{"id":36122,"date":"2018-09-24T09:00:51","date_gmt":"2018-09-24T09:00:51","guid":{"rendered":"https:\/\/one.sightlinemg.com\/defensenews\/uncategorized\/2018\/09\/24\/defense-industry-fighting-dod-proposal-to-change-performance-payments\/"},"modified":"2026-08-07T22:59:06","modified_gmt":"2026-08-07T22:59:06","slug":"defense-industry-fighting-dod-proposal-to-change-performance-payments","status":"publish","type":"post","link":"https:\/\/one.sightlinemg.com\/defensenews\/industry\/2018\/09\/24\/defense-industry-fighting-dod-proposal-to-change-performance-payments\/","title":{"rendered":"Defense industry fighting DoD proposal to change performance payments"},"content":{"rendered":"<figure class=\"wp-block-smg-jwplayer-video\"><atype-video-jwplayer nostick=\"true\" playlisturl=\"https:\/\/cdn.jwplayer.com\/v2\/playlists\/fCzRqMW8?tags=a0c2a845-7a7e-4069-b05d-d7efca75eb08\" poster=\"\/wp-content\/uploads\/2026\/08\/video-poster-a0c2a845-7a7e-4069-b05d-d7efca75eb08.jpg\" aspectratio=\"16 \/ 9\" mute autostart=\"false\"><\/atype-video-jwplayer><figcaption class=\"wp-element-caption\">In an interview with deputy editor Aaron Mehta, Undersecretary of Defense for Acquisition and Sustainment Ellen Lord provides an update on her office&#8217;s reorganization and the path ahead for acquisition reform.<\/figcaption><\/figure>\n\n\n<p class=\"wp-block-paragraph\">WASHINGTON \u2014 The Pentagon\u2019s <a href=\"https:\/\/www.defensenews.com\/pentagon\/2018\/09\/14\/pentagon-prepared-to-offer-industry-better-cash-flow-if-they-deserve-it\/\" target=_blank>proposed plan<\/a> to lower the rate of progress and performance payments some companies receive on defense contracts is sending shockwaves through the industry and invited a backlash from three large trade associations.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To incentivize defense firms to work more quickly and more efficiently for the taxpayer, Pentagon leaders want to create a tiered system that recognizes high performing companies with higher performance-based payments. Contractors, however, are balking at the Pentagon\u2019s efforts to make them more accountable.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">While obscure to the general public, the proposed rule changes have rattled government contractors, which argue they would choke off funding for innovation, shackle them with more bureaucracy, increase the cost of military equipment\u2014 and hurt profits.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The baseline performance- and progress-based payment rate for larger companies would be reset from 80 percent to 50 percent, with incremental increases or decreases based on new criteria proposed by DoD. If a contractor, for instance, delivers end items on time, hits milestone schedules, or avoids serious corrective action requests, it would win 10 percent bumps for each. (Small businesses would have their own schedule of incentives.)<\/p>\n\n\n\t<aside class=\"smg-interstitial-link wp-block-smg-interstitial-link\">\n\t\t<a href=\"https:\/\/one.sightlinemg.com\/defensenews\/breaking-news\/2017\/12\/14\/american-exodus-17000-us-defense-suppliers-may-have-left-the-defense-sector\/\" class=\"smg-interstitial-link__inner\">\n\t\t\t\t\t\t\t<div class=\"smg-interstitial-link__media\">\n\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"300\" height=\"166\" src=\"https:\/\/one.sightlinemg.com\/wp-content\/uploads\/2026\/08\/635779162083515022-ap-242258128965jpg.jpg?w=300\" class=\"smg-interstitial-link__image wp-post-image\" alt=\"\" \/>\t\t\t\t<\/div>\n\t\t\t\t\t\t<div class=\"smg-interstitial-link__content\">\n\t\t\t\t<span class=\"smg-interstitial-link__kicker\">Related<\/span>\n\t\t\t\t<h3 class=\"smg-interstitial-link__title\">American exodus? 17,000 US defense suppliers may have left the defense sector<\/h3>\n\t\t\t\t\t\t\t\t\t<p class=\"smg-interstitial-link__excerpt\">A large number of American companies that supply the U.S. military may have left the defense market, a report says, raising alarm over the health and future of the defense industrial base.<\/p>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/a>\n\t<\/aside>\n\t\n\n\n<p class=\"wp-block-paragraph\">The National Defense Industrial Association is calling on DoD to rescind the regulation and collaborate with industry to create a different rule. One objection it has is the proposed rule would determine payment rates based on companies\u2019 overall performance, as opposed to contract by contract.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cThe marching orders from Congress is we have to be faster, more innovative, to do better for the warfighter,\u201d said NDIA Senior Vice President for Policy Wesley Hallman. But, under the proposed rule, a company that wants to take on a high-risk project that fails, \u201cwill later be judged on that thing the following December. They\u2019re incentivized to take a low-risk approach.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Though Section 831 of the 2017 National Defense Authorization Act encourages DoD to use performance payments, NDIA argues the rule violate\u2019s the law\u2019s intent and that lessening companies&#8217; cash flow would slow payments to subcontractors and sap funding for independent research and development.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cWe\u2019re doing our best to let them know how this will hurt industry,\u201d said NDIA Director of Regulatory Policy Corbin Evans.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The trade group\u2019s comments were submitted at a public meeting Sept. 14 to consider changes the Pentagon <a href=\"https:\/\/www.federalregister.gov\/documents\/2018\/09\/21\/2018-20626\/performance-based-payments-and-progress-payments-dfars-case-2017-d019\" target=_blank>proposed<\/a> in August to federal acquisitions rules, the Defense Federal Acquisition Regulations Supplement. The Defense Department is holding another public meeting, Oct. 10, before the public comment period ends on Oct. 23.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Both the Professional Services Council and the Aerospace Industries Association, which more than 300 companies in the aerospace and defense industry, also offered presentations in opposition.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The move toward better stewardship of taxpayer dollars comes amid <a href=\"https:\/\/www.defensenews.com\/breaking-news\/2018\/02\/07\/congress-reaches-budget-deal-with-huge-defense-boost\/\" target=\"_blank\">record Pentagon budget growth<\/a> and amid a <a href=\"https:\/\/www.defensenews.com\/pentagon\/2018\/07\/17\/revealed-the-new-structure-for-the-pentagons-tech-and-acquisition-offices\/\" target=\"_blank\">reorganization<\/a> of the Pentagon\u2019s acquisition, technology and logistics office, now due to finish in a few months.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The move falls in line with Under Secretary of Defense for Acquisition and Sustainment Ellen Lord\u2019s <a href=\"https:\/\/www.defensenews.com\/pentagon\/2017\/12\/08\/heres-how-ellen-lord-will-reduce-acquisition-time-by-50-percent\/\" target=_blank>efforts<\/a> to halve the timeline of major defense acquisition programs, which are notoriously slow.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cI believe the lifeblood of most industry is cash flow, so what we will do is regulate the percentage of payments or the amount of profit that can be achieved through what type of performance they demonstrate by the numbers,\u201d Lord said in a Defense News interview last week.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Hence, \u201cwe\u2019re going to begin to reward companies through profit or through progress or performance payments, as a function of how they manage all of that, as well as quality and delivery and a variety of other things,\u201d Lord said.<\/p>\n\n\n\t<aside class=\"smg-interstitial-link wp-block-smg-interstitial-link\">\n\t\t<a href=\"https:\/\/one.sightlinemg.com\/defensenews\/pentagon\/2018\/05\/22\/americas-industrial-base-is-at-risk-and-the-military-may-feel-the-consequences\/\" class=\"smg-interstitial-link__inner\">\n\t\t\t\t\t\t\t<div class=\"smg-interstitial-link__media\">\n\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"300\" height=\"175\" src=\"https:\/\/one.sightlinemg.com\/wp-content\/uploads\/2026\/08\/KC-46-Line-1.jpg.jpg?w=300\" class=\"smg-interstitial-link__image wp-post-image\" alt=\"\" \/>\t\t\t\t<\/div>\n\t\t\t\t\t\t<div class=\"smg-interstitial-link__content\">\n\t\t\t\t<span class=\"smg-interstitial-link__kicker\">Related<\/span>\n\t\t\t\t<h3 class=\"smg-interstitial-link__title\">America\u2019s industrial base is at risk, and the military may feel the consequences<\/h3>\n\t\t\t\t\t\t\t\t\t<p class=\"smg-interstitial-link__excerpt\">America&#039;s aging workforce could limit the Pentagon&#039;s ability to keep up with other nations, a new government report warns.<\/p>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/a>\n\t<\/aside>\n\t\n\n\n<p class=\"wp-block-paragraph\">Though it\u2019s unclear whether DoD will formally move ahead with the rule by a Dec. 1 deadline, investors have already responded negatively to a reports on the changes, according to aerospace and defense sector analysts at Cowen and Company.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cIt will be a scramble for companies and DoD to compile the necessary data to evaluate the rate request. Under the current draft rule, DoD would need to evaluate the rate request in just one month for all its suppliers,\u201d Roman Schweizer, of Cowen and Company, said in a note to investors Friday. \u201cWe suspect that will be very hard the first time and suggests this year may be too hard.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Still, Cowen analyst Cai von Rumohr downplayed the near-term effects, especially beyond the major primes. He speculated the proposed rule change will have negligible impact on contractor results in 2019 since it doesn\u2019t apply to any current contracts; it\u2019s very unlikely to go into effect before 2020, if ever; it will not apply to time and materials and fixed-price commercial terms contracts, and because it will only apply to some cost-plus contracts.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>DoD&#8217;s Ellen Lord has a way to incentivize better contract performance, but industry is rebelling.<\/p>\n","protected":false},"author":7,"featured_media":27210,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_yoast_wpseo_meta-robots-noindex":"","_yoast_wpseo_meta-robots-nofollow":"","_yoast_wpseo_canonical":"","_acf":"","_yoast_wpseo_primary_category":12,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","_smg_distribution_targets":[]},"categories":[160,12,36,19],"tags":[],"coauthors":[3446],"class_list":["post-36122","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-daily-news-roundup","category-industry","category-newsletters","category-pentagon"],"acf":{"subheadline":"","legacy_arc_id":"MXYK5H6325HFRG6PDQ54NQWOO4","arc_canonical_url":"\/industry\/2018\/09\/24\/defense-industry-fighting-dod-proposal-to-change-performance-payments\/","remove_feature_photo":true,"is_sponsored":false,"subtype":"","redirect_url":"","disable_inline_ads":false,"native_logo_pretext":"Presented 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