The Government does not really like to enter into advance payment agreements. The current regulations state that advance payments shall be used "sparingly" and "advance payment is the least preferred method of contract financing (see FAR 32.402(b)). Nonetheless, in certain circumstances, from a contractor's perspective, it may be the only viable method of financing a contract. One big disadvantage for a contractor is that it will have to pay interest on the advance and that interest will not be an allowable cost (it will come out of profits).
There are statutory requirements and regulatory standards that must be met before advance payments will be authorized. The statutory requirements include:
- The contractor gives adequate security
- The advance payments will not exceed the unpaid contract price and
- The contracting officer certifies that advance payment is
- in the public interest or
- facilitates the national defense.
The regulatory standards include:
- The advance payments shall not exceed the contractor's interim cash needs based on
- analysis of the cash flow required for contract performance
- consideration of the reimbursement or other payment cycle, and
- to the extent possible, employment of the contractor's own working capital
- The advance payments are necessary to supplement other funds or credit available to a contractor
- The recipient is otherwise qualified as a responsible contractor
- The Government will benefit from performance prospects or there are other practical advantages.
Tomorrow we will take a look cases where, according to the Government, advance payments are "useful and appropriate". Also, we will discuss the data required from contractors. Concerning the latter, it is significant and will require a lot of effort and perhaps, expert help.