Defense Department Planning to Liberalize Contract Financing Policies

Under current procurement regulations, there are several different ways that the Government is able to help contractors with financing. These include (i) advance payments (rare), (ii) progress payments based on costs incurred as the work progresses, (iii) loan guarantees, among others.

Prudent contract financing can be a useful working tool by expediting the performance of essential contracts. Contracting officers determine whether to include contract financing in solicitations and contracts. Government financing is generally limited to situations where financing is actually needed. While financing is certainly beneficial to contractors, it simultaneously increases the contract administration workload as financing methods must be monitored as well as contractors' financial viability.

Where contractors will not be able to bill for the first delivery of products for a substantial time after work begins (generally six months or four months for small businesses), and the contractor must make expenditures for contract performance during the pre-delivery period that will have a significant impact on its working capital requirements, contract financing is often automatic. If the contract doesn't meet that criteria, the contractor must demonstrate actual financial need or the unavailability of private financing.

Being able to demonstrate actual financial need or unavailability of private financing became a very high bar to cross over and contractors and prospective contractors spent inordinate time in preparing justification only to be denied in the end. In fact, DoD found that the lack of contract financing discouraged many businesses from participating in the Government procurement arena.

With that background, DoD is now proposing to amend the FAR (Federal Acquisition Regulations) through its Supplemental Regulations (DFARS or DoD FAR Supplement) to remove the requirement to demonstrate actual financial need or unavailability of private financing. That's one less drag on contractor and contracting officer resources. The proposed rule reads as follows:

For fixed-price contracts with a period of performance in excess of a year that meet the dollar thresholds established in FAR 32.104(d) - generally $2.5 million or more - and for solicitations expected to result in such contracts, in lieu of the requirement at FAR 32.104(d)(1)(ii) for the contractor to demonstrate actual financial need or the unavailability of private financing, DoD has determined that (i) the use of customary contract financing (see FAR 32.113) is in DoD's best interest and (ii) no further justification is required from either the contracting officer or the contractor.

DoD has determined that the use of such customary contract financing provides improved cash flow as an incentive for commercial companies to do business with DoD, is in DoD's best interest, and requires no further justification of its use.