Tuesday, January 29, 2013

Advance Payments under Government Contracts - Part II

In yesterday's Part I of this two part series on Advance Payments, we discussed the availability of this particular financing option and how the Government considers it a last resort. Today we want to focus on where and when such financing may be useful and appropriate as well as provide you a flavor of what you will be expected to "deliver" as part of your request, should you decide to go in that direction.

The Government has provided us examples of cases where advance payments may be considered useful and appropriate. If you are considering a request for advance payment, one of these examples should fit. These include

  • Contracts for experimental, research, or development work with nonprofit educational or research institutions.
  • Contracts solely for the management and operation of Government-owned plants.
  • Contracts for acquisition, at cost, of property for Government ownership.
  • Contracts of such a highly classified nature that the agency considers it undesirable for national security to permit assignment of claims under the contract.
  • Contracts entered into with financially weak contractors whose technical ability is considered essential to the agency. In these cases, the agency shall closely monitor the contractor's performance and financial controls to reduce the Government's financial risk.
  • Contracts for which a loan by a private financial institution is not practicable if
    • loans with reasonable interest rates or finance charges are not available
    • contracts involve operations so remote from a financial institution that the institution could not be expected to suitably administer a guaranteed loan
  • Contracts with small business concerns, under which circumstances that make advance payments appropriate often occur.
  • And finally, the catch-all - Contracts under which exceptional circumstances make advance payments the most advantageous contract financing method for both the Government and the contractor.
Contractors can apply for advance payments either before or after contract performance. Requests must be in writing and contain the following information. This is usually the key to sucessfully obtaining advance payments.
  • A reference to the contract or solicitation
  • A cash flow forecast showing estimated disbursements and receipts for the period of contract performance. Some contracting officers have required monthly forecasts, others quarterly. Whether monthly or quarterly, you can be certain that it will be analyzed and subjected to some form of audit.
  • The proposed total amount of advance payments.
  • The name/address of the financial institution at which the contractor expects to establish a special account as depository for the advance payment
  • A description of the contractor's efforts to obtain unguaranteed private financing
  • Other information appropriate to an understanding of the contractors financial condition and need, the contractor's ability to perform the contract without loss to the Government and financial safeguards needed to protect the Government's interest. 
Financial safeguard to protect the Government can take many forms. In one case the Government required that the advance payment be put in an escrow account and funds could only be disbursed for specific expenses (such as payroll). In another case, the Government added a provision that all expenditures from the fund be co-signed (or approved) by the contracting officer.

There are a lot of hoops to jump through when requesting advance payments and sometimes there are strings attached. Nonetheless, obtaining advance payments may make the difference between successful performance and failure or default.

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