Improving Cash Flow by Reducing Fee Withholds

DCAA's failure to audit incurred costs in a timely manner imposes serious financial ramifications for contractors.Contractor (and small business contractors to a higher degree) are especially hurt by untimely audits for several reasons. First, the fee withhold provisions on cost-type contracts diminish cash flows. The Government has been sitting on fee withholds sometimes up to eight years (perhaps longer) without paying interest. Secondly, costs incurred in very old years, some going back to 2004 (perhaps longer) is very difficult to support. Records get moved, misplaced or destroyed according to record retention policies.
The record retention requirements for many of these records have long since lapsed. Employee turnover is a factor as well. Finally, small businesses often do not have in-house support and require costly outside support.

Yesterday we discussed the quick-closeout provisions available to close out some contracts ahead of the final audit.This will help in some cases. Another way to minimize the impact of the Government's holding onto money that is not theirs is to ensure that you have received as much of your fee as possible. There are three withhold levels.

Level 1 - In accordance with FAR 52.216-8, Fixed Fee under CPFF contracts, after payment of 85 percent of the fixed fee, the ACO may withhold further payment of fee until a reserve is set aside in an amount that the Government considers necessary to protect the Government's interest. This reserve may not exceed 15 percent of the total fixed fee or $100 thousand, whichever is less.

Level 2 - This same FAR provision requires the ACO to release 75 percent of all fee withholds after receipt of the certified final indirect cost rate proposal covering the year of physical completion of the contract, provided the contractor has satisfied all other contract terms and conditions, including the submission of final patent and royalty reports, and is not delinquent in submitting completion/final vouchers on prior years' settlements.

Level 3 - Finally, the ACO may release up to 90 percent of the fee withholds based on the contractor's past performance related to the submission and settlement of final indirect cost rate proposals.

Example: A $500 thousand contract with a fixed fee of 8 percent (or $40 thousand). Level 1, the ACO withholds 15 percent of $40 thousand or $6,000. Level 2, the ACO releases 75 percent of the $6,000 or $4,500. Remaining withhold at this point is $1,500. Level 3, the ACO releases 90 percent of the $6,000 or $5,400. Remaining withhold after Level 3 is $600. After Level 3, the contractor has received $39,400 of the total $40,000 fee.

If you have contracts that have not been closed and you haven't received 90 percent of the original fee withhold, you need to contact your ACO and have him/her release the maximum amount of fee withhold permissible. Its your cash flow.