At the present time the Department has about $10 billion tied up in progress Payments. This has increased from a level of about $4 billion in 1964. This means that this Government has advanced these companies about $6 billion since 1964. If that financing had come from private sources, or some other way, the $6 billion, or a substantial part would have been available for other defense products, for nondefense products or expenditures of the Government. In a sense we have an inequity here where we are taking a substantial chunk of Government resources to finance a small number of contractors and, in doing that, we have taken these funds away from a useful purpose.
The excuse used for this is that it is cheaper for the Government to borrow money than it is for the contractors to borrow money. Therefore, why shouldn’t the Government borrow money and advance it to the contractors? This is a perfectly good argument. It is a very difficult argument to rebut. It overlooks the fact that there are administrative costs and other costs in doing this.
That was former DepSecDef David Packard before a House Appropriations Committee on March 18, 1971. One of the administrative costs of progress payments is that it turns even fixed price contracts into something resembling cost-plus contracts, because companies need to track all expenditures to the fixed price contract as a basis for getting reimbursed. Then there’s the significant transaction costs of getting that done. Of course, COVID-19 led to increases in progress payments from 90 to 95 percent for small firms, and 80 to 90 percent for large firms.
Yes, progress payments increase company cash flow, but do they lead to the companies requiring less outside financing? Probably not, because major primes have significant cash flow advantages already. And then it ties up billions in funds that could otherwise have gone to more capabilities.
Former DPAP Shay Assad wanted to reduce progress payments from 80 to 50 percent. That basically got him fired. But he wasn’t the only one concerned with the practice which makes defense contractors look much more like administrative extensions of the government rather than private industry. Consider a prime that delivers a deficient weapon system on a fixed price contract. Well, it already has received 80 percent of the price, and good luck clawing that back.
DEPARTMENT OF DEFENSE APPROPRIATIONS FOR 1972 HEARINGS, BEFORE A SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS HOUSE OF REPRESENTATIVES, NINETY-SECOND CONGRESS, FIRST SESSION, PART 2.
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