The Defense Department is using an array of tools to ensure the defense industrial base stays afloat so it can provide critical materiel now and remain robust after COVID-19 has passed.
Ellen M. Lord, the undersecretary of defense for acquisition and sustainment, said last week that DOD is “carefully and methodically” tracking the state of the defense industrial base, which includes businesses large and small that have direct business with DOD or provide important components or support to companies with defense contracts.
“Our acquisition and sustainment team remains focused on partnering with industry to maintain readiness and drive modernization,” Lord said. “Our industrial policy team continues to lead multiple industry calls every week with 18 Industrial associations. I am proud of the department’s responsiveness in addressing defense industry concerns that are outlined during these calls.”
One agency heavily involved in ensuring that the defense industrial base remains strong and capable throughout the COVID-19 pandemic is the Defense Contract Management Agency, which manages some of the largest contracts for the department, including that of the F-35 joint strike fighter aircraft.
Navy Vice Adm. David Lewis, agency director, said when the first of the COVID-19 closures started happening, he told the defense industrial base businesses the agency works with that if they stayed open, DCMA would be there to support them.
“If you’re open, we’re open,” he said. “I said that, like, Day One or Day Two when this started happening. My point in that is we need the industrial base to stay open. We’re still building airplanes. We’re still building tanks. There are still soldiers, sailors, airmen and Marines in harm’s way around the world. They still need their parts, they still need their equipment. We’re still deploying. People are still shooting at us. We’re still shooting back.”
While DCMA works with nearly 10,500 businesses, the actual defense industrial base is much larger, Lewis said. A sister agency, the Defense Logistics Agency, also works with many companies, though there may be great overlap between the companies DLA and DCMA work with. Globally, the number of domestic and foreign companies in the defense industrial base could exceed 160,000.
One tool the department is using to ensure the companies remain viable is a memorandum published in March and signed by Lord. That memorandum defines the defense industrial base as the industrial complex that enables research and development as well as design, production, delivery and maintenance of military weapons systems/software systems, subsystems and components or parts, as well as purchased services to meet U.S. military requirements.
In the memorandum, Lord identifies the defense industrial base as a critical infrastructure sector as defined by the Department of Homeland Security. This allows companies to stay open even when other businesses have been directed to close.
“I’ve given the memorandum to every single DCMA employee, and we have given those to every company that wanted one and told them to give them to their employees,” Lewis said. “That has been hugely helpful.”
Another tool the department is using to help are changes made to increase the “progress payment” rate on some defense contracts. Those payments are made to improve cash flow for industry involved in the ongoing production of large defense items.
“There are about 1,500 contracts that [DCMA] pays every couple of weeks based on the progress that they’ve done,” Lewis said. “They don’t have to deliver a product. It’s such an expensive thing that we pay them incrementally as they build it.”
The progress payment rate increase from 80% to 90% for large businesses and from 85% to 95% for small businesses, Lewis said. “That has the effect of pushing $3.3 billion into the defense industrial base,” he added. Last week, Lord said about $1.2 billion in invoices were processed at the higher progress payment rate.
“We have spoken with each of our major prime companies, and they have each confirmed their detailed plans to work with their supply chains to accelerate payments, and to identify distressed companies and small businesses,” she said. “I want to particularly commend Lockheed Martin, who publicly committed to accelerating $450 million dollars to their supply chain, again, focusing on distressed and small businesses who need it most.”
It’s important that extra funding from the government gets pushed down from large “prime” contractors — such as Lockheed Martin or Boeing — to their smaller suppliers, Lewis said, because those small businesses are also a critical part of the defense industrial base and are more vulnerable to the effects of the COVID-19 pandemic.
“If you are a big company, you’ve got cash in the bank, you’ve got money on hand, you can probably work through things financially — it may not be pleasant, but you’re OK,” Lewis said. “If you’re a small wiring harness maker, you might be living paycheck to paycheck, as a company.”
Lewis also said that DCMA is working with companies to continue to provide payments even if those businesses are unable to keep the original agreed-upon schedule for product delivery.
“We’ll give them grace — if you’re supposed to deliver 10 this week, but you completed eight — that’s fine,” he said. “We’ve allowed partial payments. We’ll relax some of our normal contract provisions for penalties … we’ll relax our penalties if you’re late on deliveries. So you’re still producing, you’re compliant with the [Centers for Disease Control and Prevention] guidelines for the health of your workforce … but you’re still producing product, which means you’re still getting paid, which means you have an income stream and you can stay open.”
DOD also has made changes in what’s allowed within a “request for equitable adjustment.” The changes were part of the recent Coronavirus Aid, Relief and Economic Security Act.
Lewis likened a request for equitable adjustment as something that might be used by a small business to recoup additional, unforeseen costs associated with a contract. A contractor, he said, might agree to replace a customer’s roof for $15,000. If during the execution of that work the roofer discovers extensive termite damage to the customer’s home, then this would increase the cost of the roofing work. The roofer would need to work with the customer to get additional funds beyond what was initially agreed upon.
Businesses doing work with the government who suffer similar unforeseen circumstances — such as costs associated with COVID-19 — would use the request for equitable adjustment to seek additional funding.
“The company could say, well, ‘I was supposed to deliver ten, but because of the pandemic I could only deliver eight, … [or] it took me longer to make up the difference and that cost me extra, I had to expedite things, I had to air-freight stuff, so I’m requesting a request for equitable adjustment,'” Lewis said.
Part of the DCMA mission involves having representatives embedded in businesses who would witness the kinds of problems that might give rise to a request for equitable adjustment, Lewis said.
“We’re the ones that will say, ‘This is what happened on April 29 at a facility with this delivery,’ for instance,” he said. “So we provide the facts to the contracting activity, the buying activity, the company provides a request for equitable adjustment, and then the buying activity and the company negotiate that.”
While businesses in the defense industrial base can submit a request for equitable adjustment at this point, Lewis said he’s not aware that any company has done so.
Lord said that, as of last week, 93 of the companies that DCMA tracks are closed, and that’s down 13 from the week before. As a result of COVID-19, she said, a total of 141 of those companies had closed and then reopened. She said the trend now is that DOD is seeing more companies reopening from a closure, than new companies closing. Of the companies tracked by DLA, she said, 437 were closed last week, with 237 having closed and reopened, up almost 100 companies from a week before.
While any company within the defense industrial base suffers when it’s forced to close as a result of COVID-19, small companies are hit especially hard, Lewis said. But the worst case scenario, he said, is if a company is closed permanently as a result of COVID-19. It’s a loss for that business, and for those employees who are out of a job. It’s also, he said, a loss to DOD.
“A lot of our stuff is niche, specialty equipment,” he said. “If a company packs up, shuts down, and sends their people away, the question is how many other companies do that work? There might only be one, there might be just a couple. It would be a challenge if we couldn’t get the material that we needed to support the warfighter.”