Contract Ends For BAE Systems And Plant Closes And Unemployment Increases

(MoneyWatch)  One of the considerations a company must make when bidding on a contract is how long they think it will last. The Defense Department often establishes long term relationships with companies for large acquisition programs but for many smaller parts, pieces, services and support they quite willingly change contractors. In rare cases they will pay one company to develop an item and then turn production over to another through. In one of the most famous and blatant examples of this NASA paid Bucyrus-Erie to design the crawler that transports rockets to the launch pad but turned the construction over to their rival bidder Marion Power Shovel Company. In a perfect world Bucyrus would have got to build their design.

The Defense Department often awards "best value" contracts especially for hardware. This means that price is not the be-all-and-end-all but they get the best performance and product for the best price. This means that companies cannot always undercut each other on price and the Government has some assurance that the product will be delivered for the price bid. Many times the contractor will factor in the presumed follow on work to help them make their bid.

With the threat changing for the U.S. military in Iraq and Afghanistan the Defense Department began to develop new body armor for their troops. The new designs were big improvements over the existing equipment. Congress poured money into the defense budget to buy these products. Companies began to increase their production capabilities to meet demand and take advantage of the market. As more troops were sent to Iraq especially more armor had to be procured.

The major English defense contractor BAE Systems (BAE:L) was one company that not only got this business. They acquired the U.S. contractor Armor Holdings two years ago to expand their capability and market. BAE won several contracts to produce the Outer Tactical Vest (OTV) system they developed. Unfortunately this system can be made by others and as improved designs are made production may shift. For example in September the Army awarded Point Blank Body Armor a contract to make the Generation II Improved Outer Tactical Vests which will replace the OTV.

Because of market changes and contract losses BAE announced last week that they are closing their plant in Bean Station, TN. Located near Knoxville this plant only opened three years ago. This means that not only do the almost two hundred workers lose their job but the county and state may have a hard time finding another user for it. In the middle of a recession new production facilities are not in high demand and this plant is probably optimized to produce the armor products.

BAE Systems will still keep production going at other plants and will transfer some workers from the Bean Station one to another in Tennessee. The lesson though is that often many plants are dependent on one type of contract. Contracts end or given to another contractor meaning the plants may close with serious economic effects on the local communities. That is why Sealy, TX is fighting so hard for their truck plant. It is the city's major employer and its closure will devastate it.

The Department of Defense owes the taxpayer to get the best value for their money. This means that suppliers and products change. When getting into to the business a company must look ahead and plan for what to do after a contract ends. Everyone wants to keep their current business but developing new products and getting more business is the key to survival in the Government contracting business. It only takes one slight change in the budget or priorities for that work to go away. Larger companies are able to balance this across their entire portfolios but smaller ones are often dependent on only one contract to start. Growth is the key to survival.