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Defense contractors expected to struggle to meet weapons demand

Inflation is also driving up firms' costs for wages, materiel and transportation

Ukrainians unload Javelin anti-tank missiles at Boryspil airport in January.
Ukrainians unload Javelin anti-tank missiles at Boryspil airport in January. (Sean Gallup/Getty Images)

Defense manufacturers will struggle to quickly replace the stores of weapons the U.S. and other nations are providing Ukraine, witnesses told members of the Senate Armed Services Committee Tuesday.

The Defense Department has likely sent about a quarter of its available inventory of Stinger ground-to-air missiles, said Ellen Lord, who served as the Pentagon’s top weapons buyer during the Trump administration. And because government demand has been inconsistent over the years, the companies in the defense industrial base will take time to make more at peak production levels, she said.

“We cannot, within the next couple of years, produce more because we have a problem with the government not paying to maintain production capacity,” said Lord, who is the former CEO of Textron Systems, which makes combat vehicles and drones among other defense products. During lulls, equipment is not inspected, tested and maintained to the same standards, and gaps can emerge in the supply chain, she said.

“Even with the Javelin [anti-tank missile], which we do have a hot production line right now, we are still five years out to probably developing all the munitions we need,” she said.

David Berteau, president and CEO of the Professional Services Council, a trade group for government technology and professional services companies, said that while there are discussions underway, the Pentagon has not put a single contract in place to start replenishing the munitions and other stores that are shrinking because of the conflict in Ukraine.

In some cases, the U.S. has distributed as much as one-third of its available stocks in just two months, he said. If the war in Ukraine lasts longer than six months, those stores could be completely empty.

“There is no way a contract is going to deliver a replacement in that time, even if we started today,” said Berteau, who served as assistant secretary of Defense for logistics and materiel readiness during the Obama administration. “We’re behind, and you guys should push them to hurry up.”

Sen. Richard Blumenthal, D-Conn., urged the Biden administration to invoke the Defense Production Act, saying the U.S. had distributed one-third of its available Javelin missiles.

“We’ve lost the luxury of time here,” he said. “The closet is bare.”

It will take about a year to ramp up from the Pentagon’s current annual buy of about 1,000 Javelins per year to maximum production, Blumenthal said. Replenishing U.S. stocks would take up to 32 months, he said.

Lord encouraged Congress to provide funds for defense companies to invest in the infrastructure they need to ramp up production — including new buildings, equipment and tooling — under the Defense Production Act.

Prices rising

In addition to the strain caused by the war in Ukraine, inflation poses a major challenge for the companies, Lord said.

Inflation makes it harder for the firms to meet fixed-price contracts because of rising costs, including labor, materiel and transportation, she said. The same applies to cost-plus contracts, where the company is paid an additional amount over its expenses in producing a particular item or service.

And that’s just for existing contracts, she noted. Inflation also makes it difficult to negotiate future contracts, when neither side has a solid idea of what expenses may be.

“It’s both in the government and industry’s best interests to have multi-year contracts,” Lord said. “However, how can you negotiate a three- or five-year contract when you don’t understand what inflation is going to do, and when there hasn’t been a mechanism for quickly addressing cost growth?”

Lord said the most helpful thing that Congress could do would be to authorize and appropriate supplemental funds above the enacted fiscal 2022 budget to make up for inflation, so that productivity shortcomings caused by inflation don’t undercut military effectiveness in the near term.

“If you leave it to individual contract officers” to make equitable adjustments to existing contracts, “we will not get it done in time before we see a downward spiral in our capability.”

Berteau noted that half of the inflation is caused by a shortage of workers that is driving up wages.

“It is not the fault of the government that there aren’t enough workers to go around to fill the needs that are there,” he said. Companies that are members of the Professional Services Council have tens of thousands of vacancies in positions needed to fulfill current contracts, and they are struggling to either recruit, retain or get security clearances needed to keep them filled.

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