Government Contractor CFO's 101 (Part III) - Cashflow Management: When Cash is King
Government Contractor CFO Services - Cashflow Management I
Cash is king for most fledgling businesses, and no less so for government contractors. To a great extent, government contractors and grant recipients may not have to seek outside financing for their operations for a number of reasons. First, the government is required by law to pay valid invoices within 30 days (FAR 32.9 – Prompt Payment Act), sometimes paying within days of submitting an invoice. In some circumstances, advanced funding on a contract or grant can be secured. Plus, the government will pay all “allowable” costs.
Gone are the days of checks being mailed. The government prefers electronic transfer of funds. More troublesome for a CFO is navigating the variety of peculiar billing mechanisms and requirements the government imposes. While these techniques are somewhat arcane, the good news is there are only a handful.
Fixed price contracts routinely use milestone payments to finance a contractor’s effort. Invoices are submitted and payments made on a pre-negotiated schedule coinciding with one or a series of deliverable services or supplies (technical report, product delivery).
Payment amounts may or may not be the same. If offered milestone payments, an attentive CFO will ask for front-loaded or advance payments to build up a cash reserve.
Cost-plus type contracts bill for products and services where actual project costs are submitted along with an allocation of indirect costs and fee. A “provisional” forward looking indirect allocation is pre-negotiated with the cognizant government agency. “Final” indirect rates are reallocated to the project once the contractor’s fiscal year is complete. Any variance in project costs due to indirect rate allocation requires a billing adjustment.
The challenge for the CFO is to monitor and manage indirect rates throughout the fiscal year so as to avoid large variances.
For certain fixed price contracts, progress payments are a financing method whereby a percentage of costs (project and allocated indirect expenses) can be billed. This percentage is 80%, but 90% or higher for small businesses. The additional 10-20% can be billed for once the work is complete. (see FAR 32.5)
This method can become a bit complex, especially if there are multiple Contract Line Items (CLINs). The CFO would be wise to at least consider managing cashflow using milestone payments versus progress payments.
Grant agencies allow recipients to “drawdown” funds from a government account when project costs are expended. This drawdown process includes the allocated costs of indirect expenses as well as fee. Whereas valid invoices on contracts pay within 30 days, the funds drawn down for grants are available within days.
As one might expect, the government is very careful about vetting those requiring access to their electronic billing and payments systems. To ensure there is an uninterrupted flow of cash once a contract or grant starts, the CFO should already have dealt with the gauntlet of niggly details required for signing on to government billing systems, such as:
Wide Area Workflow (WAWF) – Credentials are afforded only to those already registered in SAM (System for Award Management). Credentials can be delegated, but that process can also take a few days.
Automatic Standard Application for Payments (ASAP) – Credentials afforded in a similar manner as WAWF, but for grants.
Each of these systems requires a certain measure of training and familiarity to operate efficiently. First timer users can expect delays due to ringing out the process.
Other financing methods
For some firms, it may not be enough to depend strictly on contract funds to finance operations, especially if it involves purchasing capital equipment. Lines of credit or other financing techniques are perfectly suitable. However, it must be noted that interest is an unallowable cost on government grants and contracts.
A CFO might want to consider factoring of accounts receivables as a method of filling in gaps in cashflow. For a fee, factoring companies will “buy” your accounts receivable, giving you cash days or weeks before you would get it from the government. Since the fee is a percentage of the AR and not based on interest, factoring fees are allowable. Plus, there are no cumbersome covenants as you might find in a line of credit.
If you would like to learn how our outsourced Government Contractor CFO's (like Dave Donley), can help your business with these and other issues, please click the link below to visit our outsourced CFO Services page and fill out the form on the left (or contact us today):
ReliAscent's next blog in our popular CFO 101 Series is: "CFO Forecasting - Part I." In this blog, Dave Donley will discuss:
- Economic Model Development
- Indirect Rates Structure
- Competitive Indirect Bid Rates
- Getting pricing under CFO control versus “business development"
- Understanding the price/risk dynamic between fixed price contracts and cost-plus types.