Performance-Based Logistics Offer Major Pentagon Savings, Increased Readiness

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About 40 national security experts and industry leaders convened at the Brookings Institution Tuesday morning to debate solutions for cutting U.S. Defense Department costs without undermining military readiness.

The discussion, which took place October 14 at the think tank's headquarters in Washington, D.C., comes at a time when declining budgets compete with an elevated need for improved technology to carry out military missions abroad.

Amongst the leading proposals was broader adoption of Performance-based Logistics (PBL) - the service-based contracting model which has been used for sustainment of Pratt & Whitney's F117 engine on the C-17 aircraft for the last 15 years.

According to Jay DeFrank, Pratt & Whitney vice president for Communications and Government Relations, "the Department of Defense spends about $170 billion annually on logistics – that is, on procuring, sustaining and transporting equipment – and many of the contracts for these things are transactional."

Transactional contracts can potentially mean competing priorities, as contractors are incentivized to sell more parts, while the customer is focused on having the parts it needs to keep its fleet flying; cost being a secondary concern.

The PBL model, on the other hand, "is designed to align the contractor's incentives with those of the customer," explained DeFrank. "In the case of jet engines, the government pays a set price to ensure that its fleet is always at an agreed-upon level of readiness, and all costs associated with ensuring this outcome are the responsibility of the contractor."

DeFrank explained that under a PBL service model Pratt & Whitney as the contractor is inherently incentivized to reduce total maintenance costs by improving reliability, increasing time-on-wing and controlling shop visit costs; all things that are in line with government's objectives.

"For the F117 engine alone, we've improved engine time-on-wing by 3X, eliminating 1,000 shop visits at a cost savings of $3 billion over the life of the contract," DeFrank explained. "[Using a] PBL forces us to continuously seek to improve our efficiency."

Mike O'Hanlon, director of research for Brookings and moderator for Tuesday's discussion, widened the assertion to say that if PBLs are adopted broadly, the Department of Defense (DoD) could save $10 billion per year in the long term – a conservative figure next to the $17 billion - $34 billion savings estimate that the DoD found in its own assessment.

During the event, DeFrank was joined by George Mitchell, vice president of aircraft and support for Sikorsky, and Al Banghart, defense supply chains lead for Deloitte Consulting LLP, who cited their own successful experiences with PBL contracts. Sikorsky's sustainment contract with the U.S. Navy for the Seahawk helicopter, for example, has seen $60 million in savings from the PBL model, and Banghart pointed to an example of a BAE Systems contract with a similar savings outcome.

Despite what appears to be a win-win solution for both the government and its contractors, the rate of new PBLs within the DoD has steadily been on the decline over the last several years as short term budget constraints and competing priorities have reduced the popularity of the contracting model among the department's acquisition officials, an approach which threatens to undermine the government's longer-term goals of cost savings and readiness.

"Our service members deserve the best, most technologically advanced equipment available, but at the same time, we face real budget concerns that cannot be avoided," said DeFrank. "The Department of Defense can answer both calls by more broadly adopting performance-based logistics."

Listen to an audio recording of the Brookings event.

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