Policy to Expedite Payments to Small Businesses Extended for Another Year

Yesterday, the Office of Management and Budget (OMB) extended the policy to expedite payments to small businesses for another year. See Extension of Policy to Provide Accelerated Payments to Small Businesses and Small Business Subcontractors.

This policy goes back to 2011 when the OMB established it for small business prime contractors. It became readily apparent however that many more small businesses were subcontractors rather than prime contractors so in 2012, OMB extended the policy to prime contractors so that they could, in turn, expedite payments to their small business subcontractors.

The payment goal for the Government under this policy is 15 days after receipt of all required documents. However, prime contractors are not obligated to the 15 day rule but by the terms and conditions of their subcontract documents. In any event, prime contractors should be endeavoring to abide by the intent of the policy. Unfortunately, many small business subcontractors have not benefited from the policy.

Perhaps that will change. The extension carries some reporting requirements that includes, among other things, quarterly reporting on the progress of any other steps that the agency has undertaken to ensure that small business contractors and small business subcontractors are paid in a prompt manner. In order to prepare such a report, agencies will need to engage their prime contractors to see how well they have implemented the accelerated payment policy to their small business subcontracts. The added oversight may help.

Defense Department Planning to Liberalize Contract Financing Policies

Under current procurement regulations, there are several different ways that the Government is able to help contractors with financing. These include (i) advance payments (rare), (ii) progress payments based on costs incurred as the work progresses, (iii) loan guarantees, among others.

Prudent contract financing can be a useful working tool by expediting the performance of essential contracts. Contracting officers determine whether to include contract financing in solicitations and contracts. Government financing is generally limited to situations where financing is actually needed. While financing is certainly beneficial to contractors, it simultaneously increases the contract administration workload as financing methods must be monitored as well as contractors' financial viability.

Where contractors will not be able to bill for the first delivery of products for a substantial time after work begins (generally six months or four months for small businesses), and the contractor must make expenditures for contract performance during the pre-delivery period that will have a significant impact on its working capital requirements, contract financing is often automatic. If the contract doesn't meet that criteria, the contractor must demonstrate actual financial need or the unavailability of private financing.

Being able to demonstrate actual financial need or unavailability of private financing became a very high bar to cross over and contractors and prospective contractors spent inordinate time in preparing justification only to be denied in the end. In fact, DoD found that the lack of contract financing discouraged many businesses from participating in the Government procurement arena.

With that background, DoD is now proposing to amend the FAR (Federal Acquisition Regulations) through its Supplemental Regulations (DFARS or DoD FAR Supplement) to remove the requirement to demonstrate actual financial need or unavailability of private financing. That's one less drag on contractor and contracting officer resources. The proposed rule reads as follows:

For fixed-price contracts with a period of performance in excess of a year that meet the dollar thresholds established in FAR 32.104(d) - generally $2.5 million or more - and for solicitations expected to result in such contracts, in lieu of the requirement at FAR 32.104(d)(1)(ii) for the contractor to demonstrate actual financial need or the unavailability of private financing, DoD has determined that (i) the use of customary contract financing (see FAR 32.113) is in DoD's best interest and (ii) no further justification is required from either the contracting officer or the contractor.

DoD has determined that the use of such customary contract financing provides improved cash flow as an incentive for commercial companies to do business with DoD, is in DoD's best interest, and requires no further justification of its use.

Performance-Based Payments - DoD Implementation

DoD is proposing to require the use of its performance-based payments (PBP) analysis tool whenever contracts are awarded using PBPs as a financing mechanism. The PBP analysis tool is a cash-flow model for evaluating alternative financing arrangements.

As with all contract financing, the purpose of PBP is to assist the contractor in the payment of costs incurred during the performance of the contract. Therefore interim payments should never exceed total cost incurred at any point during the contract. The Government has found itself in many situations where PBP to contractors have exceed their costs. It gets really sticky when there is a contract termination or some other contract dispute.

Under DoD's proposed regulations, prior to using PBPs, the contracting officer must agree with the offeror on a price using customary progress payments before negotiation begins on the use of PBPs. Then the contracting officer must analyze the PBP schedule using the PBP analysis tool. This tool is an Excel-based model and is available on the DPAP website. Contractors contemplating a PBP arrangement should download and become familiar with this tool. Contracting officers will need your help to ensure the accuracy of the data needed to accurately populate the model.

If performance-based payments are desired, the contractor must submit a proposed PBP payment schedule which includes all performance-based payments events, completion criteria, and event values, along with the expected expenditure profile. If PBP are deemed practical, the Government will evaluate, and negotiate the details of the PBP schedule.

Here's the incentive for the Government. If, based on the PBP analysis tool, the payment schedule will be more favorable to the contractor than customary progress payments, the Government will expect some consideration in return. This is typically a reduction in the profit percentage that was negotiated without concern for PBP payments. DoD calls this a "win-win" situation. On its previously linked website, DoD states the following:

PBPs offer a unique opportunity for a real "Win-Win" financial arrangement for the Government and the contractor. This opportunity presents itself due to the Government and the contractor having differing views of the time-vale of money. The "Win" for the contractor is better cash flow resulting in a more favorable financial outcome as measured by the IRR (internal rate of return) and the NPV (net present value) of the cash flows at a reduced contract price.

The "Win" for the Government is a lower contract price that more than offsets the additional financing costs of providing a better cash flow to the contract. The PBP Analysis Tool employs a discounted cash flow analysis to help the contracting officer to determine the Win-Win financial solution for any PBP arrangement. The tool provides a unique and simple to use "what if" feature on the timing of PBP event completin and payment that enables both sides to objectively assess the ptential risk of PBPs in determining the Win-Win solution.

DoD Issues Final Rule on Accelerating Payments to Small Businesses

On November 18th, DoD amended its FAR Supplement by inserting a provision that formalizes its intention to accelerate payments to small business concerns (see DFARS 232.903). The provision does not specify a particular number of days. It merely states:

DoD policy is to assist small business concerns by paying them as quickly as possible after invoices and all proper documentation, including acceptance, are received and before normal payment due dates established in the contract.

Normal due dates are typically 30 days after receipt so small business concerns should expect to see reimbursements and payments in less than 30 days, and hopefully, significantly less than 30 days. The new rule did not change the interest provision on delinquent payments. Interest on late payments still begin after 30 days.

If you are a small business and payments are not received any sooner than they were in the past, you should contact your contracting officer for assistance.