Pentagon to Slow Contractor Payments Ahead of U.S. Spending Cuts

The U.S. Defense Department began slowing payments to contractors to boost cash reserves before automatic spending cuts are set to take effect next week.

The Pentagon yesterday revoked a policy requiring faster payments, discontinuing the practice for “all prime contractors,” according to a memo by Richard Ginman, director of defense procurement and acquisition policy.

The move was to prepare for the scheduled March 1 start of across-the-board budget cuts known as sequestration, said Larry Allen, president of Allen Federal Business Partners, a consulting firm in McLean, Virginia.

The military “needs to stretch out its money as long as it can if they know it’s going to be tight,” Allen said in an e- mail.

The change will provide a one-time increase of several billion dollars in the Defense Department’s available cash, Maureen Schumann, a spokeswoman at the Pentagon, said in an e- mail.

The automatic reductions would slice about $45 billion from defense programs during the remaining seven months of the fiscal year and about $500 billion over nine years. They will take effect unless lawmakers and President Barack Obama can agree on an alternative.

The Pentagon, in response to a directive from the White House Office of Management and Budget, last year began requiring contracting officers to make faster payments and instructed companies, in turn, to speed the flow of cash to subcontractors. The policy, which was designed to help small businesses, is “no longer authorized,” Ginman wrote.

Delayed Payments

Under the policy, vendors were being paid in about 15 days to 18 days, said Alan Chvotkin, executive vice president of the Arlington, Virginia-based Professional Services Council, which represents contractors such as SAIC Inc. (SAI) and CACI International Inc. (CACI) Average payment times will probably return to about 28 days now that the department has canceled the policy, he said in a phone interview.

“There’s increased expense to contractors from delayed payments,” Chvotkin said in a phone interview. “For some, it will stretch their own cash position. They may have to borrow more in the private market.”

Prompt payments are important for small businesses that don’t have the finances to support a major government project for a month or longer, according to Molly Brogan, a spokeswoman at the National Small Business Association.

“This memo is exactly the problem with sequestration and Congress’s failure to do anything about it to this point,” she said in an e-mail.

Some small businesses that have contracts directly with the government will still be eligible for the faster payments, said Schumann, the Pentagon spokeswoman.

To contact the reporters on this story: Brendan McGarry in Washington at bmcgarry2@bloomberg.net; Nick Taborek in Washington at ntaborek@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net

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