The Pros and Cons of Contract Financing

Industry Goals For many companies, delighting their customers through continuous innovation has become their bottom line. Making money is the result, not the goal, of their activities. – Customer focus – Innovative, high quality product – Competitive price – Energized, happy employees – Pride in what we do

How Financing Contributes to Industry Goals A company may need to invest a significant amount of resources into a contract prior to receiving payment – At a minimum, these are resources which now cannot be applied to other business activities – For some businesses, this could mean inability to bid or perform, due to insufficient cash flow When a company receives financing, it has more resources to invest into it’s business activities. This typically results in more competitive pricing for the customer. – Economies of scale and production efficiencies Financing Goal : “Win-Win” partnership for both Industry and Government

Example of how Financing Increases Price Competitiveness Project Information: $20M – Long Lead Materials $10M – Variable Production Costs $10M – Fixed Overheads $40M – Contract Cost $20M Cash Flow Project #1 LLM $20M $3M Inflation over POP Future Project Estimate: $40M – Prior Cost $3M – Inflation $43M – Contract Cost $0M Production Costs & Overheads $20M Delivery Resources fully invested into project. Negative cash flow until delivery. No Financing

Example of how Financing Increases Price Competitiveness – Continued Project Information: $20M – Long Lead Materials $10M – Variable Production Costs $10M – Fixed Overheads $40M – Contract Cost $20M Cash Flow ($5M) Shared Fixed OH Future Project Estimate: $40M – Prior $3M – Inflation ($5M) – OH Reduction $38M – Contract Cost $20M Project #1 LLM $20M Production Costs & Overheads $20M Delivery Project #2 LLM $20M Production Costs & Overheads $20M $20M Financing $3M Inflation over POP $0M

When is Financing Needed Varies by company and contract Contracts prime for financing – Large upfront investments – Extended period of performance – Delivery at end of contract FAR Providing Contract Financing

Progress Payments vs PBPs Progress Payments – With approved accounting system, less upfront administrative work – On going monthly administrative burden of assembling PP requests – More consistent cash flow stream, less risk – Potentially more CIP PBPs – Larger administrative effort upfront – Potential for PBP plan revisions with contract changes – Potential for less monthly administrative burden – Less consistent cash flow stream, more risk – Potentially less CIP

Progress Payments vs PBPs – Example Cash Flow ($K)

Establishing Progress Payments FAR 32.5 – Progress Payments Based on Costs – Approved Accounting System – DLA form 1503a: Weighted Value Progress Payment Chart – Form SF1443: Contractor’s Request for Progress Payment

Form 1503a

Form 1443– Section 1

Form 1443 – Section 2

Form 1443 – Section 3

Establishing Performance Based Payments FAR 32.1 – Performance Based Payments – PBP Plan Narrative of PBP events Cash Flow Graph Support of Event Values – PBP Certification DFAR & 7013 – Reporting of total cost incurred

PBP Plan Example

Communication Between all Parties when Establishing Financing Investment upfront can greatly reduce the ongoing administrative burden while minimizing risks for all parties Work out the mechanics and details at the beginning, as the small things can become large problems later Identify and address any concerns or uncertainties at the start