Some controversy is brewing over the Defense Department’s attempts to keep its industrial base cash liquid during the coronavirus crisis as one of the Senate’s most famous watchdogs looks into the Pentagon’s sustainment methods.
Sen. Elizabeth Warren (D-Mass.) is concerned about DoD forking over more money in progress payments to companies, according to an April 30 letter she sent to Undersecretary for Acquisition and Sustainment Ellen Lord.
Progress payments are usually monthly reimbursements made by DoD to contractors for expenses incurred while working on a contract. On March 20, DoD announced it would raise its rate from 80% to 90% for large companies and from 90% to 95% for smaller companies.
“I am concerned that the change to the progress payments policy may be a cash subsidy that largely benefits big defense companies that can better withstand the economic shock caused by coronavirus, while leaving smaller, less financially resilient companies in the supply chain behind,” Warren wrote. “Furthermore, I am skeptical as to whether large defense contractors will share these extra funds with their smaller supply chain partners in a timely fashion, and whether the Department will hold these industry giants accountable if they fail to do so.”
Warren said the increase could invite waste, fraud or abuse by giving more taxpayer money to contractors that use funds for stock buybacks and other methods of enriching upper management.
“Between 2010 and 2018, the six largest defense contractors headquartered in the United States — Lockheed Martin, Raytheon, Northrop Grumman, Boeing, L3 Technologies, and General Dynamics — generated $158.5 billion of free cash flow and spent $163.9 billion in stock repurchases and dividend payments,” Warren wrote. “Not a single dollar was used to ‘invest’ in the defense industrial workforce. All of this was accomplished when the progress payment rate was 80% for those large businesses.”
DoD previously tried to lower the 80% rate, but received a lot of pushback from contractors and has since backed off.
Mandy Smithberger, director of the Straus Military Reform Project Center for Defense Information at the Project On Government Oversight, told Federal News Network that the real test for the increased progress payments during this time will be how quickly subcontractors farther down the supply chain get paid by primes.
“Warren is raising legitimate concerns that these policies could turn into a taxpayer rip off and not result in improved performance or enhanced worker financial security,” Smithberger said.
Andrew Hunter, a senior fellow at the Center for Strategic and International Studies, agreed.
“The question is whether the accelerated cash flow to big defense primes will translate into accelerated cash flow to the supply chain,” he said. “If accelerated government payments were not equally accelerated to suppliers; the primes would have some additional ability to ‘float’ these funds, generating additional income during the added time the cash was in their possession. There may be clues to the answer when companies report their second quarter financial results. I would note that several prime contractors are talking a lot about how they are accelerating payments to subcontractors, including Lockheed Martin and L3Harris, so the companies seem to be sensitive to Sen. Warren’s concerns.”
Hunter noted that Warren’s concerns reflect larger concerns about the defense industry as a whole.
“These concerns exist irrespective of what DoD’s progress payment rate is,” he said. “For example, the use of profits by defense companies to fund share buy backs and dividends over making greater investments in technology. These concerns relate more to the question of whether defense industry deserves relief in the current situation than they speak to progress payment policy per se.”
“I think the concern about profiteering may be a bit misplaced when the survival of the defense industrial base at the sub-tier level is not necessarily assured during this time,” he said. “Given the contractual relationship though our problem is we have to work through the primes to access them. This is one way to try and do that. In an emergency greater analysis that the senator may want to see would likely lead to a large loss of jobs.”
Warren is asking DoD to provide analysis on how it determined additional progress payments were needed, how much extra money is going to contractors under the new policy and what means DoD is using to ensure smaller businesses get funds.