Defense Business Brief: Pentagon to reduce contract payments; New military helo; Acquisition leadership seats filling up; and more.

The Pentagon will start paying contractors less money up front, reverting to pre-pandemic payment levels and ending a policy that was incredibly popular with small suppliers.

The move was announced in an April 17 memo from John Tenaglia, principal director of defense pricing and contracting, which was posted on a Pentagon acquisition website.

“This will be done in a manner that minimizes disruption,” Tenaglia wrote. “The effective date and details of the planned prospective change for new contracts are forthcoming.”

Per the memo, contractors will get paid 80 percent up front. That is down from the 90 percent they were paid since the beginning of the pandemic. But the memo states that small businesses are expected to get paid 95 percent up front moving forward. It’s unclear how the change will impact the thousands of small businesses that are suppliers to the large defense companies.

The memo doesn’t say when the new policy takes effect. The COVID-19 public health emergency expires on May 11. “We understand the progress payment change will only affect new contracts, not those already in force, so we expect the financial impact to defense [companies] will be gradual, although this is difficult to quantify and will vary by company and contract mix,” TD Cowen analyst Roman Schweizer wrote in an April 19 note to investors.

The accelerated progress payments have been championed by defense companies—especially small businesses. On a quarterly earnings call last week, Lockheed Martin CFO Jay Malave said the company accelerated more than $600 million to smaller suppliers in its supply chain over the first three months of this year.

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At the Space Symposium last week in Colorado Springs, there was a clear focus on the need for smaller and more resilient satellites. Gen. Chance Saltzman, the chief of space operations, had a clear message for the attendees at the annual gathering of military, civil, and commercial space professionals: Don’t get complacent.

“This crowd is passionate about space [and] I see no signs of apathy,” Saltzman said. “[But,] I’m worried about a far more subtle form of complacency. One that grows out of the comfort of continuity, the comfort of our expertise, the comfort of our successes. What we have done and how we have done it has worked and worked well, but I fear we think it will work well forever.”

The U.S. has long been a leader in space technology. Many aspects of daily life—and military operations—rely on space. And some nations, including China and Russia, have missiles and other technology that can interfere or destroy U.S. satellites.

“Now is not the time to allow for any measure of complacency,” Saltzman said. “I fundamentally believe we are now at the precipice of a new era in space.”

This week it’s all about quarterly earnings. Raytheon (Tuesday), General Dynamics (Wednesday), Boeing (Wednesday), Northrop Grumman (Thursday), and L3Harris (Friday) all report this week. 

Lockheed Martin, which earnings reported last week, said it expects fewer F-35 deliveries this year due to hardware and software issues. The company also announced last week that it would not take legal action over the Army choosing the Bell-made V-280 tiltrotor instead of the Defiant-X, a helicopter that Sikorsky jointly developed with Boeing.

The Army intends to replace the venerable Black Hawk with the V-280 through an effort it calls Future Long-Range Assault Aircraft, or FLRAA. That effort was never intended to replace every single one of the more than 2,000 Black Hawks the Army flies today. But comments made by top Army officials during a congressional hearing last week signaled the Black Hawk will remain around for a long, long time. The Black Hawk “will continue to be the mainstay of medium lift helicopters, I see for the next 40 to 60 years,” said Gen. James McConville, the Army chief of staff.

The Army might have already placed its last order for Black Hawks, but if the four-to-six decades outlook McConville gave was correct, one has to question just how many more Black Hawk orders the Army would need to place to make that a reality.

The Army is also poised to award another major helicopter contract in the coming years, the Future Attack Reconnaissance Aircraft, or FARA. Of note: FLRAA and FARA will not replace the Navy’s UH-60. “FLRAA is too big to fit on surface combatants and FARA is too small for payloads the Navy needs,” Capital Alpha analyst Byron wrote in an April 21 note to clients. “The Navy is exploring future rotary aircraft needs with Milestone A targeted for 2025. An issue to consider is how eVTOL models could meet Navy needs.”

Continuing our helicopter discussion, Airbus Helicopters announced two new military versions of its commercial H125 helicopter—one for attack and the other for special operations. The company wants to sell the AH-125 and MH-125 overseas and is not marketing the helicopters to the U.S. military. It plans to build them at its Columbus, Mississippi, factory. Virginia-based MAG Aerospace would do the weapons installation on the helicopter, according to Airbus.

“What we want to convey is that we have a proven product here from a proven industry team to address what we see as a little bit of a niche in the market,” Scott Tumpak, vice president of Airbus Helicopter’s military business, said during a Monday morning call.

Company executives would not disclose potential customers for the new aircraft, so we asked Forecast International helicopter guru Ray Jaworoski for his thoughts:

“Airbus Helicopters has a long history of spinning off military-specific variants of its various civil helicopters. These new H125 models have the potential of providing military operators with a cost-efficient solution to a variety of needs, such as light attack, armed reconnaissance, [search and rescue], etc. Also, there are fleet commonality benefits for those customers who already operate H125s or AS 350s in such roles as training or transport. Market potential will certainly exist in Eastern Europe as well as other regions. Latin America could be a big market for these models.  Besides military operators, parapublic agencies (such as coast guard, border patrol, law enforcement) could be customers.”

Tumpak said the militarized H125 helicopter “meets all the credentials for Buy America access to foreign military financing.”

Fincantieri Marinette Marine was recently hit by a ransomware attack, USNI News reports. The shipyard builds Freedom-class littoral combat ships and the new Constellation-class frigates. Per USNI News: “The attack on Marinette Marine targeted servers that held data used to feed instructions to the shipyard’s computer numerical control manufacturing machines, knocking them offline for several days. CNC-enabled machines are the backbone of modern manufacturing, taking specifications developed with design software and sending instructions to devices like welders, cutters, bending machines and other computer-controlled tools.”

Making Moves

The Pentagon’s Acquisition & Sustainment office finally has a number of key positions filled. After being confirmed by the Senate last week, Radha Iyengar Plumb begins her tenure this week as deputy undersecretary for acquisition and sustainment.

The Senate also recently confirmed Laura Taylor-Kale as the assistant secretary for industrial base policy. The White House announced last week that President Biden will name Cara Abercrombie to become assistant secretary for acquisition.

President Biden has nominated Gen. Randy George to be the Army chief of staff. George, who is the Army’s vice chief, would replace Gen. James McConville, who is expected to retire later this year.

Brig. Gen. Dale White has been nominated to become the Air Force military deputy for acquisition. If confirmed, White, who is the program executive officer and director of fighters and advanced aircraft at the Air Force Life Cycle Management Center, would skip a rank and become a lieutenant general.

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