May 04, 2020

Warren Questions Defense Department About Profiteering Risks from Changes to Pricing and Contracting Policy Amid COVID-19 Pandemic

New Policy Could Invite Waste, Fraud and Abuse, Amounts to Cash Subsidy for Big Defense Contractors with Minimal Accountability

Text of Letter (PDF)

Washington, D.C. - United States Senator Elizabeth Warren (D-Mass.), a member of the Senate Armed Services Committee, wrote to the U.S. Department of Defense (DoD) requesting clarification on a recent change to its defense contracting policy in response to the coronavirus disease 2019 (COVID-19) pandemic.

"As the Department adjusts its business practices to address the COVID-19 pandemic, I seek to ensure that this policy change will result in responsible use of taxpayer funds and that contractors are not profiteering during the crisis," the senator wrote in her letter to Ellen Lord, Under Secretary of Defense for Acquisition and Sustainment.

As a method of contract financing, the Defense Department issues "progress payments" to contractors for work that is in progress but not yet completed and for costs associated with that work. Typically, the Department sets these progress payments at 80 percent of the work conducted by large contractors and 90 percent of the work conducted by small contractors. Last month, DoD announced a temporary change to these progress payments, which "raises the progress payment rates for large businesses from 80 percent to 90 percent, and for small businesses from 90 percent to 95 percent." DoD officials have justified the recent policy change as a way of providing additional, immediate cash to the defense industry amid the pandemic.

In her letter, Senator Warren expressed concern with the policy change, noting that the current playing field of DoD contract financing is already heavily tilted in favor of large contractors, which can invoice and receive progress payments from the Department for subcontracted services before having to pay their subcontractors. The new progress payments policy will allow a large contractor to receive an even greater share - 90 percent - of all its costs reimbursed by the Department before paying subcontractors for the services and products in progress.

"I am concerned that the change to the progress payments policy may be a cash subsidy that largely benefits big defense companies that can better withstand the economic shock caused by coronavirus... while leaving smaller, less financially resilient companies in the supply chain behind," the senator continued.

In addition to noting that big defense contractors already received billions in bailout funds from the third coronavirus stimulus bill, the senator also expressed concern that this increase in progress payments could invite waste, fraud, or abuse by expediting the payments of billions of dollars of taxpayer funds to giant contractors that use the funds for stock buybacks or other methods of enriching upper management, or to large contractors whose work may not even be completed due to stop work orders and other mandatory public safety measures issued by state and local governments to stop the spread of coronavirus.

To address her concerns, Senator Warren asked DoD to answer a series of questions about how it will guard against these potential consequences. She requested a response to her letter by May 15, 2020.