Tuesday, May 3, 2011

Responsibility Determinations - Financial

Yesterday we led off this series with a listing of the seven criteria that potential contractors much meet in order for the Government to consider them "responsible" and therefore eligible to receive work from the Government. Beginning today, we will be looking into more detail on those seven attributes, beginning with "financial capability".

Potential contractors need to demonstrate that they have sufficient financial resources to perform the contract from beginning to end. So, what does this mean in practical terms? It means that contractors must have enough cash to pay its bills from the time the bills become due, until payment is received from the Government. Consider a cost-reimbursement contract. A contractor pays bills during the month, submits a voucher at the end of the month, and receives payment from the Government in 30 days or less. That works out to a two month float. If the contract has a burn rate of $100 thousand per month, the contractor should have $200 thousand ($100 thousand times two months) in working capital earmarked for the contract. Its that easy.

The Government, as is their bent, will make a much bigger deal out of performing financial capability reviews. They'll ask for historical financial statements, cash flow projections, org charts and reams of other data but at the end of the day, they're simply trying to figure out if the contractor has enough working capital to see the contract through to completion. Contractors can sometimes expedite the review process by helping Government analysts (DCMA employees for DoD contracts) focus on cash flow forecasts rather than historical records and other tangential matters.

No comments:

Post a Comment