How Pentagon Cash Helped Save Small Defense Companies During the Pandemic
Business leaders are now calling on defense officials and lawmakers to keep a policy that pays contractors more money up front.
As the world began shutting down amid the COVID-19 pandemic, Doug Carlberg worried about his San Antonio, Texas, factory that makes parts for military and commercial aircraft.
While his work making parts for combat jets like the F-35 stealth fighter remained constant, his business supplying commercial plane makers dried up, as passenger air travel nearly came to a halt. But a key Pentagon policy put in place early in the pandemic allowed him to make it through the year without having to lay off any of his 65 employees, Carlberg said.
“Even though last year was a very tough year, we were pretty close to meeting our regular revenue goal for the year,” Carlberg, a retired Army maintenance officer and test pilot, said in an interview. “It was because we were able to pick up a lot of additional DoD work where the commercial stuff kind of went off to the right, a little bit.”
Under the Pentagon policy, defense companies began receiving a larger share of contract payments up front. The firms, in turn, passed that cash to smaller suppliers, like M2 Global Technology, Carlberg’s disabled-veteran-owned company. The money also allowed firms—large and small—to blunt losses in commercial aerospace work.
Now more than a year later, as virus cases in the U.S. decline and the economy starts to rebound, those who benefitted from the accelerated payment policy want to see it kept in place, at least until their commercial work picks back up.
“Until we basically understand that we really revamped out of this, this crisis that we're in, we'd like to see it continue on, at least through this year,” Carlberg said.
Carlberg is not alone.
“I don't want to see these accelerated payments stop or go back to long-term payment situations,” said Anne Shybunko-Moore—CEO and owner of GSE Dynamics, a Long Island-based company that makes parts for aircraft and submarines.
The accelerated payments policy allowed Shybunko-Moore to pay raw material vendors early.
“I would pay early to my vendors, because they were perhaps having more cash flow impact,” Shybunko-Moore said in an interview. “It definitely trickled down.”
Three-quarters of the more than 300 Aerospace Industries Association member companies say the accelerated payments were “the most critical tool to allow them to continue to protect employees and provide customers with the product and services,” said Timothy McClees, vice president of legislative affairs for the trade group.
Now they’re pushing for broader use of the policy.
“AIA wholeheartedly endorses the continuation of the progress payments for definitive contracts, and we would like to see congressional change to allow the department to make the same decisions for undefinitized contracts,” McClees said.
Since about 80 percent of GSE Dynamics business is with the Defense Logistics Agency, it received the bulk of its advance payments directly from the government. The rest of its work is for the larger defense defense companies, including Lockheed, Boeing, Northrop Grumman, and General Dynamics. Despite the pandemic, 2020 was the best year in the history of her 80-person company.
“The accelerated payments and the [Paycheck Protection Program loans] were obviously the two incredibly effective programs that were put in place that allowed me to sleep at night,” she said. “Small businesses were seeking stability during an unstable time, and these programs were critical to the health of the supply chain.”
Carlberg’s M2 Global makes specialty parts for some of the military’s most high-tech weapons and supplies the world’s largest defense companies, including Locheed Martin, BAE Systems, and Bell. M2 makes more than 900 parts for the F-35 stealth fighter alone.
While the company’s defense work has been steady throughout the pandemic, the work it does for commercial aerospace firms was a different story. With the steep decline in passenger air travel and airlines grounding hundreds of aircraft, commercial orders from companies screeched to a halt.
Carlberg said getting paid more money up front allowed him to get a jumpstart on future defense work. It also allowed him to compete for more defense orders, as large companies like Lockheed Martin looked for companies to make parts usually manufactured in states that were shut down by the virus. The increased defense workload allowed him to keep his roughly 65 workers employed.
“When Lockheed started the advanced payments, it then allowed us to surge ahead and make additional parts to make sure they had them in stock,” he said. “It also allowed me to surge ahead and buy up what other material I could at the time.”
The money gave his small business the ability to buy titanium and other metals that take about twice as long to get now than they did before the pandemic.
As of April 30, Lockheed Martin alone has accelerated $1.3 billion in payments to its suppliers.
“It's important that [the accelerated payments] continue to help these manufacturing firms in the defense industrial base,” Marillyn Hewson, Lockheed’s former CEO, said Thursday at a Reagan Institute event.
In all, the Pentagon has sped $4.6 billion to defense companies since the onset of the pandemic, according to Bloomberg.
“The advanced payments that Lockheed did, along with allowing us to ship anything that we had in stock out there immediately, allowed us to free up cash for us to go out immediately and buy PPE equipment, which we needed to keep our doors open,” Carlberg said. “At the same time, we went out and bought raw material and parts and hardware that we needed to do to make their products.”