WASHINGTON - President Barack Obama's Defense Department plans to create 20,000 new government jobs to help revise how it buys more than $100 billion of weapons each year, the Pentagon's No. 2 official told Congress.

The Pentagon also plans to tie contract fees more closely to performance and make deals spanning two years, or more, only when real, substantial savings result to taxpayers, Deputy Defense Secretary William Lynn told the House of Representatives Armed Services Committee on Wednesday.

Lynn said the planned jobs growth would take place over the next five years. Included would be more than 9,000 positions at two Pentagon agencies that audit and manage contracts for everything from bullets, to bombs, to bread rolls.

The remaining 11,000 new hires would come from the conversion to federal civilian slots of jobs that had been outsourced to contractors.

This unprecedented, five-year planned workforce initiative will result in a properly sized, well-trained, capable and ethical workforce, he said.

Lynn and Shay Assad, acting deputy undersecretary of defense for acquisition, said bringing more work in-house would cost less than relying on contractors over the long run.

The current workforce is made up of 127,000 government employees and 52,000 contractors for a total of 179,000, said Chris Isleib, a Pentagon spokesman.

We are going to 147,000 and 41,000 contractors for a new total integrated workforce of 188,000, he said in an emailed reply to Reuters.

Assad told Reuters after the hearing that the U.S. Army would seek to restructure its costliest arms program, the $159 billion Future Combat Systems, as part of the Pentagon drive to link contractors' profits more closely to their performance.

Boeing Co is managing the Army modernization program, due to be reorganized soon, with Science Applications International Corp as its junior partner.

Our commitment is to provide best value to our soldiers and the taxpayers and we are confident we can resolve any concerns raised, said Matthew Billingsley, a Boeing spokesman.

OVER-BUDGET AND BEHIND

Pentagon weapons-buying practices have been widely criticized for decades. The Government Accountability Office has found that cost overruns on the 97 largest arms acquisition programs now total almost $300 billion. The programs are an average of 22 months behind schedule, the congressional watchdog has found.

The Defense Department's top suppliers by value of prime contracts are Lockheed Martin Corp, Boeing, Northrop Grumman Corp, General Dynamics Corp, BAE Systems Plc and Raytheon Co.

Lynn welcomed bills moving through the House and Senate that would beef up contract oversight at the Pentagon -- a goal strongly pushed by Obama. In February, Obama called an over-budget White House helicopter fleet being built by Lockheed as an example of an acquisition process gone amok.

Among other changes, the Defense Department plans to explore greater use of fixed-price development contracts, Lynn said. Although this could boost development costs as arms makers price in more of a risk premium, it would make cost estimates more accurate and overruns less frequent, he said.

The Aerospace Industries Association, a trade and lobbying group that represents arms makers and others, said stable budgets would be essential to any meaningful reform.

The use of fixed-priced arms-development contracts would not be appropriate unless we have a program with fixed technologies, fixed requirements, and fixed budgets, Cord Sterling, a vice president of the association, said in an emailed reply to Reuters.

Opening floor debate on the Senate's version of an acquisition reform bill, Armed Services Committee Chairman Carl Levin said it was aimed at putting major arms purchases on a sound footing from the outset by addressing program shortcomings in the early phases of the acquisition process.

Senator John McCain, a Republican who sponsored the legislation with Levin and who has long faulted Pentagon arms-buying procedures, added: We cannot afford to take care of our obligations in at least two wars and potential flash points all over the world and continue on the spending spree we are on.

Lynn said only about 20 percent to 25 percent of Pentagon spending would fall under the provisions of the House and Senate bills.

In response to a question from Representative John McHugh of New York, the House panel's top Republican, Lynn confirmed that Defense Secretary Robert Gates, in a memo dated April 30, had instructed the secretaries of the armed services and the joint chiefs of staff to brief him first on any significant shortfalls they might perceive in Obama's detailed fiscal 2010 budget, which goes to Congress on Thursday.

For more than a decade, the armed forces' chiefs have been encouraged by lawmakers to submit such wish lists of unfunded requirements to Congress for consideration.

I think the secretary wants to make sure he is informed prior to the submission of the lists but the advice that the chiefs would give would be their own, Lynn said.

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