A major DoD concern is the unfunded costs of execution during COVID-19. Section 3610 of the CARES Act allows the government to pay its contractors labor costs even if they are unable to work due to the crisis. 960 out of the 20,000 firms tracked by the DoD closed for an average of 57 days with 101 remaining closed as of June 10. Ms. Lord reported that one company alone estimated $1.5 billion in Section 3610 costs for itself and its supply chain.
Other unfunded costs stemming from COVID-19 includes stop work orders, contractor purchases of PPE, sterilization, schedule delays, and the cost of spacing out work areas such as factory floors. These costs, which may result in requests for equitable adjustment (REAs), are estimated to be in excess of $1 billion. Overall, Ms. Lord estimated that the total unfunded costs to the DoD and its supply chain will be over $10 billion. Final guidance on allowable costs for reimbursement is expected by July 10.
That was from the Center for Government Contracting’s latest COVID-19 report. Read the whole thing, it is interesting throughout! Includes breakdowns of contract spending worth over $16 billion into R&D, PPE, ventilators, IT/telework, facilities, etc. Also includes a summary of Defense Production Act Title I and Title III efforts, worth nearly $3.7 billion.
Note that Rep. Donald Norcross received estimates that equitable adjustments may run from $4 to $6 billion, far above the DoD’s estimate of $1 billion. Rep. Wittman asked whether there would be global settlements for equitable adjustments due to the expected flood of requests and the administrative burden. DPC Kim Herrington said that while global settlements may make sense in some cases, it wouldn’t extent to all cases. So, perhaps the largest or most suspicious will be reviewed individually whereas a great many will readily get a stamp of approval.
Remember, these costs estimated at over $10 billion for the DoD are unfunded. The DoD budget is based on program requirements. If the DoD must reimburse contractors $10 billion for idle labor and other unanticipated costs, then that will come out of the hides of defense programs without the expected progress. Ellen Lord cautions that unless the DoD receives a supplemental, the costs will come at the expense of modernization and readiness.
One of my questions is, what will happen to program baselines that officially measure cost and schedule growth? Will a generation of programs get a free pass? Or will there be new acquisition baselines set for each program?
Great question about impacts to Program Baselines. I know from personal experience in the EELV (now NSSL) program an “Administrative” Nunn-McCurdy Breach doesn’t exist. As impacts are identified across DOD, the Acquisition Community and the Congress will need to a consistent way to address the COVID-19 impacts. Ideally, it would appear in the FY21 NDAA; that timeline probably isn’t achievable unless a concerted effort is made by all parties to make it a priority.
I’d presume COVID-19 could only push programs over the edge of a Nunn-McCurdy breach if they were already teetering.
Agreed; sudden changes in circumstances can provide the “push” that trips the Breach criteria. That was my experience with EELV. The Program was in Sustainment under USAF oversight, the AT&L reinstated MDAP status. Costs and the Launch Manifest had changed greatly from the last APB, so I had to immediately declare a Breach. OSD did manage to “expedite” the Validation process and worked with the SPO to update the APB in a way that provided flexibility to address future changes in program content. I haven’t yet had time to review the latest MDAP Report, so I don’t know what Programs may already be “teetering.” Fingers crossed there are few.