Defense Contract Management Agency data shows that about 106 out of 10,509 primary Pentagon contractors are closed. 68 companies have closed but subsequently reopened. On the subcontractor side, of 11,413 subcontractors DCMA tracks, 427 closed, with 147 that originally closed that subsequently reopened.
So again, the big picture is that mostly defense industry is working, but there is a slowdown in work and that will have significant cost consequences down the road.
That was Andrew Hunter on an excellent CSIS/AEI Webinar, “Covid-19’s Impact on the Defense Budget and Defense Supply Chain.” I’d like to know where that DCMA report is. Of course, just because plants are open doesn’t mean they are operating at full capacity.
Here’s another good part, this time from Todd Harrison.
What Section 3610 allows you to do is it allows any government agency including the DoD to keep funding defense contractors as if they’re doing work so they can keep paying their employees for a 40 hour work week even if they’re not able to work.
Of course, this authority is subject to the availability of funding. What could happen is these programs already have funding because they were expecting to be doing work through the rest of this year. Even if the contractors are not actually able to perform the work, the funding is already there to keep paying them.
The problem comes when you fast forward a bit and everyone starts to get back to work, the work the contractors were supposed to be doing still needs to be done. That could very well lead to cost overruns on programs down the road. Where’s the money going to come from to reimburse these programs — being paid for unworked time. DoD could go ahead and ask Congress to pre-fund that.
It will be interesting to see the fall out on program timelines. The Air Force was recently touting 100 years of savings of program timelines, and on the way to far more. Will program impacts be perhaps 3 months as expected by USD(A&S) Ellen Lord? Or will program offices take the replan opportunity to shift even further to the right with an “excusable” delay?
No doubt Covid-19 will be something defense data analysts will have to account for and perhaps normalize for in the regular course of their work.
The recently quarterly financial reports from defense primes seem mixed. Lockheed Martin reported over $2 billion in operating profit — barely off from 2019. Lockheed’s stock price is down only 3 percent since the start of the year. It seems to be getting a gold star from the Pentagon through the Covid-19 crisis, continuing to operate and hire.
Boeing is in a worse position, as are other dual-use firms. Boeing has taken an operating loss of over $1 billion — more than a $3 billion swing over the same quarter last year. It’s cash flow was negative $4 billion!
Oddly enough, Boeing is in the position of being hurt by its penetration into commercial markets, whereas Lockheed has relatively secure cash flow from the government — even if some operations are slowed or shut.
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