Defense industry shutdowns trend upward, but Lord is monitoring cash flow

By: Aaron Mehta

WASHINGTON — The Pentagon's top acquisition official sees positive signs for the defense-industrial base, but remains concerned that enough cash may not be flowing to the smallest, most vulnerable companies in order to keep them open in the wake of the coronavirus pandemic.

Out of 10,509 defense-related companies tracked by the Defense Contract Management Agency, 93 are currently closed — a number that has improved by 13 since April 20, according to Ellen Lord, undersecretary of defense for acquisition and sustainment.

Notably, the number of companies that have closed and reopened jumped by 73 since April 20 — “the first time we have seen reopening numbers larger than the number of closures” since the crisis began, Lord told reporters Thursday.

Of the 11,413 companies tracked by the Defense Logistics Agency, 437 are closed, with 237 having closed and reopened. That's an improvement of almost 100 companies from the April 20 numbers.

Lord credited a mix of factors for the improved numbers, including some states appearing to have reached their estimated peak in coronavirus cases and thus opening themselves up again; “really good proactive actions” by companies to create a hygienic space for work; and shared experiences from other companies who have found ways to keep working despite the pandemic

However, Lord still expects the pandemic to impact major defense programs. On April 20, she warned that top programs could face an approximate three-month impact. She reiterated that timetable Thursday but stressed she is largely looking at a “slowdown” rather than a “delay” in major programs.

“What we are seeing as a result of illness or inability to travel: We see efficiency issues. So we are not physically able to get contractors sometimes overseas to conduct inspections,” Lord explained. “So we have somewhat of a slowdown in our ability to accomplish tasks. We are finding workarounds for that, versus just saying we're delaying doing something. We do not look at delaying things; we are looking at working through the issues, which sometimes cannot be executed with the same efficiency we previously had.”

“We think we're learning how to work in this new environment and get back up to rate, if you will, in areas where we didn't, but right now that is our best estimate and we are working, obviously, to minimize impacts,” she added.

The Pentagon has pushed out $3 billion in increased cash flow under its coronavirus-related progress payment plan, which increased upfront payment to contractors from 80 percent of cost to 90 percent for large businesses, and from 90 percent to 95 percent for small businesses.

The goal for department officials: getting cash into the hands of prime contractors, who can then quickly provide funds to their subcontractors and other small businesses, who Lord has consistently identified as the most vulnerable parts of the defense-industrial base.

In both her April 20 press appearance and Thursday's event, Lord praised Lockheed Martin for publicly committing to give early payments to subcontractors in order to keep them open. On March 27, the company announced it would push $50 million down toward small companies most at risk; that has since increased to $450 million.

But, Lord acknowledged, other companies have not been as open with where those Pentagon relief funds are going.

That's something she'd like to see change.

“I believe that the major primes are flowing down, they've committed. But I always like to trust, yet verify,” Lord said. “So I encourage all of those companies to be as transparent and forthcoming as they can be because we have a responsibility to the taxpayer, as well as the mid-tiers and the small companies, to make sure actions we take at the prime level do go down all the way through the chain.”

When asked if she believes the primes are being transparent with her office about where their cash is going, Lord said, “I believe they are,” but added: “I need to rely on CEOs of major primes to come forth with that data.”

https://www.defensenews.com/industry/2020/04/30/defense-industry-shutdowns-trend-upward-but-lord-watching-cash-flow/