Late last week, the Pentagon released the Defense Contract Finance Study (April 2023). The report was initiated in 2019 after GAO recommended DoD assess its policies and the effect the defense industry at large; such an assessment had not been done since 1985.
Major findings related to small businesses are:
Defense subcontractors and suppliers generally do not receive the same favorable cash flow benefits as Defense prime contractors. This is extremely important since GAO estimates that 60-70% of the defense work performed is done by subcontractors (GAO 11-61r).
Many of these subcontractors are small businesses. This segment of the Defense Industrial Base (DIB) is vulnerable if there is not cash on hand to cover operating expenses.
There are inequities in the opportunities for small businesses to obtain working capital when compared to large businesses.
Recommendations:
Evaluate, improve, and disseminate the DoD Contract Cash Flow Model | Tool,
Extend the benefits of Prompt Payment to subcontractors (requires legislative action),
Improve payment protections for subcontractors (regulatory action),
Improve subcontractor payment oversight (process),
Improve the ability of subcontractors to assert any non-payment issues (regulatory action),
Improve the implementation of accelerated payments to subcontractors (Final Rule effective 3/16/2023 found at https://www.federalregister.gov/documents/2023/02/14/2023-02425/federal-acquisition-regulation-accelerated-payments-applicable-to-contracts-with-certain-small)
Return to a customary 80% progress payment rate for large businesses (regulatory action),
Retain the 95% progress payment rate in Class Deviation 2020-00010 for small businesses (regulatory action) (Revision 1 found at https://www.acq.osd.mil/dpap/policy/policyvault/USA000801-20-DPC.pdf), and
Pilot new forms of contract financing to meet the general financing needs of small businesses (regulatory action).
The report is found at https://www.acq.osd.mil/asda/dpc/pcf/docs/finance-study/FINAL%20-%20Defense%20Contract%20Finance%20Study%20Report%204.6.23.pdf)
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