Paying Its Bills on Time Is Not the Pentagon’s Strong Suit

When defense experts debate critical issues of national security, the Pentagon’s inability to pay small aerospace contractors on time seldom comes up--even though some of them have been driven into virtual insolvency.

At the start of this year, 12,000 Defense Department payments to small businesses in the West were late because of computer foul-ups, rapid employee turnover and the Pentagon’s complex bureaucratic rules, among other reasons.

The computer software that the Defense Department uses to process contracts in a Los Angeles office, for example, is more than 20 years old. About 35% of the employees who use the computers leave government service every year. And contract regulations are so complex that many small firms hire consultants at government expense just to fill out government forms.

The situation, which has driven some companies out of defense contracting, has prompted an uncharacteristically angry response by the defense industry. Two trade groups, representing larger contractors who have also had problems, have been formed to protest payment delays.

‘Verge of Breakdown’

The problem has raised troubling questions of whether the entire structure of defense procurement--writing contracts, handling paper work and issuing payments--is in crisis. While the military services are pushing the limits of technology in weaponry, relatively simple matters--like getting a check in the mail--seem to be a problem.

The payment snafus appear to reflect a larger Defense Department problem of attempting to do too much on a shrinking budget. The mismatch between the Pentagon’s agenda and what it can realistically afford has led to such policies as forcing contractors to develop new weapons at a loss; program schedules being stretched out; and drastic reductions in quantities of weapons on order, which in turn drives up prices.

“I worry that the whole procurement system is on the verge of a nervous breakdown,” Rep. Les Aspin (D--Wis.), who chairs the House Armed Services Committee, said in a recent interview. “If morale is low and people are unhappy, it is going to affect the quality of the products. Morale is terrible right now. Everybody is unhappy with the system.”

The longstanding problems in the Pentagon’s business functions are finally getting some attention. The House Armed Services Committee last week launched an investigation into late payment problems at the Defense Contract Administration Service, the Pentagon agency that disburses $51 billion annually to contractors in the Western United States.

Brig. Gen. John Serur, commander of the regional DCAS office, said in a recent interview that the worst of the immediate problems have been solved. Of the 12,000 delinquent bills at the beginning of this year, he said, 3,330 remained at the end of March.

“I know there is light at the end of the tunnel,” he said. “Please don’t misunderstand. We still have backlogs (of unpaid bills.) As long as we have those backlogs, we have contractors with complaints.”

Indeed, some contractors say they have detected little improvement in bill payments, and even when longstanding delinquent accounts are paid off, they add, they are left with bitter feelings about the experience.

Sunrise Electronics of Glendora, for example, was unable to meet the payroll for its 10 employees last month when it failed to receive a check from DCAS for an invoice submitted in January.

“You go down to the bank to borrow money and they don’t understand,” said Vice President Alan Carey about Sunrise’s efforts to get bank credit. “It is beyond their comprehension.”

As a result of the experience, Sunrise is refusing to accept any new contracts in which DCAS is the designated payment authority. The company recently struck an agreement with the Navy under which the service will pay it directly for a contract that would ordinarily be handled by DCAS.

Behind in Know-How

“It is a sad situation over there at DCAS,” Carey said. “The attitude of the people is dismal. If it weren’t for a few caring civil servants, nothing would get done.”

Some defense experts, however, worry that persistent budget cutting, low federal pay and additional regulations will override even the best intentions of the “servants” in the government system.

“We want to buy all these really fancy weapons and spend billions on new systems, but we don’t have the money to make the system work from an administrative standpoint,” said Michael Beltramo, a defense industry consultant. “We are making it so difficult to do business with the government that you have to ask yourself whether it is even worth the bother any more. The system is too awful to comprehend.”

Essentially, Beltramo and others are asking whether the Pentagon is capable of dealing with high technology such as the Star Wars missile defense shield when its business system is not up to 1960s levels of administrative know-how.

“There is too much focus on the big picture and not enough on the things that make the system work,” said Rep. David Dreier (R-La Verne), a member of the House Small Business Committee and one of a handful of Congress members who have been involved in helping small firms get paid by DCAS.

“I have received a flow of letters from contractors,” Dreier said. “These letters are going to be a major issue that we raise. This should not be happening.”

Although contractors have long complained about late payments by the DCAS office in Los Angeles, a series of problems late last year resulted in a new surge of delinquent payments. DCAS, in a letter to contractors in February, admitted to a “deterioration of operations.”

A sprinkler system had malfunctioned late last year and partially flooded a computer room in the agency’s Los Angeles area office in El Segundo, Serur said. Also, a weather balloon had landed in a nearby power grid and caused an interruption of electricity to computers; that problem could have been avoided by a backup power supply system that had been forgone as an economy measure. Then there was new computer software that would not operate properly and caused a three-day shutdown, the general said.

Reluctance to Complain

Meanwhile, some contractors, such as Richard Puga, owner of Puga Engineering near Watts, were told that “the check is in the mail.” But, all too often, the check was not in the mail and tempers continued to rise.

Major prime contractors are just as angry but are more reluctant to make their feelings public. A vice president at one major Los Angeles defense firm said 75% of its payments from DCAS are more than 30 days late and that the average invoice is still unpaid after 180 days.

“We had some that were a year old,” he said.

Under federal law, DCAS must pay interest to a contractor if it fails to pay a bill within 45 days. So far this fiscal year, the DCAS regional office has paid out $790,000 in interest, up from $417,000 during all of fiscal 1988, Serur said. The interest total would be even higher, but DCAS does not pay when it loses invoices or on certain types of disbursements known as progress payments.

Even the military services are getting angry at DCAS. Both the Navy and the Army have complained that the agency is paying contractors out of the incorrect accounts.

For example, the U.S. Army Tank Automotive Command notified DCAS last month that it had paid bills to FMC Corp. in San Jose with funds belonging to the nation of Portugal in connection with foreign military sales, according to internal DCAS documents obtained by The Times.

A DCAS public affairs officer said, “People do make errors. It seems to happen because we have turnover of staff and we have borrowed staff. It has been happening, but not to a real large extent.”

While problems with computers can be fixed and accounting errors can be remedied, inadequate federal pay and the inability to retain workers is a longer-range problem. Many of the workers who process the millions of pages of defense paper work earn $12,000 to $14,000 a year, about half of what they would get in private industry and just at the poverty line for a family of four.

Serur said DCAS has been forced to hire recent high school graduates to conduct voucher examinations, in which contractor billings must be verified against the terms of contracts. It is hardly work for inexperienced young people, especially because defense regulations have grown so complex in recent years, observed Beltramo, the consultant.

Bad Situation Inherited

William Jenkins, a recently retired DCAS official responsible for personnel, said he is happy to be out of the agency.

“It didn’t have the reputation I like,” he said. “We couldn’t hire good people. The people we trained would go to industry.”

Jenkins said Serur, who became head of DCAS’ regional office in 1984, inherited a bad situation that had festered for years. “Of all the generals we have had there, he was the most approachable,” Jenkins said. DCAS’ workload has increased dramatically in recent years owing to Pentagon budget growth and to the increasing complexity of defense regulations.

At the same time, the DCAS work force has grown more and more inexperienced. Serur said that 60% of his employees have less than two years’ experience.

In part because the government can no longer afford to pay its employees enough to live in Los Angeles, the Pentagon announced two months ago that it has decided to consolidate its nine regional DCAS payment offices around the country in Columbus, Ohio.

The hope is that the government will be able to attract a more stable work force in Columbus that will be able to live adequately on government salaries. The Defense Logistics Agency, DCAS’ parent organization, is setting up its new finance center in a former Air Force-owned industrial plant.

Move Could Worsen Things

But the prospect of a monolithic federal bureaucracy handling $51 billion in payments annually has worried defense industry executives even more than the problems at DCAS’ regional office. While Pentagon officials insist that the Columbus operation will provide a solution, congressional officials are not sure.

“Our concern is that when they start the move from Los Angeles to Columbus this summer, things could get much worse,” an investigator from the House Armed Services Committee said last week. “That’s what we are hearing from some contractors.”

Some bankers are also worried that the selection of Columbus was ill-considered. When a contractor in Los Angeles receives a large payment, which can be in the tens of millions of dollars, a courier typically will pick up the check at DCAS’ office in El Segundo and take it to the Federal Reserve Bank branch in downtown Los Angeles. Such handling reduces the time the contracting firm must wait to actually get the money credited to its account.

There is no Federal Reserve Bank branch in Columbus, however, and contractors will have to have couriers take the checks to Cleveland to clear them. Otherwise, the checks will be mailed to the contractors, a prospect that could add several days to the payment cycle. On a $25-million payment, for example, that can cost more than $20,000 in additional interest on a three-day postal excursion. Such a loss of interest is not reimbursable under federal regulations.

The Pentagon is attempting to create the capability to transfer funds electronically, something private banks and major corporations have done for years. The capability is scheduled to be available this summer, William Cassell, comptroller of the Defense Logistics Agency, said in an interview.

But one aerospace company vice president is skeptical. “Just knowing what it takes us to train our own people internally raises concerns that they will not be able to do it,” he said.

James Southerland, president of Contract Advisory Services, a Torrance firm that helps small contractors with their paper work, said the government often compounds its late payment problems by taking discounts for prompt payment even when the payments are late. If contractors mischarged the government in such a fashion, Beltramo said, it is likely that they would be indicted for fraud.

Aspin, the House Armed Services Committee chairman, has grown increasingly concerned about horror stories in the business functions of the procurement system.

“You have a system that could freeze up on you,” he said. “In the procurement area, one problem is the continual set of reforms that have gone into effect before the previous set has been digested.

“These changes are coming too fast for the system. You have problems with people working under the old regulations and they don’t even know about the new regulations.”