WASHINGTON — The powerful chairmen of the House and Senate Armed Services committees are telling the Pentagon to pump the brakes on plans to pay contractors less money up front when it buys major weapons systems.
Rep. Mac Thornberry, R-Texas, and Sen. Jim Inhofe, R-Okla., are siding with the defense industry, which reacted sharply to a policy proposed last month that would link performance- and progress-based payments more closely to production milestones. In a Sept. 21 letter to Deputy Secretary of Defense Patrick Shannahan, they call the proposal, “fundamentally flawed," express “grave concerns” and ask that it be rescinded and revisited.
“We should not make it harder to do business with the Department of Defense than it is to do business with other parts of government — and that’s exactly what this regulation does,” Thornberry told reporters Tuesday. “We try to streamline acquisition, we try to make it easier to do business with these small companies; and then something like this comes out.”
Industry groups say they rely on the payments early in contracts to innovate and to sustain smaller businesses in the supply chain — and that cutting the payments will raise the prices of products.
The Pentagon, in its proposal, argues changing the rules will save hundreds of millions of taxpayer dollars and improve contractor performance. The Pentagon would be updating rules to reflect much lower interest rates than when the payments were last changed, in 2001.
Echoing trade groups, the letter calls the proposed rule “not consistent with the intent of Congress” as expressed in the law: “Additionally, we have grave concerns about the harm this rule could cause to innovation investment, small businesses, and stable workforces in our defense industrial base.”
“This new rule would discourage greater industry investment in innovation at a time when we need it most,” the letter reads.
On Tuesday, Thornberry cited recent defense legislation requiring the Pentagon compile data related to the issue, due in February.
“The ask was let’s hold this off until we can all look at the facts, and then we’ll take a new look at what makes sense based on what the data shows,” Thornberry said.
Pentagon officials have said they plan to enact the rule by the end of the year, though public hearings on the Defense Federal Acquisition Regulations Supplement are ongoing. The Defense Department is holding another public meeting on Oct. 10, before the public comment period ends on Oct. 23.
Three major trade groups — The National Defense Industrial Association, Professional Services Council and the Aerospace Industries Association — are objecting to the proposal, which would slash the payments on work to be performed from 80 percent to 50 percent, with incremental increases for maintaining quality or on-time delivery — and decreases for companies that have committed fraud.
AIA Vice President for National Security Policy John Luddy last week asked that the regulation be rescinded, arguing it cuts against the administration’s defense goals and “doesn’t make economic or business sense for industry or our customer."
“We remain concerned that our companies’ views about the real and significant impacts of this rule have not been fully considered and we ask DoD to rescind it,” Luddy said in a statement.
Note: This article was updated to reflect the contents of the letter from Thornberry and Inhofe.
Joe Gould was the senior Pentagon reporter for Defense News, covering the intersection of national security policy, politics and the defense industry. He had previously served as Congress reporter.