1-7 Contract Financing Don Shannon

What is Contract Financing … “the means of obtaining the funds necessary to perform the contract including – Payment Methods – Loan Guarantees, – Advance Payments – Progress Payments – And Contract Funding”

Types of Financing Self Financing Commercial Contract Financing – Bank Loans – Loan Guarantees Government Contract Financing – Progress payments – Advance payment – Government Furnished Equipment or material

Self Financing Uses corporate assets to finance contract performance – Cash flow must be carefully determined – May use existing line of credit with bank – May use corporate retained earnings – Usually done in conjunction with progress payments to reduce amount at risk.

Commercial Contract Financing Funds may come from venture capitalist Typically bank loan and/or line of credit – Key point.. Borrow the least amount needed – Pair with progress/milestone payments to reduce overall loan requirement – Bank may request Federal Reserve provide a loan guarantee – Guarantee is actually made by one of seven agencies such as DOD, DOE, Commerce, Interior etc. Cash flow requirements must be well known and monitored by contractor to ensure contract completion

Government Financing Assistance Covered in FAR Part 32 Preferred solutions: – Private financing – Customary contract financing other than loan guarantees – Loan guarantees – “Unusual Contract Financing” (Progress payments made at other than customary rates) – Advance Payments

Contract Financing Example Manufacturing contract for non- commercial item. Total value $87,000,000 Quantity 100 units – 1 First Article System - $5,000,000 Includes hardware, software etc for production system Includes non-recurring engineering & TDP/Logistics deliverable items Includes in-plant testing and first article acceptance test – 99 Production $650,000 each Full Technical Data Package required – All CAD files and specifications – Parts provisioning database – All software and firmware Installation and site preparation at 51 locations $18,000,000

Contract Financing Example Major system component (2 units per system) manufactured by robotics division in Sweden Long lead item – Production 14 weeks – Shipping 6 weeks Priced at $126,000 each / $252,000 per system in Swedish Kroner (approx 7.5 per U.S. dollar) Exchange rate concerns

Contract Financing Example Huge ($5M) non-recurring engineering effort – First deliverables due at 24 WACA – Updates of each deliverable due at 36 WACA concurrent with First Article Test – Baseline Production Technical Data Package Mechanical Electrical Controls Software / Firmware – Baseline Parts Provisioning Documentation – 8,000 parts (3,200 unique items) x 24 fields – Operations and maintenance manual with illustrated parts breakdown – Preliminary depot and site spares listing – Draft training materials – Draft test and acceptance plans and checklists

Payment Milestones Following In-Plant Test and preliminary Production Baseline 36 WACA Following First Article Acceptance at 42 WACA Upon delivery and acceptance of production units estimated at 4/week for 25 weeks. Later reduced to 2/week

Cash Flow