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 ...view middle of the document...
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,...