Monday, January 14, 2019

Cash Flow Shortages Caused by Partial Government Shutdown

The partial Government shutdown is having financial ripple effects on, not only the furloughed Government employees, but on Government contractors. For contractors and subcontractors, the disruption of Government payments for work performed makes it difficult for some contractors (and subcontractors) to meet their own financial obligations.

Some contractors are contemplating borrowing money to tide them over. That is certainly one strategy to keep funds flowing but keep in mind that the interest on those borrowing is unallowable (see FAR 31.205-20, Interest and Other Financial Costs). There is no "wiggle room" in that cost principle to make interest costs allowable - not even if the cash shortage was caused by a Government shutdown.

Another strategy is to defer payments to vendors and subcontractors. This strategy has some potential risks. Many vendor invoices come with fees and interest for late payment. Such fees and interest would, of course, be unallowable. Ultimately however, vendor and subcontractor need to be paid prior to invoicing the Government for those goods and services (or accrued and paid in the normal course of business - usually 30 days - for small businesses). This could create audit issues with DCAA (Defense Contract Audit Agency) or other contract auditors who perform "testing of paid vouchers" audits.

"Testing of paid vouchers" are conducted at every contractor. For non-major contractors, testing is performed on at least one voucher per year - more often if problems are identified and the auditors will specifically focus on payment timeliness.

One of the audit steps reads:

  • Verify that the contractor is not delinquent in the payment of cost incurred in the performance of the contract in the ordinary course of business. 
  • Review the contractor’s aging of accounts payable schedule. Discuss any significant amounts over 30 days old with the contractor. 
  • Based on the risk assessment, select a minimum number of items (e.g., five items) charged direct to the contract and trace the amounts from voucher(s) to evidence of payment. 
  • If the contractor is delinquent in paying costs in the ordinary course of business, the costs are not reimbursable in accordance with FAR 52.216-7(b) Reimbursing costs. 

Our advice to contractors facing cash flow shortages caused by the partial Government shutdown is to engage your contracting officer early on to document the issues and the ultimate resolution plan. If possible, obtain an advance agreement (see FAR 31.109) to avoid future disagreements.

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