Long-Term Relationship
Principles of Federal Acquisition

Assess how the different approaches to contract financing can impact the company.

Contracting Officers provide financing only to the extent needed for prompt and efficient performance, considering the availability of private financing and the impact of predelivery expenditures and product lead times on working capital. There are varieties of available methods: (1) progress payments, (2) advance payments, (3) performance-based payments, (4) commercial items purchase financing, and (5) other methods, such as private financing and Government loans guarantee. To minimize risk to the Government, the regulations also provide that when a contractor requests financing, the Contracting Officer should consider the financing methods in the following order of preference: (a) private financing without Government guarantees, (b) “customary” contract financing, (c) loan guarantees, (d) “unusual” contract financing, and (e) advance payments. Progress Payments: The Government will make progress payments to the contractor when requested as work progresses, but not more frequently than monthly, in amounts of $2,5000 or more approved by the Contractor Officer. (Arnavas, 2003) Advance Payments: are advances of money by the Government to a prime contractor before, in anticipation of, and for the purpose of complete performance under one or more contracts. They are expected to be liquidated from payments due to the contractor incident to performance of the contracts. Since they are not measured by performance, they differ from partial, progress, or other payments based on the performance or partial performance of a contract. Advance payments may be made to prime contractors for the purpose of making advances to subcontractors. (FAR 32.102(a) Performance-Based Payments: are the preferred Government financing method when the Contracting Officer finds them practical and the contractor agrees to their use. This payment method may be used in (a) non-commercial item contracts that are not cost-reimbursement contracts, (b) contracts for architect/ engineer services or construction or for shipbuilding or ship progress payments based upon a percentage or stage of completion, or (c) contracts awarded through sealed bid procedures. Pursuant to the “Performance-Based Payments” clause, these payments may be made on the basis of (1) performance based upon quantifiable, objective methods, (2) the accomplishment of defined events, or (3) other quantifiable measure of results. Commercial Items Purchase Financing: this is the responsibility of the contractors and vendors to provide all the resources needed for performance of commercial item contract, financing of such contracts normally also the contractor’s responsibility.
In some markets the provision of financing by the buying is a commercial practice. In these markets, appropriate financing terms may be included when this is in the Government’s best interest. There are three types of payments for commercial item purchase:
Commercial advance payments these are payments made before any performance of work under the contract. The aggregate of these payments may not exceed 15% of the contract price.
Commercial interim payments these are any payments that are not commercial advance payments or delivery payments. An interim payment is given to a contractor after some work has been done.
Delivery payments these are payments for accepted supplies or services, including payments for accepted partial deliveries. Other Financing Methods:
Loan Guarantees: Guarantee loans are available only to “borrowers performing contracts related to national defense.” Loan guarantee are made by Federal Reserve Banks on behalf of designated “guarantee agencies” to enable contractors to obtain financing from private source under contracts for the acquisition of supplies or services for the national defense. (Arnavas, 2003)
Private Financing: Contractors may finance a Government contract in much the same way as they would finance a commercial contract by obtaining financing through a commercial bank or financial institution.
Determine which contract financing approach will best suit the organizational needs. The uses of Performance-Based Payments (PBP’s) have significant advantages for both Government and the contractor.
PBP’s focuses attention on accomplishing meaningful and measurable technical progress and on meeting contract schedule commitments. By linking a contractor’s financing payments to critical aspects of program execution, PBP’s reinforces the primacy of technical and schedule accomplishment. In contrast, traditional progress payments are based on incurred costs commensurate with physical progress on the contract. In order to establish the structure for PBP’s, the parties have to identify and agree up front on what events or accomplishments will be used to indicate true progress, when they are expected to occur, how their accomplishment will be determined, and what financing value they will have. Thus, from the outset of the contract, the parties mutually impact on the contractor’s cash flow. Contractor Advantages
Potentially improved cash flow:
Structuring effective performance-based events or accomplishments can provide significant cash-flow advantages for a successfully performing contractor. For instance, assume a fixed-price contract for $10 million that has a potential profit of 15% as negotiated and only one deliverable item, at the end of the contract period. Under PBPs, the total amount of financing the contractor will receive is $9 million. Using the current progress payment rate of 80% (large business), traditional progress payments would amount to approximately $7.0 million (in example, cost would be approximately $8.7 million, and only 80% of that amount would be receive as progress payments). The difference in cash flow over the life of contract would be $2.0 million, or an improvement of 23%.
Ascertain what policies the organization will need due to presence of The Defense Contract Audit Agency (DCAA). Contractor’s accounting and related systems are non-factors when making PBPs, the contractor does not have to expend resources and make special accommodations to comply with many of the government’s cost-based oversight and compliance programs: Cost Accounting Standards (CAS), Material Management and Accounting System (MMAS), Contractor Insurance and Pension Reviews (CIPR). This can free up administrative resources to provide better overall value and possibly reduced cost.

Administratively, the Cost Accounting Standards (CAS) Board (Board) is a function located within OFPP. Board consisting of five members: the OFPP Administrator, who serves as the chairman, and four members with experience in Government contract cost accounting, two from the Federal government (DOD and GSA), one from industry, and one from the accounting profession. The Board has the exclusive authority to make, promulgate, and amend cost accounting standards and interpretations designed to achieve uniformity and consistency in the cost accounting practices governing the measurement, assignment, and allocation of costs to contracts with the United States. Material management and accounting system (MMAS) means the Contractor's system or systems for planning, controlling, and accounting for the acquisition, use, issuing, and disposition of material. Material management and accounting systems may be manual or automated. They may be stand-alone systems or they may be integrated with planning, engineering, estimating, purchasing, inventory, accounting, or other systems. The administrative contracting officer (ACO) is responsible for determining the allow ability of insurance/pension costs in Government contracts and for determining the need for a Contractor/Insurance Pension Review (CIPR). Defense Contract Management Agency (DCMA) insurance/pension specialists and Defense Contract Audit Agency (DCAA) auditors assist ACOs in making these determinations, conduct CIPRs when needed, and perform other routine audits as authorized under FAR 42.705 and 52.215-2. A CIPR is a DCMA/DCAA joint review that—
(1) Provides an in-depth evaluation of a contractor's—
(i) Insurance programs;
(ii) Pension plans;
(iii) Other deferred compensation plans; and
(iv) Related policies, procedures, practices, and costs; or
(2) Concentrates on specific areas of the contractor's insurance programs, pension plans, or other deferred compensation plans.
(b) DCMA is the DoD Executive Agency for the performance of all CIPRs.
(c) DCAA is the DoD agency designated for the performance of contract audit responsibilities related to Cost Accounting Standards administration as described in FAR Subparts and as they relate to a contractor's insurance programs, pension plans, and other deferred compensation plans.

Determine the approaches the organization will need in place due to the government’s need for quality. Every customer wants a quality product, and the government is no exception, remember with the government or its prime contractors, "quality will be assumed."
Therefore, when the government purchases products or services from your company, you will be subjected to a very definite standard of quality as specified in your contract. The level and type of quality standard that you will be required to meet will depend on the product or service being purchased. For example, an extensive quality requirement would probably not be imposed if you are producing a non-complex item, since simple measurement or testing would be able to determine whether it conforms to contract requirements.
To assure the government, as well as other prospective customers, that you will provide a quality product, you need to have a well-documented quality assurance (QA) program in place. Your program should provide a systematic approach for evaluation, inspection, testing, calibration or whatever is needed to monitor and assure the quality of your product. And, most importantly, that approach should be written down.
From the government's point of view, the purpose of a quality program is to provide a way to assure that an item complies with contract specifications. From your point of view, the purpose is twofold: It will attract and assure government buyers, and perhaps even more importantly, it will also save you money by providing you with the necessary indicators and tools to identify problem areas and the means for correcting those areas. It will make you look at every aspect and phase of your manufacturing and operating processes as well as the results of those processes.

References
Hearn E. (2011). Federal acquisition and contract management. (7th ed.). Los Altos, CA: Minutemen Press

Arnavas, D. (2001). Government contract guidebook. (3rd ed., pp. 10.1 to 10.13). West Group.

Performance based payments guide the better buying power initiative. (2012). Retrieved from http://www.acq.osd.mil/dpap/cpf Acqweb. (n.d.). Retrieved from http://www.acq.osd.mil/