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Labor is the New Front in Battle to Slow Defense Spending

The U.S. government does try to get value for its money -- and for 600 Boeing workers, that could mean taking a hit.

Military contractors serve the U.S. armed forces all over the world. Companies that provide equipment, such as Boeing (BA), Raytheon (RTN), Lockheed Martin (LMT) and Northrop Grumman (NOC) also make money servicing and maintaining their products. When they can, they use cheaper, local workers. Competition within in the U.S. also puts pressure on labor costs.

Citing this squeeze, Boeing has just announced that it will reduce the benefits of 600 non-union workers who maintain U.S. Air Force fighters. Wages will remain constant but health insurance will cost more and 401K matching and sick leave will be eliminated. Without these kinds of cost savings, Boeing says, the company will lose the contracts when they are up for renewal. Boeing is also saying that some union workers will see their benefits reduced when their contracts expire -- an announcement bound to raise hackles before the negotiations even begin.

Blame the government, Boeing suggests, which awards contracts to lower-cost companies with whom Boeing finds it difficult to compete on price. Boeing lost an aircraft maintenance and support contract with the U.S. Navy for this reason.

Charging a higher price is not always a disadvantage. The concept of "best value" awards allow higher-cost companies to win if they offer experienced workers and a track record of performance. This helps prevent situations where a new company low balls the bid but cannot do the job. But as pressure on the defense budget grows, so will the pressure to award contracts at the lowest cost possible -- and thus on wages and benefits.

Boeing's options are limited: Lower its labor costs or lose the work. Unfortunately, their workers will pay for these kind of decisions.

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