How the Sequester Will Increase Defense Costs

Posted July 31, 2013 at 3:18pm

National Journal

“If a company has prepared for more business, for instance, it may have invested in machines, buildings, staff, and even parking lots. Less volume means charging higher prices to defray those costs… Giving companies a guarantee for, say, 500 parts in set quantities over five years would yield one stable price, but suppliers could mitigate their risk by charging…more for a softer order.”

“The 39 planes the U.S. purchased in 2011 cost $120 million each. But in 2018, 180 planes will cost $75 million each. So when Lockheed more than quadruples the production rate, the customer saves $45 million per airplane. It’s difficult to predict whether a long-term cost hike would exceed the short-term savings, but it’s fair to say that if the government still plans to buy roughly the same total number of planes, it would save by doing so in large batches, rather than dribbling out the order over time.”

Meanwhile, The Hill reports that the Defense Department will reduce the number of days that it will furlough civilian employees.

“To cut the furloughs by five days, the Pentagon would need to find $900 million in savings to make-up for the added workdays.”

Crossposted at Wonk Wire.