DEFENSE DEPARTMENT

COVID-19 NEWS: Defense Contractors Will Have to Wait Months for Reimbursements

9/9/2020
By Jon Harper

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Companies in the defense industry will have to wait five months or more before they are reimbursed for extra costs they’ve incurred due to the COVID-19 crisis, the Pentagon’s top weapons buyer said Sept. 9.

Section 3610 of the Coronavirus Aid, Relief and Economic Security, or CARES, Act and other authorities allow the Defense Department to provide funding to contractors for allowable expenses related to the pandemic. However, although the legislation was passed by Congress in March, the Pentagon is still waiting for lawmakers to appropriate the funding, noted Undersecretary of Defense for Acquisition and Sustainment Ellen Lord.

It’s unclear when Congress might provide the money. However, once that happens, it will still take a while before contractors receive their payments, according to Lord.

“We think it would take five to six months because once we got an appropriation, we would go out for a request for proposal [for reimbursement] and the larger companies are going to have to flow down those RFPs through their supply chain [and] gather the data,” she said during remarks at the Defense News Conference, which was held virtually this year due to the ongoing public health crisis.

“So, we would get all of that back. We think that would take two to three months. Then we want to look at all of the proposals at once. It isn't going to be a first in/first out” process, she added. “We have to rationalize using the rules we've put in place, what would be reimbursable and what's not. So overall we think five to six months in terms of a process.”

The Pentagon plans to initially look at costs incurred by contractors in the March 15-Sept. 15 timeframe as it considers claims, she said

Lord estimated that COVID-19-related expenses will total $10 billion to $20 billion. If fiscal relief isn’t forthcoming, acquisition programs will suffer, she warned.

“We believe we need that appropriation to maintain readiness because if we do not get that, what we are going to find is we are not going to get the number of units delivered. We are not going to maintain warfighter readiness. We're not going to move forward in modernization,” she said.

The Pentagon request has run into opposition on Capitol Hill and elsewhere, with some observers questioning whether the funding is needed and pointing to positive earnings reports among some firms in the defense sector. However, Lord said more visibility is needed to assess the economic impact.

At the peak of the crisis for the industrial base, hundreds of companies had to temporarily close. There are now only about 30 businesses closed among those the department is tracking, according to Lord. Social distancing measures have also presented challenges for the workforce.

“There has been mixed reports in terms of revenue and profitability, but I would contend that most of the effects of COVID haven't yet been seen because most companies gave their employees time off. They stretched out production, paid a lot of people for working 100 percent [of their regular hours] when perhaps they were only getting 50 percent of the hours in, and so forth,” she said.

Industry is riding out this unprecedented challenge, but there could still be financial and other problems down the road, she noted.

“I think the system has absorbed it up to this point in time,” she added. “Now, when we get to the point where we're having payments and incentive fees and award fees earned, and if we haven't done the deliveries, that's where you're going to see the hit. So I believe there is a bit of a delayed response. We want to make sure that we have a one-time accounting for these major COVID hits very, very well defined in terms of a period of time — March 15 to September 15 — that we take a very, very data-driven approach in terms of [asking companies to] send us a proposal showing what the impact was.”

 

Topics: Defense Department, Defense Contracting

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