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FAR Part 32: Contract Financing

FAR Part 32: Contract Financing. November 27, 2012. SCOPE. Contract financing covers types of payments to contractors before USG accepts product or service Advance, interim, partial or progress It is not payment for invoices, partial deliveries or for lease or rental

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FAR Part 32: Contract Financing

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  1. FAR Part 32: Contract Financing November 27, 2012

  2. SCOPE • Contract financing covers types of payments to contractors before USG accepts product or service • Advance, interim, partial or progress • It is not • payment for invoices, partial deliveries or for lease or rental • for purchases under Part 13 (simplified acquisitions) unless agency permits 32.003 – 32.104

  3. Reasons for Financing • Only to extent needed for prompt performance • Aids acquisition and reduces riskof loss • In Government’s best interest • Use of provided financing monitored; Performance based or advance payments • Made when working capital affected • Private financing unavailable • Payments are self-liquidating 32.104-105

  4. Order of Preference • Private financing • Customary contract financing • Loan guarantees • Unusual contract financing • Advance payments • Need for financing not a handicap for company • Not disqualified if need not identified prior to award 32.106-107

  5. Non-commercial Financing Boundaries • Small business • 4 month time frame before invoicing • Contract price > SAT ($150,000) • For IDIQ/BOA aggregate value > SAT • Other businesses • 6 month time frame before invoicing • Price > $2.5M for individual contract or IDIQ/BOA aggregate • Limited to contract values > SAT 32.104

  6. Subcontractors • May be financed by Prime under CR contracts only if 32.110 conditions met • If Subcontractor asserts non-payment, CO investigates. If Prime non-compliant: • Encourages timely payment to sub • Reduces or suspends payments to Prime • If Prime’s certification of payment inaccurate, administrative or remedial actions possible 32.110, 32.112

  7. Commercial Item Financing • Subject to Part 12 • Financing generally Contractor’s responsibility • Advance payments • If commercial marketplace financing customary • Aggregate payments ≤15% of contract price • Contract must be >SAT • Different terms from non-commercial financing • CO conducts market research, obtains security equal to unliquidated amount financed 32.200-32.202-4

  8. Commercial Financing Terms • Solicitation Terms • Contractor not unresponsive if terms not used • Financing not basis for adjustment of price • Contractor may propose financing terms • Contract financing terms include • Payment amount(s) – installment payments limited to 70% or lower • Contractor entitlement, Payment liquidation • Security – CO responsible for monitoring 32.206, 32.207

  9. Loan Guarantees – Defense Production • Guaranteed or V loan: • Max. guarantee authorized annually by Congress; less than 100% unless exceptional or vital • Authorized agencies: • Defense, Energy, Commerce, Interior, Agriculture, GSA, NASA • No inter-agency loan guarantees • Difference from conventional loan: agency may be obligated to purchase percentage of loan and share losses 32.300-302

  10. Loan Guarantees - Procedures 32.304-1 – 32.304-2

  11. Certificate of Eligibility • Issued by CO based on determining • Guarantee in USG interest • Contractor has facilities and management to perform • No practical alternate source without prejudice to national defense (n/a for SBC) • Contractor’s past performance and meeting schedules • If certificate not justified, CO documents and provides to agency contract financing office 32.304-2

  12. Loan Guarantees – Procedures (cont.) • Working capital loans • Asset formula limits amount of guarantee amount to a % of contractor’s defense production contracts • Includes items for which entitled to payment on performance or termination minus progress payments • Guarantee amount and maturity – adjusted if new contracts signed which need financing; generally needs new eligibility certificate 32.304-3, 304-4

  13. Loan Guarantees – Other • Contractor usually required to execute assignment of claims; subcontracts generally not eligible for financing • Other forms of collateral may be requested • Contract surety bonds incompatible – interest must be subordinated to guaranteed loan • Other borrowing (unguaranteed) generally prohibited • Termination: guarantee provides necessary financing pending termination settlements • Loans need to be self-liquidating from proceeds • Subcontracts – possible to make progress payments by contractor, reducing need for guarantee 32.304-5 – 32.306

  14. Advance Payments – Non-Commercial • Least preferred method, but acceptable for negotiated/sealed bid contracts if statutorily authorized • Statutory requirements: adequate security, ≤ unpaid contract price, in USG best interest or for national defense • Standards: don’t exceed interim cash needs; necessary; contractor qualified; USG benefits • Applicability: non-profit R&D; M&O only; acquisition of property for USG; highly classified; technical competence, financially weak 32.400-32.404

  15. Advance Pmts– Non-Commercial (cont.) • Agency options with sealed bid contracts • If requested, agency may comply • If not needed, award w/o advance payment • Deny award if request disapproved • Letters of Credit mechanism required unless waiver obtained from Treasury • Applicable when duration > 1year, $120,000 per year, otherwise Treasury check issued • Multiple LOCs may be combined into one • Timing of drawdown and disbursement minimized • Interest charged on daily unliquidated balance 32.405 – 32.407

  16. Advance Payments – Non-Commercial (cont.) • Contractor Application • Reference contract; forecast cash flow, disbursements; total amount requested; financial institution; efforts to obtain other financing; financial condition and need, ability to perform, financial safeguards • If educational institution or M&O contractor, info limited to reliability, technical ability, accounting system & controls • CO recommends approval or disapproval as a written finding and may require special account at financial institution 32.408 - 32.408-11

  17. Progress Payments Based on Cost • N/A to CR contracts, or construction based on percentage or stage of completion • Customary: • Rate: 80% of total costs (and for undefinitized contract actions), 85% for SBC; frequency of pmt; ordinary (liquidation = progress pmt) or alternate liquidation method (allows contractor to retain earned profit element of prices for items completed) • Unusual: • Used when predelivery expenditures are large relative to contract price/contractor’s capital; need documented; HCA approves; rate lowest possible 32.500 – 32.502; 32.503-8; 32.503-9

  18. Progress Payments – Cost (cont.) • Determining Payment Limitation • FFP: current fixed amount + NTE amount of unpriced mods • Redeterminable or Econ. Pr. Adj.: initial price until modified • FPI: target price + NTE amount of unpriced mods • Letter: max. obligated, as modified • Unpriced order under BOA: maximum obligated, as modified • Reimbursement of costs only – excluded from price • Payments may not exceed funds obligated • CO may add additional protective terms 32.501-3 – 32.501-5

  19. Progress Payments – Cost, Preaward (cont.) • CO must reject bids conditioned on progress pmts if not in solicitation • CFO approval for unusual rate, contractor with history of financial issues; on Hold-up list • Solicitations – CO may authorize progress payments to everyone, SBC only, or none • Contracts – Nature of contract may require separate payment rates for portions of work clearly severable; separate payment requests required from contractor 32.502 – 32.502-4

  20. Progress Payments – Cost, Postaward (cont.) • Supervision according to contractor’s record, sufficient for action to protect USG • Monitor losses outside progress payment contract • Indirect cost issues need early resolution • Accounting System • If ACO finds reliable, adequate system, sound finances: payments approved • All others: determine liquidation capability, protect USG against loss; are system and controls adequate; use of responsible audit agency, if necessary • Payment Request Approval • ACO approves w/o audit unless loss anticipated or doubtful amount of request 32.503 – 32.503-4

  21. Progress Payments – Cost (cont.) • ACO conducts periodic post-payment reviews • Under indefinite-delivery contracts, payments handled for each order as if separate contract • Suspending or reducing payments - CO notifies contractor, evaluates impact and documents actions • Contractor noncompliance or unsatisfactory financial condition • Excessive inventory • Delinquency in payment of costs of performance • Fair value of undelivered work (≥ unliquidatedpmts) • Loss contracts (Costs incurred + ETC > total price) 32.503-5 – 32.503-7

  22. Progress Payments – Cost (cont.) • CO may reduce liquidation rates for contractor to maintain profit rates; contractor certifies annually specific conditions met • Contract modification issued for new rate • Alternate rates • Must ensure USG recoups progress pmts each billing and be supported by documentation • Min. liquidation rate = expected progress payments contract price 32.503-8 – 32.503-10

  23. Progress Payments – Cost (cont.) • Maximum unliquidated amount • If unliquidated payments exceed contract limit, CO can increase liquidation rate, reduce progress • ACO must protect USG title to all materials, WIP, finished goods and other property – no other encumbrances allowed • Subcontracts • Financing payments must conform to Progress Payments clause 52.232-16 in Prime, modified appropriately • If performance-based payments, clause 52.232-32 used • If commercial item purchase finances, clause structured according to 32.206. 32.503-12 – 32.504

  24. Contract Debts • Scope: identifying, collecting and deferring collection of debts; N/A to common carrier transportation claims • Debts are monies due to the USG as a result of price reductions or adjustments, defective cost/pricing data, exceeding contract price, increased liquidation rates, overpayments, reinspection costs, erroneous payments, breach of contract, damages, or delinquincy. • CO responsible for identifying debt and demanding payment. • Payment Office collects debt or agrees to offsets 32.600 – 32.602

  25. Contract Debts (cont.) • CO determines debt promptly, based on merits of case and contract terms • Once established, demand letter issued to contractor, copy to payment office • If contractor notifies CO of debt, demand not issued earlier than 30d after notice received. • CO issues final decision to contractor if agreement not reached, copy to payment office • If pmt not made in 30d of due date, withholding initiated • After 180d, delinquent debt transferred to Treasury for collection 32.603-32.605

  26. Contract Debts – Installment Pmts, Deferment • Agency approves/denies, not CO • Contractor must submit written request if pmt not possible in full or contracts impaired • Agreement: Specific payment schedule based on specific events, shortest maturity, interest charged • Deferment – CO forwards request, recommendation, statement whether appeal pending and final CO decision to responsible agency office for authorization • If appeal pending, payment due in full when decision reached 32.607

  27. Contract Debts - Interest • Applies to debt unpaid after 30d from demand issuance • Interest credit allowed for successful appeals, overcollection; may not exceed amount collected. • Debts < $100,000 may be settled by agency • Interest not charged on contracts ≤ SAT, with other agencies, state or local governments or instrumentalities, or without provision for profit or fee with a non-profit organization 32.609 - 32.611

  28. Contract Funding No officer or employee of USG can create or authorize obligation in excess of available funds • Full funding – funds cover price or total estimated cost • Incremental funding – funds cover allotted amount 32.700 – 32.702

  29. Contract Funding (cont.) 32.703-2 – 32.705-2

  30. Assignment of Claims • Designated Agency - executive branch • No-setoff commitment – payments by agency not reduced to liquidate contractor’s indebtedness • Conditions: Payments ≥ $1000; assignment to institution or bank; not contractually prohibited; covers all unpaid amounts; made to 1 party only; cannot be further assigned • Assignee sends copy of instrument to CO or HCA, surety on bond, and disbursing payment officer • Protection: assignment can’t be revoked or reduced to make up for any other liabilities due to USG by contractor 32.800 – 32.804

  31. Assignment of Claims (cont.) • Entities issue assignments as directed and file with prescribed parties per 32.802(e) • Government examines assignment, acknowledges receipt if all in good order • Release obtained when • Further reassignment needed • Obligations under assignment fulfilled • Contractor files written notice of release 32.

  32. Prompt Payment • Subpart N/A for contract financing payments • Definitions • Discount– reduction for payment prior to due date • Mixed invoice – items with different payment dates • Payment date – check date or for EFT, settlement date • Settlement date – date payment credited to bank • Payment: • Supplies / services: later of 30d after receipt of proper invoice or acceptance of supplies/services • Construction: 14d • Food: 7d fresh fish, meat; 10d agricultural and dairy 32.900-32.904

  33. Prompt Payment – Invoicing, Interest • Invoices must be “proper” - complete, correct • Payments • USG doesn’t pay earlier than 7d prior to due date • Payment for discrete/partial deliveries allowed • Discount payments as close to, not later than, end of discount period • Interest – USG pays interest owed for late payments or improper discount; contractor does not have to request payment • Penalties – contractor makes written demand if USG fails to pay interest; unavailability of funds not excuse from obligation to pay • Delinquent payments: questions to billing or payment office • Disagreement over amount: contact contracting officer 32.905 - 32.909

  34. Performance-Based Payments (non-commercial) • Preferred financing method • Fully recoverable in event of default • Not payment for accepted items or subject to interest penalties • Fixed price contract • Contract does not provide progress payments • Performance bases • Milestones or measurable criteria identified in contract; may be severable • Payments may be on whole contract or severable items 32.1000 – 31.1006

  35. Performance Based Payments (cont.) • CO responsible for admin, review, approval • May suspend or reduce payments, if applicable • May renegotiate terms if USG causes delay • USG has title to property; other encumbrances violate contractor’s obligations • Contractor bears risk of loss until delivery, unless USG assumes risk 32.1007 – 32.1010

  36. Electronic Funds Transfer • Required for all contract payments • Some exceptions: office loses ability to make EFT payments; Payment received outside US/Puerto Rico; Contract paid in other than US currency; Classified contract – compromise national security; Deployed military or emergency situations • Not a substitute for assignment of claims • Government wide commercial purchase card authorizes 3rd party (bank) to make immediate payment to contractor • Contractor may not have outstanding debt in CCR 32.1100-1110

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