Contractors and the cost of war: research into economic and cost-effectiveness arguments

• Main Author: Harris, Neil J.
• Other Authors: Henderson, David R.
• Published: Monterey, California. Naval Postgraduate School 2012
• Online Access: http://hdl.handle.net/10945/10071

MBA Professional Report === Since the end of the Cold War, the Department of Defense has led unprecedented efforts in outsourcing and privatization. Empirically, private firms offer efficiency incentives and cost savings which are maximized in competitive markets. Recent contingency operations have underscored the importance of contractors, as evidenced by the number and magnitude of reconstruction contracts. In turn, utilizing private contractors has raised questions regarding their true cost-effectiveness. This research highlights the key features of the private military industry from an economic perspective. After revisiting DoD's initial objectives for outsourcing many of their traditionally inhouse roles, an assessment is made to whether current efforts are based primarily on capability or financially-driven constraints. The economics of privatization are subsequently explored, with particular emphasis on current contracting efforts. The research will provide deeper insight to contract valuation, industry competitiveness, and cost effectiveness arguments. Despite their current controversies, a case is made that contractors are cost effective given their inherent flexibility. The argument becomes stronger after considering the military's relevant alternatives to using private military companies.