Budget Impasse Delays DoD Progress Payments Study


Dec 2 • 4:25 PM
By: Tony Bertuca, Inside the Pentagon

Congress' inability to pass a fiscal year 2020 budget is delaying the start of a Pentagon study that could change the way defense contractors have been paid for years.

"Actually, we haven’t kicked off because it's a budget thing -- you need money to start it," Kevin Fahey, the assistant secretary of defense for acquisition, told reporters at the Pentagon today. Lawmakers have yet to pass an FY-20 federal budget because of partisan differences over President Trump’s use of defense funds to construct a wall on the U.S.-Mexico border.

The delayed study is related to a controversial proposal the Defense Department rescinded more than a year ago that would have lowered the customary progress payment rate on defense contracts from 80% to 50%, while establishing performance-based metrics that could increase the payment rate. The rate structure has remained largely unchanged since 1985.

The proposal drew heavy opposition from the defense industry, which successfully mobilized the GOP chairmen of the House and Senate Armed Services committees to have it withdrawn last year.

Fahey said the new study, which was recommended by the Government Accountability Office, will seek the input of industry and Congress before a final proposal is made.

"We really do know how we're going to do it," he said. "We've asked industry and Congress for input to it and we intend to have them part of the process."

Asked when he expected the study to begin, Fahey said: "If you know when I'm going to get a budget, I could tell you."

The Pentagon has previously said it plans to establish a steering group to supervise the study, which will be conducted by an independent entity.

The study and how it is conducted will be a significant issue for defense contractors, as they hope to convince the Pentagon to maintain the predictable levels of cash flow the industry and its investors have come to expect.

Andrew Hunter, a former Pentagon acquisition official who now works at the Center for Strategic and International Studies, recently told Inside Defense the "stakes for industry in this contract financing proposal are very high."

"A large portion of industry's revenue comes in the form of progress payments, so changes to the progress payment formula will directly impact their bottom line," he continued.

David Berteau, president and chief executive of the Professional Services Council, previously said: "It is clearly in the best interest of industry and government to work together on this from the beginning."

Fahey said today the study should take about one year to complete.

"My expectation is a year from now we would have submitted what we believe the rule is to adjust it if that is what the study says," he said.