DOD monitors industrial base as Congress eyes another massive COVID-19 aid package

By Tony Bertuca  / April 27, 2020

The Pentagon is bracing for a possible three-month delay across its major acquisition programs because of the COVID-19 outbreak, while Congress is eying another massive economic rescue package that could push billions in new funding to defense contractors.

Pentagon acquisition chief Ellen Lord said last week her team continues to "carefully and methodically track the state of the defense industrial base."

Lord, citing statistics from the Defense Contract Management Agency, said out of 10,509 "major prime companies," 106 are closed, with 68 companies having closed and reopened. Out of 11,413 "vendor-based companies," she said 427 are closed, with 147 having closed and reopened.

"Domestically, we are seeing the greatest impacts in the aviation supply chain, shipbuilding and small space launch," she said. "So right now there isn't any specific COVID penalty that we see for a specific program; however, we do anticipate about a three-month slowdown."

Defense contractors will not be penalized for delays related to COVID-19, however, and can ask the government to be reimbursed for any costs incurred. Lord said she expects that bail-out effort to cost "billions and billions."

Hawk Carlisle, president of the National Defense Industrial Association, said on a conference call last week organized by the Jewish Institute for National Security of America that economic aid from Congress is required to help contractors through the upcoming delays.

"All of that is going to cause things to cost more, whether it's service agreements or products and manufacturing capability," he said. "I think the other [thing] that needs to come in the next stimulus package is acknowledgment that these programs are going to exceed budget."

Andrew Hunter, a former DOD acquisition official who now works at the Center for Strategic and International Studies, told Inside Defense many companies are in precarious positions.

"My broader sense right now is that companies are really hurting, but they are hanging on waiting to see where things go and how effective the government relief programs will be," he said. "If things stay bad for a while and/or if the government's assistance is inadequate or poorly implemented, I'm concerned a lot of these firms won’t be able to continue to hang on in the next three months or so."

House Speaker Nancy Pelosi (D-CA) said at a news conference Friday another massive aid package is in the works.

"There will be a bill, and it will be expensive," she said.

House Armed Services Committee Chairman Adam Smith (D-WA) has said he wants the bill to include protections for the defense industrial base.

Congress has already approved more than $2 trillion in COVID-19 aid, which included $10.5 billion for DOD. Meanwhile, the Congressional Budget Office reported last week the federal deficit will reach $3.7 trillion, while federal debt held by the public is projected to be 101% of GDP by the end of the fiscal year.

The Pentagon is also working to accelerate payments to contractors and has encouraged big primes to push money down to subcontractors and small suppliers as quickly as possible.

But Hunter of CSIS said he is concerned about "a couple of big data gaps" in DOD's assessment of the defense industrial base.

"One is visibility on the condition and performance of subcontractors," he said. "There are huge gaps in the data DOD collects on subcontractors and I'm worried that these are exactly the companies that are likely to have the biggest challenges in the current economic environment."

The department is aware of this shortcoming. Lord said last week DOD is "focusing on supply chain illumination tools."

A new report from George Mason University's Center for Government Contracting says the overall obligation of federal dollars does not appeared to have slowed since the start of COVID-19.

"That is partly due to government efforts to assure contract cash flow," the report said. "The other part is the lack of a strong correlation between COVID hotspots and the destination of federal obligations. Moreover, some facilities impacted by COVID, such as Boeing facilities in Washington state, are now reopening as cases recede in that former hot spot."

But Hunter said he is also worried about companies that work outside the traditional defense production complex.

"DCMA is doing a good job monitoring companies that are on its radar screen, and that is a huge job that covers a lot of industry members of interest, but DCMA's focus is generally on the big production programs and big production sites," he said. "I would also like to be able to monitor emerging issues with companies that work on the services contracting side or otherwise outside the major production complexes, and I’m not sure we have good tools for that."

Lord said Vice Admiral David Lewis, director of DCMA, has worked to modify 1,500 contracts to help companies file invoices at higher progress payment rates -- from 80% to 90% for large businesses and from 90% to 95% for small businesses.

Lord said DOD expects payments at the new rates to generate $3 billion in increased cash flow to industry.

NDIA, meanwhile, released survey results last week finding that small businesses in the defense industrial base are experiencing problems with meeting obligations and gaining access to capital.

NDIA reported 60% of the companies that responded said the COVID-19 outbreak has interfered with cash flow.

Lockheed Martin and L3 Harris said last week they are accelerating payments to subcontractors. Lord commended Boeing last week for making a similar announcement and said she hoped other large primes would follow suit.