Defense firms sound inflation alarm as Congress mulls 2023 budget

Trade groups representing defense companies large and small are pushing lawmakers to add tens of billions of dollars to the Pentagon’s budget to make up for months of high inflation that is only now starting to level off.

One group, the National Defense Industrial Association, estimates that inflation will cost the Pentagon $110 billion in lost “buying power” between fiscal years 2021 and 2023. 

“This loss comes at a dangerous time,” NDIA said in a new white paper that it began circulating on Tuesday. “DoD faces the challenge of keeping pace with China while the defense industrial base (DIB) it depends on still suffers from COVID-19, supply chain, and workforce challenges.”

NDIA, the Aerospace Industries Association, and the Professional Services Council urged lawmakers to take inflation into account when reviewing the Pentagon’s fiscal 2023 budget request—and particularly if they pass a stopgap spending measure in the absence of a full-year appropriations bill.

“To protect readiness, maintain critical acquisition and [research-and-development] schedules, and avoid waste, we request that Congress consider inflation when setting the topline for a continuing resolution,” the associations wrote in a Monday letter to Senate and House appropriations leaders.

NDIA said the Pentagon needs $815 billion, a $42 billion increase, to keep pace with inflation in 2023.

“If the shortfall is left unaddressed, we should expect to see over time growing maintenance backlogs, lower readiness ratings, delays in modernization efforts, cost overruns in weapon and construction programs, and further disruptions to recruiting and retention,” NDIA said.

The calls from trade groups to increase spending come as the federal Bureau of Labor Statistics reported Tuesday that overall prices stayed nearly flat in August, registering just a .01 percent increase. But many investors had expected a decrease, and the news drove a nearly 4 percent decline in the Dow Jones index, the largest single-day drop in two years.

Last week, Bill LaPlante, the Pentagon’s top weapon buyer, said he was most concerned about smaller suppliers going out of business because they are locked into contracts that were signed before the inflation spike.

“[I]f you're in an [firm-fixed-price] contract that was signed in 2020,...it's got to suck when it's 2022 with an inflation rate of 10 to 11%,” LaPlante said. “That's what I'm worried about.”

Cumulative inflation over the past year has been 8.6 percent, the Bureau of Labor Statistics reported Tuesday. In June, overall inflation hit a 2022 high of 9.1 percent.

On Monday, the Pentagon gave its contracting officers new directions on how to deal with inflation, signaling that they may give companies more money under “extraordinary circumstances.” In some instances, they can decline to penalize companies if they deliver items late.

“[T]here may be circumstances where an accommodation can be reached by mutual agreement of the contracting parties, perhaps to address acute impacts on small business and other suppliers,” John Tenaglia, the principal director of defense pricing and contracting, wrote in a memo.

The associations called on lawmakers to authorize and direct LaPlante to adjust contracts.

“Companies are being critically harmed, and it may not be sustainable for smaller companies to remain in the defense ecosystem,” the groups wrote. “The disruptions from inflation are far more significant than just the temporary  funding measures. We must not disincentivize companies from working with the government if we want a competitive marketplace.”

In its white paper, NDIA took that a step further, arguing that Congress should order the Pentagon to adjust contracts, even fixed ones, for inflation.

“Congress should direct that contract prices are adjusted for inflation,” the white paper states. “Programs that are currently being executed and that were priced prior to the onset of inflation should be adjusted to correct for unexpected inflation. Future contracts should include an automatic inflation adjustment clause.”

Defense companies have not been immune to the worker shortages and supply chain troubles that have plagued the country in recent years.

Some progressive Democrats have argued that the Pentagon doesn’t need additional cash, especially since there are no longer thousands of troops deployed in Afghanistan and Iraq. They instead argue the extra money should be spent on other issues, including combating climate change and the COVID-19 pandemic. 

But a bipartisan group of lawmakers in the Democrat-controlled Congress added tens of billions of dollars to President Biden’s 2022 budget request—and lawmakers are poised to do so again for the upcoming fiscal year. The four defense oversight committees have already added tens of billions of dollars to the Pentagon's $773 billion budget request. But with 17 days left in the fiscal year, Congress has yet to pass any of that legislation.