Friday, May 20, 2011

Financial Capability Risk Indicators

Government auditors, contracting officers, price/cost analysts, and most people involved in procurement are trained to be on the lookout for signs that contractors are in financial distress. Aside from the normal financial capability reviews that they perform (upon request), procurement folks are told to be cognizant of the events and conditions that can significantly affect a contractor's ability to perform on Government contracts. These indicators include, but are not limited to the following:

  • Defaults on loan/line of credit agreements
  • Defaults on usual trade credit from supplies
  • Restructuring of debt where the contractor is charged a higher interest rate above the prime rate than the prior rate charged by lending institutions. (The increase in the rate charged above the prime could be attributable to perceived contractor financial distress.
  • Denial of usual trade credit from suppliers
  • Noncompliance with loan/line of credit covenants
  • Contracts in significant loss position
  • Legal proceedings/pending claims
  • Loss of principal customer/supplier
  • Uninsured or under insured catastrophic events
  • Labor strikes
  • Unpaid state, local and federal tax liabilities
  • Contingent liabilities
  • Deteriorating bond ratings
  • Significant dollar amount of accounts receivable
  • Significant post award or suspected irregularity conduct audit findings and other significant questioned costs that are unresolved
  • Contract termination for default
  • Deferral of payments to suppliers
  • Failure to fund pension plans
  • Loans from employees or issuing stock to employees in lieu of salary
  • Environmental clean-up impact
  • Significant unpaid contractor debts
  • Unusual progress payments or other billing concerns
  • Poor physical conditions of the work facilities
  • Unpaid insurance liabilities

These are only indicators and, if noted, might generate an inquiry. Or, more likely, the risk indicator would be documented and added to a permanent file somewhere to followup at another time or when the number of indicators becomes sufficiently large where the Government must look deeper into a contractors financial viability.

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