Pentagon’s December Contracts Climbed 8% as Logjam Eased

Pentagon contracts climbed 8 percent last month to $24.9 billion as the military worked to clear a backlog caused by October’s partial government shutdown.

The top agreement was shared by Northrop Grumman Corp. (NOC), Leidos Holdings Inc. (LDOS), Raytheon Co. (RTN) and four other companies, according to data compiled by Bloomberg. The contract is valued at as much as $4 billion for research and development to counter weapons of mass destruction.

The gain from November doesn’t necessarily mean defense contract spending is rebounding. December’s deals paled in comparison with the $36.3 billion a year earlier. In addition, the 16-day partial government closing delayed awards and contributed to a surge after agency offices reopened.

“We are still living with the overhead of the temporary government shutdown,” said Loren Thompson, a defense analyst with the Lexington Institute, an Arlington, Virginia-based research organization.

The federal government has been operating under a temporary spending bill, or continuing resolution, that barred new programs and higher production levels.

Defense spending also has been hindered by the across-the-board cuts known as sequestration, though a budget agreement passed by Congress last month would provide $22.3 billion in relief for the Pentagon.

Defense Cuts

The military announced 295 contracts in December, compared with 198 awards with a maximum value of $23 billion during the previous month. The Defense Department is required to announce contracts of at least $6.5 million.

Contributing to December’s gains was the fact that the last month of each quarter is usually the busiest for awards, said Brian Friel, a Bloomberg Industries analyst. The Pentagon also pushed out as many contracts as possible in December 2012 because of the looming threat of sequestration, he said.

The $4 billion contract awarded by the Defense Threat Reduction Agency on Dec. 3 was the biggest of the month. It replaces expiring contracts given to the same companies for work in combating weapons of mass destruction from terrorist groups and rogue states, Friel said.

“This area of developing technology to respond to terrorist threats has obviously been a growth area,” he said.

The seven companies are guaranteed a minimum of $100,000 apiece under the so-called indefinite delivery, indefinite quality contract, which may run through 2023.

Top Contract

Falls Church, Virginia-based Northrop, Waltham, Massachusetts-based Raytheon and Reston, Virginia-based Leidos are the largest federal contractors on the agreement. Spokesmen for all three companies declined to comment on the award.

The other vendors are Engility Holdings Inc. (EGL), based in Chantilly, Virginia; Applied Research Associates Inc., based in Albuquerque, New Mexico; and Exelis Inc. (XLS) and Alion Science & Technology Corp., both based in McLean, Virginia.

Only one other contract topped $1 billion last month. That Defense Logistics Agency award for aviation fuel went to a unit of Royal Dutch Shell Plc. (RDSA) It was announced Dec. 11 and is worth as much as $1.36 billion through April 30, 2015.

Chicago-based Boeing Co. (BA), the No. 2 U.S. contractor, on Dec. 12 was awarded the third-biggest contract, worth a maximum of $872.8 million for F/A-18 and EA-18G aircraft upgrades for the Navy and several foreign countries. The work is expected to be finished in December 2018.

The fourth- and fifth-biggest contracts were awarded by the Defense Logistics Agency to two Texas-based oil companies, Exxon Mobil Corp. (XOM) of Irving, for $872.6 million, and to Valero Energy Corp. (VLO) of San Antonio, for $769.7 million. The aviation fuel contracts expire April 30, 2015.

To contact the reporter on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net

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