Pentagon Vows to Better Align Profit With Performance

The Pentagon wants to better align profits paid to defense contractors with improved performance, the military’s top weapons buyer told an investors conference.

“I don’t think we do as good a job as we should” in tying profits to how well a project is executed, Frank Kendall, undersecretary of defense for acquisition and technology, told a Credit Suisse Group AG conference yesterday in New York.

Kendall discussed the Defense Department’s draft “Better Buying Power 2.0,” intended to refine an initiative first unveiled in 2010 to improve the purchase of weapons and services.

“In the aggregate, we will reward better performance,” Kendall said. “We have a history in the department, to some degree, of paying a certain kind of margin no matter what,” he said. “We don’t want to do that” anymore.

The Pentagon’s approach “is anything but a war on profit” for defense contractors, he said. “Profit is our tool to get lower cost, to get better performance,” he said.

Current defense industry profits “in the aggregate are probably about reasonable,” Kendall said, so he didn’t predict a “fundamental shift” to lower margins due to Pentagon policies.

“I would like to use those profit margins” to encourage better performance by more clearly specifying in contracts the extent to which profits are tied to meeting cost goals, he said.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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