Long-Term Relationship You owner/CEO a large business idea concept phase full production, a short window due robotics machinery department
Contract is a form of payment; or rather it is an unauthorized government distribution of funding to a contractor before accepting supply of goods or services offered by the government. Contract financing excludes debit payments, payments for incomplete acceptance or charter or rental payments. This is because payments of invoices on cost style contracts do not qualify as contract financing. Therefore, contract financing primarily applies to fixed price contracts. The primary intention of contract financing is to help the contractor in handling costs incurred during the performance of the contract (DOD, 2012).
In addition, provision of this financing covers the amount needed for quick and efficient performance of the contract. The order of preference for contract financing suggests that for every government financing provided the contractor should not acquire private contract financing without the government's warranty. In addition, except for situations such as non-profit educational, research organizations or the management and operation of government facilities, advance payment is the most preferred method (DOD, 2012). Other methods include private financing without government guarantee, customary contract financing, loan guarantees, unusual contract financing and advance payments.
From a business perspective, any prudent buyer may opt to pay the seller upon delivery of goods or services. This is because payment upon delivery is cheap and offers maximum motivation for the seller to deliver the goods or services. This is the principle used by the government, whereby it prefers advance payments where the government pays in advance for work in progress (DOD, 2012). The government provides contract financing on fixed prices, non-commercial contracts for deliveries scheduled to start within six months or after awarding of the contract. In addition, provision of contract financing is in the form of customary contract financing. Under customary financing, the commonly used financing method is the customary progress payments based on cost.
Performance-Based Payments (PBP) fall under customary contract financing and the government prefers this form when the contracting officer finds them suitable, and the contractor accepts its terms. However, PBPs do not apply for all contracts. An individual or organization cannot use two financing methods simultaneously. This means that this company should choose one method that suits them best. For instance, the company cannot use both Progress Payments and Performance-Based Payments. However, there is room for modification on either financing approach the company chooses (DOD, 2012). For instance, this happens through changing the approach, and when this happens the new approach requires adequate consideration.
Performance Base Payments
PBPs are financing payments based on the achievement of accomplishments defined and valued in advance by the involved parties. This is the appropriate method the company should adopt because it is recoverable in case of default. PBPs cannot exceed 90% of the contract price, and this is the maximum that the company can provide. In addition, for the company to establish this approach, the true progress, determination of accomplishment and financing values are given prior the beginning of the contract. This approach will offer expected results for the company because it has potential advantages such as enhanced technical and scheduled focus, reduced oversight cost, wide contractor participation and improve contractor's cash flow.
Expected Advantages of PBPs
Enhanced Technical and Scheduled Focus
This is an expectation that PBPs can enhance the focus on technical and schedule performance because of the effort needed to develop a PBP arrangement, and the attention required to complete the PBP events during the execution of the contract. The company can achieve this if the PBPs are properly structured, which will reinforce the contractor's motivation and the contractor may accomplish the work promptly and efficiently (DOD, 2012). However, if the PBP schedule lacks meaningful events, or the valuation does not reflect the successful performance of the contract, and the structuring is inadequately completed criteria, the PBP arrangement can misdirect a contractor's focus.
Reduced Cost of Oversight and Administration
The company should expect that since there is prior establishment of PBP event values, this approach will not require the oversight of the contractor's accounting system on the government's side. However, this expectation does not consider that supervision of a contractor's accounting structure is done on the company as a whole, but not contract specific (DOD, 2012). In addition, unless a contractor had no other contracts such as cost type contracts or contracts using progressive payments, which require accounting systems, PBPs did not result to reduction in the oversight of the accounting system.
Lower Price in Exchange for Improved Flow of Cash
From a contractor's perspective, the benefit of improved cash flow is significant. In addition, contracts with lower prices with PBPs are good financial deals for contractor's compared to higher prices for the same contract with progressive payments. The key to this chance is mutual such that the company and the contractor understand the value of time in terms of money in measuring the cost to the government, and benefit to the contractor of improved cash flow (DOD, 2012). Fortunately, the value of time in terms of money to the contractor is significant than the time of value of money to the company.
Evaluation of PBP Financing Approach
The company should use this financing approach in order to determine costs and benefits of cash flows by measuring using the available financial functions in electronic spreadsheets. This makes it possible to compare financial cost and significance of PBP financing vs. customary progress payments. In addition, this approach can establish a win-win arrangement for various reasons. First, companies are likely to adopt this method if a PBP arrangement turns out impractical (DOD, 2012). Second, many companies utilize this approach and thirdly it is a low-risk form of financing. For these reasons, the company should adopt the Performance-Based Payment approach.
For this assignment, this contract is an Engineering and Manufacturing Development (EMD) contract and activities are towards completion of the robot design as evidenced by the Preliminary Design Review (PDR). PBP events are associated with completion of a task, but not the initiation of the task. Therefore, the PDR and CDR (Critical Design Review) are significant events in the EMD process. In addition, a resolution of items originating from PDR and CDR during the review process is determinants to the success of review (DOD, 2012). Therefore, initiation of PDR or CDR does not qualify as events in EMD process. However, form a contractor's view point, in such a contract resolution of actions may need further review by incorporating government personnel to make the task easy to complete.
Prior to PDRs candidates submit various plans that may fall under CDR deliveries on the contract. However, timing of development contract events may pose a challenge when it comes to evaluation. In addition, the connecting of cash payments to certain events will focus the contractor's attention to the earliest accomplishment of those events (DOD, 2012). Therefore, companies should take caution in development contracts when identifying events and associated accomplishment criteria that the contractor is not motivated to sacrifice quality work so as to receive financing payments sooner.
Defense Contract Audit Agency (DCAA)
DCAA is an organization with the responsibility of contracting audits. This organization operates under the direction, authority and control of the Secretary of Defense. The organization serves the public interest as its primary client; in addition, the organization performs all the necessary contract audits for the Defense Department and provides accounting and financial advice services concerning contracts and sub-contracts to organizations responsible for procurement and contract administration (DCAA, 2012). In addition, the agency provides these services in connection with negotiation, administration, settlement of contracts and sub-contracts to make sure that taxpayer money is spent on fair contract prices. The agency offers contract audit services to other appropriate Federal agencies.
Complying with the Defense Contract Audit Agency standards is essential for every company for it to get cleared in audits. When companies win contracts from the government, it becomes difficult for small business owners to comply with the requirements and directives of DCAA audit. Therefore, it is important for a company to seek consultations about DCAA policies to implement an efficient standard cost accounting system in the company and make it compliant with the DCAA guidelines (DCAA, 2012). For instance there businesses majoring in software, management and web-based project timing and cost accounting services, which other companies may consult.
DCAA's primary objective is to avoid unallowable cost. Therefore, if the company wants to comply with DCAA and have the ability to pass a potential audit, the company should have documented policies and procedures (DCAA, 2012). Along with the documentation, the company will also require upholding the system that charges labor for hourly time, specific accounting and billing factors and have proficient employees in certain elements of DCAA compliance (DCAA, 2012). For instance, the company should mention all the costs clearly in the accounting details. In addition, the company should allocate the labor costs and the accumulation separately.