Procurement Information Circular
November 30, 1998
EARLY PAYMENT AND FREQUENT BILLING
PURPOSE: To provide guidance on how to determine the cost to the Government and the value of consideration offered by a contractor/offeror in the negotiation of early payment and frequent billing arrangements.
BACKGROUND: The Office of the Inspector General (OIG) issued an audit report covering early payment and frequent billing on certain long term contracts. The OIG conceded there may be circumstances that could warrant the use of early payment and frequent billing as negotiation tools, but it recommended the issuance of additional guidance for Contracting Officers. Although limited instances of early payment and frequent billing were identified by the OIG, the Office of Procurement agreed that it was appropriate to provide additional guidance on these areas.
Early payment occurs when contract financing payments are made prior to the standard 30 day period after the designated payment office receives a proper invoice (FAR 32.906). NASA’s policy, as stated at NFS 1832.906, is to make payment on the 30th day. The policy does not encourage payment prior to that date, but recognizes that there may be cases when it would be in the Government’s interest to negotiate earlier payment. The NFS specifies what is to be done in those cases.
The NFS requirements include determining that the value of the consideration received from the contractor/offeror exceeds the cost to the Department of the Treasury, since the Government borrows the funds to make the payments. Computing the cost to the Government is fairly straight forward since it is determined using the Current Value of Funds Rate published annually in the Federal Register (the rate is subject to quarterly revision). The Current Value of Funds Rate can be found at http://www.fms.treas.gov/fedreg/fundrate.html.
Determining the value of the consideration received from the contractor/offeror can be a more complex exercise, since the consideration may or may not be monetary or easily converted into monetary terms. An example of how the evaluation of contractor/offeror proposed monetary consideration and the cost to the Government would be performed is as follows: If the contractor/offeror proposes to reduce the available award fee pool in return for early payment, the Contracting Officer should consider not only what the Current Value of Funds Rate is at the particular moment, but also what the cost would be if the rate increased or decreased during the contemplated period of performance, including options. The probability of rate fluctuations generally increases the longer the period of performance.
One must also look at the consideration offered. In the case of award fee, the total amount of potential award fee being offered should not be accepted at face value. The Contracting Officer should evaluate the history of the firm on past/current award fee contracts, particularly contracts involving work similar to that under the instant contract, to determine the average amount of award fee earned. Again, different award fee rates should be looked at to make a reasonable estimation of the real value of the award fee pool being proposed by the contractor/offeror. A similar analysis would be expected for other types of consideration that were monetary in nature.
The NFS policy at 1832.906 also recognizes that firms may offer consideration that would have value to the Government but which was not monetary in nature, e.g., an accelerated delivery schedule. This type of evaluation usually will be more complicated. In those cases, a legitimate attempt must be made to establish the value of the consideration being offered. One approach would be to look at the consideration being offered and ask the question "how much would I be willing to pay to get it." The basis for the value derived must be supported, whether it is based on a prior contract or some other source. The amount one would be willing to pay would then be compared to the cost based on the analysis described above using the Current Value of Funds Rate.
NFS 1832.906 requires that the contract file be documented as to the analysis performed, and that the use of early payment be approved by the Contracting Officer with the concurrence of the installation Financial Management Officer. These requirements apply whether monetary or non monetary consideration is involved.
The negotiation of early payment provisions should not be confused with invoice-based discounts for making payment within the contractor stipulated number of days. Such discounts are typically offered by a contractor on an individual invoice basis. Invoice-based discounts are taken when they are economically advantageous to the Government and we are in a position to take advantage of the opportunity.
Frequent billing occurs when payment is made to a contractor on a single contract more frequently than once every two weeks, the standard period specified for cost-type contracts by the clause at FAR 52.216-7, Allowable Cost and Payment. The only exception to this rule is for small business concerns, which is also specified by the Allowable Cost and Payment clause. Deviations to this rule are only to be negotiated when the benefit to the Government is adequately supported.
As with early payment, billing more frequently than once every two weeks costs the Government money since the funds must be borrowed. If frequent billing is requested, a determination must be made that the value to the Government exceeds the cost. The cost to the Government is computed using the Current Value of Funds Rate. As described above, the computation of the cost to the Government should consider what the impact would be if the Current Value of Funds Rate increases or decreases over the contemplated contract period of performance. Again, as with early payment, an analysis of the consideration being offered must be performed to determine its value. The form the analysis takes will depend on the particular consideration involved. The analysis of the cost to the Government and the value of the consideration offered must be documented.
EFFECTIVE DATE: This PIC is effective as dated and will remain in effect until canceled.
HEADQUARTERS CONTACT: Joe Le Cren, Code HK, (202) 358-0444, e-mail: firstname.lastname@example.org.
R. Scott Thompson
Director, Contract Management Division