For less than $1 thousand a pop, Ukrainians are taking out Russian tanks costing $3 million. For less than $300 thousand a pop, they are taking out Russian warships costing $ billions. Ukraine is doing these things with homemade cardboard drones, store-bought drones, and their roll-your-own mostly-submerged drones. Ukraine’s TLK-150 and TLK-400 submersible drones with 700-1200 mile ranges and up to 500 lb payload cost around $250k apiece.
One US cruise missile costs about $2 million; its launch platform is likely more than $1 billion. A patriot missile costs about $4 million; the launch platform $10 million. Each High Mobility Artillery Rocket (HIMAR) costs around $170 thousand; the launcher, about $4 million. US drones like those being used in the Middle East typically range from $700 thousand to $70 million; may even run as high as $400 million. Today, an F-35 single-seat, single-engine, all-weather stealth multi-role combat aircraft runs about $75 million.
This session, a bipartisan group of senators has introduced a bill, Audit the Pentagon Act of 2023, calling for defense spending audits. The Senators think that defense contractors’ profit margins may be around 40%. (In a world where it is get the bid and let extras do the rest, surely, they meant 140%) . Best Buy will sell you a PlayStation Controller for less than $500. Lockheed will make the Navy one for $5 million.
It works something like this*: Lockheed Martin wins the project with their $100 billion bid. Winning the contract gets them in the door; has little or nothing to do with the final cost. The final cost might be $300 billion. Next, the project enters the extras stage. Henceforth, Lockheed is playing with house money. All Lockheed Martin personnel assigned to the project ‘bill’ their time to the project and then Lockheed Martin bills the Defense Dept. It’s cost plus from here on out. Say Defense allowed Lockheed Martin 20% profit. 20% of $100 billion is $20 billion; 20% of $300 billion = $60 billion. That’s 60% profit on the original bid. Since Lockheed is playing with house money, the Defense Dept. pays the wages and salaries of the workers and engineers assigned to the project for an additional 5, 10? years. There is, of course, a few percent added on for overhead and profit on the house money.
For Lockheed’s workers and engineers, a bird in hand is worth two in the bush. Especially if one bird is in Southern California, the other in Seattle, or one is in South Carolina, and the other in Alabama.
And, where are the salaries of the retired Admirals and Generals getting billed to? The Audit the Pentagon Act of 2023 seems worth the wait.
Back when, the Economics Professor taught us about cost-plus contracts using the example of machine screws and bolts used in dam ballasts during the Great Depression. All defense contracting is essentially cost-plus, which means that, for the vendor, the higher the costs, the better. The US pharmaceutical manufacturing is another example. The more a pharmaceutical spends on research, labor, marketing, and management salaries, the more they charge for their products. 20% of a lot more is a lot more than 20% of what it could have been done for. Cost plus is compounding, if you will.
*Petite Disclaimer: During the early 1980s, I did perhaps a dozen control systems for Lockheed at their Sunnyvale facility (then Lockheed Missile and Space Company, as I recall). I got to know several of their engineers quite well — their politics — to see the inter-workings. In the mid-1980s, a patent of mine for wave energy capture competed with their ‘Dam-a-Toll’ for federal research funding. They won. All in all, it was a lesson on how defense contractors work.