Jump to content

Time value of government finance payments?


Sam101

Recommended Posts

This is probably the dumbest question on this forum but I just can't wrap my mind around the concept of how the time value of money, net present value, OMB Circular A-94, discount rate, etc. ties into situations where the government provides contract financing... what exactly is the government borrowing and from who?

Say the IGCE is $1M, you already have the $1M on a requisition, you award the contract and obligate that $1M that you already have, then you make a few interim commercial payments, progress payments, or performance based payments, whichever of those you are using... OK, so what does something like "nominal discount rate specified in Appendix C of the Office of Management and Budget (OMB) Circular A-94, "Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs," appropriate to the period of contract financing" from FAR 32.205( c )(4) have to do with the fact that you already have funds obligated to the contract and you're simply just paying the contractor before final delivery and if they don't deliver they will just pay the government back?... What does "nominal discount rate" and strange finance jargon have to do with any of this?

I'm not looking for a complex in-depth lesson on FAR 32, I was just hoping to kind of get a very high level understanding to where I can do my own research.

For example, is the government actually lending money to the contractor at a very low rate and the interest that the contractor owes the government is just deducted from the contract price? I hope this isn't the case, because that would just confuse me even more but this is the type of high level answer I'm looking for.

Link to comment
Share on other sites

Sam, FAR 32.205 prescribes procedures for evaluating contract financing proposals for commercial items.  It does not prescribe payment procedures.  As for progress payments, such payments create an interest free debt the contractor owes the government.  The debt is paid off, (liquidated) by the contractor performing the contract.  If there is an overpayment or the contractor does not perform, the government can demand repayment of unearned amounts.  Interest would accrue on the amount demanded under either the Interest clause, 52.232-17 or the Disputes clause 52.233-2.

Link to comment
Share on other sites

Thanks C Culham, yes, the link helps but I read it 100 times before.

This is how I understand it, I'm probably wrong, and if I'm wrong it's the documentation's/FAR's fault for being too difficult to understand:

Contract awarded FFP: $1M, meaning progress payments can't go over $900,000.00 (90% of $1M)

Assuming the contractor asks for the entire 90%:

Progress payment 1: $300,000.00 ($900,000.00 / 3)

Progress payment 2: $300,000.00 ($900,000.00 / 3)

Progress payment 3: $300,000.00 ($900,000.00 / 3)

Invoice payment 1 (and final, upon completion of the contract): $100,000.00 ($1M - $900,000.00)

And in the case of any other form of financing it would involve interest, and that it one of the interest rates in OMB Circular A-94, for example 1.3% for anything up to 3 years? So it will look like this:

Contract proposed amount FFP: $1M, meaning finance payments can't go over $900,000.00 (90% of $1M)

Assuming the contractor asks for the entire 90%:

$900,000.00 * 1.3% = $11,700.00 (or whatever the interest formula is)

$1M - $11,700.00 = $988,300.00 is the new contracted amount.

Then the $988,300.00 is gradually paid at agreed to intervals as long as the sum of all finance payments do not exceed the total incurred costs of performance and whatever is left is paid in response to the first and final invoice.

If it's not this way then it should be... but with the amount of documentation on this topic I have a feeling that there is way more to this.

Link to comment
Share on other sites

On 12/8/2022 at 11:29 AM, Sam101 said:

For example, is the government actually lending money to the contractor at a very low rate and the interest that the contractor owes the government is just deducted from the contract price?

No, there is no loan.  The progress payment helps the contractor avoid loans (or loans with very long periods) by reimbursing the contractor for costs it has already incurred in manufacturing the deliverable product.  The progress payment is payable only if the contractor maintains satisfactory progress.  It is akin to a partial payment, but is not an advance payment.

The contractor does not ask "for the entire 90%."  Rather, the contractor periodically shows that it has incurred costs and that satisfactory progress is being made.

An agreed-upon payment schedule of three contract financing payments of $300,000 each plus the remaining $100,000 at delivery is not a progress payment structure.  It could be an installment payment (for contracts for commercial items, limited to 70% of the contract price) or a performance-based payment (for contracts for non-commercial items, limited to 90% of the contract price).  In competitive procurements when financing terms may vary among offerors, the contracting officer is supposed to compute the imputed cost of the contract financing payments and add it to the proposed price for each offeror requesting financing payments.  This is explained in FAR 32.205(c) and 32.1004(e)(2).

Link to comment
Share on other sites

Sam101 mentions A-94 in the context of post-award contract administration, but his citation of A-94 from FAR 32.205(c)(4) applies in the context of pre-award evaluation of competitive proposals where offerors may propose varying contract financing terms.  It is error to cite FAR 32.205(c)(4) in the context of post-award contract administration, as it applies only to pre-award evaluation.

Sam101, Are you asking about (a) pre-award evaluation; (b) post-award administration; or (c) something else?

Link to comment
Share on other sites

@Retreadfed, to answer your question about why I said "And in the case of any other form of financing it would involve interest, and that it one of the interest rates in OMB Circular A-94", it was a wrong assumption on my part, there is no clause.

Upon further reading it appears to me as though interest and "imputed cost" to the government is only for evaluation purpose when the government lets offerors propose their own financing terms with their proposals. This confuses me because if there is no real consequence of "imputed cost" post award, then saying "this proposal has $X imputed cost to the government" just for evaluation purposes is meaningless.

For example, if Offeror A's proposed price is $1M and Offeror B's proposed price is $1.3M, then after the procedure in FAR 32.205(c) Offeror A's "evaluated price" is $1.4M and Offeror B's "evaluated price" is $1.2M then the award will go to Offeror B (given that Offeror A's non-price ratings do not warrant an award to the "higher" offer) but the actual obligated amount will be $1.3M when the government could have awarded to Offeror A at $1M if it weren't for FAR 32.205(c).

How does letting offerors state their own finance terms introduce "imputed costs" into the evaluation while when the government states the finance terms the "imputed costs" magically disappear?

 And if you award a contract without financing and then do a mod to allow financing then what? The government and contractor just agree to something without worrying about FAR 32.205(c)?

On 12/9/2022 at 11:02 AM, ji20874 said:

Sam101, Are you asking about (a) pre-award evaluation; (b) post-award administration; or (c) something else?

I am asking about (a) pre-award evaluation and (b) post-award administration.

On 12/9/2022 at 4:07 PM, here_2_help said:

Are we talking about cost-based customary progress payments or are we talking about performance-based payments? This reader is confused.

Both. And also commercial interim payments.

Link to comment
Share on other sites

1 hour ago, Sam101 said:

Upon further reading it appears to me as though interest and "imputed cost" to the government is only for evaluation purpose when the government lets offerors propose their own financing terms with their proposals.

This is partially correct.  Remember that FAR 32.205 only applies when the government is acquiring commercial items.  As such, it does not apply when the government will provide financing to the contractor and the procurement is for items that are not commercial.

Link to comment
Share on other sites

2 hours ago, Sam101 said:

I am asking about (a) pre-award evaluation and (b) post-award administration.

 

2 hours ago, Sam101 said:

Both. And also commercial interim payments.

It might work better if you selected one scenario for your question.

Link to comment
Share on other sites

With respect to performance-based payments, DoD mandates the use of a "tool" (spreadsheet) that takes into account both the contractor's interest rate on its borrowings as well as the A-94 interest rate. No I don't know the rationale for doing so. Most of how DoD implements PBPs is a mystery to me. I just know that the spreadsheet exists and can be accessed by those who need to use it.

Link to comment
Share on other sites

Thanks everyone, but just on a side note, I just don't understand why if a contract is awarded for $5M, why can't the government just front (place the money in the contractor's bank account) the entire $5M to the contractor at time of award and let them do whatever they want with it?

If the contractor isn't performing well then have a special button that the government clicks that automatically takes whatever is remaining in that account and then let the contractor find their own financing for the remainder of the contract, and then request that the money expended by the contractor be paid back if they default.

Like this:

1) Total FFP award: $5M, 3 year period of performance.

2) Place $5M in contractor's special account.

3) The contractor isn't performing well on the 16th month, there is $3M remaining in the contractor's special account because the contractor expended (physically spent) $2M already.

4) The government clicks a button on a special website and $3M automatically disappears from the contractor's special account and the contractor needs to now find their own financing for the remainder of the contract.

5) All goes well and 30 days after completion of the contract the government pays $3M to the contractor and everyone is happy.

OR

5) The contractor defaults, so the government does not pay the $3M and just keeps it and on top of that requests that the $2M not taken by the special button click be paid back to the government.

I don't think that this will ever be adopted into the FAR because it's too simple and makes too much sense.

Link to comment
Share on other sites

2 hours ago, Sam101 said:

[W]hy can't the government just front (place the money in the contractor's bank account) the entire $5M to the contractor at time of award and let them do whatever they want with it?

The government can do something similar to that. Such a "front" as you call it would be  an advance payment. See FAR 32.102(a) and FAR 32.408 et seq.

Link to comment
Share on other sites

On 12/12/2022 at 6:52 PM, here_2_help said:

With respect to performance-based payments, DoD mandates the use of a "tool" (spreadsheet) that takes into account both the contractor's interest rate on its borrowings as well as the A-94 interest rate. No I don't know the rationale for doing so. Most of how DoD implements PBPs is a mystery to me. I just know that the spreadsheet exists and can be accessed by those who need to use it.

Thanks H2H.

image.thumb.png.ebd621e665164e2ff80a8b34b9d033d6.png

So, with the proposed price on the SF33 is $91,250,000. The win-win solution with PBP says $91,066,434.

But am I understanding correctly that the government still awards the contract (i.e., obligates) $91,250,000.00? And then during performance the PBPs will look exactly like on cells in column H? But the invoice payments in column I (i.e., DD 250) will have an extra invoice for the $183,566.00 difference?

Link to comment
Share on other sites

2 hours ago, Sam101 said:

Thanks H2H.

image.thumb.png.ebd621e665164e2ff80a8b34b9d033d6.png

So, with the proposed price on the SF33 is $91,250,000. The win-win solution with PBP says $91,066,434.

But am I understanding correctly that the government still awards the contract (i.e., obligates) $91,250,000.00? And then during performance the PBPs will look exactly like on cells in column H? But the invoice payments in column I (i.e., DD 250) will have an extra invoice for the $183,566.00 difference?

I don't see it that way. However I have already caveated that I'm not an expert in how DoD does PBPs. In my view, the tool is telling the DoD CO to negotiate the lower price of $91,066,434 if the contractor is permitted to use PBPs instead of progress payments based on (adjusted) costs incurred. I would expect the amount obligated to be equal to the price of the contract awarded.

Link to comment
Share on other sites

Lets say that the awarded price is $91,066.434.00 because the offeror said in their proposal that they will use PBP.

But what if Offeror A chooses to use PBP in their proposal and their evaluated price is $91,066.434.00 but Offeror B says in their proposal that they do not need any financing and their proposed and therefore evaluated price is $92,000,000.00.

Is section M allowed to say that offerors who do not need government financing will be evaluated more favorably? In which case the government can safely award to Offeror B? Or is the government not allowed to favor offerors who do not need financing?

Link to comment
Share on other sites

1 hour ago, Sam101 said:

Is section M allowed to say that offerors who do not need government financing will be evaluated more favorably? In which case the government can safely award to Offeror B? Or is the government not allowed to favor offerors who do not need financing?

See FAR 32.107.

Link to comment
Share on other sites

11 hours ago, Retreadfed said:

See FAR 32.107.

Thank you, I forgot about that... but wait, I just realized that the Final Cost to the Govt with PBP says $92,437,551.00 and even with progress payments it's $92,527,209.00.

So wouldn't that mean that if an offeror said that they do not need any government financing and they price their proposal at $92,400,000.00 they would still win because they are the lowest "evaluated price"? If this is not the case then there is no point of the "Final Cost to Govt" field.

I might be not understanding something, but to me this "imputed" Final Cost to Govt is "fake" because the government already has this money and really isn't borrowing it from anywhere. It's just a calculation to comply with FAR 32.205. Or is this the wrong way to think about this?

Link to comment
Share on other sites

On 12/16/2022 at 8:56 PM, Sam101 said:

they price their proposal at $92,400,000.00 they would still win because they are the lowest "evaluated price"?

Are you thinking about a contract awarded using sealed bids or a negotiated contract?  If the latter, remember that award is to be made to the offeror whose proposal offers the best value to the government.

Link to comment
Share on other sites

52 minutes ago, Retreadfed said:

Are you thinking about a contract awarded using sealed bids or a negotiated contract?  If the latter, remember that award is to be made to the offeror whose proposal offers the best value to the government.

Negotiated... when I said lowest price wins I meant in a scenario where the government can't wordsmith their way into awarding to a "higher" priced offeror.

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
×
×
  • Create New...