Installment Payments to Repay Debts to the Government

Yesterday we discussed DFAS's (Defense Finance and Accounting Services) program to accept installment payments in lieu of an immediate payback of overpayments made under Government contracts. The Government will charge interest of course, currently its set at three percent but adjusts each quarter. We mentioned that the approval for installment payments is conditional upon a satisfactory financial capability audit. The whole purpose of an audit is to assess whether a company has the financial resources to repay a debt over time. DFAS is understandably concerned that if a contractor has disclosed that it is experiencing financial difficulty in its inability to repay in lump sum, it may also be unable to repay in installments.

There are four possible outcomes from a DFAS financial capability audit.

1. Acceptable financial condition - contractor can make lump sum payment without adversely affecting acceptable financial condition. DFAS will usually deny the contractor request and demand a lump sum payment.

2. Acceptable financial condition - contractor can make installment payments without adversely affecting acceptable financial condition. DFAS usually grants the installment payment request.

3. Unfavorable financial condition - contractor can make installment payments without further adversely affecting unfavorable financial condition as long as extraordinary actions are taken. Knowing that the contractor may have difficulty making the proposed installment payments, DFAS will have to use its judgment as to whether to grant the installment payment request. Extraordinary actions are not defined but would have to include something more than business as usual. It could mean divestiture of product line, sale and leaseback of facilities, or bringing in additional capital.

4. Adverse financial condition - substantial doubt that contractor can make installment payments. The contractor does not have the financial resources to make the proposed installment payments. In these cases, DFAS will normally request immediate full payment of the debt amount.

Obviously, if your a contractor asking for installment payments to repay a debt, you will want to be in Category 2. If you find yourself in Category 3, there will be a lot of on-going oversight by DFAS until the debt is paid. At a minimum, you will be required to submit future financial statements and cash flow forecasts for the life if the installment agreement.