Monday, November 25, 2013

Preaward Surveys - SF Form 1407 (Financial Capability)

This is the sixth installment in our series on Preaward Surveys of Prospective Government Contractors. Before awarding contracts, the Government must ensure itself that contractors are able to perform the contracts. If the Government has no experience with a particular contractor and has no easy method for finding out information about that contractor, its will order up some preaward surveys of different aspects of the contractor's operations that are applicable to the respective contract. For example, if the Government is contemplating a cost-type contract, it will need to ensure that the prospective contractor has an accounting system that is capable of collecting costs by contract (SF Form 1408). So far, we've looked at technical capability, production, and quality. Today, we will look at financial capability.

Almost every contractor (or prospective contractor) has had to, at one time or another, provided financial statements to the auditors or the contracting organizations. The financial analysts (using the term loosely) take information from the financial statements and run some financial rations (e.g. quick, current, and liabilities to net work) and compare the results to some kind of benchmark. These analysts, usually part of DCMA (Defense Contract Management Agency) have little training in this area and little understanding of what they are doing. Back when DCAA (Defense Contract Audit Agency) was performing financial capability reviews, they focused on cash flow and tried to answer the question of whether the contractor had the financial resources to perform the work. For example, under a cost reimbursable contract, a contractor can bill for costs every 30 days. That means the contractor needs only 60 days or so of working capital. DCAA would determine whether the contractor had 60 days of working capital.

SF Forms 1407 requires a different approach than the cash flow analysis. The form requires financial information from the contractor's most recent balance sheet and income statement, demographic information (type of legal entity, parent company) and sales forecsts for the next six quarters (good luck getting that one). The form also requires narrative responses to "reputation" questions; comments from the bank, comments from creditors, and comments from credit organizations.

After gathering this information, the evaluator makes a judgement giving a thumbs up or thumbs down. There is also a section to provide narrative to support the recommendation. We've seen cases where the evaluator completely missed the boat with regard to contractor's financial capability to perform a prospective contract. As with the other forms in this series, it is important for prospective contractors to ensure that the evaluators are cognizant of all facts relating to financial capability and to demonstrate that it has the financial resources necessary to perform. Contractors should ask to review a draft of the Form 1407 prior to issuance to ensure its accuracy.

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