COVID cash crunch still hurting small defense firms

By: Joe Gould

WASHINGTON ― Cash flow for small defense contractors is continuing to suffer under the coronavirus pandemic, according to a survey by the National Defense Industrial Association.

The survey echoes warnings from the Pentagon that these firms, part of a vast network of suppliers that makes up the defense-industrial base, are especially vulnerable. The Pentagon this week announced it will make $3 billion in new “progress payments" to increase cash flow to prime contractors, expecting the money would then trickle down.

Of the NDIA survey respondents:

• 67 percent of companies with less than $1 million in annual revenue have seen a cash-flow disruption.
• 60 percent said the crisis has interfered with their cash flow.
• 60 percent expect to have long-term financial and cash-flow issues stemming from the crisis.
• 66 percent said accelerated payments from the Defense Department or prime contractors would be the most helpful step toward business recovery.

L3Harris Technologies said this week it will issue more than $100 million in payments to its small suppliers. Lockheed Martin announced Friday it executed $256 million in accelerated payment toward its $450 million goal.

Both of these promised followed the Pentagon's announcement this month that it will boost progress payment rates from 80 percent to 90 percent for large companies, and to 95 percent for small businesses.

The payments are made to contractors, usually on a monthly basis, for costs incurred and work performed under a contract; a 90 percent rate means that if $1 million in expenses are submitted on the program, the Defense Department will reimburse $900,000.

Sixty-six percent of the respondents also said it would help them to receive flexibility on the performance of their contracts.

Seventy-two percent expected to avoid overruns on their firm fixed-price contracts as a result of disruptions caused by COVID-19.

On Thursday, acquisitions officials with the Army said they expect costs to rise, and in response will guard against program slips and closely watch vulnerable lower-tier companies with less slack in their workforces. Pentagon officials anticipate workforce and supply chain issues will yield a three-month delay across the majority of its Major Defense Acquisition Program portfolio.

“The supply chain does have some challenges, and that's probably where the vast majority of any slips would occur that are tied to individual companies,” said Bruce Jette, the Army's acquisition chief. “These companies are small, and if one person gets COVID in the company, the next thing you know you've lost 14 days with the company because everybody that didn't get it is in quarantine.”

As of April 10, 769 small businesses responded to the NDIA survey. The number of companies expecting cash-flow disruptions was slightly lower last month, when 458 small businesses responded.

Factoring into cash-flow problems, according to the NDIA, are cuts to billable hours, delayed payments from prime contractors and government customers, a lack of telework options or schedule flexibility in contracts, and shelter-in-place orders that prevent employees from working.

Beyond revenue expectations, meeting contract obligations and access to capital are where small businesses are taking the biggest hits during the pandemic. Other areas of difficulty were workforce availability, access to secure facilities, contracting officers accessibility, clear information from the Defense Department, confidence in the supply chain, and stock and cost of materials.

The technology and services sectors reported more disturbances from the crisis than the manufacturing sector, NDIA noted. And businesses with fewer than 50 employees are feeling the brunt harder than businesses with more than 500 employees.

Defense Contract Management Agency data this week showed that 106 out of 10,509 primary Pentagon contractors are closed, and 68 companies closed and then reopened. Of 11,413 subcontractors, 427 were closed, with 147 having closed and reopened.

https://www.defensenews.com/2020/04/24/covid-cash-crunch-still-hurting-small-defense-firms/