Does anyone have a standard definition of what would be considered excess inventory for the purposes of progress payments?

By joel hoffman on Wednesday, November 29, 2000 - 06:02 pm:

Carolyn, I'll admit ignorance here. Are you referring to progress payments for a terminated contract,a cost reimbursible contract or what?
Thanks! happy sails joel

By Carolyn Guinan on Thursday, November 30, 2000 - 08:31 am:

I mean progress payments based on costs as described in FAR 32.5. They are restricted to firm fixed price or fixed price incentive contracts. Excess inventory is cause for suspension but FAR defines excess as inventory allocated ot the contract that exceeds reasonable requirements. FAR doesn't define reasonable requirements and I'm looking for an aircraft industry standard.

By John Ford on Thursday, November 30, 2000 - 12:56 pm:

Carolyn, have you tried contacting the Defense Contract Management Agency? They administer contracts at most of the major aircraft manufacturers. These contracts frequently have progress payments provisions in them. It is my understanding that the standard used by DCMA is sufficient inventory to meet contract requirements. This includes quantities to be included in deliverable product plus an additional quantity to account for waste, scrap, spoilage and material failures. These latter factors are based on actual experience if available. This is all in keeping with the idea that progress payments are a means for financing contract performance and are not to be used to allow a contractor to build up its inventory at government expense.

By Charlie on Thursday, November 30, 2000 - 05:09 pm:

John has pretty much hit the nail on the head. It's what's required to build the end items, giving consideration for scrap, spoilage, testing, etc. What's reasonable is going to depend on the circumstances. You can't really use a general industry standard to limit progress payments, although the comparison might useful as an indicator. If the comparison indicates excessive costs, ask the contractor to justify its inventory levels. The closest definition you're going to find in the FAR is at 31.201-3, Determining Reasonableness.

By Vern Edwards on Thursday, November 30, 2000 - 09:33 pm:

Carolyn:

If you're thinking about suspending progress payments because of excess inventory, I checked the records of the boards of contract appeals and could not find a single case based on such a suspension. This suggests that such suspensions have been infrequent.

Inventory requirements for a particular contract will depend upon factors such as product specifications, production rates based on contract delivery requirements, and the lead times for materials and parts. Lead times for materials and parts will vary from one contract to another for a variety of reasons beyond the control of the contractor. It is unlikely that you will find an industry standard for what constitutes a reasonable amount of production inventory.

By Kennedy How on Monday, December 04, 2000 - 12:10 pm:

I can think of one reason where a contractor might have excess inventory, and that is if the contractor can get a better deal on raw material in one big lump rather than spreading it out over the life of the contract. For example, say a contract runs for 3 years, the contractor may get all 3 years worth of material up front (for whatever economic reason), and store it. It may sound unreasonable, to have material for year 3 in stock during year 1, but the background reasoning behind that is acceptable to me.

Kennedy

By CarolynGuinan on Tuesday, December 05, 2000 - 09:15 am:

I wasn't thinking of suspending progress payments
but I was considering a reduction. FAR says that
I should require the transfer of excess inventory from the contract and eliminate the costs of the excessive inventory from the costs eligible for progress payments with appropriate reduction in progress payments outstanding. I am part of DCMA and I'm interested in what other aircraft manufacturer's use as a standard but have been unable to get too much information. One source uses 45 days prior to need date. Of course, economic order quantities would be considered. MMAS requires valid time phased requirements but I
can't find anything that defines valid time phased. I doubt that it means everything to build every aircraft even if the aircraft won't enter the assembly process for a year. I also need to consider the affect of late delivery on the excess inventory but there is little or no guidance here.
Any ideas?

By Kennedy How on Tuesday, December 05, 2000 - 12:38 pm:

It's been a long time since I really delved into progress payments, but even so....

Has it been determined that the excess inventory is really in excess of contract requirements? I mean, it's more than what's needed to complete the contract? If not, I don't know how you can "transfer the excess inventory from the contract to remove the costs eligible for progress payments".

I seem to remember one time we've had contracts where 100% of the material showed up early on, and, from the contract costs standpoint, most of the cost was incurred; the only thing left was actual labor to assemble the item. From a progress payments standpoint, I think they were limited by the percentage cited in the clause.

On the other hand, when we had massive yearly vehicle production contracts, sometimes material costs fluctuated so that they were incurred early on before the actual deliveries of the end item. The ACO did some limitation, but I don't know how (if they even did) they segregated some of the material aside for future billings (which the contractor was eligible for, since the material was required on the contract, but it was maybe more than they could bill for at the instance).

One other thing, your need time might be contingent on the contractor's production schedule, and the lead time to actually manufacture the end item. Since every comoddity is different, you might not get a hard, fast rule on days.

Just kind of throwing out some thoughts here.

Kennedy

By John Ford on Tuesday, December 05, 2000 - 12:45 pm:

Carolyn, one thing that is missing from this discussion is why you may think your contractor has excess inventory.
Another factor you may want to consider is the effect of different payment practices on contractor purchasing practices. Commercial customers may pay the contractor on a different basis that DoD does under progress payments. This could effect the inventory practices of the contractor. Also, even different contract types can effect a contractor's inventory/purchasing practices. thus, I don't believe you are going to find a single standard or uniform set of standards for answering this question.
The best guidance I beleive would be to ask if what the contractor has done demonstrates prudent business judgment, all factors considered.