The newly enacted Fiscal Year 2023 National Defense Authorization Act has stripped a Senate provision that would have created a new progress payment incentive pilot program, opting for the Government Accountability Office to study the issue.
The stripped provision, championed by Sen. Elizabeth Warren (D-MA), would have required the Defense Department to implement a four-year pilot program that would have made accelerated payments to defense contractors contingent upon responsiveness to various metrics like cost and schedule performance.
The House version of the bill didn't contain the measure, however, and it was opposed by the White House in a statement of administration policy, which said the provision “presents significant implementation challenges and could negatively impact the DIB, particularly given supply chain constraints, workforce shortages, and inflation.”
Now, the compromise version of the bill directs GAO to provide Congress with a report on DOD contract financing, assessing an independent study that is still under review at the Pentagon and has not yet been released. President Biden signed the bill into law on Dec. 23.
Lawmakers, in an explanatory report accompanying the bill, said they “are aware” of DOD’s contract financing study.
“We anticipate this study to provide useful findings and recommendations on the impacts to cash flow based on contract type, the impact on small businesses (especially based on the amount and sufficiency of cash flowing down to small business subcontractors from their primes), analysis of the tradeoffs in longer-term capitalization decisions made by the defense industrial base between pursuing private sector loans versus advanced government payments, and the potential impact government accounting system requirements for contractors have on the ability to access cash flow,” the report states.
The bill directs GAO to provide Congress with a report no later than one year after the completion of DOD’s contract financing study.
The lawmakers say GAO should assess the study, “including efforts the Department of Defense could take in light of the study findings to ensure fair and reasonable pricing of commercial products and services.”
Additionally, the lawmakers state they are aware that the Defense Contract Management Agency has been conducting a review of data gathered on the degree to which prime contractors have flowed progress payments down to subcontractors since March 2020, when DOD adjusted progress payment rates in response to COVID-19.
To that end, the lawmakers direct DCMA to brief congressional defense committees on its findings by March 1, 2023.
Contract financing has proved controversial in the past and senior DOD officials have likened it to a “third rail.”
Under the current progress payment system, large companies have been paid as much as 90% of incurred costs, up from the traditional 80% paid as progress goals are met, while for small businesses the figure is 95%, up from 90%. The increased rates were put in place after the onset of the COVID-19 pandemic to protect the defense industrial base.
Lockheed Martin President and CEO James Taiclet recently said he believes 100% of all progress payment increases should flow down to smaller subcontractors to strengthen the U.S. defense industrial base.