Moody's argues DOD focus on innovation creates new opportunities

In a new report, Moody's Investor Services argues a "heightened focus on innovation and efficiency" at the Pentagon means more contractors might be able to lead platform programs.

"In an effort to improve efficiency and innovation in its procurement process, the U.S. Department of Defense (DoD) has been more readily awarding lead contracts to bidders beyond the large, Tier 1 companies such as Boeing, Lockheed Martin, Northrop Grumman, General Dynamics and Raytheon," the report contends. "The trend presents opportunities for such companies as Science Applications International Corp. (SAIC) and Kratos Defense and Security Solutions."

Moody's predicts in the report DOD will create small and medium modernization programs -- which it defines as those worth up to $3 billion -- to continue to grow this base.

"We estimate $30 billion to $40 billion of program opportunities in aggregate should be open to such non-traditional bidders over the next five years," the report adds.

This movement is already beginning, according to the document. Moody's points to SpaceX's work for the Air Force, SAIC's Marine Corps contract to work on amphibious assault vehicles and Kratos' work in unmanned aerial vehicles.

"Traditional primes held the lead on prior contracts in all cases," the report states.

Moody's also contends a larger base of companies able to lead platform programs could help the Pentagon.

"Such companies are typically more willing to assume R&D costs without seeking reimbursement, particularly on mid-size programs," the document notes. "They also tend to seek out less expensive solutions, such as adapting new technology to existing platforms."