Use of Letters of Credit for Payments to Defense Contractors

A determination was requested as to whether the Department of Defense (DOD) could advantageously use letter of credit procedures for paying contracts authorized to be financed by advances and progress payments. The Energy Research and Development Administration saved substantial interest costs by using the letter of credit approach to pay advances to contractors. Under most large DOD contracts, contractors are financed by progress payments which are tied in with progress made in completing work. The checks paid letter of credit system would permit a more precise identification of the level of government and contractor investment in the working capital needed to perform specific contracts. However, it would alter the existing level of government and contractor investment in working capital, and its known benefits do not justify the extensive changes that would be necessary in DOD administrative and accounting systems to accommodate this approach. A decision on how to pay contractors should not be made until more important decisions are reached regarding the desired level of government and contractor investment in working capital and whether contractors are adequately compensated for their investment.