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Pentagon To Slow Contractor Payments To Boost Cash Reserve

Feb. 21, 2013 - 06:19PM   |  
By MARCUS WEISGERBER   |   Comments
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WASHINGTON — The U.S. Defense Department will slow payments to prime contractors in the coming week in an attempt to increase its on-hand cash as defense spending cuts loom.

Pentagon officials said changing these payment processes combined with other initiatives will add about $1 billion, or a few days worth, of available cash within working capital spending accounts. DoD will begin notifying contractors of these payment changes in the coming days.

The Pentagon is facing a $46 billion reduction to its 2013 budget between March and September should across-the-board defense spending cuts, known as sequestration, go into effect.

Also complicating matters is that DoD is operating under a continuing resolution, which freezes spending at 2012 budget levels, creating an $11 billion shortfall from planned 2013 spending. The continuing resolution also keeps funds aligned in the same accounts as 2012, meaning new programs cannot start and ones that have been terminated are still receiving money.

Senior Pentagon officials have referred to sequestration combined with a yearlong continuing resolution as “the perfect storm.”

The move to slow prime contractor payments comes a week before sequestration begins on March 1.

“We don’t particularly want to do this [slow contractor payments]. It’s one of the many unfortunate steps we’re having to take because of the possibility of sequestration and a yearlong continuing resolution,” a senior defense official said on Thursday. “But we think it’s necessary to avoid running the risk of going negative in our cash and therefore violating the law.”

DoD has taken a number of steps to save money in advance of sequestration, primarily slowing contract awards, freezing hiring, cutting back on facility maintenance and limiting travel.

“The slowdown in spending is causing the services and agencies to cut down on their purchases from … working capital funds,” the official said.

The working capital fund pays for business-like activities, such as fuel, spare parts and office supplies. By law, the DoD must keep money in these coffers at all times; however, the amount of funds in these accounts is shrinking.

“Today that positive cash position is threatened,” the official said.

DoD typically keeps a week of money on hand. However, currently it only has two to four days of cash available. Budget officials have instituted a number of steps to reduce overhead to boost these accounts.

“They may have to stop some lower-priority services,” the official said.

The slowing of prime contractor payments is part of the curtailment of a process called the Quick Pay initiative. When DoD receives a bill, it is checked for accuracy. Budget officials make sure the particular service was rendered and it is consistent with the contract. That process takes a couple of weeks.

In the past, DoD would hold the bill for 30 days to minimize the amount of cash it pays out. But in 2011, DoD began using the Quick Pay initiative as a way to get payments to small businesses faster. That meant small businesses were paid as soon as a bill was verified.

That program was expanded to prime contractors in July 2012 as a way to aid those companies’ small business subcontractors.

“This Quick Pay policy results in a one-time cut in our cash,” the official said.

In other words, DoD has less cash on hand.

“As of last year, we were doing OK on cash,” the official said. “We wanted to aid small businesses and so this policy worked fine.

“With sequestration looming and cash problems occurring, we’re going to turn off Quick Pay in DoD for all but eligible small businesses,” the official said.

If sequestration is averted, DoD would re-evaluate its decision to stop the Quick Pay process.

“If we got both an appropriations bill and sequestration is averted, then I think we would want to relook at this,” the official said.

Pentagon officials do not believe these changes will have far-reaching effects on contractors.

“We’d rather not do it if we weren’t facing this uncertainty,” the official said. “We are going to try to protect as many of the small [businesses] as we can as we are able to identify them in our payment systems.”

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