The ability of U.S. industry to continue delivering the highest-quality ISR equipment, communications systems and cybersecurity technologies depends in large part on innovations designed by small businesses under contracts to prime contractors. A case in point is the intelligence community’s shift toward cloud computing. Most of the core technologies for the cloud were developed by small innovators. The government needs to continue cultivating and harvesting innovations from these small companies.
But here’s the catch: To keep the innovations flowing, small companies need to get paid in a timely manner and they need access to credit. Without both, they cannot hire, invest and produce technologies critical to the ISR and information technology communities. Unfortunately, cases abound of late payments to these businesses from the prime contractors. The problem is likely to worsen if this year’s budget season produces a repeat of the arduous 2011 process that saw a string of innovation-hampering continuing resolutions.
There is something the government can do to help alleviate the strains on small businesses, short of fixing our broken political system. The U.S. government should broaden its accelerated payments initiative so that it includes subcontractors.
The accelerated payment initiative was ordered in September by the White House Office of Management and Budget and implemented in the defense industry by the Office of Small Business Programs. In many cases, payments by the government to its small prime contractors were shortened to as little as two weeks, down from the 30 days required under the formerly weakly enforced U.S. Prompt Payment Act.
The beauty of the accelerated payment initiative was that it reduced dependence on credit, enabling small companies to grow and thrive largely by reinvesting revenue. At my company, Orbis Technologies, our capital requirements were reduced by more than 15 percent.
The accelerated payment initiative was a rare bright spot in an otherwise dismal 2011 fiscal cycle, but its impact has not been as great as it could be. To participate, a company must have a contract directly with the U.S. government. Many small businesses, however, work entirely as subcontractors, or they generate revenue from a mix of work for prime contractors and government agencies.
The accelerated payment initiative would have much more impact if Congress and the White House broadened it to require small businesses that benefit from accelerated payments to share those benefits with subcontractors.
This could be done through an amendment to the section of the Federal Acquisition Regulation describing the government’s interactions with small businesses. Under this statute, companies involved in large procurements are required to contract a percentage of the effort to small and disadvantaged companies.
The government could create an instant stimulus with no cost to the taxpayer by simply inserting language clearly stating that companies with small-business status as defined by the regulations must be paid in 30 days or less. If the U.S. government can pay in two weeks, there is no reason a big company can’t follow suit (plus another 16 days). It’s reasonable to ask a company that receives billions in tax dollars to be at least as efficient as the government.
An expansion of the accelerated payment initiative would help small businesses rebound from the difficult year of 2011. Repeated continuing resolutions injected massive financial instability into the U.S. industrial base, and no one was hurt worse than small businesses. They had no choice but to support contracts and hope their clients issued checks in a timely manner.
Unlike larger corporations, the small guys don’t have unlimited projects to shift employees among until government funding arrives. They don’t have the luxury of telling government clients they won’t support a certain project until a funding modification arrives. The White House policy helped, but many companies remain at risk.
Without consistent cash flows, small companies would have no choice but to freeze investments in new hardware, software, and research and development. The result: long-term technical innovation so needed by the ISR community and war fighters would be paused.
Continual credit crunches and more continuing resolutions threaten to dismantle even healthy, growing companies. To develop and expand, a company depends on a consistent supply of working capital. Slow and protracted payments can put a company out of business just as quickly as no payment at all. Someone has to pay the overhead, salaries and benefits. The tightening of the credit market leaves small businesses in a panic every time a payment does not arrive according to plan.
Without action, credit crunches could cripple ISR innovation and private investment at a time when they are needed most.
Unfortunately, U.S. banks are making the credit situation worse for small-businesses. They are requiring small business owners to back their companies’ assets with personal assets, which is a frightening burden that dampens innovation. It is also hypocritical, coming from a banking industry that prospered when U.S tax dollars underwrote its loans. I don’t recall Wall Street bank executives having to put up their homes in the Hamptons as collateral for this working capital. It is as though bank executives have forgotten that the U.S taxpayer bailed them out of financial disaster.
During the recession, while the banks and large automotive companies were being handed money, small businesses were asking for something fairly simple: Could the U.S. government pay the money it owed faster? No bailout, no grants and no special treatment. Simply pay the money owed for the work performed as quickly as possible. The September memo from the White House was a start, but only a start.
At Orbis Technologies, our commercial clients appear to be “losing” invoices or having “issues” with invoices that can stretch out our payment cycles to greater than 90 days. In fact, very recently, one client took four months to pay invoices equal to 10 percent of our annual revenue. Approval was delayed for months on end, with no satisfactory explanation, because someone simply had a question and they were too busy to meet and resolve the problem. Without action, this type of behavior could cripple small companies like mine.
Last September’s decision to accelerate payments to small prime contractors proved to be encouraging momentum in an excruciating business environment. The next move should be to ensure that the contractors on the receiving end of those accelerated payments are acting responsibly.
This would help ease the credit crunch facing small businesses. As it stands, subcontractors who do not fall under the accelerated umbrella typically receive payments 45 to 60 days after invoicing a prime contractor, which makes credit essential. My company has seen a payment take as long as 126 days after submission.
Legislation should be passed requiring agency prime contractors to pay subcontractors faster. This could reduce capital requirements for these companies by 25 percent to 50 percent. For government contracts, this would be the equivalent of a massive injection of capital — $100 billion to $200 billion — directly to small businesses. This would amount to a stimulus that is not directly funded by the taxpayer and is strictly performance-based.
What would be the ISR impact? Small companies could invest in new technologies and talent necessary for future programs. More time could be dedicated to program execution versus cash management.
With so much dysfunctional behavior in Washington, our leaders should stop focusing on what the other party is doing wrong and start focusing on expanding one program that really works.
Brian Ippolito is president and CEO of Orbis Technologies Inc. of Annapolis, Md., a 60-person company that provides information technology services and expertise to contractors and government agencies.