President Barack Obama on Wednesday promised to save American taxpayers 40 billion dollars a year by slashing waste in government contracting, with a special eye on bloated spending on defense.

"I reject the false choice between securing this nation and wasting billions of taxpayer dollars," Obama said on a day when he signed a presidential memorandum reforming the contracting system across the entire government.

"In this time of great challenges, I recognize the real choice between investments that are designed to keep the American people safe and those that are designed to make a defense contractor rich," Obama said.

The president’s promise to clean up contracting was in line with his pledge to cut the soaring federal budget deficit in half by the end of his mandate in 2013.

As Obama spoke, he was flanked by his former Republican rival for the presidency, Senator John McCain, who is a hawkish opponent of wasteful spending in the Pentagon, and scours legislation for lawmaker’s pet projects.

Obama honed in on runaway Pentagon spending, vowing that "the days of giving defense contractors a blank check are over," and highlighted work by Defense Secretary Robert Gates to overhaul military procurement at the Pentagon.

Cost overruns have been especially apparent in Iraq, where "too much money has been paid out for services that were never performed, buildings that were never completed, companies that skimmed off the top," he said.

The Bush administration attracted fierce criticism over "no bid" contracts which awarded work in the war zone to favored companies by the government — without competitive tendering — a practice Obama vowed to stop.

"Over the last eight years, government spending on contracts has doubled to over half a trillion dollars," Obama said.

"Far too often, the spending is plagued by massive cost overruns, outright fraud, and the absence of oversight and accountability. In some cases, contracts are awarded without competition.

"We are spending money on things that we don’t need, and we’re paying more than we need to pay. And that’s completely unacceptable."

Obama, who has pledged to make two trillion dollars in budget cuts over the next 10 years, also used the occasion to take a swipe at the former president George W. Bush administration, which he accused of leaving him a "fiscal disaster"

"When we walked in the door we found a budget deficit of 1.3 trillion dollars, the largest in American history.

"This fiscal burden has been compounded by the most severe economic crisis since the Great Depression."

The reforms require the White House budget director to work with cabinet members and agency heads to frame tough new guidelines on contracting work by the end of September.

Last month, Obama ordered a review into huge cost overruns on a new fleet of presidential helicopters, after McCain complained at the skyrocketing cost, raising concerns about how many military projects tend to come in well over budget.

"I don’t think that there’s any more graphic demonstration of how good ideas have cost taxpayers an enormous amount of money," McCain said at the time.

The US Government Accountability Office has found that last year the Defense Department’s weapons programs shot up 295 billion dollars from initial estimates, and were delayed by an average of 21 months.

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