As the Pentagon works to increase the use of contractor-based logistics, industry officials are hoping reports of flaws in the system will not impede the trend.

Better Buying Power 2.0, Pentagon acquisition chief Frank Kendall's contribution to the never-ending effort to improve military acquisition and logistics, lays out the steps to increasing the use of performance-based logistics (PBL) contracts. A guidebook containing the tenets, analytics, metrics and a request for proposal template, is due Dec. 1.

“The department can achieve improved readiness at significant savings if PBL business arrangements are properly structured and executed,” Kendall writes. “PBL's success, however, is dependent on ensuring the workforce has the expertise and support to properly develop and implement PBL arrangements.”

The Pentagon has had difficulty managing its logistics supply chain and its performance-based logistics contracts. The Department of Defense Office of Inspector General (Dodig) has conducted a series of audits highlighting overspending.

In 2011, a Dodig report found the military purchased a small ramp gate roller assembly from Boeing for its Chinook CH-47 helicopters for $1,678 apiece. The Defense Logistics Agency (DLA) was purchasing the same part for $7.71. After the report, Boeing voluntarily returned about $1 million to the military. Other instances abound. The Army continues to purchase now-obsolete seats for General Dynamics' Stryker vehicles that will never be used. The DLA purchased enough guide assemblies for Sikorsky UH-60 Black Hawk helicopters to last for 38 years.

There are a number of reasons for this disparity, according to a senior Pentagon official. DLA is charged with purchasing and distributing small parts via the military's supply chain. But if there is any difficulty in obtaining parts through DLA, the services turn to PBL contracts, which lack the cost-containment incentives that exist at DLA, the official says.

Procedures for stopping the flow of small parts are not written into PBL contracts. So services wind up spending big to keep certain programs at a 90% efficiency rating. Once that is attained and excess capacity is still being purchased, the services find it hard to turn off the spigot.

If the Pentagon tries to stop the flow of gear through PBL awards, contractors can take their case to Capitol Hill, where lawmakers fight to maintain the status quo, the official says.

Daniel Goure of the industry-funded Lexington Institute, does not dispute that contractors have made occasional missteps. But he contends that occasional waste is worth the potential savings of well-managed PBLs. He fears that inspector general-issued reports finding flaws in one-off logistics contracts could undermine the benefits of the trend toward increasing PBLs.

The Pentagon has an institutional bias against PBL contracts, particularly if they last for more than one year, Goure says. “They hate being locked into a contract.”

PBLs often get a bad reputation because some are written in a manner that overstates needs. PBL contracts that demand a 90% readiness rate are going to cost more than ones that stipulate a lower level of readiness. “A properly structured PBL will save you money,” he says.

And the third major problem is that the Pentagon fails to rely enough on the best practices of the commercial supply chain. “The government does not embrace it at all or embraces it half-heartedly,” he says.

The Pentagon could do more contracting with companies that provide services for the government to oversee logistics contracts for platforms made by other companies.

As the Pentagon shop moves toward increasing PBLs, the senior defense official has ideas for rooting out waste before it leads to another embarrassing report—or more new anti-waste rules. The inspector general has identified backlogs just by cross-checking data on parts against the rate of usage. The services could monitor the databases on their own to curtail wasteful spending before it spirals out of control, he says.

On the positive side, there are some examples of increased platform reliability and cost savings. In 2011, Boeing's Apache Worldwide Support was nominated for an Aviation Week Laureate Award. The program's flight hours increased by 20%, and reliability of components eventually far outclassed reliability specifications.

By reforming the military supply chain to use commercial best practices, Goure boasts he could save the Pentagon $40 billion, enough to make up for a year's worth of anticipated budget cuts.