Tools to contract with the Government and maintain a healthy cash flow (Part 1)

June 1, 2016

Are you trying to figure out how to have a government contract while still maintaining some semblance of cash flow? Here are a couple methods where you can work with your Contracting Officer to put them into place to assist with the cash flow. Of course these all depend on a lot of different variables, not to mention that they are usually at the discretion of your CO. I’ve put these in order of a typical CO’s likelihood of allowing them; from most likely to least likely. With any of these, make sure that if you even think you’ll need it (and who doesn’t need positive cash flow?) discuss it with your contracting officer prior to award (i.e. prior to when you’ll need it!). It is easier to incorporate before award. And for some of the more complex ones, prior to award is the only time to incorporate it.

Partial Delivery and Partial Payment. These are typically used for delivery of a large quantity of products. Partial Delivery and Partial Payment aren’t technically considered Contract Financing. However, they can help ease your cash flow burden during a long delivery period, especially for a large quantity of items. Look for specific verbiage in your contract, usually with your funding or delivery information. This is the easiest method as it is simple to apply.

Here’s how it works: You deliver the product, submit and invoice, the government accepts the delivery, and the government pays for items delivered. The biggest challenge here is that you will typically need to have individual line items or a quantity ‘EACH’ designator in your contract – something that allows an accurate and exact payment for the actual items delivered. A quantity of ‘1 Job’ or ‘1 Lump Sum’ or ‘1 Lot’ will not get you there – these are all generic descriptors, and often encompass a large variety of individual line items, or skews. For example, ‘1 Lot’ of roofing supplies may be priced at $100,000 and include 100 pallets of shingles, 50 rolls of tar paper, and 500 yards of flashing material. If the contractor only delivers the 100 pallets of shingles, he cannot invoice for those until everything is delivered. The order was for the entire ‘lot’ of items. Keep this in mind when you are pricing your proposal.

Progress Payments. (FAR 35.502-4(a), 52.232-16) This is the most often used type of contract financing. Progress payments are “easier” than Performance Based Payments in that they are based on a severable milestone.

Here’s how it works: (E.g. Phase-I: Delivery of Product, Phase-II: Installation, calibration and set-up of product; Phase-III: User training for product.) In this case, the government and contractor have 3 distinct deliverables, each of which could be accurately invoiced at completion, and technically not have to move forward to receive benefit for the payments made. Progress payments are made at up to 90% of the costs incurred, and are typically made at monthly intervals. For this example, let’s say that we are building a playground. Step 1 is clearing the land and is a $5,000 line item. Next, you are installing the equipment, another $5,000 line item, and finally, step 3 is adding rubber mulch, fencing and landscaping for $10,000. So this contract is a total of $20,000. (Notice how there are severable deliverables here!?) If you need to invoice after step 1, you will only be able to do so for 90%, or $4,500 ($5,000 x 0.9). You can invoice the leftover amounts on your final invoice. Basically, this helps the government ensure that jobs get finished completely, while allowing you to maximize your cash flow for longer term or higher dollar projects.

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