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.

Owe Money to DFAS? Consider Installment Payments

From time to time, contractors, especially small contractors, find themselves in situations where they owe a significant amount of money back to the Government. Perhaps they were billing at provisional indirect billing rates that were higher than their final rates. Perhaps a contracting officer found unallowable costs in their billings. Or, maybe there was a billing error that resulted in an overpayment. The prospect of paying back the Government can hit a small contractor very hard because of cash flow concerns. Sometimes these contractors are under capitalized. Sometimes these firms forego salaries to their owners to help keep the company afloat or to invest in new capital equipment. If you find yourself in such a situation, don't despair. There is hope.

The DoD (Department of Defense) Financial Management Regulation, Volume 10, Chapter 18 may provide some relief. When a debtor to the U.S. Government can establish sufficient justification, a series of installment payments may be approved by DFAS (Defense Finance and Accounting Services) to liquidate the debt within a reasonable time frame.

When contractors anticipate having financial difficulty repaying the debt, the contractor may approach DFAS for a repayment installment plan. Prior to approving the installment agreement, DFAS may request the contracting officer to perform a financial capability audit taking into consideration the proposed installment payments to ensure that the contractor has the financial capability to repay the installments.

Here's the process set up by DFAS:

1. The contractor submits a request to DFAS for an installment agreement on debt owed of $50 thousand or more.
2. DFAS provides the contractor with a proposed monthly payment amount.
3. DFAS informs the contractor of a pending audit and request the contractor to provide its financial statements for the past three years and a twelve month cash flow forecast reflecting the proposed monthly installment amount.
4. DFAS submits a request for a financial capability audit to the contracting officer. The contracting officer may decide to perform the financial capability audit in-house or request a more formal audit from DCAA (Defense Contract Audit Agency).
5. DFAS uses the information from the financial capability audit to make a determination whether the proposed installment agreement amount is acceptable.
6. DFAS coordinates their decision on the installment agreement with the contractor.

Tomorrow we will discuss the four possible outcomes of a financial capability audit.Two are good and two, not so good.