The brink is now—defense contractors are no longer acting as shock absorbers for inflation

The Pentagon may be heading toward a reckoning with industry over the cost of parts, equipment and weapons, with defense companies less amenable to taking on financial risk in future contracts, the head of the Aerospace Industries Association warned on Thursday.

The defense industry has acted as an initial “shock absorber” for the Pentagon on inflation, taking the brunt of cost increases caused by rising labor costs and the price of high-demand commodities like titanium, Eric Fanning told reporters during a roundtable.

But companies have signaled that they have been forced to assume too much risk, and the Defense Department needs to prepare for a decrease in purchasing power that could challenge its ability to fund its modernization priorities, said Fanning, whose organization represents more than 330 aerospace and defense vendors.

“Eventually there’s new competitions, there’s new contracts, there’s new order quantities. If the price of a platform is variable and the Pentagon plans for three and isn’t really adjusting for inflation, eventually they’re going to realize they get two,” he said. “Eventually that dynamic is going to shift.”