The Pros and Cons of
Contract Financing
Industry Goals
• For many companies, delighting their
customers through continuous innovation has
become their bottom line. Making money is
the result, not the goal, of their activities.
– Customer focus
– Innovative, high quality product
– Competitive price
– Energized, happy employees
– Pride in what we do
How Financing Contributes to
Industry Goals
• A company may need to invest a significant amount of
resources into a contract prior to receiving payment
– At a minimum, these are resources which now cannot be applied
to other business activities
– For some businesses, this could mean inability to bid or perform,
due to insufficient cash flow
• When a company receives financing, it has more resources to
invest into it’s business activities. This typically results in
more competitive pricing for the customer.
– Economies of scale and production efficiencies
• Financing Goal : “Win-Win” partnership for both Industry
and Government
Example of how Financing Increases
Price Competitiveness
Project Information:
$20M – Long Lead Materials
$10M – Variable Production Costs
$10M – Fixed Overheads
$40M – Contract Cost
Project
#1
LLM
$20M
$3M
Inflation
over POP
Future Project Estimate:
$40M – Prior Cost
$3M – Inflation
$43M – Contract Cost
Production Costs & Overheads
$20M
Delivery
No Financing
Cash
Flow
$20M
$0M
Resources fully invested into project. Negative cash flow until delivery.
Example of how Financing Increases
Price Competitiveness – Continued
$3M
Inflation
over POP
Project Information:
$20M – Long Lead Materials
$10M – Variable Production Costs
$10M – Fixed Overheads
$40M – Contract Cost
Project
#1
LLM
$20M
Production Costs & Overheads
$20M
$20M
Financing
Cash
Flow
$20M
($5M)
Shared
Fixed OH
Future Project Estimate:
$40M – Prior
$3M – Inflation
($5M) – OH Reduction
$38M – Contract Cost
Delivery
$0M
$20M
Project
#2
LLM
$20M
Production Costs & Overheads
$20M
When is Financing Needed
• Varies by company and contract
• Contracts prime for financing
– Large upfront investments
– Extended period of performance
– Delivery at end of contract
• FAR 32.104 - Providing Contract Financing
Time to First
Delivery
Contract Price
Small Business
4 Months
> Simplified Acquisiton
Threshhold
Other
6 Months
>=$2.5M
Progress Payments vs PBPs
• Progress Payments
– With approved accounting system, less upfront administrative
work
– On going monthly administrative burden of assembling PP
requests
– More consistent cash flow stream, less risk
– Potentially more CIP
• PBPs
–
–
–
–
–
Larger administrative effort upfront
Potential for PBP plan revisions with contract changes
Potential for less monthly administrative burden
Less consistent cash flow stream, more risk
Potentially less CIP
Progress Payments vs PBPs – Example
Cash Flow ($K)
Establishing Progress Payments
• FAR 32.5 – Progress Payments Based on Costs
– Approved Accounting System
– DLA form 1503a: Weighted Value Progress
Payment Chart
– Form SF1443: Contractor’s Request for Progress
Payment
Form 1503a
WEIGHTED VALUE PROGRESS PAYMENT CHART (DLA Form 1503a)
Contractor
NO.
1
2
3
VALUE OF
ELEMENT
CONTRACT PERFORMANCE ELEMENT
Direct Labor
Direct Material
Other Direct Costs
Progress
Payment No.
Contract Number
WEIGHTED
VALUE
PERCENT
COMPLETE
PERCENT OF
TOTAL EFFORT
50.2%
67.2%
52.5%
10.0%
53.7%
0.0%
$
$
$
500,000
2,000,000
100
0.200
0.800
0.000
$
2,500,100
1.00
G & A, Fringe, and Overhead are not part of
this progress payment analysis
Total
63.8%
REMARKS
Form 1443– Section 1
Form 1443 – Section 2
Form 1443 – Section 3
Establishing Performance Based
Payments
• FAR 32.1 – Performance Based Payments
– PBP Plan
• Narrative of PBP events
• Cash Flow Graph
• Support of Event Values
– PBP Certification
• DFAR 252.323-7012 & 7013
– Reporting of total cost incurred
PBP Plan Example
AA
Event # C or S
Description
Acceptance Documentation
Cumulative
Quantity
Est Date
0001AA
0002AA
Total Event
Value
1
S
Receipt of Steel
Material Receiving & Inspection Report
100,000 Lbs
Dec-15
$
500,000 $
500,000 $
1,000,000
2
S
Receipt of Explosives
Material Receiving & Inspection Report
20,000 Lbs
Mar-16
$
125,000 $
125,000 $
250,000
3
S
Receipt of Tungsten Spheres
Material Receiving & Inspection Report
25,000 Lbs
Apr-16
$
400,000 $
- $
400,000
4
C-3
Receipt of Tungsten Spheres
Material Receiving & Inspection Report
50,000 Lbs
Jun-16
$
- $
400,000 $
400,000
5
S
Fabrication of Projectile Body
Certificate of Conformance
5,000
Apr-16
$
500,000 $
- $
500,000
6
C-5
Fabrication of Projectile Body
Certificate of Conformance
10,000
Aug-16
$
- $
500,000 $
500,000
7
S
Fabrication of Base Bleed
Certificate of Conformance
5,000
Jun-16
$
300,000 $
- $
300,000
8
C-7
Fabrication of Base Bleed
Certificate of Conformance
10,000
Sep-16
$
- $
300,000 $
300,000
9
S
Completion of Projectiles
Ballistic Test Report
5,000
Sep-16
$
350,000 $
- $
350,000
10
C-9
Completion of Projectiles
Ballistic Test Report
10,000
Jan-17
$
- $
350,000 $
350,000
$
2,175,000 $
2,175,000 $
4,350,000 81%
DD250 Balance
$
525,000 $
525,000 $
1,050,000 19%
CLIN Total
$
2,700,000 $
2,700,000 $
5,400,000 100%
Communication Between all Parties
when Establishing Financing
• Investment upfront can greatly reduce the
ongoing administrative burden while
minimizing risks for all parties
• Work out the mechanics and details at the
beginning, as the small things can become
large problems later
• Identify and address any concerns or
uncertainties at the start