Long-Term Relationship

Our company is able to take an idea from concept phase to full production within a very short window due to the use of the robotics in our machinery department. With this ability, we have decided to expand our already large business by competing for government contracts. With our very unique products and quick turnaround time, we feel secure in our success in acquiring a government contract. However, this is a new arena for us and before we jump in with both feet, we would like to take the time to brush-up on the ins and outs of government contracts as they are different from our current contracting process. We are currently studying the process of the long-term relationship and impacts of government contracts. Learning the impact that government contracts can have on our business is very important and being able to make adjustments in our current practices now will help us further down the road. For us to get a good grasp on the long-term relationship and impact of government contracts, we will take a look at some of the different approaches to contract financing and their impacts on our company; determine which contract financing approach would be the best suited for our organization; the policies our organization will need in place due to the Defense Contract Audit Agency; and the approaches we will need due to the government's need for quality.

Assess how the different approaches to contract financing can impact the company.

There are a few different approaches to contract financing. The government can provide financing through government guarantee loans, advance payments, and progress payments. Each can affect our company in different ways.

Government guarantee loans "are essentially the same as conventional loans made by private financial institutions, except that the guaranteeing agency is obligated, on demand of the lender, to purchase a stated percentage of the loan and to share any losses in the amount of guaranteed percentage," (Part 32-Contract Financing, 2013, 32.113(f)). The government will decide if a contractor is eligible to receive a guaranteed loan base on several factors such as government request; if after review of contractor's financial status and performance issuance is in the government's interest; effort is essential to national defense; contractor has the facilities and capabilities required for effort; and lastly, if there is no other alternative.

When the government realizes a contractor who, without advanced financial assistant, would be unable to start or maintain satisfactory progress on contracts they may issues an advance payment. In order to be issues an advance payment the contractor's effort must deem within the public interest or facilitates the national defense and the contractors must provide a written request with "current and long-term operating capital needs as stated in their cash flow projection and profit/loss statement and proposed method and schedule of advanced payment liquidation, and identification and installation of in-house financial and operating controls to assure liquidation of Advanced Payments," (DCMA Advance Payments Job Aid, 2007, page 4).

Advance payments are made prior to, in anticipation of, and for the purpose of complete performance under a contract or several contracts under a Pool Agreement. This means the government's risk can be increased considerably by an insufficient contractor progress, management, or any deterioration of their financial condition. For these reasons the government considers advance payment as the least preferred method of contract financing. At no time will the amount provided via advance payment exceed the unpaid contract price and the government will ensure it will not exceed the actual reasonable requirements for the contract or the provisional cost required during the reimbursement cycle.

Of the three contracts financing situations, progress payments is the most preferred. When a contractor receives payment base on the cost they incur as the work progresses under the contract is known as progress payments. Progress payments are ideal for fixed-price contracts. "It is customary to apply a progress payment rate to the cost of performing the contract," (Hearn, 2011, page 260). For large businesses the usual rate is 70 percent that is applicable to the total costs of the performing contract while the rate for small businesses is 80 percent. Once government has deemed a contract has been successfully completed, they will provide the remaining unpaid cost to the contractor. However, there can be flexible progress payments. This type of payment is a way to help the contractor recoup costs in excess of the stipulated progress payment rate thus allowing them to be able to complete the work. With progress payments the contractor has a higher risk as the government can reduce or suspend progress payment. The contractor must ensure they comply with all the material requirements of the contract and maintain their accounting and control systems. If those systems are found to be insufficient the government may suspend payments until the contractor has made the recommended changes. Also, if the contractor's financial condition is worsened during the course of the contract or the contract fails to make progress are sufficient reasons for the government to suspend payments. The government will review any existing reasons and substantial evidence before enacting reduced or suspended progress payments.

Determine which contract financing approach will best suit the organizational needs.

As discussed above, each approach to contract financing can affect a company differently. Unfortunately as contractors, we are at the mercy of the government's decision when providing the payment method for a particular contract. As such we will need to analyze and determine which contract financing approach would best suit our organizational needs. After reviewing the different approaches and assessing their impact, we feel the solicitations which reference progress payments as the proposed payment method would be the best for our company.

While our company is producing unique products that are used within the government environment and we have the facilities and capabilities required for the effort, these products are not essential to national defense. Also, being a large business we have prided ourselves on being able maintain a stable financial status and being able to perform our work within the required timeframe. Thus, we would not require government guaranteed loans to be able to start and complete the effort as per the contract.

While we are not opposed to receiving advanced payments, we feel our company does not meet