The Department of Defense has released the findings of its Defense Contract Finance Study, an effort to comprehensively assess the effect that DoD contract financing and profit policies have on the defense industry. Initiated in late 2019 at the recommendation of the Government Accountability Office (GAO), the study examined financial health, financing regulations, insight into the commercial marketplace, and impacts to subcontractors, including small businesses, over a 20-year timeframe.
The major findings and conclusions from the study are as follows:
- In aggregate, the defense industry is financially healthy, and its financial health has improved over time. Operating in the DoD environment has its advantages, especially with respect to cash flow through DoD’s contract financing policies, and this result is demonstrated by traditional major defense contractors out-performing commercial counterparts in many key financial metrics. While profit policy per se was not significantly assessed by this study, the analysis of contract financing is integral to profit and incentive policy. This report concludes that the Department does not find a need to modify its weighted guidelines structured methodology of arriving at objective profit positions for negotiation.
- Defense subcontractors and suppliers generally do not receive the favorable cash flow benefits to the same extent enjoyed by defense prime contractors. This is a crucial finding, as GAO has noted estimates of 60 to 70% of defense work being performed by subcontractors. Improvements can be made in this area, which would not only aid in the financial health of defense subcontractors but could assist in attracting new entrants into the DIB at the supply chain level.
- Small businesses are particularly vulnerable when it comes to having cash on hand to cover operating expenses. In general, they do not have the same opportunities to obtain working capital as their larger counterparts. The Department seeks to improve small businesses’ financial health and assist in attracting new entrants at the prime and subcontractor levels.
The report makes a number of recommendations, such as ensuring timely payments to subcontractors, assisting small businesses with financing, and addressing perceived challenges with the government accounting system.