Business News – November 18, 2024

Elon Musk is looking for trillions in government waste, and defense is a massive potential target

Jake Epstein and Grace Kay. Business Insider Nov 16, 2024.

President-elect Donald Trump has tasked Elon Musk with slashing government spending.

Defense could be a prime target: It's the largest discretionary spending category in the federal budget.

Some systems and programs may be more resistant to change than others.

President-elect Donald Trump has tapped Elon Musk to help spearhead cuts to government spending, and the defense sector could be a prime target.

The Defense Department's budget for the 2024 fiscal year is $841 billion, roughly 12.5% of the total federal budget, and the Pentagon has struggled with cost overruns and waste.

Musk plans to review federal spending as part of a newly created "Department of Government Efficiency" — or DOGE. It's not an official agency, and Congress controls budgets for federal agencies. DOGE's role may be limited to offering advice to Trump.

There are still a lot of unknowns around DOGE as it solicits direction from X, formerly Twitter, including where and how it'll find up to $2 trillion in promised cuts.

But Musk's past comments hint at one area he could target: defense contracts.

Musk has criticized government contracts with top defense companies that put the government on the hook for overages in the construction of warships, aircraft, and combat vehicles. And his company, SpaceX, has won some government contracts by bearing higher risks of cost overruns.

Musk's way of doing business

Before Musk founded SpaceX in 2001, NASA and the Pentagon often used "cost-plus" contracts, which reimbursed contractors for their expenses and provided a set profit margin.

The contracts allowed for cost overruns and placed much of the risk on the US government, Clayton Swope, a senior fellow at the Center for Strategic and International Studies think tank, told Business Insider.

Musk compared the contracts to "gravy trains" in journalist Walter Isaacson's biography of the billionaire. "You just can't get to Mars with that system," Musk said. "They have an incentive never to finish. If you never finish a cost-plus contract, then you suckle on the tit of the government forever."

Musk built SpaceX's business model around fixed-price contracts. This means the government and contractors set a price for the project at the onset, and the company is paid predetermined amounts once it hits certain milestones.

SpaceX has had several fixed-price contracts with NASA, including a $1.6 billion contract in 2008 for 12 missions under the agency's Commercial Resupply Services program and a $2.6 billion contract in 2014 that covered six crewed missions to the International Space Station.

The US government previously reserved fixed-price contracts for off-the-shelf products that did not need to be specially made for the government, but SpaceX demonstrated that it could fund missions more efficiently, Swope said.

Without the processes and tracking required for cost-plus contracts, companies like SpaceX "can be more agile to changes in the market and iterate on their products faster," Swope said. "When it's done right, it can be beneficial to both the government and the company."

Overspending and delays

The Pentagon has often been criticized for mismanagement, delays, and ballooning costs on expensive systems. Earlier this year, for instance, a government watchdog found that the F-35 stealth fighter program has become more expensive, with expected lifetime costs topping $2 trillion, even with the aircraft flying less often than in the past.

The defense industry, like the military, has also been called to account. Major shipbuilding projects, for example, are severely delayed. Coming off problems with the Zumwalt-class destroyers, first-in-class USS Gerald R. Ford, and the Littoral Combat Ship, new constructions like the next Ford-class carrier, Constellation-class frigate, and Columbia-class

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Episode 3328 - November 19 - Tiếng Anh - Tin Kinh doanh – Ngày 18 tháng 11, 2024 - Vina Technology at AI time