The largest share of the Pentagon’s billions of dollars in accelerated payments to contractors — intended to help mitigate the impact of the Covid-19 pandemic — is going to four of the country’s five biggest defense companies.
Lockheed Martin Corp., Boeing Co., Raytheon Technologies Corp.,Northrop Grumman Corp. and the United Launch Alliance LLC joint venture are the top beneficiaries of the Pentagon effort, according to a previously undisclosed May 15 letter to Senator Elizabeth Warren from Ellen Lord, the Defense Department’s undersecretary for acquisition and sustainment.
The companies are benefiting from a policy the Pentagon announced in March, just as the pandemic was building in the U.S., that provided for faster, and bigger, payments to companies.
According to figures previously released by Bethesda, Maryland-based Lockheed, it appears to be the single biggest recipient of the Pentagon’s action. The company has said it’s received $1.1 billion so far out of a total that Lord has estimated would be about $3 billion.
The Defense Department’s move meant that larger firms could get as much as 90% of their payments for contracts in progress, up from 80% previously. For smaller businesses, which might be more susceptible to virus impacts, the rate rose to 95% from 90%.
“Disbursements to prime contractors include payments to all tiers of its supply chain,” Lord wrote in the letter obtained by Bloomberg News. Lord said she expected the increased, accelerated rates to continue “until he national emergency is over.”
The Pentagon’s move was intended to guarantee that critical national security contracts — including the production of key weapons systems and supplies — weren’t interrupted by companies having problems accessing cash or credit. The extra funding would ensure production lines were able to stay open.
Warren Raises Doubts on Pentagon Bid to Get Cash to Contractors
After the program was announced, Warren, who serves on the Senate Armed Services Committee, expressed concern about its oversight. In particular, the Massachusetts Democrat questioned whether companies might try to divert the increased payments for stock buybacks, dividends or executive pay.
Lord said that hasn’t been the case.
“These payments represent costs incurred on our contracts and therefore are used to pay those associated bills (e.g. supplier costs, labor costs),” Lord wrote. “Companies do not divert payments for incurred costs to share buybacks, dividends or executive salaries because contractors must have already incurred costs before they receive the increased progress payments.”
In some cases, “major prime contractors used corporate funds to accelerate payments to at-risk suppliers in advance of payments received from DoD,” Lord continued.
The accelerated and increased progress payments are separate from more than $10 billion in claims that Lord has said the Defense Department expects to receive from contractors stemming from provisions in the Cares act, which has provided relief from economic impacts of the pandemic.
Lockheed, Boeing, Raytheon and Northrop Grumman were ranked first, second, third and fifth among U.S. defense contractors for fiscal 2019, according to a Bloomberg Government ranking. United Launch Alliance is the joint space launch venture between Boeing and Lockheed.
“The department does not comment on industry financial information,” Jessica Maxwell, a spokeswoman for Lord, said in an email when asked for details about the payments.
Flow to Suppliers
Lockheed said June 26 that the additional funds were forwarded to subcontractors, saying that “to date, we have received more than $1.1 billion in accelerated progress payments from the Pentagon and have flowed all of it to suppliers.”
Company spokesman Trent Perrotto said Monday that the $1.1 billion represented solely the increase to 90% from 80% of progress payment rates as of that date.
In Warren’s original request, she also sought insight into how the Pentagon was overseeing contractor requests for accelerated payments.
According to Lord, officials with the Defense Contract Management Agency conduct “triweekly phone calls with industry associations and major prime contractors and other regularly-established forums.”
Lord declined to put a timeline on when the Pentagon policy would end, citing uncertainty around the Covid-19 outbreak as cases in the U.S. continue to soar.
“We intentionally decided not to tie this policy to a specific date or event due to the uncertainty of the current crisis,” Lord wrote. “We will monitor the situation and the operational and economic need for its use.”
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