December 2008

What is an Acquisition?

An aquisition is a contract with appropriated funds of supplies or services (including construction) by and for the use of the federal government through purchase or lease, whether the supplies or services are already in existence or must be created, developed, demonstrated and evaluated. An acquisition is the responsibility of all three branches of the federal government. In 1970s, the Office of Federal Procurement Policy was created as an executive appointee. In the 1990s, Congress passed the Federal Acquisition Streamlining Act, which revised the Competition in Contracting Act of 1984.

Other methods of government purchases: contract, grants and cooperative agreements

The Acquisition Process

Step One: Determine the need, analysis of requirement and source selection
Step Two: Solicitation, evaluation, award
Step Three: Initiation of work, payment and accounting, modification, closeout, termination

The closeout process is an important step for vendors. If the contract is closed out prematurely, and a pending invoice is sent, the Prompt Payment Act is not in place. The vendor must make sure there are no unpaid invoices before the contracting officer closes out the contract. However, the vendor may write "Final Invoice" on the last pending invoice for the contract to be closed out and any overage can be placed in other allocations for new contracts. Often it is not a high priority for either the vendor or the contracting officer. With more and more government agency audits, vendors will see an increase in contract closeouts. During the closeout process it is up to the contracting officer to make sure there are no outstanding claims or disputes. According to the FAR, most contracts give vendors six years and six months to file a claim of payment. Most agencies have their own closeout procedures, and the vendor needs to contact the agency of the contract directly.

Withholding Coalition

As you may know, the 3% tax withholding that Congress passed with Section 511 of Tax Reconciliation Act has been tabled with the help of NACM/GBG lobbying. The Government Business Group is still actively watching the administration and Congress to make sure it does not get a last-minute reprieve to increase government income. The withholding was at a rate of 3% on all government payments for products and services made by federal, state and local governments with expenditures of $100 million or more, and applied to all payments starting in 2011.

Member-to-Member Question

Thank you to GBG member Wayne Mattson for the answer to last month’s member question.

Answer: SDVOSB stands for "Service-Disabled Veteran-Owned Small Business." In essence, these commercial entities are just like any other small business, with the caveat that they are paid directly by the government, which substantially reduces (but does not eliminate) the risk that the middleman company will default to the questioner’s company. That distinction is because the SDVOSB is not using the product/service for their own consumption, which would cause them to have to fund the transaction out of their own cash flow.

Since the SDVOSB is a commercial entity, the risk mitigation process is much the same as it would be in extending credit to any other commercial entity. The standard steps/processes are:

    Credit application
  • Credit analysis
  • Standard commercial risk mitigation tools
    • Credit limits
    • Periodic reevaluation
    • Various alternatives to open credit when warranted
      • LOC
      • Credit insurance
      • Escrow (see below)
      • Etc.
  • Prompt collection follow-up
  • 3rd party referral/collection attorney when necessary

Once a new account has been granted open credit, some nuances with selling through other commercial entities to the government present themselves. This is particularly true when the commercial entities are small businesses (as in this scenario) with limited cash flow. This typically gives rise to a "pay when paid" scenario, where the SDVOSB refuses (or is unable) to pay until they get paid by the government. At DLT, we don’t offer "pay when paid" terms (we are standard Net 30, sometimes Net 45), but that often doesn’t stop the commercial entity from wanting to pay that way anyway. This presents some interesting collection challenges, which I won’t get into but I’d be happy to share. Since the questioner also bills the VA directly, I’m sure they are aware of some of the challenges with collecting from the VA, and those can be magnified in an SDVOSB situation because collector resources on the customer’s end are limited, or they may be unfamiliar with collection processes. Some creative ways that we have mitigated some of the concerns on this front are:

  • Escrow agreements (the government pays a bank, which in turn pays our customer their margin and us our invoice amount to our customer). No danger in this case of our customer getting paid but not paying us.
  • Asking for a copy of the customer’s customer PO (the PO from the government), of course with prices blacked out, so that we know who the customer is selling to (and POC’s).
  • At times we act as the collection agent for our customer, so that they get paid faster, and we do in turn.
  • Establishing an open relationship where the customer informs us when they have invoiced the customer and where they are in the collections process.

Finally, I have found it helpful to break out my collections staff so that I have a particular person(s) assigned to the commercial accounts. The techniques those collectors use are radically different than those used by the personnel collecting directly from the government. It is a much "stronger" touch, with quicker escalation and a lower tolerance for payment delays.

This Month’s Member Question

Anyone else having trouble getting paid by Indian Health Services? Any ideas to help with the payment process or contact information that is reliable?

You may send answers to the question to Answer will be posted in the January newsletter.

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