This contract deals with contract financing of Government contracts. The Zenith

Question

This contract deals with contract financing of Government contracts. The Zenith Corporation was a relatively new electronics company, which had started in a garage and was struggling to get ahead. The company bid on a contract with the Air Force to provide guidance systems for the F-27 aircraft. It won a fixed price contract at the price of $53,000,000. It had previously been relying on commercial financing for its operations. Being unfamiliar with the U.S. Government procurement process, it signed a contract that did not include the Progress Payments clause. As work started, the need for long lead material increased and Zenith found that commercial financing available from normal sources was not sufficient. Joe, the President of Zenith contacted the Contracting Officer for help in financing the program. The C.O. told Joe that he should try to get a Guaranteed Loan for the financing. After several weeks Joe came back to the C.O. and said he could not get such a loan. In the meantime, Joe had found in the FAR there was the possibility of getting financing in the form of progress payments on fixed price contracts. Joe asked the C.O. if that would be possible. The C.O. said Progress Payments would be possible, but that a Supplemental Agreement to the contract would have to be negotiated. Joe was pleased with that answer, and they set a date to negotiate the first Supplement Agreement to the $53,000,000 contract.

Questions: Please discuss in this order: 1. In Government contracting, what is a guaranteed loan that Zenith could not get? 2. What would be the possible result to the $53,000,000 contract when the Supplemental Agreement for adding the customary progress payments clause to the guidance system contract was negotiated? 3. From the Government’s standpoint, what is the order of preference for financing contractors between progress payments, and guaranteed loans?

Explanation / Answer

In the United states commercial finance is a function of offering loans to business. Commercial financing is generally offered by bank or other lender and the loans are secured either by business assets or it can be unsecured if the lender relies on the cash flow of the business to repay it. Contracting officers provides finance only to the extent of of money needed for prompt and efficient performance considering the availability of private financing and the impact of predelivery expenditures. Joe can not get a loan based on Advance payments or unusual contract financing. Customary progress payments are those made under general guidance using the customary progress payment rate, the cost base and the frequency of payment established in the progress payment clause. The customary progress payment rate is 80% applicable to the total cost of performing the contract. The contacting officer must consider any rate higher than those permitted in this section i.e 80% as an unusual progress payment and must not include a higher rate in the contract unless advance agency approval is obtained. In accordance with 10 U.S.C 2307(e) (2) and 41 U.S.C 4504 (b)the limit for progress payment is 80% on work accomplished under undefinitized contract actions .The contracting officer must not authorize a higher rate under unusual progress payments for the undefinitized actions. (C) Progress payments are periodic payments made by the government as performance on contract proceeds. such payments are based either on the cost incurred by contractor in performing the contract or on a percentage of stage of completion of contract. There are certain customary limits on percentage of incurred cost . Progress payments at a higher rate are considered unusual. Loan gurantees are made by Federal reserve banks to help contactors obtain financing from private sources to support national defense contracts. such lons are guaranteed by federal agency which is obligated to purchase the stated percentage of loan and to share any kind of losses sustained under the loan in the amount as specified Hence , Performance based payments or progress payments are the most preferred Government financing method when the contracting officer finds them practical and the contactor agrees to it.

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