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.

We Were Auditors Once, and .... (Part 1)

As many readers of this blog know, we spent a considerable number of  years as contract auditors before venturing out and forming this consulting firm. Our experience gives us a little insight into the mindset and guiding philosophy of an auditor. Although the organization we worked for, Defense Contract Audit Agency (DCAA) has changed a lot during the ensuing years, the organization's focus has not. The focus has been, is now, and probably always will be saving money for the taxpayer. Over the next few days, we want to provide you a glimpse into the thinking of auditors as they go about their business. Obviously, these are going to be generalized statements and we're certain that many Government contractors have had experiences that diverge widely from what we're about to describe. Nevertheless, here's Part 1

We were auditors once and we had absolutely no concern about a contractor's cash flow. The only time cash flow entered our vernacular was when we were judging a contractor's financial capability for performing a prospective contract. Requests for expediting a provisional payment request or approving revised billing rates fell on deaf ears.We felt that cash flow was the contractors problem, not an audit issue. Many in the Government, not just the contract auditors, feel that contractors are morally obligated to invest some financial resource into the contract commensurate with the potential rewards (fee or profit) and the investment of working capital is a financial commitment.

We also did not care that a contractor might have to go out and borrow money for working capital. After all, interest on those borrowings are unallowable anyway so there's no cost to the Government if a contractor must borrow money to perform under the contract.

We knew then and we know much better now that companies live and die by their cash flow. A disruption of  planned cash flows for even a few days can cost contractors money and that money comes out of profit. Disruption could result in interest on borrowing for cash flow needs, lost cash discounts on material purchases, delays in paying subcontractors, and even the ability to meet a timely payroll date.

The Prompt Payment Act has given contractors some relief - contractors are entitled to interest on payments not made with 30 days of a request. However, there is a significant difference between five days and 30 days. Contractors accustomed to five days from request to payment will complain if elapsed days extends much further.

So what do you think? Let us know.