CARES Act: Significant Funds for Defense Department and Defense Contractors

Adam Proujansky

The recently enacted coronavirus COVID-19 Coronavirus Aid, Relief, and Economic Security Act stimulus package (the “CARES Act” or “the Act”) includes billions of dollars earmarked for the Department of Defense (“DoD”) and defense industry contractors. It does this in two ways:

    1. By providing billions of dollars in loans, loan guarantees, and other financial assistance to businesses through the Department of the Treasury, including up to $17 billion specifically for businesses “critical to maintaining national security;” and
    2. By providing $10.5 billion in supplemental appropriations to DoD, much of which is likely to go to procuring goods and services from federal contractors, including in areas ranging from healthcare to information technology. The Act also contains provisions intended to streamline DoD contracting during the present emergency.

Although the procedures to obtain these loans were not established by the Act, the Secretary of the Treasury is required to publish procedures for applying for these loans within 10 days of enactment. It is expected that DoD will issue solicitations very soon to meet these pressing needs. We expect many contractors in the defense industry will be eligible for these loans, or for the parallel loan program for small businesses being administered by the Small Business Administration under the Act.

Section 4003 of the CARES Act: Authorizes $500 billion in loans, loan guarantees, and investments for businesses, states, and municipalities that have incurred losses relating to the COVID-19 pandemic, giving the Secretary of the Treasury broad discretion as to how the money is distributed, as well as considerable flexibility regarding the rate of interest on the loans and the terms of loan repayment. Businesses are eligible for these loans, loan guarantees, and investments if their continued operations are jeopardized by losses related to the pandemic. The Act requires that the loans and payments be publicly disclosed, and they are subject to strict oversight and conflict-of-interest provisions.

In return for the loans, guarantees, and investments, the businesses must agree to limitations on executive compensation, payment of dividends, and stock buy-backs, and the Government must receive warrants, equity, or debt instruments as collateral.

Of the $500 billion total fund:

    1. Up to $17 billion is designated for direct loans to “businesses critical to maintaining national security” (a term not defined in the statute);
    2. $25 billion for passenger air carriers (and certain airline industry contractors); and
    3. Four billion dollars for cargo air carriers.

In addition to possible eligibility for direct loans, contractors in the defense industry are likely to benefit from the $10.5 billion appropriation for the Department of Defense, which contemplates significant procurements in a variety of areas including, but not limited to, healthcare:

    1. Approximately $3.4 billion will go to the purchase of medical equipment to treat military personnel and for the expansion of military treatment facilities.
    2. Another one billion dollars is designated for purchases pursuant to the Defense Production Act to increase access to materials necessary for national security and pandemic recovery.
    3. An additional $1.45 billion is set aside by the Act for Defense Working Capital Funds, in order to mitigate the impact of COVID-19 on production lines and supply chains.
    4. The stimulus package also includes $300 million to procure IT equipment and increase bandwidth in order to facilitate telework.

Of particular interest to contractors in the defense industry, the CARES Act also contains provisions designed to streamline DoD contracting in response to the pandemic:

    1. Section 13003 of the Act removes the one-billion-dollar cap on advance billings for Defense Working Capital Funds to improve the Department’s procurement flexibility and ensure supply chain stability.
    2. Section 13004 removes the incurred cost limit on progress payments under undefinitized contract actions to enhance cashflow to federal contractors.
    3. Section 13005 removes restrictions on the Department’s use of undefinitized contract actions to enhance the Department’s emergency response.
    4. Section 13006 allows the Department to waive certain restrictions on the usage of other transaction authority in contracts to improve liquidity in the defense contracting sector, particularly among small businesses, in connection with the pandemic response.

As COVID-19 issues permeate virtually all aspects of commerce nationally and internationally, we stand ready to help. Blank Rome’s Coronavirus (“COVID-19”) Task Force includes interdisciplinary resources across every business sector from insurance recovery to HR.