Northrop Grumman is pushing hard for another inflation bailout from Congress this year.
The corporation is lobbying lawmakers for price increases to existing firm fixed-price Pentagon contracts. In materials for lawmakers obtained by POGO, Northrop cites inflation to justify higher prices without providing data that could back their claim by showing inflation’s impacts.
Northrop states that price adjustments are a “common tool” to mitigate cost fluctuations on fixed price contracts. This is true. What isn’t common is Congress statutorily authorizing those price adjustments. Contract price adjustments are complicated and typically left to contracting officers at the Pentagon.
It’s also uncommon to alter a contract after it’s finalized. The only time to authorize potential price adjustments to a contract is during the contract’s development and negotiation, and even then, a trained contracting officer at the Pentagon makes that decision — not Congress!
So imagine the Pentagon’s surprise when Congress snuck an inflation bailout into the final fiscal year 2023 defense policy bill. Lawmakers negotiating the final bill airdropped a provision into the legislation temporarily transforming a law designed to be a safety net for contractors experiencing extraordinary financial hardship. Due to this provision, for the duration of fiscal year 2024, the law enables price adjustments to existing contracts when, “due solely to economic inflation,” the cost of performing a contract exceeds the contract price.
But the temporary modification to the law does not require contractors to prove that cost increases resulted from inflation. Congress effectively greenlit contract price increases to cover any financial losses that corporations might experience, so long as they cry poor because of inflation.
Put another way, lawmakers turned a safety net of last resort into what can be simply characterized as profit insurance. Lawmakers left the Department of Defense to deal with the fallout of this nonsensical move, requiring the Pentagon to issue guidance on how to implement the bailout for military contractors. We’ve heard nothing but crickets from the Pentagon all year.
To be fair, the department had already rejected an earlier attempt to statutorily authorize inflation-based price adjustments.
“The problem is that Northrop is bragging about spending all its free cash on shareholders while telling Congress that it can’t afford to do its job without more taxpayer money.”
The main reason for the Pentagon’s opposition was that a company agrees to assume risk when it signs a firm fixed-price contract. Inflation is one of those risks. The Pentagon clarified this in two separate 2022 memos on mitigating the impacts of inflation. Unless a corporation negotiated a clause in its fixed price contract that provides for price adjustments due to unexpected inflation, that corporation must bear the financial impacts of inflation — even if doing so cuts into a contractors’ shareholder returns, a major priority for Northrop Grumman. Indeed, Northrop Chief Executive Officer Kathy Warden recently noted on an earnings call that the corporation is “committed to returning over 100% of its free cash flow to investors.” Warden said the company has paid over $2 billion to shareholders through stock buybacks and dividends so far this year.
Now, companies can do whatever they want with free cash flow. Cash is king for a reason. The problem is that Northrop is bragging about spending all its free cash on shareholders while telling Congress that it can’t afford to do its job without more taxpayer money.
Northrop is framing price adjustments as necessary inflation relief for low-rate initial production of the B-21 Raider, a nuclear bomber it suggests is critical to our national security strategy. Without additional funding, Northrop writes, the corporation will be “unable to invest in the future growth” of the B-21 — a pretty classified program that is one of the most expensive military aircraft in U.S. history. But the actual provision that Northrop is lobbying Congress to include in the National Defense Authorization Act (NDAA) would statutorily authorize price adjustments to all existing firm fixed-price contracts — not just Northrop’s.
By framing the need for inflation-related contract price adjustments within the context of the B-21 bomber, Northrop creates a sense of urgency around enacting the provision to advance America’s first new bomber in decades. But the corporation’s focus on the B-21 obfuscates military contractors’ persistent efforts to obtain statutory authorization for price adjustments to existing contracts industry-wide.
Military contractors have been citing inflation to promote price adjustments to existing contracts for well over a year. Yet the NDAA provision to authorize price adjustments does not mention inflation, much less the B-21. So despite what Northrop’s lobbyists suggest, it isn’t just about inflation, the B-21, or even national security strategy. The provision would set the precedent for corporations to squeeze more money out of Congress whenever “unforeseeable macroeconomic” conditions arise, regardless of whether those corporations signed contracts assuming the financial risk of potential disruptions like inflation. The authorization would undermine the whole point of firm fixed-price contracts, encouraging corporations to try to change the terms of those contracts whenever they anticipate potential financial losses.
The B-21 program simply offers Northrop lobbyists a sexy vehicle to sell the provision to lawmakers, who already rejected this provision verbatim (see Sec. 829) last year — at least partially because the Pentagon pointed out that corporations with firm fixed-price contracts are responsible for bearing unforeseeable cost increases. The provision’s failure prompted Congress to find another way to bail out industry for its unproven inflation burden in the final FY 2023 NDAA.
The Pentagon had other issues with the language, beyond the fact that corporations assume risk when they agree to firm fixed-price contracts. While sympathetic to the notion that smaller businesses might be struggling because of inflation, Pentagon acquisition chief William LaPlante said last year, “I need data about companies that are either potentially going under or not bidding that are affected by inflation. Because we need to inform the Congress, we need to inform the Pentagon … we need to show the data.” There are no public indications that the Pentagon was ever provided such data. Last October, the Pentagon stated that it had no plans to institute a policy to increase contract prices due to inflation.
“By framing the need for inflation-related contract price adjustments within the context of the B-21 bomber, Northrop creates a sense of urgency around enacting the provision to advance America’s first new bomber in decades.”
Before that, the Pentagon had supplanted its calls for data justifying price adjustments by cautioning against potentially pervasive adjustments to existing firm fixed-price contracts. In the 2022 memos, Pentagon Defense Pricing and Contracting Principal Director John Tenaglia directed contracting officers to limit the scope of price adjustments on existing fixed-price contracts.
He not only explained that corporations with firm fixed-price contracts are responsible for bearing unforeseeable cost increases due to inflation. The director also pointed out that contractors already had access to inflation relief through an existing law designed to be a safety net for contractors at risk of going out of business. (That safety net is now glorified profit insurance.) So the proposal to adjust contract prices isn’t just unjustified: It is also unnecessary and contrary to Pentagon guidance.
Tenaglia outlined the parameters of price adjustment clauses for any Pentagon contracting officers who were actively pondering whether to include one in a developing fixed-price contract. Such a clause would constitute a fixed-price contract with economic price adjustments, a different contract type than a firm fixed-price contract.
He noted that appropriate price adjustment clauses “will not be one-sided, but will be fair to both parties,” explaining that price adjustments may be a good tool for “contracts being developed or negotiated during this period of unusually high inflation.” Tenaglia went on to say that contract price adjustments must be based on pre-established formulas that “allow for both upward and downward revision of the stated contract price.”
In other words, any authorization to adjust contract prices must establish a clear framework to determine why and how much a contract price might change in the future. Such a framework ensures that any potential price adjustments are equitable to both the taxpayer and the contractor. This is why price adjustments are left to contracting officers.
In its resources for Congress, Northrop disregards both the Pentagon’s calls for data justifying requested inflation relief and its guidance on mitigating inflation impacts. The corporation appeals to Congress by referencing inflation and Northrop’s support for “employees and the Raider supply base throughout the pandemic” to help justify its money grab, without providing receipts. Northrop even cites the Pentagon’s aggregate data on procurement cost increases since 2015 to try to demonstrate a need for inflationary relief — anything but data demonstrating how much the corporation is hurting from inflation, much less how exactly inflation has impacted the B-21 program.
Northrop’s lack of data is particularly curious given the material it provided lawmakers for the Department of Defense appropriations bill — the legislation that outlines how money will be distributed after a topline figure is authorized. The corporation proposes $590 million of inflation “relief” for the B-21. The material doesn’t clarify how Northrop came up with $590 million of so-called inflation relief for the program. And again, the legislative text that Northrop promotes for the defense spending bill is not about the B-21 program. The actual provision requests that lawmakers appropriate an additional $1.5 billion for procurement, research, development, and test and evaluation across all five military services “to reflect revised economic assumptions.”
Northrop provides some insight into its economic assumptions in its 2022 annual report. The corporation wrote that it believed “one or more of the [low-rate initial production] options could be performed at a loss,” explaining that the range of potential loss for low-rate initial production of the B-21 was between $0 and $1.2 billion. How it came to that conclusion is perplexing, and it even stated in the same paragraph that it did not “believe a loss is probable” on any of the B-21 contract options for low-rate initial production. Further, Northrop wrote that it had not “recognized any such loss” as of December 31, 2022.
So Northrop lobbyists are peddling year-old talking points on inflation to garner more funding for the B-21, without providing data to back them up and without explaining what losses the corporation experienced on the program in the past 11 months.
“As was the case with last year’s bailout, Congress would depend on the Pentagon to figure out how to implement the bailout.”
If lawmakers authorize and allocate money for this bailout, the only saving grace for taxpayers could be the Pentagon (imagine that). As was the case with last year’s bailout, Congress would depend on the Pentagon to figure out how to implement the bailout. The department could once again fail to issue guidance, subverting Congress’s bailout for military contractors.
Otherwise, one can only hope that lawmakers are asking questions. All (public) signs point to Northrop passing this provision off as inflation relief for an already wildly expensive program while paying shareholders over 100% of its free cash. The least lawmakers can do is due diligence on the B-21. Northrop must provide data illustrating how inflation impacted the B-21 program this year.
The Pentagon did not respond to repeated requests for comment on this story. But based on its last public statement and its failure to issue guidance implementing Congress’s last inflation bailout, the department likely maintains its position against statutory authorization for pervasive price adjustments to firm fixed-price Pentagon contracts.
UPDATE: Following publication of this piece, Department of Defense Spokesman Jeff Jurgensen responded to POGO’s requests for comment. He stated that the department continues to request that contractors provide data justifying the need for price adjustments because of inflation. He noted that the data the department has received thus far “has not been extensive,” and he confirmed that the Pentagon maintains its opposition to price adjustments to existing Pentagon contracts. See POGO’s questions and the Pentagon’s full responses here.