Government agencies often take 30 days or more to pay their invoices, so government contractors turn to government contract financing for invoice factoring services or asset based lending. Invoice factoring improves your cash flow because you don’t have to wait 30+ days to collect your receivables.
Government Contractors
Government contractors are comprised of two types – primes and subs. Prime contractors work directly with the government and provide a single point of contact. Prime contractors may hire subcontractors to perform work in accordance with a subcontracting plan established by the government.
The prime contractor may be subject to compliance reviews to ensure they follow the subcontractor guidelines set forth in the contract. Likewise, subcontractors must adhere to their requirements in their subcontracting plans and may be subject to compliance reviews.
The largest prime contractors of the U.S. government:
- Lockheed Martin
- The Boeing Company
- General Dynamics
- Raytheon
- Northrop Grumman
- McKesson Corporation
- United Technologies Corporation
- L3 Technologies
- Bechtel
- BAE Systems
The list is primarily defense contractors. McKesson is a healthcare conglomerate and Bechtel is the largest construction company in the country.
Small Business Government Contracts
The government’s goal is to award at least 23% of all government contracts to small businesses. With the help of the SBA, the government limits or sets-aside certain contracts for small businesses which are called “set-asides”.
Competitive contracts are used when at least two small businesses can perform the work or provide the products. All government contracts under $150,000 automatically qualify for set-aside contracts.
Sole-source contracts are used when a contract can be fulfilled by a single business.
The Small Business Administration (SBA) sets aside government contracts for these special assistance programs:
- 8(a) Business Development program – disadvantaged businesses
- HUBZone – historically underutilized business zones
- Women-owned small businesses
- Service-disabled veteran owned small businesses
Small business prime contractors are required to perform minimum levels of work on a government contract in order to prevent otherwise ineligible businesses from using small or disadvantaged businesses to win government contracts.
Joint ventures between two or more businesses are common when they want to pool their strengths and efforts to compete for a contract award.
Government Contract Payments
Government contracts specify the government office responsible for payment and the proper invoicing procedures. Your business gets paid quicker if you follow the government’s invoicing requirements.
Under law (Prompt Payment Act – PPA), the government is generally required to pay contractors within 30 days of receiving the invoice. They usually remit payments via electronic fund transfers, either ACH or Wire Transfer Payment.
If your invoice is not deemed “proper,” the designated billing office will send the invoice back to you within seven days of receiving it, with a statement of why they considered it not proper. You’ll need to correct the invoice, resubmit it to the government, and restart the 30-day wait.
Certain types of contracts are not covered under the PPA:
- Cost plus contracts
- Cost reimbursable contracts
- Progress payments
- Advanced payments
Because subcontractors don’t deal directly with the government, they aren’t privy to the protections afforded to prime contractors. However, subcontractors receive payment protections under amendments to the Prompt Payment Act and Section 8(d) of the Small Business Act.
Federal agencies are required to include a contract clause in federal construction contracts that require the prime contractor to pay the subcontractor for “satisfactory” performance within seven days of receiving payment from the government. Prime contractors must also notify the contracting officer in writing if they pay a “reduced price” to a subcontractor, or whenever payment is more than 90 days past due.
Contract payments are paid according to the type and size of the government contract. Small fixed-price contracts with a single item of work are generally paid in one lump sum payment after you deliver the product or service. Larger fixed-price contracts with multiple items of work may be paid in several payments throughout project deliveries.
Contractors may receive progress payments based on costs incurred as work progresses. Some contracts provide payment if the first delivery is several months after the award. This is commonly referred to as a mobilization payment. Progress payments require you have a proper accounting of your project costs.
A contracting officer can assign payments under a contract to a separate financial institution. This can be valuable for contractors who are receiving government invoice factoring services. The assignment of payments are subject to the Federal Assignment of Claims Act (FACA).
Government Contract Factoring
Government contract factoring provides working capital for businesses that perform services or sell goods to the government. They offer a variety of financing products for government contractors including invoice factoring, purchase order financing, and asset based lending. A government factoring company advances you cash as soon as you bill your customer. The faster cash flow enables you to pay employees, contractors and suppliers quicker, as well as take on more projects.
