US Military scaling back on outside contractors

No part of the country has benefited more from defense contracts than Northern Virginia. The Pentagon awarded $25 billion last year to Northern Virginia companies in large part because they're right next door. The companies provide everything from software support to administrative services to food catering.

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But businesses in Northern Virginia are worried about their best customer. Last summer, U.S. Secretary of Defense Secretary Robert Gates announced plans to cut spending on contractors by 10 percent a year for three years, a scary prospect to many Northern Virginia businesses.

�That would just be devastating,� says Bobbie Kilberg, president of The Northern Virginia Technology Council. Kilberg says Gates' proposed contracting cuts could reduce projected economic growth in Northern Virginia by as much as 50 percent.

Cuts to contractors would not reduce the military's bottom line, however. Defense Secretary Gates wants to keep the Pentagon's budget in tact, and has called for the military budget, overall, to continue to grow at 1 percent a year after inflation. Gates says reducing outside contracts will allow him to shift money to higher priorities within the military.

The question is: Can the Pentagon more wisely use its dollars by spending within or contracting out? Stephen Fuller, a professor of public policy at George Mason University in Northern Virginia, said outside contractors play an important role and can provide certain services more efficiently and more quickly than the government.

�The federal government has a long history (of relying on outside contractors), they want good airplanes, they don't build them themselves. They go to Lockheed Martin or to Boeing and say we need new material, invent me something radar can't see. And they do it,� said Fuller.

�If you want good art, you don't hire a federal artist, you hire a freelance artist.�

But there's a bottom line: The Pentagon simply can't afford to pay all it's outside �artists� at the same trajectory of growth. In 2000, the Pentagon awarded $133.8 billion in defense contracts; in 2009, that number reached $354.7 billion.

Of course not every defense contractor will see its funding cut, and the Pentagon will still be doling out hundreds of billions of dollars a year. Even after the cuts, contractors will be getting far more dollars than just a few years ago.

Rich Wilkinson with the Northern Virginia software firm Deltek, which provides services to government contractors, said that may be true, but it still hurts when it's your ox that's about to be gored.
�The idea that we've had a good run for 15 or 20 years is cold comfort, to be honest with you,� said Wilkinson.

Still, businesses here will have to learn to diversify their customer base and not count on the government to buy all their stuff, said Stephen Fuller at George Mason University. He said Northern Virginia businesses have been largely shielded from the downward swings of the economy since 1982.

Those days appear to be numbered. One of the primary tasks of the new Congress will be tackling government debt. President Obama has said, �Everything must be on the table.�

That includes defense spending, which accounts for more than 19 percent of the federal budget. The defense budget has grown from $310 billion in 2001, prior to the start of the wars in Afghanistan and Iraq, to $664 billion in fiscal year 2010.