We frequently are asked about ways to increase payments due from the government so we thought we would review some of the most common available options. Though sometimes slow, the government is notable for its reliability as a paying customer. In recent years changes to the FAR have been designed to speed up payments, particularly through direct submission of vouchers, rate variances, profit retainage recovery and quick closeout procedures.
Contractors can now submit their public vouchers directly to payment offices and online, bypassing the historical process of first submitting them to the Defense Contract Audit Agency for review. To be eligible for direct submission, contractors must (1) have an approved billing system (2) maintain approved billing rates (3) revise billing rates to reflect actual rates at year end that are adjusted for historical disallowances and (4) submit timely indirect cost rate proposals (due six months after year end). 7 GCA REPORT VOL 21, NO. 3 The government is undoubtedly pairing the incentive of faster payment with the implied penalty of contractors not complying with closing out contracts faster and submitting their incurred cost submittals on time. Before, there was virtually no penalty for failing to submit incurred cost proposals on time; now, failure to do so means direct billing may be prohibited.
FAR 42.704(e) has been revised to encourage contractors to revise the provisional rates they have been using to reflect proposed final indirect cost rates. The former practice of waiting sometimes years for an incurred cost audit to adjust rates and bill for the variances has been replaced with contractors requests to adjust their provisional rates for the year with revised actual rates adjusted for historical disallowed costs resulting from audits. The elimination of old so-called “M” funds that allowed a virtual indefinite timeframe to collect the variances has resulted in limited funds to pay these variances, often resulting in failure to collect. By revising their billing rates, contractors can collect from more current funds, even their open contracts, while the government has fewer “surprises” chasing limited funding in later years. Another incentive for revising provisional rates is you can increase cashflow and have the opportunity to expand the originally funding level as you approach the original limits of the contract. One word of caution: the tactic of revising provisional rates to reflect actual costs is a good idea when contractors have underbilled (which is more and more common due, in part, to the need to bid low to win awards), but it may not be such a good idea when contractors have overbilled (provisional rates above actual).
Retainage refers to the government’s withhold of 15% of fee, up to $100,000 on cost-type contracts as well as construction and incentive contracts. Historically retainages have not been collected until contract closeout which can take several years. The clause FAR 52.216-8 (Fixed Fee) has been revised to require the CO to release 75% of the fee retainage and permits up to 90% if the contractor has a good record of submitting and settling its incurred cost proposals. Release of the retainage requires (1) the contract be physically complete (2) the contractor has submitted its certified incurred cost proposal for the year of physical completion of the contract (3) the contractor is in compliance with all terms of the contract and (4) the contractor is not delinquent in submitting final invoices. The last condition has been tightened by changes to FAR 52.216-7 (Allowable Cost and Payment) that require final invoices be submitted within 120 days of settlement of the indirect rates for the last year of contract performance. Previously there was no regulatory period for the submission of final invoices and there was certainly no incentive when the contractor owed the government money.
FAR 42.708 allows for contracts to be closed out in advance of settlements using proposed incurred cost rates. Utilizing this underused tool allows contractors to collect their rate variances and fee retentions quickly, eliminating any surprises resulting from audit adjustments later. Quick closeout may be used if (1) the amount of unsettled indirect costs for any one contract does not exceed $1 million and (2) the total indirect costs closed out this way are less than 15% of the total unsettled indirect costs. This 15 percent rule can be waived by the CO if the company has strong internal controls and relatively little historical cost disallowances. Also, the 15 percent rule applies to all outstanding costs so when DCAA has several outstanding years, you can quickly settle a lot of dollars.
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