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Pentagon aims to wring savings out of more acquisition reforms

By Andrea Shalal-Esa

WASHINGTON (Reuters) - The Pentagon on Tuesday released the next version of its "better buying power" initiative, saying the U.S. military needed to "wring every possible cent of value" from the dwindling dollars in the U.S. defense budget.

Deputy Defense Secretary Ashton Carter said the first version of the initiative, launched in 2010 when he was the Pentagon's chief weapons buyer, had generated some savings, but there was more work to do.

"We've tried things that have worked, we've tried things that haven't worked. We've learned," he told a news conference.

Carter said a focus on affordability had allowed the Navy to shave $2 billion off the projected cost of a new program to replace its aging Ohio-class submarines, plus $300 million more from the DDG-51 destroyer program.

The Air Force was prioritizing affordability targets on its program to build a new bomber, while the Army was cutting costs on ammunition purchases by pumping up competition and encouraging more small business participation, he said.

Frank Kendall, who served as Carter's deputy before moving up to become undersecretary for acquisition, technology and logistics, previewed the new initiative, dubbed Better Buying Power 2.0, last week, noting that it had factored in concerns voiced by industry in recent years.

He said companies and lawmakers could comment on the draft that was released on Tuesday over the next two months, before the department issued a final version in January.

"It turns out that defense acquisition is a pretty complicated subject, and there aren't easy solutions that are going to ... make everything infinitely better over night with one or two policy changes," Kendall said.

Kendall said the department would develop a database to help inform its reforms, try to come up with better incentives for industry to do better on programs, and enforce new affordability caps to give them more teeth.

He said the department would back off using fixed price contracts for development programs, which were widely opposed by industry, and apply them more to programs that were in low-rate production.

The Pentagon would also redouble its efforts to create a preferred supplier program, and planned to target service contracts for additional reforms, he said.

Lockheed Martin Corp, Boeing Co, Northrop Grumman Corp, General Dynamics Corp, Raytheon Co and other defense firms are carefully watching the Pentagon's approach to contracts as they brace for lower defense spending after more than a decade of growth.

In addition, the defense budget faces $500 billion in further cuts due to start taking effect in January unless the United States avoids the so-called fiscal cliff.

Kendall said that the budget crisis facing the Pentagon could help accelerate the needed changes, although he warned that additional across-the-board cuts due to take effect in January would have a "devastating effect" on the whole effort.

In recent years, many of the companies have criticized the Pentagon's war on overhead costs, arguing that government oversight itself sometimes makes weapons more expensive. They have also cited long delays in getting contracts signed.

Kendall told reporters on Tuesday that he was particularly troubled by the long delays and vowed to work through the long backlog in audits that were holding up quicker contract awards.

He said the first phase of the better buying power initiative had already increased the "cost-consciousness" of acquisition officials in the Pentagon, but more work and training were needed. And ultimately, he said, the department would likely have to revisit the reforms again in several years.

Cutting production rates would raise the cost of individual weapons and stretch out development programs for longer than was optimal, he said.

(Reporting by Andrea Shalal-Esa; Editing by Lisa Shumaker)

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