Industry Perspective

Justin Ludwiszewski

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

$20M

Cash Flow

Project #1

LLM$20M

$3M Inflation over POP

Future Project Estimate:$40M – Prior Cost $3M – Inflation$43M – Contract Cost

$0M

Production Costs & Overheads$20M

Delivery

Resources fully invested into project. Negative cash flow until delivery.

No Financing

Example of how Financing Increases Price Competitiveness – Continued

Project Information:$20M – Long Lead Materials$10M – Variable Production Costs$10M – Fixed Overheads $40M – Contract Cost

$20M

Cash Flow

($5M) Shared

Fixed OH

Future Project Estimate:$40M – Prior $3M – Inflation($5M) – OH Reduction$38M – Contract Cost

$20M

Project #1

LLM$20M

Production Costs & Overheads$20M Delivery

Project #2

LLM$20M

Production Costs & Overheads$20M

$20M Financing

$3M Inflation over POP

$0M

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 FinancingTime to First

DeliveryContract 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

ProgressPayment No.

NO. CONTRACT PERFORMANCE ELEMENT VALUE OFELEMENT

WEIGHTED VALUE

PERCENTCOMPLETE

PERCENT OFTOTAL EFFORT REMARKS

1 Direct Labor 500,000$ 0.200 50.2% 10.0%2 Direct Material 2,000,000$ 0.800 67.2% 53.7%3 Other Direct Costs 100$ 0.000 52.5% 0.0%

G & A, Fringe, and Overhead are not part of this progress payment analysis

Total 2,500,100$ 1.00 63.8%

WEIGHTED VALUE PROGRESS PAYMENT CHART (DLA Form 1503a)

Contractor Contract Number

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

Event # C or S Description Cumulative Quantity

Est Date 0001AA 0002AA Total Event Value

1 S Receipt of Steel 100,000 Lbs Dec-15 $ 500,000 $ 500,000 $ 1,000,000

2 S Receipt of Explosives 20,000 Lbs Mar-16 $ 125,000 $ 125,000 $ 250,000

3 S Receipt of Tungsten Spheres 25,000 Lbs Apr-16 $ 400,000 $ - $ 400,000

4 C - 3 Receipt of Tungsten Spheres 50,000 Lbs Jun-16 $ - $ 400,000 $ 400,000

5 S Fabrication of Projectile Body 5,000 Apr-16 $ 500,000 $ - $ 500,000

6 C - 5 Fabrication of Projectile Body 10,000 Aug-16 $ - $ 500,000 $ 500,000

7 S Fabrication of Base Bleed 5,000 Jun-16 $ 300,000 $ - $ 300,000

8 C - 7 Fabrication of Base Bleed 10,000 Sep-16 $ - $ 300,000 $ 300,000

9 S Completion of Projectiles 5,000 Sep-16 $ 350,000 $ - $ 350,000

10 C - 9 Completion of Projectiles 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%

Certificate of Conformance

Material Receiving & Inspection Report

Material Receiving & Inspection Report

Material Receiving & Inspection Report

Material Receiving & Inspection Report

Certificate of Conformance

Certificate of Conformance

Acceptance Documentation

Certificate of Conformance

Ballistic Test Report

Ballistic Test Report

AA

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