CMI Explains: What do US military contractors do and how much do they make?
When you think of a United States defense contractor, you probably conjure up thoughts of companies like Lockheed Martin and Boeing making big, expensive, state-of-the-art jets and missiles. Though companies like these make up a significant portion of contractors, the expanse of government contracts go far beyond them. So besides making planes and missiles, was else do contractors do? Which companies are responsible for these contracts? And how much do they make from said contracts? In this CMI Explains, we take a closer look into US military contractors and the expanse of their services.
At its simplest, a government contractor is a private company that produces goods and services for public government agencies (in this case the Department of Defense/military). The government employs the private company by awarding a contract. Companies compete against each other by submitting proposals with a focus on keeping the cost as low as possible. In fact, the Department of Defense is required by law to accept the lowest cost bid. However, some of these contracts are anything but cheap. For example, in FY19, the Department of Defense awarded $597 billion in contracts total, over $48 billion of which was allocated to Lockheed Martin alone (which was the highest earner). However, the Department of Defense awards thousands of smaller contracts. The only ones that are disclosed to the public are over $25,000.
How does the demand for these contracts come about? In terms of defense contracts, it depends on the greater militaristic and geo-political context. For example, during the Cold War, the risk of nuclear war between the two world superpowers (the US and USSR) was a constant threat. In their eyes, the best way to prevent a nuclear war was to consistently advance military technology and intimidate each nation away from aggressive military actions. As a result, there was a demand to research and develop the latest technology in airplanes, missiles, ships, submarines, and radar. This demand led to the need for specialized expertise, which were mostly centralized in private companies and engineering firms.
What do these private companies produce/provide while under contract? This can be split into two broad categories: things produced and services provided. Things produced is the stereotypical idea of a government contract. Using the Cold War contracts example from above, Lockheed Martin was contracted to design and develop such iconic planes like the SR-71 Blackbird, F-16 Falcon, and F-117 Nighthawk (which my dad actually worked on while he was employed by Lockheed). Since the end of WWI, pretty much every major airplane, ship, missile, drone, radar system, gun, or armor built for militaristic use was produced by a private company as a result of a government contract. The one big exception in all that time is the Apollo and Space Shuttle programs, which was undertaken by a government agency, NASA. But even they used contractors to build certain parts of the rockets, like the boosters.
On the other hand, the Department of Defense contracts private companies to provide services, rather than just build stuff. For example, when reviewing the Department of Defense’s top 100 contractors, you’ll notice that there are several notable consulting companies on the list. In fact, Booz Allen Hamilton is one of the Department of Defense’s most contracted companies. These consulting companies advise on a variety of projects ranging from bureaucratic hiring oversight to budget management. They are hired to perform research and recommend efficient actions, just like what a consultant would do for a private company. Furthermore, practically any service that needs to be provided to the Department of Defense is handled through a government contract. For example, many military bases have food chains on them. As a result, McDonalds is one the government’s top 100 contractors. The contracts can be for services as menial as hiring a plumber to oversee all the plumbing on the military base. These contracts really have no bounds.
Caught up in all of this government spending is that it is very profitable for the private sector. As stated above, Lockheed Martin earned $48 billion in government contracts in FY19. For reference, that accounts for over 83% of its revenue (total of $59 billion). Fortune 100 companies like Exxon, Chevron, General Electric, Raytheon, Boeing, IBM, and Northrup Grumman all earn at least 20% of their revenue strictly from government contracts issued through the Department of Defense.
It also helps that the Department of Defense has an immense financial budget. In 2020, its annual budget was $750 billion, with over $590 billion of it going to independent government contracts. The military also doesn’t shy away from spending these funds. For example, the Department of Defense has paid Lockheed Martin $1.3 trillion to research, develop, and construct the F-35 Lightning II fighter jet over the past 15 years.
So, if the government has so many resources, then why do they grant contracts to private businesses? Though the Department of Defense has a massive budget, the cost of building up the infrastructure to undertake these projects would be immense. It is much more efficient for the government to hire Lockheed Martin to build an airplane, since they already have the facilities, equipment, employees, and expertise already in place. If the government decided to undertake these projects on their own, it would take years and billions of dollars to reach Lockheed’s capabilities. Also Lockheed would not be the only company under contract when building the airplane. In regards to the F-35 project, Lockheed Martin was contracted for the overall design of the plane.
But sub-contractors were also included for specific parts on the plane because of their specialized expertise, like Raytheon for the radar and electronic systems in the jet. Furthermore, since these companies are concerned with profits at the end of the day, they have to be more mindful of efficient practices and business procedures. When putting together their bids for the contract, they must optimize the logistics to undertake the project in a way that is both economical in terms of time and resources. As a result, the private company maximizes revenue and the government gets the planes quickly for use.
Though the Department of Defense clearly has the funds and the will to invest them in the greater economy, there are still some complications. For instance, the government rarely awards contracts to small businesses. According to a 2012 study, only 22.5% of all federal government contracts are won by small businesses. As a result, the concentration of the Department of Defense’s contracts is going to a small portion of large companies. This relationship between this select group of private companies and the Department of Defense has garnered an infamous title over time, the “Military-Industrial Complex.” It has been a source of controversy dating back to former President Dwight Eisenhower’s farewell address in 1961.
There are concerns of this relationship manufacturing great profits for companies as a result of war or militaristic action. In a sense, the Department of Defense and contractors are incentivized to remain active in geopolitical events to secure jobs and inflows of capital. War is expensive and there is a lot of money to be made from it. Furthermore, considering how many jobs these contractors provide the economy, it can be argued that the Executive is pressured to retain a military presence to uphold stable jobs and quash unemployment. In a sense, a more peaceful world means lost profits and higher unemployment, something that company executives and politicians want to avoid.