DOD launches new contractor cash flow and pricing study rooted in controversy

February 22, 2021

By Tony Bertuca

The Pentagon has entered arrangements with three universities to study key areas related to contract finance and pricing that could impact the way defense contractors are paid.

The Defense Department awarded blanket purchase agreements in December to the University of Tennessee, George Mason University and the University of Virginia, according to Jessica Maxwell, a DOD spokeswoman.

The universities will compete to perform an array of studies initially previewed in an October 2020 request for information.

"The government may award an order for an individual study to one, some, none or all based on the evaluation criteria," she said.

DOD plans to complete the report by the end of the year and to release it and its recommendations to the public "to the extent practicable," Maxwell said.

The Pentagon's effort to study contract finance and pricing has a controversial history.

A previous attempt to reduce industry "progress payments" championed by Shay Asad, the former DOD pricing chief, resulted in pushback from Congress and the defense industry. The proposal was ultimately rescinded, despite having been approved by senior Pentagon officials and the White House Office of Management and Budget.

The rescinded policy would have lowered the progress payment rate for large businesses from 80% to 50% and tied potential increases to company performance, rather than stages of production. Defense companies said the change would have disrupted the industry's cash flow model.

But, among other things, the new study will be used to "validate or recommend changes to the Defense Pricing and Contracting (DPC) Cash Flow Model to calculate financial returns by contract-type and financing methods," according to the original RFI.

Meanwhile, the COVID-19 pandemic has moved DOD in the direction of freeing up greater cash flow to defense contractors. Pentagon acquisition officials in March 2020 approved a temporary increase in progress payment rates for contractors for the duration of the COVID-19 crisis, raising the rate from 80% to 90% for large businesses and from 90% to 95% for small businesses.

Defense industry advocates have said they would like to keep the current progress payment structure in place.

Last October, former Pentagon acquisition chief Ellen Lord urged large defense contractors who wanted to keep the current rate in place to publicly discuss how beneficial it is for smaller companies in their supply chains.

"The only criticism we get in terms of changing the progress payments is a perception that it primarily benefits large primes and it doesn't benefit small companies," she said at the time. "We can have the large primes talk about flowing down progress payments, how much cash is moving. That's half of the equation."