[Federal Register Volume 61, Number 16 (Wednesday, January 24, 1996)]
[Proposed Rules]
[Pages 1889-1892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-973]



=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF DEFENSE

48 CFR Part 232


Defense Federal Acquisition Regulation Supplement; Finance

AGENCY: Department of Defense (DoD).

ACTION: Proposed rule with request for comment.

-----------------------------------------------------------------------

SUMMARY: The Department of Defense is proposing to amend the Defense 
Federal Acquisition Regulation Supplement (DFARS) to reflect recent 
changes in the Federal Acquisition Regulation pertaining to contract 
financing.

DATE: Comments on the proposed rule should be submitted in writing to 
the address shown below on or before March 25, 1996, to be considered 
in the formulation of the final rule.

ADDRESS: Interested parties should submit written comments to: Defense 
Acquisition Regulations Council, PDUSD(A&T)DP(DAR), IMD 3D139, 3062 
Defense Pentagon, Washington, DC 20301-3062, telefax number (703) 602-
0350. Please cite DFARS Case 95-D710 in all correspondence related to 
this issue.

FOR FURTHER INFORMATION CONTACT: Mr. John Galbraith, Finance Team 
Leader, (703) 697-6710. Please cite DFARS Case 95-D710

SUPPLEMENTARY INFORMATION:

A. Background

    The proposed revisions to the Defense Federal Acquisition 
Regulation Supplement (DFARS) implement the Federal Acquisition 
Streamlining Act of 1994 (Pub. L. 103-355) and resulting changes to the 
Federal Acquisition Regulation (FAR) published as Item VII of Federal 
Acquisition Circular 90-32 on September 18, 1995 (60 FR 48206), and 
Items I and IV of Federal Acquisition Circular 90-33 on September 26, 
1995 (60 FR 49706). The proposed revisions include deletion of DFARS 
sections 232.173, Reduction or Suspension of Contract Payments Upon 
Finding of Fraud, and 232.970, Payment of Subcontractors, since 
equivalent coverage is now provided in the FAR; the addition of DFARS 
Subpart 232.2, Commercial Item Purchase Financing, to establish prompt 
payment times for commercial payments, to provide guidance on the use 
of installment payments for commercial financing, and to specify 
administrative instructions for Foreign Military Sales (FMS) contracts; 
the addition of DFARS Subpart 232.10, Performance-Based Payments, to 
establish prompt payment times for performance-based payments and to 
specify administrative instructions for FMS contracts; and to make a 
number of editorial changes to reflect revisions made in the FAR.

B. Regulatory Flexibility Act

    The proposed changes to DFARS Part 232 may have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
because the rule specifies prompt payment times, at 232.206(f) and 
232.1001(d), that are shorter than the equivalent standard prompt 
payment times in the Federal Acquisition Regulation, and thus should be 
beneficial for small entities. An Initial Regulatory Flexibility 
Analysis (IRFA) has been prepared and may be obtained from the address 
stated herein. A copy of the IRFA has been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration. comments are 
invited. Comments from small entities concerning the affected DFARS 
subparts will be considered in accordance with Section 610 of the Act. 
Such comments must be submitted separately and cite DFARS Case 95-D710 
in correspondence.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the proposed 
rule does not impose any new recordkeeping, information collection 
requirements, or collections of information from offerors, contractors, 
or members of the public which require the approval of the Office of 
Management and Budget under 44 U.S.C. 3501, et seq.

List of Subjects in 48 CFR Part 232

    Government procurement.
Michele P. Peterson,
Executive Editor, Defense Acquisition Regulations Council.
    Therefore, it is proposed that 48 CFR Part 232 be amended as 
follows:
    1. The authority citation for 48 CFR Part 232 continues to read as 
follows:

    Authority: 41 U.S.C. 421 and 48 CFR Chapter 1.

PART 232--CONTRACT FINANCING

    2. Sections 232.006, 232.006-5, 232.070, 232.072, 232.071-1, 
232.072-2, and 232.072-3 are added to read as follows:

Sec.
232.006  Reduction or suspension of contract payments upon finding 
of fraud.
232.006-5  Reporting.
232/070  Responsibilities.
232.071  Contract Finance Committee.
232.072  Financial responsibility of contractors.
232.072-1  Required financial reviews.
232.072-2  Appropriate information.
232.072-3  Cash flow forecasts


232.006  Reduction or suspension of contract payments upon finding of 
fraud.


232.006-5  Reporting.

    Departments and agencies, in accordance with department/agency 
procedures, shall prepare and submit to the Under Secretary of Defense 
(Acquisition and Technology), through the Director of Defense 
Procurement, annual reports (Report control symbol DD-ACO(A) 1891) 
containing the information required by FAR 32.006-5.


232.070  Responsibilities.

    (a) The Director of Defense Procurement, Office of the Under 
Secretary of Defense (Acquisition and Technology), USD(A&T)DP, is 
responsible for ensuring uniform administration of DoD contract 
financing, including DoD contract financing policies and important 
related procedures. Agency discretion under FAR part 32 is at the DoD 
level and is not delegated to the military departments or defense 
agencies. Proposals by the military departments 

[[Page 1890]]
and defense agencies, to exercise agency discretion, shall be submitted 
to the Director of Defense Procurement, through the DoD Contract 
Finance Committee (see 232.071).
    (b) The departments and agencies are responsible for their day-to-
day contract financing operations. Refer specific cases involving 
financing policy or important procedural issues to USD(A&T)DP for 
consideration through the department/agency Contract Finance Committee 
members (see also subpart 201.4 for deviation request and approval 
procedures).
    (c) The Under or Assistant Secretary, or other designated official, 
responsible for the comptroller function within the department or 
agency is the focal point for financing matters at the departmental/
agency headquarters. Departments/agencies may establish contract 
financing offices at operational levels.
    (1) Department/agency contract financing offices are--
    (i) Army--Office, Assistant Secretary of the Army (Financial 
Management);
    (ii) Navy--Executive Comptroller for Banking, Cash Management, 
Contract Financing and Compensation Systems, Assistant Comptroller of 
the Navy for Financial Management;
    (iii) Air Force--Chief of Banking and Contract Financing, 
Directorate of Accounting, Air Force Accounting and Finance Center;
    (iv) Defense agencies--Office of the agency comptroller.
    (2) Contract financing offices should participate in--
    (i) Developing regulations for contract financing;
    (ii) Developing contract provisions for contract financing; and
    (iii) Resolving specific cases which involve unusual contract 
financing requirements.


232.071  Contract Finance Committee.

    (a) The Contract Finance Committee consists of--
    (1) A representative of the USD(A&T)DP, serving as chairman;
    (2) A representative of the Comptroller of the Department of 
Defense;
    (3) A representative of the Defense Finance and Accounting Service;
    (4) A representative of the Civilian Agency Acquisition Council 
(for matters pertaining to the Federal Acquisition Regulation);
    (5) A representative of the National Aeronautics and Space 
Administration (for matters pertaining to the Federal Acquisition 
Regulation);
    (6) An advisory consultant from the Defense Contract Audit Agency; 
and
    (7) Two representatives of each military department and the Defense 
Logistics Agency (one representing contracting and one representing the 
contract finance office).
    (b) The Committee--
    (1) Advises and assists the USD(A&T)DP in ensuring proper and 
uniform application of policies, procedures, and forms;
    (2) Is responsible for formulating, revising, and promulgating 
uniform contract financing regulations;
    (3) May recommend to the Secretary of Defense through the 
USD(A&T)DP further policy directives on financing; and
    (4) Meets at the request of the Chair or a member.


232.072  Financial responsibility of contractors.

    Use the policies and procedures in this section in determining the 
financial capability of current or prospective contractors.


232.072-1  Required financial reviews.

    The contracting officer shall perform a financial review when the 
contracting officer does not otherwise have sufficient information to 
make a positive determination of financial responsibility. In addition, 
the contracting officer shall consider performing a financial review--
    (a) Prior to award of a contract, when--
    (1) The contractor is on a list requiring preaward clearance or 
other special clearance before award;
    (2) The contractor is listed on the Consolidated List of 
Contractors Indebted to the Government (Hold-Up List), or is otherwise 
known to be indebted to the Government;
    (3) The contractor may receive Government assets such as contract 
financing payments or Government property;
    (4) The contractor is experiencing performance difficulties on 
other work; or
    (5) The contractor is a new company or a new supplier of the item.
    (b) At periodic intervals after award of a contract, when--
    (1) Any of the conditions of paragraphs (a)(2) through (a)(5) of 
this subsection are applicable; or
    (2) There is any other reason to question the contractor's ability 
to finance performance and completion of the contract.


232.072-2  Appropriate information.

    (a) The contracting officer shall obtain whatever type and depth of 
financial and other information is required to establish a contractor's 
financial capability or disclose a contractor's financial condition. 
While the contracting officer should not request information that is 
not necessary for the protection of the Government's interests, the 
contracting officer must insist upon obtaining that information which 
is necessary. The unwillingness or inability of a contractor to present 
reasonably requested information in a timely manner, especially 
information that a prudent business person would be expected to have 
and use in the professional management of a business, may be a material 
fact in the determination of the contractor's responsibility and 
prospects for contract completion.
    (b) Obtain the following information to the extent required to 
protect the Government's interest. In addition, if the contracting 
officer concludes that information not listed in paragraphs (b) (1) 
through (10) is required to comply with 232.072-1, that information 
should be requested. The information must be for the person(s) who are 
legally liable for contract performance. If the contractor is not a 
corporation, obtain the required information for each individual/joint 
venturer/partner:
    (1) Balance sheet and income statement--
    (i) For the current fiscal year (interim);
    (ii) For the most recent fiscal year and, preferably, for the two 
preceding fiscal years. These should be certified by an independent 
public accountant or by an appropriate officer of the firm; and
    (iii) Forecasted for each fiscal year for the remainder of the 
period of contract performance;
    (2) Summary history of the contractor and its principal managers, 
disclosing any previous insolvencies--corporate or personal, and 
describing its products or services;
    (3) Statement of all affiliations disclosing--
    (i) Material financial interests of the contractor;
    (ii) Material financial interests in the contractor;
    (iii) Material affiliations of owners, officers, directors, major 
stockholders; and
    (iv) The major stockholders if the contractor is not a widely-
traded, publicly-held corporation;
    (4) Statement of all forms of compensation to each officer, 
manager, partner, joint venturer, or proprietor, as appropriate--
    (i) Planned for the current year;
    (ii) Paid during the past two years; and
    (iii) Deferred to future periods.
    
[[Page 1891]]

    (5) Business base and forecast which--
    (i) Shows, by significant markets, existing contracts and 
outstanding offers, including those under negotiation; and
    (ii) Is reconcilable to indirect cost rate projections.
    (6) Cash forecast for the duration of the contract (see 232.072-3).
    (7) Financing arrangement information which discloses--
    (i) Availability of cash to finance contract performance;
    (ii) Contractor's exposure to financial crisis from creditor's 
demands;
    (iii) Degree to which credit security provisions could conflict 
with Government title terms under contract financing;
    (iv) Clearly stated confirmations of credit with no unacceptable 
qualifications; and
    (v) Unambiguous written agreement by a creditor if credit 
arrangements include deferred trade payments or creditor 
subordinations/repayment suspensions.
    (8) Statement of all state, local, and Federal tax accounts, 
including special mandatory contributions, e.g., environmental 
superfund.
    (9) Description and explanation of the financial effect of issues 
such as--
    (i) Leases, deferred purchase arrangements, patent or royalty 
arrangements;
    (ii) Insurance, when relevant to the contract;
    (iii) Contemplated capital expenditures, changes in equity, or 
contractor debt load;
    (iv) Pending claims either by or against the contractor;
    (v) Contingent liabilities such as guarantees, litigation, 
environmental, or product liabilities;
    (vi) Validity of accounts receivable and actual value of inventory, 
as assets; and
    (vii) Status and aging of accounts payable.
    (10) Significant ratios such as--
    (i) Inventory to annual sales;
    (ii) Inventory to current assets;
    (iii) Liquid assets to current assets;
    (iv) Liquid assets to current liabilities;
    (v) Current assets to current liabilities; and
    (vi) Net worth to net debt.


232.072-3  Cash flow forecasts.

    (a) A contractor must be able to sustain a sufficient cash flow to 
perform the contract. Whenever there is doubt about the sufficiency of 
a contractor's cash flow, the contracting officer should require the 
contractor to submit a cash flow forecast covering the duration of the 
contract.
    (b) A contractor's inability or refusal to prepare and provide cash 
flow forecasts or to reconcile actual cash flow with previous forecasts 
is a strong indicator of serious managerial deficiencies or potential 
contract cost or performance problems.
    (c) Single or one-time cash flow forecasts are of limited 
forecasting power. As such, they should be limited to preaward survey 
situations. Reliability of cash flow forecasts can be established only 
by comparing a series of previous actual cash flows with the 
corresponding forecasts and examining the causes of any differences.
    (d) Cash flow forecasts must--
    (1) Show the origin and use of all material amounts of cash within 
the entire business unit responsible for contract performance, period 
by period, for the length of the contract (or until the risk of a cash 
crisis ends); and
    (2) Provide an audit trail to the date and assumptions used to 
prepare it.
    (e) Cash flow forecasts can be no more reliable than the 
assumptions on which they are based. Most important of these 
assumptions are--
    (1) Estimated amounts and timing of purchases and payments for 
materials, parts, components, subassemblies, and services;
    (2) Estimated amounts and timing of payments for purchase or 
production of capital assets, test facilities, and tooling;
    (3) Amounts and timing of fixed cash charges such as debt 
installments, interest, rentals, taxes, and indirect costs;
    (4) Estimated amounts and timing of payments for projected labor, 
both direct and indirect;
    (5) Reasonableness of projected manufacturing and production 
schedules;
    (6) Estimated amounts and timing of billings to customers 
(including progress payments), and customer payments;
    (7) Estimated amounts and timing of cash receipts from lenders or 
other credit sources, and liquidation of loans; and
    (8) Estimated amounts and timing of cash receipts from other 
sources.
    (f) The contracting officer should receive the assumptions 
underlying the cash flow forecasts. In determining whether the 
assumptions are reasonable and realistic, the contracting officer 
should consult with--
    (1) The contractor;
    (2) Government personnel in the areas of finance, engineering, 
production, cost, and price analysis; or
    (3) Prospective supply, subcontract, and loan or credit sources.
    3. Subpart 232.1 is revised to read as follows:

Subpart 232.1--Non-Commercial Item Purchase Financing

Sec.
232.102  Description of contract financing methods.
232.102-70  Provisional delivery payments.
232.108  Financial consultation.

Subpart 232.1--Non-Commercial Items Purchase Financing

232.102  Description of contract financing methods.
    (e)(2) Progress payments based on percentage or stage of completion 
are authorized only for contracts for construction (as defined in FAR 
36.102), shipbuilding, and ship conversion, alteration, or repair. 
However, percentage or stage of completion methods of measuring 
contractor performance may be used for performance-based payments in 
accordance with FAR subpart 32.10.


232.102-70  Provisional delivery payments.

    (a) The contracting officer may establish provisional delivery 
payments to pay contractors for the costs of supplies and services 
delivered to and accepted by the Government under the following 
contract actions, if undefinitized:
    (1) Letter contracts contemplating a fixed-price contract;
    (2) Orders under basic ordering agreements;
    (3) Spares provisioning documents annexed to contracts;
    (4) Unpriced equitable adjustments on fixed-price contracts; and
    (5) Orders under indefinite delivery contracts.
    (b) Provisional delivery payments shall be--
    (1) Used sparingly;
    (2) Priced conservatively; and
    (3) Reduced by liquidating previous progress payments in accordance 
with the Progress Payments clause.
    (c) Provisional delivery payments shall not--
    (1) Include profit;
    (2) Exceed funds obligated for the undefinitized contract action; 
or
    (3) Influence the definitized contract price.


232.108  Financial consultation.

    See 232.070 for offices to be consulted concerning financial 
matters within the Department of Defense.
    4. Subpart 232.2 is added to read as follows:
    
[[Page 1892]]


Subpart 232.2--Commercial Item Purchase Financing

Sec.
232.202-4  Security for Government financing.
232.206  Solicitation provisions and contract clauses.
232.207  Administration and payment of commercial financing 
payments.

Subpart 232.2--Commercial Item Purchase Financing


232.202-4  Security for Government financing.

    (a)(2) When determining whether an offeror's financial condition is 
adequate security, see 232.072-2 and 232.072-3 for guidance on 
evaluation of financial condition. It should be noted that an offeror's 
financial condition may be sufficient to make the contractor 
responsible for award purposes, but not be sufficient to be adequate as 
security for commercial contract financing.


232.206  Solicitation provisions and contract clauses.

    (d) Instructions for multiple appropriations. If the contract 
contains Foreign Military Sales requirements, the contracting officer 
shall provide instructions for distribution of the contract financing 
payments to each country's account.
    (f) Prompt payment for commercial purchase payments. The 
contracting officer shall incorporate the following standard prompt 
payment times for commercial item contract financing:
    (i) Commercial Advance Payments: 30 days from the later of receipt 
by the designated billing office of a proper request for payment, or 
the contractor entitlement date specified in the contract;
    (ii) Commercial Interim Payments: 14 days from the later of receipt 
by the designated billing office of a proper request for payment, or 
the contractor entitlement date specified in the contract. The prompt 
payment standards for commercial delivery payments shall be the same as 
specified in FAR subpart 32.9 for invoice payments for the item 
delivered.
    (g) Installment payment financing for commercial items. Installment 
payment financing shall not be used for defense contracts, unless 
market research has established that this form of contract financing is 
both appropriate and customary in the commercial marketplace. When 
used, the contracting officer shall use the ceiling percentage of 
contract price that is customary in the particular marketplace (not to 
exceed the maximum ceiling rate established in the FAR (See FAR 
32.206(g)(2)).


232.207  Administration and payment of commercial financing payments.

    (b)(2) If the contract contains Foreign Military Sales 
requirements, each approval shall specify the amount of contract 
financing to be charged to each country's account.


232.970, 232.970-1, 232.970-2  [Removed]

    5. Sections 232.970, 232.970-1, and 232.970-2 are removed.
    6. Subpart 232.10 is added to read as follows:

Subpart 232.10--Performance-Based Payments

Sec.
Sec. 232.1001  Policy.
Sec. 232.1004  Procedure.
232.1007  Administration and payment of performance-based payments.

Subpart 232.10-Performance-Based Payments


232.1001  Policy.

    (d) The contracting officer shall incorporate the following 
standard prompt payment times for performance-based payments: 14 days 
from the later of receipt by the designated billing office, of a proper 
request for payment, or the contractor entitlement date specified in 
the contract.


232.1004  Procedure.

    (c) Instructions for multiple appropriations. If the contract 
contains Foreign Military Sales requirements, the contracting officer 
shall provide instructions for distribution of the contract financing 
payments to each country's account.


232.1007  Administration and payment of performance-based payments.

    (b)(2) If the contract contains Foreign Military Sales 
requirements, each approval shall specify the amount of contract 
financing to be charged to each country's account.
[FR Doc. 96-973 Filed 1-23-96; 8:45 am]
BILLING CODE 5000-04-M