By: Carter Copeland
Twenty-five years ago, the fate of the US Defense industry changed forever when the Pentagon informed a large group of contractors that the pressures of declining budgets would force most of them to combine or exit the market. This famous meeting has long since been known as “the last supper”. The consolidation that followed through massive M&A is the stuff of Defense industry lore, but what gets little attention is how the terms of business between industry and the DoD changed simultaneously. In terms of profits, risk, and cash, business got better for the consolidated survivors. One of these improvements came from improved payment terms, including the introduction of Performance Based Payments (PBPs) in 1996 and increases in the payout percentage of progress payments on fixed price work shortly thereafter. While the industry struggled to maximize reported profits for several years, the optimization of cash flows and working capital happened rather quickly, within 5-10 years. This has gone unchanged for almost two decades, but a new proposal by the DoD to change payment terms in the future could result in some reversal of this progress.