No way to escape tighter budgets, acquisition reform.

• Author: Farrell, Lawrence P., Jr.
• Position: PRESIDENT'S PERSPECTIVE

A mix of unease and confusion is what best describes the current mood in the defense industry as it tries to predict what lies ahead. Two major developments--an acquisition reform bill now being debated on Capitol Hill and the Obama administration's defense budget proposal--are stirring many questions and concerns about what all this means for the industry.

President Obama recently laid down his marker on the need for reform in government contracting and procurement. Sens. Carl Levin, D-Mich., and John McCain, R-Ariz., have introduced legislation to tighten up the front end of the acquisition process and to ease the path to program cancellations for those in breach of Nunn-McCurdy cost-overrun limits.

Defense Secretary Robert Gates said he expects the Pentagon's free spending ways to end soon. The 2010 defense top line has been set at $533.7 billion--a modest 4 percent increase over fiscal 2009--in addition to a $130 billion supplemental war request. But all indicators point to potential cuts for fiscal 2011. Deputy Comptroller Kevin Scheid recently said the department may cut procurement in the fiscal 2010 budget by 2 percent of maybe 3 percent. But he warned that the administration's policy decisions that will substantially shape the defense budget will not be known until the completion of the Quadrennial Defense Review early next year, when the president will submit the budget proposal for fiscal 2011.

Rumors are swirling about possible "targets" among the Pentagon's procurement programs. They include the Air Force's aerial refueling tanker--which would be delayed but not cancelled--and its next-generation long-range bomber. Other programs that could face substantial cuts include the Army's Future Combat Systems and the Marine Corps' Expeditionary Fighting Vehicle.

Exacerbating this unpleasant exercise is the financial crisis that is gripping the nation.

Early on in the presidential race, then-candidate Obama's national security team signaled that Defense would not be a "bill payer" in an Obama administration. There was an understanding--based on Congressional Budget Office estimates--that even the generous budgets of recent years under-funded defense modernization programs by $100 billion a year. Much of that short-fall was the result of major overruns in defense acquisition programs.

The economic circumstances obviously have changed since last year's presidential campaign. Some major adjustments to defense spending appear inevitable...