Contract Financing

What is Contract Financing? Definition – The Government authorized payment of funds to the contractor prior to acceptance of deliverables by the Government. (No-interest loan) Contract financing only applies to fixed-price contracts and to take it one step further, to those fixed-price Contract Line Item Numbers (CLINs) on the contract. They have their own separate invoices in WAWF that are required for submission.

Purpose and Scope of Contract Financing The purpose of contract financing is to assist the contractor in paying costs incurred during the performance of the contract. Encourages participation in competition, especially on “Big Rock” acquisition contracts. There are two types of financing payments that you would normally see on your contracts: Progress Payments Performance Based Payments Cannot have both on the same contract

Non-commercial Contract Financing Performance-based payments. These are the preferred method of providing contract financing. They are measured by objective, quantifiable methods, accomplishments of defined events, and other quantifiable results – schedule of events included in the contract. Progress payments based on costs. These are incurred by the contractor as work progresses under the contract (see FAR 32.5). Progress payments based on a percentage or stage of completion (construction, ship building, etc.). Loan guarantees. These are made by Federal Reserve Banks on behalf of designated guaranteeing agencies. They enable contractors to obtain financing from private sources under contracts for the acquisition of supplies or services for national defense. Advance payments are payments made before work commences. Due to the high degree of risk associated with advance payments, they are the least preferred method of contract financing.

Commercial Contract Financing If it is in the best interest of the Government, commercial interim payments and commercial advance payments can be authorized in accordance with FAR Part 32. The contracting officer can either state the form of financing available in the solicitation or allow the offeror to propose it.

Commercial Contract Financing Private financing can be obtained without violating the Assignment of Claims Act of 1940. This act allows the contractor to transfer (or “make over”) its claim for reimbursement under the contract to a bank, trust company, or other financing institution. This type of financing has the least risk for the government, as it requires no direct use of Government funds for the loans. Commercial advance payments are made before any performance of work under the contract. Commercial interim payments are given to the contractor after some work has been completed.

Contract Financing Provided only to the extent actually needed for prompt and efficient performance, considering the availability of private financing and the probable impact on working capital of the pre-delivery expenditures and production lead-times associated with the contract; Contract financing is administered so as to aid, not impede, the acquisition; Avoid any undue risk of monetary loss to the Government through the financing; Any form of contract financing included will be deemed to be in the Government’s best interest

Progress Payments A form of contract financing used with fixed price contracts/CLINs when acquiring non-commercial items Progress payments are typically included when the contract requirement includes significant time between award and delivery. Progress Payments are made on the basis of costs incurred by the contractor as work progresses under the contract.

Progress Payments When the Contracting Officer determines progress payments are appropriate, the appropriate provisions and clauses must be included in the solicitation and contracts. The customary progress payment rates for DoD contracts, including contracts that contain foreign military sales (FMS) requirements, are 80 percent for large business concerns and 90 percent for small business concerns. Payments are made on the basis of costs incurred by the contractor as work progresses under the contract. Under this arrangement, the contractor is typically paid between 7 and 30 days of submitting an approved request to the Contracting Officer.

Cost- Reimbursement Contracts Cost-reimbursement contracts do not include progress payments, for in a cost-reimbursement type contract, contractors are paid 100% of their actual, allowable costs incurred. Under a cost-reimbursement contract, the contractor is operating under the “best efforts” terms of the Limitation of Cost (FAR 52.232-20) or Limitation of Funds (FAR 52.232-22) clauses. There is no “best efforts” language in most fixed price contracts.

Payment Guidance Clause 252.204-0001 Line Item Specific: Single Funding. (SEP 2009) 252.204-0002 Line Item Specific: Sequential ACRN Order. (SEP 2009) 252.204-0003 Line Item Specific: Contracting Officer Specified ACRN Order. (SEP 2009) 252.204-0004 Line Item Specific: by Fiscal Year. (SEP 2009) 252.204-0005 Line Item Specific: by Cancellation Date. (SEP 2009) 252.204-0006 Line Item Specific: Proration. (SEP 2009) 252.204-0007 Contract-wide: Sequential ACRN Order. (SEP 2009) 252.204-0008 Contract-wide: Contracting Officer Specified ACRN Order. (SEP 2009) 252.204-0009 Contract-wide: by Fiscal Year. (SEP 2009) 252.204-0010 Contract-wide: by Cancellation Date. (SEP 2009) 252.204-0011 Contract-wide: Proration. (SEP 2009) Other – when a specific clause can not be used To see specifics of each PGI Clause view at the following link: http://farsite.hill.af.mil/reghtml/Regs/FAR2AFMCFARS/FARDFARS/DFARS/PGI%20204_71.htm?zoom_highlight=pgi+204%2E7108+payment+instructions

Payment Guidance PCOs shall ensure the required payment clause is included in contracts. For example, if utilizing DFARS PGI 204.7108(d)(12) DFAS should pay according to how the Contractor has invoiced and in accordance with these instructions – “Other, the payment office shall make payment in accordance with the contractor's invoice, (e.g., by specific ACRN) due to the funds allocation methodology. This task order is funded by multiple lines of accounting (LOA); therefore, the payment instructions set forth in DFARS PGI 204.7108(d)(1) through (d)(11) are not appropriate." 

Payment Schedules Sometimes a payment schedule is included in the contract, for example $5,000/month for a monthly service. This payment schedule should be called out in Sections B and G – so the contractor knows exactly what to bill and DFAS knows what to pay. This also allows the FM community to track invoiced amounts and payments.

Monitoring of Performance Through the performance of the contract, Contracting Officers (or their designated Administrative Contracting Officer or representative) must monitor performance, review contractor’s requests for progress payments, and verify performance is satisfactory before approving payments.

Monitoring of Payments The ACO monitors distribution of delivery payments to ensure recoupment of unliquidated progress payment funds is on the same basis as the progress payment(s).

Reduction or Suspension of Progress Payments The CO may reduce or suspend progress payments if the contractor’s performance is not satisfactory in key areas, including: Meeting terms and conditions of the contract, or failing to make reasonable progress; Evidence of an unsatisfactory accounting system, or questionable financial stability; The estimated value of the remaining work on the contract indicates the applicable limitation on progress payments has been exceeded; Doubt with respect to the amount of the contractor’s request for a progress payment.

Accounting for Financing Payments Ensure Payment Instructions have been included in the contract for every type of invoice that can be submitted against your contract. They are imperative for proper distribution of the payments. Financing Payments – Progress/Performance Based Firm Fixed Price Payments – Combo (Receiving Report/Invoice) Commercial Invoice Payments (Shipment Number begins with BVN) Contracts/Orders that contain FMS requirements, must also include instructions for distribution of the contract financing payments to each country’s account Financing Payments percentage are determined in your contract clauses and can be different between US and FMS. Percentage authorized for payment is the same percentage for recoupment.

Accounting for Financing Payments (cont.) Financing Payments are potential debts to the government and are recorded as such, in the event the contract is terminated for cause, vendor goes bankrupt, terminated for governments convenience, etc. These payments have their own General Ledger Account Code (GLAC) for reporting on financial statements. They cannot be moved from the 9940 line until the FFP CLIN item has been delivered. When reviewing your ODL for a specific contract your 9940 line will be a separate DSR from your obligation DSR and this 9940 line should always be a negative ULO or “0.” If you have a positive ULO on your 9940 line you have a problem. You are limited to the authorized percentage of the total Firm-Fixed Price CLINs obligation on the contract

Accounting for Financing Payments (cont.) When utilizing a reimbursable line of accounting for the purpose of contract obligations/payments you do not normally bill your customers for progress payments because nothing has been delivered. Without specific financing payment instructions included in the contract you should not bill your RBA customers for these payments as credit bills will be inevitable which can create additional problems. These payments are usually processed without a JON so that they will not process through the JOCAS system for billing to the customer. The PSR should not be established with a “J” and the DSR should not include a JON. Always posted to the 9940 EEIC.

Contract Financing Questions