A year after aborted progress payments proposal,
DOD to launch new contract financing review

InsideDefense.com | Nov 11
By Tony Bertuca

The Defense Department is preparing to review its decades-old policy for paying contractors, including a look at how potential changes might impact the profits of defense companies.

Pentagon spokesman Lt. Col. Mike Andrews told Inside Defense the upcoming review is “in the final planning stages.” The assessment follows a DOD proposal in 2018 to reduce the progress payment rate of 80% to 50%, while establishing performance-based metrics that could increase the payment rate.

The defense industry mobilized to block the rule, which was later withdrawn.

In June 2019, the Government Accountability Office recommended DOD conduct a “comprehensive assessment of the effect that its contract financing and profit policies have on the defense industry.”

Andrews said the review does not yet have a set schedule and DOD has not selected an outside group to manage it.

“The tentative plan is that the study will be guided by a DOD steering group . . . with an independent entity conducting the study,” he said.

The steering group, he said, will be chaired by an official from DOD’s defense pricing and contracting team.

Andrews said the defense industry “will definitely be engaged in the study activity,” though “that is a detail that has to be worked with the study entity.”

Wes Hallman, the senior vice president for strategic programs and policy at the National Defense Industrial Association, said contractors look forward to providing input.

“We’re heartened the Pentagon is taking the recommendation of the GAO to conduct a holistic study on contract financing and plans to engage industry throughout its process,” he said.

David Berteau, president and chief executive of the Professional Services Council, said “it is clearly in the best interest of industry and government to work together on this from the beginning.”

John Luddy, vice president for national security policy at the Aerospace Industries Association, said DOD has reached out to AIA about how the assessment “should be shaped.”

“We’ll continue to promote pragmatic policies that enable our industry to invest in capital, R&D, and talented workforces needed to deliver successful programs,” he said.

Defense contractors have contended last year's proposal came as a surprise and failed to include industry feedback.

Ultimately, the GOP chairmen of the House and Senate Armed Services committees sent a letter to DOD calling the proposal “fundamentally flawed.” When the Pentagon rescinded the proposal, then-Deputy Defense Secretary Pat Shanahan said it had been “prematurely released, absent full coordination.”

GAO noted the current payment rate has not undergone a “comprehensive assessment” since 1985.

“Industry and economic conditions, however, have since changed, including lower interest rates and the emergence of contractors who do not typically work with DOD,” GAO wrote.