MARKET OUTLOOK

Efforts underway to bolster cash flow in face of COVID-19 pandemic

Cash flow is always king for companies in the government market and that especially holds true amid the economic slowdown caused by both the coronavirus pandemic and efforts to slow the spread of it.

For its part, the Defense Department appears to have recognized that fact with its announcement last week that it would raise its progress payment rate from 80 percent to 90 percent for large contractors. The rate for small businesses will go up from 90 percent to 95 percent.

“DOD’s class deviation to raise progress payment rates is a good first step towards enhancing cash flow to the defense industrial base to help stabilize suppliers and support our workforce,” John Luddy, vice president for national security policy at trade group Aerospace Industries Association, said in a emailed statement to me Thursday. “We look forward to working with DOD to ensure this policy change is applied to existing contracts, so these positive benefits can be felt throughout the supply chain as soon as possible.”

Lockheed Martin is undertaking similar initiative to that of DOD by advancing more than $50 million to small- and medium-sized businesses in the defense giant’s supply chain. Lockheed is committing $66.5 million in total to support the supply chain, plus nonprofit organizations participating in the COVID-19 response and an employee disaster relief fund to help affected workers and retirees.

These are among several “initial financial steps” and contributions intended to “ensure they have the financial means to continue to operate, sustain jobs and support the economy,” CEO Marillyn Hewson said in Lockheed’s statement on Friday that detailed other initiatives to help assist in the COVID-19 response among industry and government.

The $2 trillion stimulus bill expected to be signed by President Trump Friday also has some language that could help contractors navigate that cash crunch. Agencies can modify contract terms and conditions to reimburse contractors for paid leave including sick leave through Sept. 30 at up to 40 hours per week. This is also intended to keep contractor workforces ready even if they cannot access federal facilities or if their contract does not have telework.

Logistical "hiccups" could arise early on though, Professional Services Council President and CEO David Berteau said Wednesday on a Bloomberg Government webinar.

Those include delays in deliveries of products and services with many agency and contractor personnel working remotely, and could also include the next phase after those deliveries.

“It’s possible that contract payments could be delayed a bit, particularly for agencies whose contracting officer has to approve invoices for payment (that) is now working from home,” Berteau said, adding that communication is crucial between agencies and contractors as issues come up.

Back to the supply chain. Federal technology services contractors lean on a global IT supply chain with technology providers and smaller subcontractors as part of a larger mandate to be a systems integrator for agencies, not unlike the defense hardware giants such as Lockheed.

Supply chain implications was the main topic of my conversation with Chris Meissner of the market intelligence and analytics firm 202 Group for this episode of our Project 38 podcast.

So given the economic conditions, could that group of government IT integrators also give helping hands of sorts to their partners further down the supply chain and ensure its resiliency for whenever the COVID-19 crisis starts to slow down?

“The contractors with more ‘progressive’ partnership/alliance strategies will be able to ‘unite the clans’ in their subcontractor network and quell any trepidation by sharing as much of the risk and the risk-management as possible,” Technology Business Research Senior Analyst John Caucis told me.

Caucis, who watches public sector IT for the market intelligence firm, pointed back to how that group of integrators has to varying degrees embraced alliances with technology providers of all sizes well before the COVID-19 crisis began.

Large systems integrators also count on smaller pure-play government contractors for certain work as well, including that of the general professional services variety. The latter group stands to bear the brunt of any slowdown in both the global economy and any disruptions in the business of government, whether that be delays in procurement or in agencies paying companies for work on contracts.

“Subcontractors in federal contracting (IT and otherwise) have long relied on their prime partners to chaperone them through the federal acquisition and procurement process; that expectation will only intensify,” Caucis told me. “There will probably be some anxiety about primes taking the expanded payments and not paying it forward, but I’m going to give everyone the benefit of the doubt at this stage. The optics of not doing to and getting caught would be potentially catastrophic.

“Primes will also have to bring more business functions to the table; IT, legal, accounting, etc. (and encourage partners to do so also), when collaborating with partners to share and manage risk.”

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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