By Amanda James

Law360 (April 23, 2020, 9:50 PM EDT ) Small businesses in the defense sector say the COVID-19 crisis has had a major impact on cash flow, a survey released Thursday by the National Defense Industrial Association found.

The trade organization asked 770 companies what areas of their business had taken the biggest hit so far during the coronavirus pandemic, and 60.63% responded that they had experienced disruptions of cash flow.

"This number alone reveals the far-reaching nature of this crisis," the study said. "Issues with cash flow lead businesses to face issues paying staff, meeting bill requirements such as rent, and the ability to purchase supplies and raw materials, flowing down the negative impacts to those lower in the supply chain."

Some of those cash-flow problems stem from shelter-in-place orders, preventing employees from going to work, the NDIA found. According to the study, 51% of the small businesses have experienced issues carrying out their contract tasks due to shelter-in-place orders, which vary by state, and require nonessential employees to stay at home.

"DOD should proactively grant flexibility on contract performance periods to allow contractors to adjust to the new realities of a remote workforce," the study recommended.

The majority of businesses reporting cash-flow concerns had under 50 employees, and businesses with more than 500 employees didn't have as significant a problem in that area, the NDIA said. The lack of options for remote work and cuts to billable hours have contributed to the cash-flow issue, according to the study.

"One theme that runs throughout the survey is that smaller companies, especially those with under 50 employees, are citing more dramatic impacts than those responding from larger companies — even though both sets cite significant disruption as a result of the COVID-19 crisis," survey director Corbin Evans told Law360.

The survey divided the impacts by industry and found that companies in the technology sector reported higher levels of negative impacts. On a scale of 1 to 5, with 5 being the most severe impact, technology companies put nearly every category of disruption, including availability of workforce, cost and availability of materials, and confidence in supply chain partners, at level 3 or above.

Businesses in the technology sector also took a hit due to difficulty accessing secure working facilities, an impact to revenue expectations due to cash-flow disruptions, and challenges stemming from a lack of clarity from the U.S. Department of Defense, respondents said.

But the services sector, including businesses providing administrative, technical or other consulting services, came in a close second, also ranking most categories above a 3 in terms of impact level. For that sector, the biggest challenges are unpredictable cash flow and being able to perform on a contract, the study found. Those businesses also reported issues finding workers.

One reason the NDIA believes the services sector is having difficulty carrying out work is because "these contracts typically require the contracting workforce to be present at a government site that is currently unavailable," Evans said.

The majority of respondents had less than 50 employees, and one-third reported annual revenues of between $1 million and $5 million, the NDIA said.

The DOD Office of Small Business has responded to some of the study results, according to the survey authors. In its response, the office cited the Coronavirus Aid, Relief and Economic Security Act, a $2 trillion relief package signed by President Donald Trump on March 27, which includes support to small businesses impacted during the COVID-19 outbreak.

The Defense Department did not immediately respond to a request for comment from Law360.

The NDIA said that business performance during the outbreak should be treated differently than during normal circumstances, especially down the road when the Pentagon looks at past performance when considering whether a contractor is suitable for a job.

"Whether excusing delays or giving extra credit to those businesses that keep performance schedules during this period, it is important to note that this is not a typical business performance environment and that businesses should not be punished in the future for discrepancies in performance during this time," the NDIA said.

Respondents said that the DOD should conduct more COVID-19 testing for contractors who do "mission-critical" work and requested that the security clearance process be sped up.

"There is a widespread fear among the contracting community about losing the cleared workforce and being unable to quickly replace it to continue performance on contracts," according to the study.

The NDIA survey collected responses from March 23 to April 10.

--Editing by Jill Coffey.

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