On March 20, 2020, the US Department of Defense (“DoD”) issued a Class Deviation raising the customary progress payment rates for defense contractors from 80% to 90% for large businesses and from 90% to 95% for small businesses. This change, which is effective immediately and remains effective until rescinded, was issued “in response to the Coronavirus Disease 2019 (COVID-19) national emergency” to boost cash flow for both small and large defense contractors in the midst of the economic shocks caused by the pandemic. The increase helps cash flow not only for contractors but also for their subcontractors and suppliers.
DoD uses progress payments based on cost to help cover some of the upfront costs for contractors who might otherwise lack the necessary cash flow to perform (or who are reluctant or unable to obtain sufficient private financing). Under this approach, the federal government reimburses the contractor at regular intervals for a fixed percentage of the costs incurred by the contractor, with the balance being paid upon satisfactory completion of the contract. This payment approach eases contractor cash flow while protecting the federal government by reserving a portion of the payment. In the case of DoD contracts, the customary progress payment rates—prior to the issuance of the Class Deviation—were 80% for large businesses and 90% for small businesses. (See Defense Federal Acquisition Regulation Supplement (“DFARS”) 232.501‑1.)
The Class Deviation
This Class Deviation is especially notable because until recently, DoD was moving toward reducing progress payment rates in order to “improve contractor performance.” For instance, in August 2018, DoD published a proposed rule to amend DFARS 232.501‑1 (and several corresponding contract clauses) to lower the progress payment rate for large defense contractors from 80% to 50%, while leaving the progress payment rate for small businesses unchanged at 90%. DoD abandoned this proposed change in October 2018.
Although the Class Deviation is effective immediately, pursuant to FAR 43.102(a), “[o]nly contracting officers acting within the scope of their authority are empowered to execute contract modifications on behalf of the Government.” Accordingly, in order to benefit from this Class Deviation, defense contractors with ongoing contracts that use progress payments will need to seek and obtain a contract modification from the responsible contracting officer.