Pentagon Raises Contractor Payments to Keep Cash Flowing

(Bloomberg) -- The Pentagon, in a move to boost cash flow to large and small defense companies during the coronavirus crisis, will temporarily increase the percentages paid to contractors, known as periodic progress payments.

Public interest groups called for the policy to be closely monitored.

The change comes as the U.S. Department of Defense was touched by a coronavirus fatality for the first time. A contractor who tested positive for the virus and worked at the Defense Security Cooperation Agency in Crystal City, Virginia, died on Saturday, the Pentagon said.

The Pentagon’s Director of Defense Pricing and Contracting issued a “Deviation on Progress Payments” memo late Friday that increases the rate for contracts to 90% of incurred costs from 80% for large businesses, Pentagon spokesman Air Force Lt. Col. Mike Andrews said in a statement on Sunday.

For small businesses the rate will go to 95% from 90%.

“This is an important avenue where industry cash flow can be improved,” Andrews said. The department also “is accelerating payments through several means to prime contracts, and directing prime contracts to expedite payments to subcontractors,” Andrews said.

In addition, the agency that manages contracts is working with the Pentagon’s accounting organization that makes the payments “to ensure that invoices are continuing to be paid in a timely manner,” Andrews said.

Blow-Back Possible

Pentagon acquisition head Ellen Lord on Friday issued guidance to industry that defense contractors are “expected to maintain their normal work schedules” -- within recommended guidelines from the U.S. Centers for Disease Control and Prevention -- amid the coronavirus outbreak because they’re considered “critical infrastructure.”

Byron Callan, a defense industry analyst for Capital Alpha Partners, said in an email that the new policy “will work if the large contractors assist smaller ones that are typically small and private. Think of the $50 million machining parts company that has 70% of sales for commercial aerospace and 30% of defense.”

The industry also risks negative blow-back if the increased payments are abused, he said. “If the large public companies use this change to accelerate share buybacks, I would expect management to be tarred and feathered,” he said.

“It’s important to help employers to keep paying people during this crisis, but the Pentagon needs to do more than just trust the better angels of these companies’ nature to prevail,” Mandy Smithberger, a director for the Project on Government Oversight, which monitors military spending, said in an email.

Taxpayer-Ripoff?

“They should require companies that receive these funds to commit that this money won’t go to dividends, salaries, and stock buybacks, but to the employees on the front lines who are most vulnerable.”

Shay Assad, the Pentagon’s long-time top official on pricing and contracts financing, said in an email the new effort reflects a fundamental misunderstanding of the regulations already in place that already provide for generous reimbursement rates. Assad retired in 2019.

“The fact is that cost of borrowing” from banks “is negligible” and doesn’t require additional Pentagon intervention, Assad said. “There is absolutely no reason to change the progress payment rates for large businesses. Large business is more than capable of using their own cash or borrowing at minimal interest rates. This is a taxpayer rip-off.”

Assad estimated that the top five defense contractors generated $93 billion in free cash flow between 2012 and 2017. “They bought $90.5 billion of their own stock during that same time frame,” he said. “There is no cash-flow intervention required.”

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