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.
In my first post, I talked about Progress payments. Today I talk about Performance Based Payments, which are similar to – and often confused with – Progress Payments, as well as Advance Payments.
Performance Based Payments (PBPs). (FAR 32.1002, 52.232-28, 52.232-32) Like Progress Payments, this method is typically used for Fixed Price contracts. However, this method is a little more complex to set up and administer. Typically the contractor will propose a schedule, milestones, and basis for payment amounts to the contracting officer. Look in the solicitation for FAR Clause 52.232-28 to see if the contracting officer will entertain PBPs in your proposal.
Here’s how it works: Unlike a Progress payment, a PBP can have a multitude of different payment gates, and is usually a point of discussion and negotiation for a contract. PBPs do not need to be severable. (For example: Designing and building a car. Your first milestone could be providing the engineering drawings for the electrical system, and the next the building of a clay model, and the next building the electrical wiring harness. None of these items alone give you a useable product – at any level, so would not be considered severable.) Also, a PBP schedule of events does not need to be a 1, 2, 3, 4, type sequenced order. You could work simultaneously on item 1 and 4, and get paid for them before moving to step 3 for example. All of these parameters will be discussed and negotiated up front, which is one of the reasons why this method comes after Progress Payments in the likeliness of using this on your contract. Performance based payments are made at up to 90% of the costs incurred, and are typically made at monthly intervals.
Advance Payments. The FAR (32.402) outlines the use of this method, and specifically states that
“Advance payments may be provided on any type of contract; however, the agency shall authorize advance payments sparingly. Except for the contracts described in 32.403(a) and (b), advance payment is the least preferred method of contract financing (see 32.106) and generally they should not be authorized if other types of financing are reasonably available to the contractor in adequate amounts. Loans and credit at excessive interest rates or other exorbitant charges, or loans from other Government agencies, are not considered reasonably available financing.”
That FAR language sums it up pretty well. If you need, and get approval for an advance payment, consider yourself lucky. Like you and I, the government doesn’t really like to pay for things up front.
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