Commercial financing (FAR 32.2) is not normally considered for commercial items and services. It is the contractor’s responsibility to provide the resources necessary for contract performance.
The three types of commercial financing are advance payments, delivery payments, and interim payments. I’ll provide more details on these in later paragraphs, but the important thing to remember is that none of these can be approved unless:
• the item/service is commercial; price exceeds the simplified acquisition threshold;
• CO determines it is customary to make financing payments;
• financing is in the best interest of the Government;
• adequate security is obtained;
• prior to performance, the aggregate advance payments can’t exceed 15 % of the contract price;
• the contract is awarded competitively or adequate consideration is obtained; and
• CO obtains concurrence from the payment office.
In very limited circumstances and where it is customary practice, commercial financing may be offered for commercial items and services purchased by the government. Commercial financing is not going to be used often or without a great deal of market research to justify its use.
Here are the three types and their quick definition.
Commercial advance payment – payment made before any performance of work under the contract and the aggregate of payments cannot exceed 15 % of the contract price.
Delivery payment – payment for accepted supplies or services, including payments for partial deliveries.
Commercial interim payment – payment that is not a commercial advance payment or a delivery payment. A commercial interim payment is given to the contractor after some work has been done, whereas a commercial advance payment is given to the contractor when no work has been done.
Here is an example of what this looks like from my CO experience:
During the competition, multiple offerors requested commercial advanced payments. They explained that components of the end item had to be purchased up front and suppliers did not sell on credit. The CO believed all the conditions had been met and approved commercial advance payments.
The Defense Contract Management Agency (DCMA) had to determine whether the contractor had “adequate security” before the “advance” could be calculated. The value of the security had to be at least equal to the maximum unliquidated amount of contract financing payments. Forms of security include an irrevocable letter of credit from a federally insured financial institution; a bond from a surety; a guarantee of repayment from a person or corporation of demonstrated liquid net worth (connected by ownership to the contractor); or title to contractor assets of adequate worth.
DCMA asked to inspect the supplies to be assembled into the end item. The contractor could not order supplies until they got the advance payment. DCMA argued that needed “adequate security” before an advance could be approved. So a government team made a site visit. The contractor’s “plant” consisted of several lean-to metal buildings with PVC pipe hanging from the ceiling by coat hangers. Their “secured facility” (where they kept the completed items) was a pad-locked double wide trailer.
After the site visit, the government said there was no way the “plant” could possibly be used as security for advance payments. The contractor said they could get a letter of credit from the governor of Louisiana, who was a buddy. No – not a “federally guaranteed financial institution”. Maybe Grandma could guarantee payment? Unfortunately, Grandma did not have enough credit or collateral. DCMA said “no advance payments”.
While you may be laughing at this point (at the time it was NOT funny, but it is now), you can see that it was a crazy situation that could not have been anticipated. And this contractor had successfully performed many other federal and commercial contracts for these items. So how would anyone have known had they not asked for advance payment?
It became a very contentious situation and delivery was eventually made but by that time the CO, contractor, and DCMA had learned more about commercial advance payments and how they were supposed to work than they ever wanted to.
So my final thoughts are to never assume a contractor has “adequate security”. Verify that up front and do a LOT of market research before authorizing advance payments because it could end up being a real mess.