Strategic Withdrawal
Defense contractors are turning down business from their largest and most reliable client, the Pentagon. This growing trend, publicized in a recent article by the Wall Street Journal, isn’t just a fluctuation in the defense industry’s business practices; it’s a stark indication of the deep-seated challenges now facing those who operate within this complex ecosystem. The essence of this evolving scenario is not merely about declining opportunities but underscores a broader narrative on the strategic recalibrations necessitated by today’s fiscal realities and contracting environments.
The heart of the issue lies in the intricate process of aligning contract bids with the dual objectives of meeting the Pentagon’s stringent requirements and contract type while ensuring the contractor’s financial viability. Finding this equilibrium is further complicated by the inherent uncertainties and the high stakes involved. Misjudging costs or failing to accurately predict project complexities can lead to bids that, while potentially winning, may ultimately prove unprofitable.
“When those plans are ironed out, and weapons are ready for production, the Pentagon often switches to fixed-price deals. The parties agree on a price, but companies are left on the hook if costs run higher.” –WSJ.
Defending the Bottom Line
Due to the government’s limitations on profit margins, companies can expect miscalculations resulting in widespread consequences ranging from eroded profit margins to significant financial and reputational loss, transforming potential opportunities into burdensome liabilities. L3Harris Technologies dropped out of competing for a new Navy missile last summer and skipped another one in the fall. CEO Chris Kubasik said, “I will sacrifice revenue for earnings and cash every day of the year.”
This predicament is exacerbated by the reality that a substantial portion of a project’s costs—estimated to be between 80% and 90%—is determined during the initial design and development stages. Decisions made at this juncture can profoundly impact a project’s long-term affordability and, by extension, its viability. A flawed cost estimate or an inadequate assessment of the project’s technical and logistical challenges can set a trajectory toward financial underperformance.
Adding Cost Estimation Software to the Arsenal
This escalating situation begs for technology that surpasses traditional cost-estimating methods, pointing towards the necessity for innovative software solutions to provide credible, defendable, and dynamic cost assessments. Cost estimating software, like Unison Cost Engineering’s, TruePlanning®, offers contractors a crucial advantage: the ability to model various scenarios, account for uncertainties and risk, and ultimately arrive at cost estimates that are both competitive and realistic.
TruePlanning® provides a dynamic and flexible estimating solution to enable winning more business in less time, allowing the organization to:
- Orient products to customer affordability and/or market-driven pricing
- Treat product cost as an independent variable during requirements definition
- Work to achieve target cost during product and process development
- Achieve the price goal without sacrificing functionality and quality
As contractors seek to find their way in working with the Pentagon, the role of predictive modeling to ensure the credibility and reliability of cost estimates is becoming critical. In the absence of robust cost estimates, defense contractors face a challenging future: each new bid is a gamble, while choosing not to bid forfeits potential gains. In order to address this challenge, companies who do business with the government must invest in cost engineering software and processes to ensure a profitable outcome.