooling, material, and a workforce. So what we need
to do is incentivize industry to do that through long-term
contracts that allow them to make those investments, and a
reasonable return on that investment, so that they will stay in
business. So long-term, clear demand signals, along with, if we
really need to get this jump-started I would say some DPA Title
III-type investment to stand up lines, train the workforce, and
get the supply chain going.
Senator Hawley. How much of it, in your opinion and in your
experience, is about incentivizing industry versus overcoming
hurdles within our own acquisitions bureaucracy? Can you speak
to that?
Ms. Lord. Oh, I think that it is a Venn diagram that is
very--well, there is a huge amount of overlap, and I think,
again, we have an acquisition system that can do these things
quickly. We are not incentivizing our workforce to do that. To
David's point earlier, how often does this Committee have a
hearing calling out and trying to understand all the fantastic
applications of other transaction authorities and middle tier
of acquisition, what that did to speed up the acquisition
process, what that did to help the user downrange? We need to
communicate the art of the possible and then encourage it,
versus admiring the problem.
Senator Hawley. My concern on this, to be clear where I am
coming from here, it is not just related to the Stingers. I
understand we are also having production issues with the LRASMs
[Long-Range Anti-Surface Missiles] and other advanced munitions
we are going to need if we are in an environment, and I think
we are, where deterrence is the name of the game, and
deterrence by denial----
Ms. Lord. Absolutely.
Senator Hawley.--both in the Indo-Pacific, also going
forward in Europe. We have got to be able to deter our near-
peer competitors, and in the case of China, frankly, our peer
competitors. In order to do that our competitors--our enemies,
frankly, our opponents--have got to believe and got to know
that we have the kind of capabilities that we are going to
need, and we can supply our partners and allies with the
capabilities they are going to need in short order.
So to me, getting this right is vital to being able to
execute deterrence by denial, which we have got to do going
forward.
Ms. Lord. Exactly, and one of the things that we need to
consider is when you go down those various weapon systems,
three, four, five, six levels down to supply chain, you find
all of a sudden the family tree does not branch anymore and
that you have some critical semiconductor components and so
forth. So it gets back to some of these fundamentals that
Senator Kelly was asking about as well. We have got to fix the
fundamentals.
Senator Hawley. I have got a few more questions for each of
you, which I will submit for the record. Thanks so much for
being here.
Thank you, Mr. Chairman.
Chairman Reed. Thank you, Senator Hawley.
Senator Manchin, please.
Senator Manchin. Thank you, Mr. Chairman. Thanks to both of
you for your service and thank you for being here today.
Let me start on just a couple of things. I know it has been
talked about as far as supply chains and all of that. This war
that we are supplying most of the armament that they are
needing to defend themselves in Ukraine, if it continues for
any period of time, say a year or longer, how does that
threaten our security?
Ms. Lord. It is a huge threat to our security. I think you
can go back to the supply chain report we did in 2018, in
responding to an Executive order, where we called out all of
these areas of our defense industrial base where we either had
very fragile supply chains, we were single sourced, or we were
dependent on an overseas, unfriendly nation.
So I think, frankly, this is our Sputnik moment here with
Ukraine, relative to our capacity and throughput to generate
what we need in terms of weapons systems.
Senator Manchin. Are they looking down the road right now?
Are you all looking down the road, knowing that we have to
resupply ourselves for what we are basically sending over to
Ukraine?
Ms. Lord. I think that is clear within the Department,
but----
Senator Manchin. Has that acquisition started yet? Is there
any acquisition going on right now to replace immediately?
Ms. Lord. I am not inside the Department anymore. I am
outside the Department. However, there is a bit of activity.
The Army has a UFR up here on the Hill about Stingers. There is
a bunch of activity, but it takes money. There is only so much
reprogramming, redirecting.
Senator Manchin. I am thinking the money we are sending,
the goods we are sending over would be resupplied.
Mr. Berteau. Senator, about a week and a half ago the
Defense Department posted what is called a RFI, request for
information, soliciting input from companies. I think it is due
May 6th, so it is a very rapid turnaround, with respect to
Ukraine. What it does not address, though, is something that
you hinted at. We are not only sending equipment to Ukraine, we
are oftentimes replacing equipment that other countries are
sending to Ukraine. In many cases they are sending them Russian
equipment, and we are replacing them with American equipment.
That is part of the demand as well. I do not believe it is
covered in the RFI. So we have only made the baby steps here.
Senator Manchin. I am trying to find out also, are the
countries that are basically supporting, NATO allies, the same
as we are in Ukraine right now? Are we responsible to send that
to them and replace it free of charge, or are they buying it?
Mr. Berteau. In many cases those are still being
negotiated.
Senator Manchin. Okay. If I can ask you also about, when
you have contractors, first of all, from cyber, most of our
hacks come from the bottom up. So let us say that we have a
major contractor, one of the big boys--I will not name any
names but the big ones. They are pretty much hardened. But the
subs that they have are not as hardened. A lot of the subs do
not want to be tied to the main because then the main will do
what they are going to do and knock them out of the contract.
So it is a real dilemma that we are in right now, and the
back door of hacking, this back door, has been prolific. So do
you all have any thoughts on that? With that I would ask you
all because my time is running out here very quickly,
commercial markets. Okay. If there is a contractor in the
commercial market and they are priced in the commercial market,
and then they also are providing almost the same services in
the industrial, for our defense, how come they do not make
those prices available to us? Why is it a whole other pricing
system and we never call them on it?
Ms. Lord. Well, to answer the second question, we may
sometimes buy the same products but our cybersecurity
requirements, our physical hardening requirements, might be
different. So although it looks the same it might not be.
I will say that quite often industry tries to get
commercial pricing because it is easier for them just to go off
of a price list. But often the Department's regulations require
a cost-based assessment, building up from the cost, and the
exercise of going through that to demonstrate why everything
costs what it does costs money, puts a wrapper of overhead and
G&A [General and Administrative] on it.
Senator Manchin. I mean, we just put so much red tape
involved in this, trying to secure something, and people are
just so absolutely aghast at us continuing to throw money away.
I mean, that is where you have got the toilet seats and the
hammers and all those. Remember all the comparisons they used
for years and years?
Ms. Lord. That comes back to training the workforce. We
have the authorities. Congress provided them to DOD. We have
translated those into policy and implementation guidance or
procedures. We need to train the workforce to use those and
then hold the workforce accountable. That needs to happen at
DOD senior levels as well as here.
Mr. Berteau. Part of that training, Senator, is we
frequently, in DOD, will say we want to commercial but we would
like you to tweak it just a little bit so we can use it. Of
course, when you have got a production line of a million a
month and DOD is only going to buy 100, there is no benefit in
that tweaking.
Senator Manchin. Is President Dwight Eisenhower's statement
still true today--beware of the industrial complex?
Mr. Berteau. You know, the original draft of that actually
said beware of the military congressional industrial process.
Senator Manchin. Oh, congressional.
Mr. Berteau. They took the congressional out of it, but it
is still worth paying attention to.
Senator Manchin. He had it right, did he not? Thank you.
Thank you, Mr. Chairman.
Chairman Reed. Thank you, Senator Manchin.
Senator Rounds, please.
Senator Rounds. Thank you, Mr. Chairman. First let me begin
by just thanking both of your for your continued service to the
Nation, both within the DOD and within the private sector. Ms.
Lord, I want to thank you for working so closely with me in
2020, to execute the Defense Production Act authorities in
response to the worst days of COVID-19. I think we made a
difference.
To both of you, I would like to ask a question about what I
see is a very disturbing trend of consolidation within the
defense industrial base over the last 20 to 30 years. This
results in less competition, which slows innovation, decreases
performance, and impacts pricing so that the government and the
American people do not get the best bang for the buck.
Sepcifically, 90 percent of missiles that DOD purchases come
from three companies. Fixed-wing aircraft are provided by three
companies, down from eight, and satellite contractors are down
to four, also from a previous high of eight.
The pandemic and recent supply chain disruptions have had
particular impacts on small and mid-sized businesses that DOD
relies on. My question is, what can we do to increase
competition and encourage small and mid-sized businesses who
often are at the cutting edge of innovation, to compete to
provide with us for the best and strongest national defense
that we can possibly afford?
Ms. Lord. Senator, I will quickly answer that and then pass
it along to David. It all comes down to predictable
procurement. If you do not have a clear demand cycle, and you
do not know what is being purchased over the next 5 years, you
cannot invest your resources, whether that be your plant, your
equipment, your tooling, your people, in something where you do
not know what the return is. Because there has been such an
erratic demand cycle and purchasing cycle, companies start to
go out of business or they put themselves up for sale.
So the most critical thing that the government could do is
be very clear about how much of what is going to be procured
over multiple years, and then have long-term, multi-year
contracts.
Senator Rounds. Mr. Berteau?
Mr. Berteau. Senator, you have raised some absolutely great
points, and we have been wrestling with this for a long time.
Let us look first at the question of is there enough demand to
support the supply. Your missiles were a great example. A big
part of the reason why there are only three companies
delivering on that 90 percent is we are not buying enough
missiles to keep more companies in business, from a production
line point of view.
I actually think that part of the answer to the concern
that has been raised across the board of replenishment here is
that we do need to buy more, and if you buy enough you will get
more competition.
The second thing is that oftentimes the requirements are so
specific that only one or two companies are going to be able to
meet the requirements. So if we expand the flexibility of the
requirements so more companies can bid, then it will go
forward.
The third is that about half of what DOD spends its
contract dollars on is not products. It is services. That
sounds pretty straightforward, but the reality is that the
migration of technical capability that the government needs,
they buy a lot more today as a service that they used to buy as
a product. Two big examples are access to space. When the
government no longer owns the launch vehicles it is the private
sector that is providing it. So you are just buying the launch
as a service. But we still maintain a mentality as if we are
buying a product. Software. I cannot remember the last time I
actually held software in my hand, and it is a floppy disk, and
I am not even sure I have a machine that could read it if I
did. So we are really just buying it as a service. But our
procedures still are as if it is a product, so we are not
taking advantage of that.
The third is that for small businesses, in particular, we
put these contracts out where every small business has to be on
this government-wide contract because that is where the work is
flowing, but we often put so many on there that there is not
enough work that flows through to keep them, and give them even
the return to make the money back that they spent on putting
the bid in place. So we need to rationalize our supply and
demand in order to get forward there. It is really across the
board. It is not just a few big companies at the top.
Senator Rounds. Does the Federal Government or the
Department of Defense have the capability to assist small
contractors in their need to be at their best with regard to
cybersecurity issues? Today it seems like our larger
contractors, we can hold them accountable, but the smaller
contractors, in many cases, may have excellent capabilities
specific to a particular product but do not have the
capabilities in-house to take care of their cyber protection
needs.
Would it help if we established a process to assist them in
their cybersecurity needs?
Mr. Berteau. Well, there are two ways to do that, and it is
really critically. So you have really got a dilemma there. You
want the companies you do business with to be secure against
cyberattack, and that is not just in America but around the
world as they go forward. At the same time, you do not want to
burden them with the costs that, in fact, it puts them out of
business in order to do that. We hear this from our member
companies all the time.
So there are two ways to get at that. One is, in fact, for
the government to provide some type of support. It might be the
computer servers that you are operating on, so that you can
have your systems in place, and the government is part of that
protection. The problem is this is a huge cost for the
government, and frankly, I am not optimistic that the
government can do this more effectively than the companies
themselves can.
The second is for that to be a reimbursable cost. So, in
fact, for the companies to incur it, right now if they spend
that money--I have got a small company, maybe $20 million a
year, it is costing them $100,000 to put the cybersecurity in
place. All that does is increase their rates--and this is
overhead. This is not direct charge--it increases their rates
to the point where they are not competitive in winning a
contract. So boy, talk about a beggar's choice here, right?
So if the government actually could figure out a way to
cover those costs to maintain the competition and get the
security we need, that would be a big plus.
Senator Rounds. I think we agree it is a problem, but I am
not sure that we have resolved it with the appropriate answer
yet.
Mr. Berteau. As I mentioned before, the threat keeps
increasing every single day.
Ms. Lord. This is an area where the industrial policy team
at DOD could probably more clearly articulate the avenues to be
followed.
Mr. Berteau. What DOD has done is they have migrated the
responsibility from your old shop to now the CIO, the chief
information officer shop. Sometimes reorganization does not
speed up results.
Senator Rounds. Thank you. Thank you, Mr. Chairman.
Chairman Reed. Thank you, Senator Rounds.
Senator Kaine, please.
Senator Kaine. Thank you, Mr. Chair, and thanks to the
witnesses. Really important hearing, and my colleagues have
asked a number of really good questions.
Secretary Lord, I want to start with you, because you
talked about the need to scale up things that are working. You
mentioned DIU, and I wanted to ask about the Defense Innovation
Unit. DIU has had some real success. They have brought 100 new
vendors to the DOD. They have facilitated more than $3.7
billion in contracts.
It would seem that DIU would fit very closely with
President Biden's recently released report on safeguarding our
national security by promoting competition in the defense
industrial base. That has five key recommendations, and one is
increasing new entrants and increasing opportunities for small
businesses. But in my examination of DIU, and I have visited
the Silicon Valley operation, I do not really think the
Department or service leadership are really pushing investment
in that venue.
You could talk about other authorities. I think both of you
mentioned the other transaction authorities that we have
provided.
So if what we want to do is promote innovation and speed,
and if we have credible venues that have proven their ability
to do that, why are we not using them more? How do we scale up
use of these innovation acquisition strategies?
Ms. Lord. My opinion is, one, we do not reward individuals
or groups for using these different authorities to innovate and
move quickly, and secondly, we do not do a particularly good
job of training the individuals who need to use these
methodologies, as well as their leadership, about the art of
the possible. So again, if it is not being required it might
not be paid attention to.
So I think this is one of those issues that need to be
unpacked, so to speak, so it is very clear that secretaries of
the services, leaders of agencies, have an expectation that a
certain amount of their procurements will go through these
methods, and then measure what the progress is being made, how
fast it is. Because it is just not getting things on contract.
It is bringing it over the finish line and then making sure it
moves on to a sustainable situation.
Senator Kaine. Mr. Berteau, do you want to add to that? How
can we take existing strategies that can lead to innovation and
speed and actually make them work? We do not need to create new
paths. We just sometimes need to use the ones that we have in a
more effective way.
Mr. Berteau. I am going to try not to get too wonky here,
but you are a man with whom I can get wonky with occasionally.
I just had a discussion with a contracting officer yesterday
that just floored me. The core of the Federal acquisition
regulation and contracts, the one that is burdened with the
most regulations and the most processes, is part 15, and that
is the standard, do everything by the book, all the way
through.
This contracting officer said to me--I said, ``Why aren't
you using,'' and I mentioned another part that has a lot more
flexibility, and he said, ``I am more comfortable with the one
that tells me everything I need to do and I do not have to make
any decisions on my own.''
Senator Kaine. Wow. Wow.
Mr. Berteau. So the point I made earlier, if we do not
actually promote people taking a risk but actually evaluate and
promote them, give them credit for it, that is the only way we
are going to get out of it.
Ms. Lord. I call it creative compliance. You do not want
all of these acquisition officers to be a pilot, or pilots. You
want them to check off every single thing on the checklist. You
want your acquisition professionals to look at the art of the
possible, do just enough to be compliant, but move on. I do not
think we are rewarding that behavior.
Senator Kaine. See, that is very, very important.
Mr. Berteau. If those people get promoted, the rest of the
group will notice it, and they will start doing it.
Senator Kaine. When I was governor of Virginia, my Highway
Department folks, they kind of felt like they could never get
in trouble for not making a decision, and the only way they
would ever get in trouble was making a decision, and that
became a pathology that I think is not unique to the Virginia
Highway Department.
Protecting the U.S. defense industrial base is not just a
DOD responsibility. So the Department of Commerce has a Bureau
of Industry and Security, and here is their mission statement.
They are responsible for, ``advancing U.S. national security,
foreign policy, and economic objectives, by ensuring an
effective export control and treaty compliance system and by
promoting continued U.S. leadership in strategic
technologies.''
Based on your opinion, do the DOD and Commerce work
together in a good fashion on this? Because I am not so much
aware of what Commerce is doing in this space, but they may be
able to be helpful for the DOD.
Ms. Lord. Yeah, I am not sure Commerce is well staffed in
that area with individuals with significant backgrounds. I will
tell you that while I was at DOD we took one of their standout,
stellar civilian employees, Michael Vaccaro, and brought him
over to Industrial Policy at DOD for many reasons, but one was
to have that reach-back and interagency. But I will tell you,
Commerce, DOD, and State really need to work together to make
sure that we become much more contemporary with our
releasability and exportability standards. We need to work with
nations like Australia to help us help ourselves in terms of
our strategic competitions.
Senator Kaine. Thank you. I am over time and I see Senator
Scott chomping at the bit over there.
Mr. Berteau. I have some good news on that point, though,
on the BIS [Bureau of Industry and Security], if I may indulge
myself on that, Senator.
Senator Kaine. Go ahead.
Mr. Berteau. The United States Senate, just last month,
confirmed a long-time defense expert as the Under Secretary of
Commerce over at BIS, Alan Estevez. You are going to have a
much better time having that work together going forward. But I
do not expect immediate results tomorrow.
Chairman Reed. Thank you, Senator Kaine.
Senator Scott, please.
Senator Scott. I think Senator Kaine probably had the exact
same experience when he was governor. You have all these
examples where people--how we bought stuff made no sense. So
let me give you a story. We have hurricanes in Florida, so we
have pre-landfall contracts with the people who do debris
pickup. Whether the Federal Government should be paying part of
it, they pay 75 percent of it, minimum, and as much as 90
percent.
The local contracts were $7, $8.50 a cubic yard. Guess what
the Corps of Engineers was?
Mr. Berteau. Triple.
Senator Scott. Seventy-two dollars.
Mr. Berteau. Ten times.
Senator Scott. It is even better. The same company.
So just think about it. Let us say the number is $200
billion that you are buying. How much money, if we actually
bought like the private sector bought, could we save? How much
money is there out there? How much could we save? If we did
like a company like Textron or how you guys buy things, or
anybody, a normal private company?
Ms. Lord. It is probably going to be at least 50 percent,
but we have done it to ourselves with all the bureaucratic
regulations we have. So I think what we need to do is shift
away from all of the very cumbersome regulations we have for
nuclear reactors and think about when we are buying a shoulder-
launched missile, what the difference is, and use only those
regulations we need. We need to recognize those individuals who
use that creative compliance in hearings like this to call out
the fact that that is the behavior everyone wants to see.
Mr. Berteau. Senator, I was part of a Defense Science Board
study that looked at that exactly question back in the 1990s,
and we concluded, and I think the analysis was arithmetically
pretty accurate, that it was in the range of 30 to 35 percent.
Then I had the privilege of trying to translate that into what
people would actually have to do to achieve that money, and the
number one thing people had to do was get rid of government
bureaucrats. As you know, in your experience as governor, this
is not the easiest thing to do. So that is where we ran aground
very, very quickly. I actually got subpoenaed and hauled up
before the United States Congress because I was going to get
rid of four of those bureaucrats.
Senator Scott. So did either of you ever come and say--let
us say it would be a minimum of the numbers you have got, 30
percent, so $200 billion? That is $60 billion that we can be
spending on something else. Did you ever come in front of us
and say, ``I need this'' and Congress did not give it to you?
Mr. Berteau. I have actually had pretty good success--it
was a long time ago--in coming before Congress, and they did
let us do it. When we consolidated the Defense Commissary
Agencies in 1990, we ended up saving about 30 percent of the
overhead of that operation in the space of 2 or 3 years.
But here is the problem--that is a one-time savings. It is
gone, and then you have still got to maintain the momentum.
Ms. Lord. I think also Congress has given the Department
many authorities. They have been translated through policy and
implementation guidance. What we have not demanded, if you
will, is that those new processes and procedures be utilized as
much as possible, and hold the teams accountable for using
them. It is much safer--you are not going to get in trouble if
you do it the same old way you have always done it, and so
there is a culture shift that has to happen, by rewarding those
who are doing things in the streamlined ways that they can.
Senator Scott. Were you able to do that when you were
there?
Ms. Lord. In small pockets we were able to do it in a
number of areas, but frankly, it took certain personalities who
were personally invested in it. I am not sure that the senior
leadership, other than myself, in the Department really
understood the differences in the different mechanisms and knew
enough to hold their teams accountable.
Senator Scott. Have you ever outsourced a whole bunch? I
mean, in the private sector I used to--I am a business guy--if
I could outsource the whole operation, if it was not a core
function, I mean, why did I do it, right? So if it is not a
core function of government--the core function of, I think, the
military is to be able to be a lethal military, not to be the
best buyer of anything.
Ms. Lord. Right. So I think some really great examples of
outsourcing and using contemporary contracting practices are
launched as a service. That has been incredibly successful. ISR
[Intelligence, Surveillance, and Reconnaissance] is a service,
with contractor-operated, contractor-owned systems. However,
there is a fear factor there about giving that away, and so
that is the cultural issue.
In this day and age, we were just saying earlier, we buy
many things as a service. It is a far more efficient way to do
it and will save us money. But that is very foreign to a lot of
DOD, and they have got to get comfortable with it.
Senator Scott. Thank you.
Chairman Reed. Thank you, Senator Scott.
Senator Rosen, please.
Senator Rosen. Thank you, Chairman Reed, Ranking Member
Inhofe--I know he is not here--but it is a really important
hearing, and it has been really interesting to hear both of you
speak on so many topics. I appreciate your work and you being
here.
I want to focus a little bit on the microelectronics
shortage, because there are a lot of defense businesses in my
state of Nevada. They have discussed with me their challenges
with the supply shortage of microelectronics. Such shortages
not only affect the U.S. computer, numerically controlled CNC
[Computerized Numerical Control] manufacturing base, which
provides machine tools to all major sectors of the U.S.
economy, but also impacts U.S. national security and economic
interests overall.
So while DOD has established a Department-wide supply chain
resiliency working group to address these systemic barriers
limiting microelectronics supply chain, several of my Nevada
delegation colleagues and I recently sent a letter to the
Administration urging them to take a more aggressive approach
to resolving the CNC manufacturing base crisis, because that is
absolutely critical.
So can both of you speak to how the CNC manufacturing base
crisis is affecting the rest of the defense industry, what
steps the Federal Government should do to increase and
stabilize the supply of microelectronics available to the CNC
manufacturing base? Secretary Lord, we can begin with you.
Ms. Lord. Thank you, Senator. The primary issue is that
over decades we have outsourced our microelectronics or
semiconductor industry. Why did we do that? One was
environmental reasons. Another was cost of labor. Another was
cost of materials. The travesty is most of the intellectual
property that goes into that is developed here, yet we have
devices made offshore, even some made here and tested and
packaged offshore.
So we are at the point where we do not have the industrial
capacity and throughput, and it takes an enormous investment to
get that capacity and throughput. So what I believe we are
going to need to see are appropriations. We need to see money
that is going to allow industry to invest, whether those are
long-term contracts or potentially even DPA Title III
investments.
This is a problem that did not happen overnight. It
happened over a long time, and for industry to be able to get
the supply it needs, the trusted supply it needs, we have to
reestablish that supply chain, but businesses are not going to
reestablish themselves unless they can make a profit and be an
ongoing concern. David?
Mr. Berteau. Senator, I have a long history with this.
Senator Kelly earlier mentioned that we went from a high of 40
percent of microelectronics domestic capacity in the 1990s down
to what it was today. It was not 40 percent in the 1980s. It
was in the low 30s. We had a program called Simatek
[phonetic]--I ran the funding to support that--that invested in
the technology capabilities to bring the broader industry
along.
The problem is DOD is such a small part of that. You see
that from your folks as well. In 2004 and 2005, I ran the study
for the National Academies on printed circuit boards, which is
a subset of that, and we concluded two important things, and
one of them is exactly yours. One is DOD will have to spend
more money, and you are going to have to make them do that,
because left to their own devices that money will go somewhere
else. It is not important enough because we do not buy enough.
The second is because we are always one or two generations
behind, we are not drawing from the latest technology, so we
have to figure out how to do two things--get what we need and
sustain innovation. I think there is a huge technical challenge
of mapping the generational gap that we have, because it takes
us so long to buy anything, with the technical capabilities we
need to sustain and support.
So it is not only money for what we need today, it is money
for what we need tomorrow. There is nobody in charge of doing
that.
Senator Rosen. Well, and I would argue with the war in
Ukraine going on, we are talking about backfilling the supplies
that we have already sent, having those CNC microelectronics it
is important because all those things are made, machined that
way, with those computer numerical control.
Mr. Berteau. Yeah. The one thing we do not really build
into our budget is the cost of not doing it.
Senator Rosen. That is right.
Mr. Berteau. Right, because that cost is a future cost. The
cost today is what we need to invest. You just need to keep
reinforcing that.
Senator Rosen. Thank you. I would also like to take--oh,
can I finish my question? I am the last one here. Thank you.
Senator Rounds talked about cybersecurity needs, and I just
want to talk about--it is not just enough to talk about the
needs. We have to talk about the people who actually do the
work.
Last year, in last year's Senate NDAA, as reported out of
this Committee, it included my Civilian Cybersecurity Reserve
Act. It is bipartisan legislation I introduced with Senator
Blackburn to create a civilian cyber reserve that ensures
additional cyber capacity at greatest times of need, just like
we have other reserves. So they are people who work, whether
they are engineers or programmers, not hackers but people who
do cybersecurity, do all of those things. The idea behind the
initiative is we cannot go it alone. We need to bring those
people in, help us at a great time of need. They can do
training, et cetera, et cetera, and then go back to the private
sector.
So I just think that is really important. It is a voluntary
program. I was wondering what you think we could do with that.
What are some improvements that could be made to the defense
industrial base cybersecurity program that would use this kind
of public-private collaboration to take that private sector
expertise and bring it to us?
Ms. Lord. I believe private-public partnerships are
critical for our national security and the cybersecurity
reserve is a great step that way.
I will tell you, I do not think the greater community
understands that program. I am not, to the degree that it has
been implemented. So I would strongly suggest that you go on a
communications campaign about that and that you partner with a
series of universities and colleges, because I think it
benefits all of us and it is a great idea.
Mr. Berteau. I think the National Academy of Public
Administration just did a report for the Department of Homeland
Security and the CISA operation there that concluded that
something on the order of 600,000 jobs needed in the
cybersecurity industry. I am not familiar with the
implementation of your legislation but it is clearly not enough
and we need to do more in that regard.
We have talked a lot about the overall workforce issues.
This is a subset. It may be one of the most important subsets.
Senator Rosen. I think so too. Thank you. Thank you, Mr.
Chairman.
Chairman Reed. Thank you, Senator Rosen, and I want to
thank the witnesses for their extraordinarily insightful
testimony, for their public service which has been remarkable.
This is a fundamental issue for our national security. It
is not as appreciated as many other issues. I hope that we can
bring the focus of this Committee onto the issues that we have
discussed today. Both in the short run and the long run, we are
going to need a very, very vigorous and dependable industrial
base.
With that I would again like to thank you, and I adjourn
the hearing. Thank you very much.
[Whereupon, at 11:34 a.m., the Committee adjourned.]
[Questions for the record with answers supplied follow:]
Questions Submitted by Senator Jack Reed
mergers and acquisitions
1. Senator Reed. Ms. Lord and Mr. Berteau, do you believe The
Department of Defense (DOD) has sufficient data and analysis tools to
maintain insight into a baseline for the defense industrial base (DIB)
to improve the ability to proactively assess the impact of any merger
or acquisition actions?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. In response to these two questions, the long history
of DoD assessments of proposed mergers and acquisitions shows first,
that DoD considers each proposed action as a separate action for
assessment and decision and second, that government-wide decisions may
not agree with DoD's position.
In the first question, PSC suggests that the Committee require DoD
to report not only on the baseline assessment of the defense industry
but more importantly on what the goals of such assessments should be.
Too often, mergers are assessed against the impact on DoD contracts. I
respectfully suggest that they should also be assessed against U.S.
long-term national interests. Competition in domestic markets needs to
be balanced against competition globally.
Perhaps equally important is the enforcement of compliance with
covenants to which companies agree as the basis for approval of a
merger or acquisition. Anecdotal evidence indicates instances where
companies do not comply with such covenants. The Committee might
request a report from DoD to determine the degree to which this is a
problem.
2. Senator Reed. Ms. Lord and Mr. Berteau, do you believe DOD has
authority to block any mergers and acquisition of contractors they
believe would cause harm to the defense industrial base. If DOD does
not, what would this authority look like?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. In response to these two questions, the long history
of DOD assessments of proposed mergers and acquisitions shows first,
that DoD considers each proposed action as a separate action for
assessment and decision and second, that government-wide decisions may
not agree with DoD's position.
In the first question, PSC suggests that the Committee require DOD
to report not only on the baseline assessment of the defense industry
but more importantly on what the goals of such assessments should be.
Too often, mergers are assessed against the impact on DOD contracts. I
respectfully suggest that they should also be assessed against U.S.
long-term national interests. Competition in domestic markets needs to
be balanced against competition globally.
Perhaps equally important is the enforcement of compliance with
covenants to which companies agree as the basis for approval of a
merger or acquisition. Anecdotal evidence indicates instances where
companies do not comply with such covenants. The Committee might
request a report from DOD to determine the degree to which this is a
problem.
intellectual property
3. Senator Reed. Ms. Lord, what are your thoughts on how to balance
intellectual property (IP) rights desired by the government in support
of the acquisition and sustainment of weapons programs with the desire
of companies to protect IP that may be commercially sensitive?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
industrial base planning
4. Senator Reed. Ms. Lord and Mr. Berteau, how could the Department
better plan for, react to, and make strategic trade-offs in cases where
emerging needs for a technology involve long lead times that are
compounded by obsolescent manufacturing lines or processes (including
collecting, coordinating and analyzing existing data and applying
analytic tools to support decision making)?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. DOD currently has too little information on its
dependency on obsolete requirements, products, and processes. However,
we have seen from the war in Ukraine that systems that do not meet
DOD's needs may still be useful to other nations.
__________
Questions Submitted by Senator Jeanne Shaheen
ukraine
5. Senator Shaheen. Ms. Lord and Mr. Berteau, I was pleased that
last week President Biden appointed retired Lieutenant General Terry
Wolff to manage the swift delivery of urgently needed security
assistance to Ukraine, something that I and my colleagues Senator
Portman, Senator Wicker and Senator Durbin recently called for. What
steps should he and the Department of Defense be taking to identify
technologies available across the commercial defense industrial base
that are available and can make an immediate impact in bolstering the
Ukrainians' defenses?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. There appears to be general agreement that the
security situation in Ukraine and its ongoing fight against Russian
military forces will remain fluid for the foreseeable future. Thus, the
types and quantities of capabilities required by Ukrainian forces--
particularly through the various United States security assistance
programs--cannot be static. To date, I believe there has only been one
official DOD request for information (RFI) regarding possible industry
support to Ukrainian forces, a Defense Logistics Agency RFI released on
April 22 with a due date of May 6, 2022. In the weeks since that
deadline, the Department has shared little feedback with industry on
submissions received. Given the constantly changing nature of the
conflict and the evolving demands for support from the U.S. and our
allies and partners, it seems clear that DOD would benefit from
providing industry with on open-ended opportunity to propose and
provide information on solutions that could serve Ukrainian--and United
States--interests.
There are practical steps that DOD officials can take to identify
needed capabilities that would bolster Ukraine's defenses. First, DOD
could create a portal for proposed solutions, building on the example
set by the OSD COVID portal originally created by the Office of
Industrial Policy in the weeks immediately after the COVID-19 emergency
declaration in March 2020. Such a portal should be appropriately
resourced and sufficiently transparent so that industry could receive
feedback on their proposals in a reasonable timeframe. In addition, DOD
officials could meet regularly with their industry colleagues--perhaps
using trade associations to expand the reach--to share information
about urgent capability requirements and about the Department's
decision-making and approval process(es).
small business innovation research/small business technology transfer
programs
6. Senator Shaheen. Ms. Lord and Mr. Berteau, the Small Business
Innovation Research and Small Business Technology Transfer, or SBIR and
STTR, programs will lapse at the end of this fiscal year if Congress
does not extend the authorizations. How detrimental to the defense
industrial base would it be for the SBIR and STTR expire?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. SBIR and STTR are important programs for both small
businesses and the Department. PSC recommends that the Congress
reauthorize and refine, as appropriate, these two critical programs.
Such refinement, for example, would recognize that participating
companies often face a ``valley of death'' after their initial
investments in research and development, as they try to move to SBIR
Phase III wherein they would access funding outside of the SBIR
program. The committee should consider legislative language that would
require development of simplified, standardized procedures for
``graduating'' work to Phase III test and evaluation, production, etc.
7. Senator Shaheen. Ms. Lord and Mr. Berteau, do you believe it is
in the best interests of the defense industrial base to simply
permanently reauthorize the program?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. Yes, after demonstrating its value for nearly four
decades, the program should be made permanent. PSC looks forward to
supporting the committee's efforts to do so.
8. Senator Shaheen. Mr. Berteau--in your statement, you cited
statistics showing that the number of companies that participate as
prime contractors or subcontractors dropped from 60,000 to 41,000--the
vast majority being small businesses. Additionally, you mentioned that
current DOD policies punish small businesses for growth because they no
longer become eligible for ``set aside'' awards only given to small
businesses. What policies and regulations are needed to reward small
businesses for growth?
Mr. Berteau. The practical results of the government's efforts to
boost the participation of small businesses in the federal market have
been mixed. Regardless of the funding amounts going to small business
prime contractors, we continue to see a decline in the number of small
businesses working with and for the government. This situation extends
beyond DOD to include the entire Federal Government.
For many small commercial entities--who often have limited access
to capital and other critical resources--the barriers to entry for the
federal marketplace can be prohibitively high. For example,
requirements for specific accounting systems, potentially burdensome
reporting and disclosure requirements, and demands to demonstrate
``relevant'' past performance can deter such small businesses from
bidding. They may not have the scope and scale to operate in the manner
the government demands, particularly with constantly evolving
requirements.
PSC has long recommended that the Congress conduct a review of how
the government measures small business participation, specifically the
reliance on information related to prime contract dollars versus small
business utilization at prime and subtier contracts. Alternative
methods to measure progress could include the number of businesses
participating in the federal marketplace, job opportunities that result
from small business and set-aside programs, and/or additional
subcontracting requirements. Measures such as these may provide a
clearer picture of the impacts of the government's small business
policies and programs.
Currently federal agencies and their staff are not incentivized to
focus on creating more small business jobs through to small business
subcontractors. They only get credit in government scorecards--or in
annual performance reviews for senior executives--for dollars awarded
to small business prime contractors. Jobs and innovation can come from
subcontractors as well as primes. It may be worth considering how to
reward relevant government personnel for all small business jobs and
funds, not just some.
For additional information and suggestions specific to DOD, please
see PSC's response to the ``Notice of Request for Comments on Barriers
Facing Small Businesses in Contracting with the Department of
Defense.''
submarine industrial base
9. Senator Shaheen. Ms. Lord, I was pleased to see the President's
Budget Request include $750 million for the submarine industrial base,
which supports a number of New Hampshire companies that are critical
suppliers for our submarines and develops the next generation workforce
to maintain submarines at the Portsmouth Naval Shipyard. How important
are sustained investments in our submarine industrial base for
correcting the years of neglect after the end of the Cold War and
ensuring we retain our critical technological superiority over
adversaries like China and Russia?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
aukus
10. Senator Shaheen. Ms. Lord, through AUKUS, Australia, the UK and
the United States are expected to more profoundly collaborate on the
advanced systems, like hypersonics, needed to keep pace with China.
What benefits does this agreement bring to the United States and its
industrial base?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
11. Senator Shaheen. Ms. Lord, as we develop these new, advanced
technologies, how can we best expand and mature our defense industrial
base to meet the often complex requirements of these new systems?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
__________
Questions Submitted by Senator Kirsten E. Gillibrand
accelerating acquisition speed
12. Senator Gillibrand. Ms. Lord and Mr. Berteau, what aspects of
the Federal Government's contracting process do you recommend adapting
to better facilitate acquisition of emerging technologies?
Mr. Berteau. In addition to the burdensome and sometimes arcane
nature of the Federal Government's procurement processes, it simply
takes too long to identify, generate, and validate a requirement, to
translate that requirement into a solicitation, to evaluate offers, and
then to award the contract. Each of these steps can take anywhere from
several months to several years, and the cumulative effect can delay
acquisition and fielding of needed capabilities.
We need to be able to identify and field technologies faster. Once
the government identifies a need, it should be able to obtain those
goods and services as quickly as possible. This is especially critical
given the pace of technology change in contractor-proposed solutions,
which can change dramatically between the time at which a requirement
is identified and years later at the time of delivery of that
capability to the government customer.
Recognizing the adverse impact of extensive procurement
administrative lead times (PALT) on procurement outcomes, Congress
acted to reduce PALT by requiring the government to ``develop, make
available for public comment, and finalize'' a definition of PALT and a
plan for measuring and publicly reporting this data for contracts. In
January 2021, OMB's Office of Federal Procurement Policy provided a
PALT definition and guidance to federal agencies so they can ``reduce
PALT in their acquisition activities through modern business practices
that shorten the time from the identification of need to delivery of
value.''
At PSC, we believe that PALT has increased rather than been
reduced. A review by the Committee and/or the Government Accountability
Office of how DOD is implementing this requirement--particularly as it
related to purchasing and applying emerging technologies--would be
timely and prudent.
13. Senator Gillibrand. Ms. Lord and Mr. Berteau, do you think
certain defense programs should be excluded from federal acquisitions
regulations altogether?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. PSC understands the value that non-FAR-based
contracting procedures can bring to the Department and to participating
companies. Other Transaction Authority agreements, certain set-asides
and use of Federally Funded Research and Development Centers (FFRDCs),
and the creation of new marketplaces are a result of the frustrations
with the burdensome and cumbersome requirements imposed on the
government and contractors during the acquisition process. However, PSC
believes that the government should eliminate unnecessary and
duplicative FAR-based requirements for all companies, rather than
create avenues to circumvent the existing process for a subset of them.
If certain requirements are unnecessary for some, they should be
unnecessary for all.
14. Senator Gillibrand. Ms. Lord and Mr. Berteau, DOD has used
other transaction authority (OTAs) contracts to develop prototypes with
industry for emerging technologies to speed the acquisition process.
How has this contracting method been received by the DIB? Should we
expand the use of this authority?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. PSC believes that OTA agreements, when appropriately
managed and with appropriate oversight mechanisms, have a role in the
acquisition toolbox. That said, I would reiterate that if requirements
are deemed unnecessary for certain acquisitions, they should be
reviewed for their necessity for all acquisitions.
foreign military sales
15. Senator Gillibrand. Ms. Lord, I just returned from a trip to
India and Nepal. These countries would love to acquire United States
produced helicopters and other weaponry. But the challenge is that such
sales take too long--it is so cumbersome that countries turn to China
or Russia. What issues have our allies and partners raised about the
timeliness of the American FMS process and what can we do to increase
the speed of developing long term partnerships with such countries
through FMS?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
__________
Questions Submitted by Senator Mazie K. Hirono
education and training partnerships
16. Senator Hirono. Mr. Berteau, the COVID-19 pandemic has stressed
the supply chain and highlighted the importance of a U.S.-based
workforce. The 2021 report from the Defense Critical Supply Chain Task
Force recommended the Department form partnerships between the DOD and
industry, academia, and other entities to incentivize and increase the
education and training of the U.S. workforce. What are the primary
hinderances to a more robust domestic workforce?
Mr. Berteau. PSC believes that the primary hindrances to a more
robust United States-based workforce in the defense industry include
excessive emphasis on lowest-price contracts without regard to
maintaining the long-term workforce needed, the challenges in security
clearances for contractors and in providing reciprocal recognition of
clearances between agencies, and a focus on input in contracts instead
of outcomes.
17. Senator Hirono. Mr. Berteau, what partnerships have been formed
since the release of the Task Force report to bolster the U.S.
workforce?
Mr. Berteau. PSC is unaware of any widespread new partnerships
formed since the Task Force report recommended them.
shipbuilding
18. Senator Hirono. Ms. Lord, there are significant maintenance
delays for a number of the Navy's ships which have triggered delays for
the maintenance, repair, and building of other vessels. Given the delay
in our Nation's maintenance of ships and China's rapid naval expansion,
are additional or expanded authorities or funds necessary to facilitate
domestic shipbuilding and maintenance?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
19. Senator Hirono. Ms. Lord, are the delays primarily caused by a
lack of parts or a lack of manpower?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
20. Senator Hirono. Ms. Lord, has the Defense Production Act been
invoked to supply parts for ship maintenance?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
21. Senator Hirono. Ms. Lord, what partnerships has DOD forged
between industry or academia to train a new generation of shipyard
workers?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
supply chain
22. Senator Hirono. Ms. Lord, supply chains have both been stressed
by the pandemic and attacked outright by adversaries. How does DOD
work, alone or with partner agencies, to deter and defend against
cyber-attacks on the supply chain?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
23. Senator Hirono. Ms. Lord, what stage of the supply chain is
most vulnerable, and how is the U.S. working to defend these
vulnerabilities?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
24. Senator Hirono. Ms. Lord, how do domestic industries alert DOD
to possible cyber-attacks?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
cybersecurity maturity model certification (cmmc)
25. Senator Hirono. Ms. Lord, Mr. Berteau, DOD created the
Cybersecurity Maturity Model Certification (CMMC) to ensure Defense
Industrial Base contractors are following best cybersecurity practices
when handling sensitive data. It is important that companies come into
compliance with CMMC but it is also challenging for small businesses to
meet the requirements for certification. DOD should focus on ways to
help small businesses meet CMMC requirements as they make up more than
three-quarters of the Defense Industrial Base. What can DOD do to
encourage prime contractors to help their sub-contractors, particularly
small businesses, come into compliance with CMMC?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. The range of cybersecurity threats to the United
States, the Department of Defense, and the industrial base is real and
growing. Past approaches are not sufficient to meet these evolving
threats.
Cybersecurity rests on a partnership between government and
industry, working together to address growing cybersecurity threats
with a robust response to protect our infrastructure, information
(including operational information as well as technical data for weapon
systems), and supply chains, including software, telecommunications,
and data systems.
Accordingly, PSC supports the idea of DOD pursuing a unified
cybersecurity standard based on `best practices' to secure the
industrial base and for examining programs that may assist small
businesses with cyber hygiene and the costs for addressing
vulnerabilities, including Project Spectrum and the Trusted Capital
Program.
Other options include having DOD provide the infrastructure--the
servers, the security structure, etc.--so that a small business can
operate without having to own it themselves. Of course, part of the
problem is you give up some of your privacy and rights if you are
participating in a government-operated program. Another option is for
large contractors to provide that structure for their small business
subcontractors. This would require new authorities and funding to
implement.
Additionally, small businesses--like companies of all sizes--would
benefit from increased transparency on the requirements, timelines and
compliance costs that the Department will impose.
However, while these and similar programs may contribute to a more
secure ecosystem and to the ability of small businesses to achieve and
afford compliance with CMMC, they are not enough. Standards evolve more
slowly than the threat. A compliance-focused approach looks back,
rather than forward. Rules that apply to DOD only, or even only to all
government contractors, are too narrow in their reach. A nationwide
approach is needed.
impact of decommissioning on maintenance and repair work--both
witnesses
26. Senator Hirono. Ms. Lord, decisions and rumors about which
ships are slated to be decommissioned can have unintended consequences
on companies that are contracted to perform ship repair and maintenance
work. What can DOD do to mitigate the impact of decommissioning on ship
repair and maintenance contractors?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
27. Senator Hirono. Ms. Lord, Mr. Berteau, What can DOD do to
encourage companies to remain in the Defense Industrial Base even when
they lose out on contracts or a decision is made to divest of their
product?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. In addition to improving the overall acquisition
environment, two improvements DOD could make to keep companies in the
industrial base are better business forecasts and improved contract
award debriefings.
Business forecasts
Congress can and should provide companies with additional
information on their specific contracting opportunities and on the
overall market landscape. Greater transparency in government
procurement opportunities and approaches help companies have the
stability and predictability to remain in the marketplace if/when they
choose.
Federal contractors rely on procurement forecasts to conduct
business planning activities and better meet the needs of government.
The Committee should propose requirements for agencies to provide
improved, timely information to the public on acquisition forecasts,
choices of instruments, source selection criteria, contract types, and
cancelled solicitations.
A procurement forecast is often the first step for those companies
who want to contract with DOD. Yet many forecasts contain incomplete,
inconsistent, or out-of-date information and the availability of this
information is wildly varies across the Department and federal
agencies. PSC released its 4th annual Business Forecast Scorecard,
reporting on 62 federal agency on-line forecasts of coming contracts.
You can find the results here, followed by this press release. Some DOD
entities received favorable scores, but others did not, and some are
missing entirely. PSC would support Congressional efforts to require
DOD to report on progress improving its forecasts to increase the value
to contractors who use them to remain or enter the market.
Enhanced Debriefings
Similarly, the Congress took a step toward assisting small
businesses by enacting Section 818 of the Fiscal Year 2018 NDAA. This
provision required DOD to provide comprehensive debriefings to
offerors, to help them understand what went right and wrong with their
bid and how to improve in the future.
This provision was implemented initially by a class deviation and
then a final DFARS rule. PSC's anecdotal evidence suggested that these
debriefings can be valuable when adequately provided but are neither
well known nor widely utilized. PSC requests Committee efforts to
review the use and value of the debriefings provided by DOD since Sec.
818 was implemented.
__________
Questions Submitted by Senator Jacky Rosen
maintaining our defense technological edge
28. Senator Rosen. Ms. Lord, global competition, declining R&D,
contracting challenges, and the STEM workforce gap are a few
impediments eroding our technological edge with adversaries. I'd like
to get your thoughts on an issue I've raised before in this committee--
the ``valley of death,'' which is the point in the DOD innovation cycle
when cutting-edge technologies die before they can win a contract to
produce software or equipment at scale. One of the gaps in the defense
technology development process is the lack of private capital interest
in defense-centric startup companies. What are specific steps the
Department of Defense can take to improve the transition of successful
technology prototypes to the point of production, and then rapidly
field these technologies at scale so that we can leverage technology to
better compete with our adversaries? How can the Department of Defense
better incentivize private capital investments in small to medium size
defense companies and does it need any new authorities to do so?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
__________
Questions Submitted by Senator Mark Kelly
stem education
29. Senator Kelly. Ms. Lord and Mr. Berteau, in 2018 the previous
administration released an analysis of the resiliency of the U.S.
manufacturing and defense industrial base. The analysis identified a
few challenges driving risk within our defense industrial base, one of
them being a decline of STEM-related skills within the labor force,
particularly among younger Americans. Over time this decline can result
in a lack of innovation, placing our technological and competitive edge
at risk. This is an issue that I've focused on as Chair of this
committee's Emerging Threats and Capabilities panel--because we need
these skills to continue to outcompete countries like China. In your
view, what concrete steps can this Congress take to curtail that
decline and promote an increase in STEM-related skills?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. For STEM-related workers, as for the entire federal
and contractor blended workforce, PSC believes that creating and
supporting a more robust United States-based workforce in the defense
industry is the best way to promote such an increase. Barriers to this
include excessive emphasis on lowest-price contracts without regard to
maintaining the long-term workforce needed, the challenges in security
clearances for contractors and in providing reciprocal recognition of
clearances between agencies, and a focus on input in contracts instead
of outcomes.
impact of executive orders on existing contracts
30. Senator Kelly. Ms. Lord, I am curious about your views
regarding the impact of inflation on the defense industrial base. My
office has heard concerns from industry that DOD has been slow to
adjust agreements to reflect the realities of inflation, and that the
Department has not been forthcoming in adjusting contracts generally to
reflect certain realities, such as when changes are made to contracts
at the government's insistence to comply with a new Executive Order.
These changes have real impacts on the costs for contractors that we
count on to deliver national security critical systems. In your view,
does failure to account for costs impact the industrial base?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
__________
Questions Submitted by Senator James M. Inhofe
munitions--ammunition
31. Senator Inhofe. Ms Lord, we discussed a lot about guided
munitions, such as stingers. However, I also have concerns about
ammunition supply chain vulnerabilities. My understanding is a little-
known mineral compound, called antimony trisulfide, plays a unique role
in its application for primers. Antimony primarily comes from and is
processed in China, but also from Russia. I worry that without a
domestic source and processing capabilities of this little-known
compound, that is inherent and strategically important to the lethality
of our armed forces, we will, in the not so distant future, run into
ammunition supply shortages. Did you know this about antimony and do
you think we need to secure domestic sourcing and processing
capabilities for not just antimony, but a variety of other minerals
that are almost entirely sourced from China and are at the same time
strategic components in our national security platforms?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
__________
Questions Submitted by Senator Roger F. Wicker
estimated inflation rate
32. Senator Wicker. Ms. Lord and Mr. Berteau, in preparing the
budget for fiscal year 2022, the Department of Defense used 2.2 percent
for its predicted inflation rate. Furthermore, in preparing the budget
for fiscal year 2023, the Department of Defense used 2.6 percent for
its predicted inflation rate. Are the DOD's estimates of inflation
realistic for 2022 and 2023?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. The estimate for fiscal year 2022 may have seemed
adequate at the time the president's budget was submitted, but it was
clearly unrealistic by the time fiscal year 2022 appropriations were
enacted in March of this year. While inflation for fiscal year 2023 is
harder to predict, it is unlikely that the assumptions in the fiscal
year 2023 President's Budget will reflect reality.
Inflation, including controlling future costs and recovering actual
costs incurred, is a top and immediate concern for the contractor
community and an issue that cannot wait for the fiscal year 2023
appropriations bills to be enacted. Contractors across the board are
seeing dramatic increases in their costs--for materiel at every step of
their supply chains, for transportation, and for the skilled labor
necessary to provide much-needed capabilities in support of federal
missions.
While component and raw material supply chain concerns have been
regularly assessed and discussed, the impact of inflation on our
contractor workforce has been not received the attention it deserves.
With wage growth of roughly 8 percent year over year, a contractor that
operates on a 5 percent margin may not be able to absorb wage growth
that outpaces that margin and still stay in business. This is needs to
be urgently addressed.
Industry will suffer if DOD tries to address the impact of
inflation one contract at a time. Thanks to years of low inflation, few
current contracts include the contract clauses that would allow
companies to request price adjustments to recover inflation-related
costs. With hundreds of thousands of contracts every year across a
variety of agencies and sub-agencies, it is not possible to amend every
relevant contract.
Rather, contracting officers need guidance that would cover all
contracts--``blanket'' guidance, so to speak. The Office of Management
and Budget (OMB)--or the heads of agencies if OMB does not act--should
issue such guidance to their program and contracting officers that
would let companies recover inflation-related costs, subject to the
availability of funds.
In the case of one agency, the General Services Administration
removed the cap on the number of requests for equitable price
adjustments (EPAs), easing just one of several constraints. GSA's
temporary moratorium on the limits to these requests is a positive step
but it (a) does not make more money available; (b) does not direct
contracting officers to proactively allow for EPA requests, when funds
are available; and (c) does not provide an expedited timeline for
consideration of such requests. Currently, there is a tight time limit
at the front end for filing requests, but there is no real time limit
for how quickly the government processes payments to contractors.
Consistent with Part 1.6 of the Federal Acquisition Regulation (the
FAR), government-wide guidance would provide contracting officers with
both an affirmative responsibility on the individual contract, but also
a responsibility to maintain the long-term viability of the business
base that's supporting the government across the board.
This could and should be done quickly, and without legislation. As
an example, the government can look to the beginning of the pandemic,
when OMB guidance instructed contracting officers across the Federal
Government to maximize teleworking for contractors, even if there was
no clause in the contract that permitted such teleworking. The
government did not need to modify each contract. All that guidance did
was provide direction to the contracting officers to make that
decision. The same thing could--and should--be done very quickly with
recovering costs from inflation.
__________
Questions Submitted by Senator Dan Sullivan
shrinking defense industrial base
33. Senator Sullivan. Ms. Lord and Mr. Berteau, the recently
released DOD report, ``State of Competition within the Defense
Industrial Base'' says that ``[o]ver approximately the last three
decades, the number of suppliers in major weapons system categories has
declined substantially: tactical missile suppliers have declined from
13 to 3, fixed-wing aircraft suppliers declined from 8 to 3, and
satellite suppliers have halved from 8 to 4. Today, 90 percent of
missiles come from 3 sources.'' In your estimation, what is the most
effective way to lower barriers to entry for small businesses to
adequately compete for defense contracts?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. One measure of the defense industrial base is the
number of companies that participate as prime contractors or
subcontractors. A recent report from the Center for Strategic and
International Studies cited the drop in overall numbers of companies
with one or more prime contracts from DOD, from more than 60,000 in
2009 to roughly 41,000 in 2020. Experience tells us, though, that those
numbers alone are not the full story.
More than 25,000 of those 41,000 companies in 2020 are small
businesses, and their contracts are frequently awarded through various
programs that ``set aside'' awards only for eligible small businesses.
This does help keep small businesses going, until they outgrow their
eligibility for those ``set-aside'' contracts. PSC analysis shows that
once such companies ``graduate'' from small-business status, their
success in winning DOD contracts drops precipitously. In other words,
DOD and federal small business policies and practices punish growth
rather than rewarding it. This is not the way to attract more companies
to do business with DOD.
For many small commercial entities--who often have limited access
to capital and other critical resources--the barriers to entry for the
federal marketplace can be prohibitively high. For example,
requirements for specific accounting systems, potentially burdensome
reporting and disclosures, and relevant past performance can deter such
small businesses, who do not have the scope and scale to operate in the
manner the government demands and cannot afford to stay in business to
comply with existing and constantly evolving requirements.
PSC has long recommended that the Congress conduct a review of the
government measures small business participation, specifically the
reliance on information related to prime contract dollars versus small
business utilization at prime and subtier contracts. Alternative
methods such as the number of businesses participating in the federal
marketplace, job opportunities that result from small business and set-
aside programs, and/or additional subcontracting requirements may
provide a clearer picture and better achieve the goals of the
government's small business policies.
Currently federal agencies neither measure, track, nor reward small
business funding and jobs generated by small business subcontractors.
They only get credit in government scorecards--or in annual performance
reviews for senior executives--for dollars awarded to small business
prime contractors. PSC believes that innovation can come from
subcontractors as well as primes and that the government should
recognize all small business jobs and funds, not just some.
The SBA could base their small business score on the total dollar
value of the award, considering both prime and subtier contracts to
small business concerns with equal weight in their annual scorecard.
This would better reflect the participation of small businesses in the
federal market.
For additional information and suggestions specific to DOD, please
see PSC's response to the ``Notice of Request for Comments on Barriers
Facing Small Businesses in Contracting with the Department of
Defense.''
34. Senator Sullivan. Ms. Lord and Mr. Berteau, if we fail to
correct this trend of shrinking competition in the defense-industrial
base, how would this impact our ability to prepare for and prevail in a
great power conflict?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
Mr. Berteau. For centuries, one of America's great national
security strengths has been the dynamic partnership of government and
the private sector. This partnership is vital. In DOD, contractors
provide a wide range of goods and services to the warfighter, as well
as the components and agencies of the Department. These contractor
contributions are essential maintain national security, and the
government benefits from a strong, diversified national interest
business base to support its current and emerging requirements.
This is especially true and relevant as we look at potential great
power conflicts and the technology that would be utilized by our
adversaries in a conflict. Diversity and variety in the government
contractor community brings diversity and variety in the solutions that
could be procured and deployed.
critical minerals sourcing
35. Senator Sullivan. Ms. Lord, in 2019, the Lynas Rare Earths
company was awarded a $30.4 million contract under a Defense Production
Act Title III technology agreement to establish domestic processing
capabilities of critical minerals. This award aligns with the previous
executive orders to ensure supplies of rare earth elements and
strengthen defense supply chains. Fortunately, other companies are
answering the call as well; undertaking similar processing and refining
projects across the country, including at locations like the Bokan mine
project in Alaska. Do you believe the DOD should continue to provide
DPA Title III awards to companies answering this requirement?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
36. Senator Sullivan. Ms. Lord, how does over-regulation regarding
environmental considerations inhibit domestic critical mineral
production and processing capabilities?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
37. Senator Sullivan. Ms. Lord, globalized competition in the
critical minerals space has presented substantial challenges to
domestic and allied manufacturers, whom often must exit the industry
amid a lack of comparative advantage. As a result, the United States
has come to rely heavily on foreign sources for critical weapon system
components. Do you believe we are doing enough to create domestic
supplies of critical minerals to address our over-reliance on foreign
resources?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
38. Senator Sullivan. Ms. Lord, how should we balance cost-
effective procurement with national security concerns about foreign
sourced materials?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
requests for equitable adjustments
39. Senator Sullivan. Mr. Berteau, unprecedented levels of
inflation, combined with a delayed appropriations bill this previous
year, has significantly impacted the defense industrial base. Deputy
Secretary Hicks was recently quoted saying that despite this, the DOD
has ``not seen a huge influx'' of equitable adjustments to contracts.
In your written statement submitted to this committee for this hearing,
you state, ``[i]f I were still in DOD, rather than saying that we don't
yet see a problem because few requests have been received, I would try
to get in front of this problem by estimating the additional funding
needed to cover this cost growth and looking at ways to meet those
costs.'' What must be done to better enable the defense industrial base
to deal with consistently delayed appropriations and current
inflationary pressures?
Mr. Berteau.
Delayed Appropriations
Delays in appropriations harm the entire Federal Government but hit
DOD particularly hard. Agency budget officers hold back needed funds
until at least one month after final appropriations are enacted, which
for this fiscal year meant mid-April, more than half way through the
fiscal year. The congressionally-chartered commission on DOD's
Planning, Programming, Budgeting, and Execution (PPBE) system will
hopefully address this question, but PSC believes that the best way to
deal with ``consistently delayed appropriations'' is to stop doing
them.
On-time appropriations enable DOD to contract faster and better and
to get the results sooner. In a competition with China, achieving such
timely results are critical. Continuing resolutions would be a top item
in the wish list of those nations who would undermine America and
freedom around the world. PSC urges Congress each year to enact
appropriations in advance of the start of the fiscal year. For DOD,
this has happened exactly once in the past 13 years.
Inflation
Inflation, including controlling future costs and recovering actual
costs incurred, is a top and immediate concern for the contractor
community and an issue that cannot wait for the fiscal year 2023
appropriations bills to be enacted. Contractors across the board are
seeing dramatic increases in their costs--for materiel at every step of
their supply chains, for transportation, and for the skilled labor
necessary to provide much-needed capabilities in support of federal
missions.
While component and raw material supply chain concerns have been
regularly assessed and discussed, the impact of inflation on our
contractor workforce has been not received the attention it deserves.
With wage growth of roughly 8 percent year over year, a contractor that
operates on a 5 percent margin may not be able to absorb wage growth
that outpaces that margin and still stay in business. This is needs to
be urgently addressed.
Industry will suffer if DOD tries to address the impact of
inflation one contract at a time. Thanks to years of low inflation, few
current contracts include the contract clauses that would allow
companies to request price adjustments to recover inflation-related
costs. With hundreds of thousands of contracts every year across a
variety of agencies and sub-agencies, it is not possible to amend every
relevant contract.
Rather, contracting officers need guidance that would cover all
contracts--``blanket'' guidance, so to speak. The Office of Management
and Budget (OMB)--or the heads of agencies if OMB does not act--should
issue such guidance to their program and contracting officers that
would let companies recover inflation-related costs, subject to the
availability of funds.
Consistent with Part 1.6 of the Federal Acquisition Regulation (the
FAR), government-wide guidance would provide contracting officers with
both an affirmative responsibility on the individual contract, but also
a responsibility to maintain the long-term viability of the business
base that's supporting the government across the board.
navy shipbuilding plan
40. Senator Sullivan. Ms. Lord, released last week, the Navy's 30-
year shipbuilding plan states, ``[t]he buildup in the 1950s and 1980s,
followed by ``bust'' periods of little production, each led to the loss
of portions of our shipbuilding industrial capacity,'' and that, ``[w]e
are at a level of fragility in the supplier base, amplified by COVID
impacts, such that without consistent and continuous commitment to
steady and executable acquisition profiles the industrial base will
continue to struggle and some elements may not recover from another
`boom/bust' cycle.'' Given the evolving requirements that emerge from a
dynamic geopolitical landscape, how do we attain more consistency in
these production cycles?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
41. Senator Sullivan. Ms. Lord, new classes of ship such as the
Light Amphibious Warship (LAW) and various unmanned vessels could be
built in smaller shipyards, increasing competition and driving costs
down for these contracts while allowing larger shipyards to focus on
large surface combatants, amphibious ships, and nuclear submarines.
What are your thoughts on the role smaller shipyards can play in
delivering new vessels to accelerate the Navy's ship growth?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
hypersonics
42. Senator Sullivan. Ms. Lord, one sector that has been stifled by
reduced competition is the testing and production of hypersonics. The
recently released DOD report on the ``State of Competition within the
Defense Industrial Base,'' says that ``[w]ithin this sector, many
primes, first-tier subcontractors, and first-tier material suppliers
are positioning themselves to acquire lower-tiered hypersonic
contractors and material suppliers. This vertical integration will
likely lead to reduced competition and may eliminate it altogether.''
How should we combat the trend of vertical integration in the
hypersonics market and defense industrial base as a whole?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
__________
Questions Submitted by Senator Marsha Blackburn
small businesses
43. Senator Blackburn. Ms. Lord, with a substantial decline in
small business competition, what are the immediate and long-term
implications of only having approximately five prime contractors?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
44. Senator Blackburn. Ms. Lord, what are the benefits and
disadvantages between consolidation and competition within the DIB?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
cybersecurity
45. Senator Blackburn. Ms. Lord, what steps are companies that
provide critical components to the Department of Defense (DOD) taking
to mitigate adversary malicious cyberactivity?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
46. Senator Blackburn. Ms. Lord, how is the DOD supporting these
companies, and is this a system-wide or ad hoc issue?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
47. Senator Blackburn. Ms. Lord, what shortfalls do you identify in
the current industrial base and acquisition policies and practices
concerning DIB cybersecurity?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
national technology and industrial base (ntib)
48. Senator Blackburn. Ms. Lord, how have Beijing's malign actions
influenced the role of NTIB integration with allies and the commercial
marketplace?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
munitions industrial base
49. Senator Blackburn. Ms. Lord, how can we address the gap between
production time of munitions and energetics production lead time?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
50. Senator Blackburn. Ms. Lord, how is the crumbling
infrastructure of our government energetics production facilities a
single point of failure in a protracted conflict?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
__________
Questions Submitted by Senator Josh Hawley
chinese printed circuit boards
51. Senator Hawley. Ms. Lord, I led efforts last year to pass
legislation phasing out the Department of Defense's use of Chinese
printed circuit boards inside of our Nation's critical defense systems.
We ultimately succeeded, but it was a multi-year fight, in large part
because major corporations and their allies seemed determined to put
profit ahead of protecting our national security. What should Congress
or the Department itself do going forward in order to overcome this
kind of resistance from industry, so we can end our reliance on Chinese
inputs for some of our most sensitive military systems?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
defense industry consolidation
52. Senator Hawley. Ms. Lord, over the past few decades the defense
industrial base has increasingly become consolidated, where now only a
handful of companies are conducting the critical defense and aerospace
work for the Department. In your opinion, how has the consolidation of
the defense industrial base impacted DOD's ability to acquire the
capabilities it needs, when it needs them, at reasonable cost?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
53. Senator Hawley. Ms. Lord, how should we address the fact that
DOD is now effectively reliant on just a handful of prime defense
contractors for many--most, even--of the most important programs
currently underway?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
effects of inflation
54. Senator Hawley. Ms. Lord, we are currently experiencing some of
the worst inflation our country has ever seen. How have these soaring
prices, high inflation, and supply chain disruptions impacted our
defense industrial base and its ability to do the critical national
security work needed to keep pace with competitors such as China and
Russia?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
sole-sourcing limits on production surge capacity
55. Senator Hawley. Ms. Lord, according to recent reporting, the
Air Force relies on a sole-source vender to repair its military
aircraft. If surge capacity is needed, how would this type of reliance
on a sole-source impact our ability to surge effectively in the event
of a potential conflict in the Indo-Pacific?
Ms. Lord did not respond in time for printing. When received,
answer will be retained in committee files.
[all]