Federal Contract Financing Guide: Progress Payments, Loans & Cash Flow
Complete guide to government contract financing options. Learn about progress payments, performance-based payments, mobilization funding, SBA loans, and strategies to manage cash flow on federal contracts.
Quick Answer
Federal contract financing helps contractors manage cash flow during contract performance. Options include progress payments (up to 80% of costs for large businesses, 85% for small), performance-based payments (tied to milestones), and advance payments (rare). SBA also offers Contract CAPLines and 7(a) loans specifically for government contractors.
Understanding Contract Financing
Government contracts often require significant upfront investment in labor, materials, and equipment before payment is received. Contract financing bridges this gap, allowing contractors to fund operations while awaiting payment for delivered goods and services.
The federal government provides several financing mechanisms directly through contracts, while private lenders and SBA offer additional options specifically designed for government contractors.
Government-Provided Financing Types
- Progress Payments: Based on incurred costs during contract performance
- Performance-Based Payments: Tied to achievement of specific milestones
- Advance Payments: Paid before work begins (rarely used)
- Partial Payments: For accepted portions of contract deliverables
- Loan Guarantees: SBA-backed loans for contract performance
Progress Payments
Progress payments are the most common form of government contract financing. They provide periodic payments based on costs incurred during contract performance.
Customary Progress Payments
Unusual Progress Payments
Progress Payment Requirements
Eligibility
- • Fixed-price contracts over $3,500
- • Contract includes progress payment clause
- • Adequate accounting system
- • Costs must be allocable to contract
Limitations
- • Cannot exceed total contract price
- • Subject to liquidation upon delivery
- • Government retains title to work-in-progress
- • Must maintain adequate insurance
Performance-Based Payments
Performance-based payments (PBPs) are tied to the achievement of specific, measurable milestones rather than costs incurred. They're preferred over progress payments when practicable.
How PBPs Work
Milestones Defined
Contract specifies events, deliverables, or performance criteria that trigger payments
Payment Values Set
Each milestone assigned a payment value based on anticipated costs at that point
Milestone Achieved
Contractor demonstrates completion to contracting officer's satisfaction
Payment Made
Government pays the predetermined amount for that milestone
Advantages of PBPs
- • Can exceed 80/85% progress payment rates
- • Less accounting system scrutiny required
- • Incentivizes schedule performance
- • Simpler billing process
Considerations
- • Milestones must be objectively measurable
- • Payment tied to performance, not costs
- • Must negotiate milestone values carefully
- • Schedule delays = payment delays
Advance Payments
Advance payments are made before contract performance begins and are the least common form of government financing. They require special justification and approval.
Rarely Approved
Advance payments are only authorized when essential to contract performance and no other financing is practicable. They require high-level approval (typically agency head) and significant contractor accountability.
Advance Payment Conditions
- Contract is for experimental/research work
- Contractor is nonprofit organization
- Essential for national defense
- Special account required for funds
- Government retains paramount lien
- Interest may be charged on advances
SBA Loan Programs
The SBA offers several loan programs specifically designed to help small businesses finance government contract performance.
Contract CAPLines
Working Capital for Contracts
Revolving line of credit specifically for financing costs of performing government or commercial contracts.
7(a) Loans
General Small Business Loans
SBA's primary program for small business financial assistance. Can be used for working capital, equipment, and other business purposes.
Surety Bond Guarantee
Bonding Assistance Program
SBA guarantees bid, performance, and payment bonds for small contractors who cannot obtain bonds through regular channels.
Commercial Financing Options
Invoice Factoring
Sell your government invoices to a factoring company for immediate cash (typically 80-90% of invoice value).
Asset-Based Lending
Loans secured by contract receivables, equipment, or other business assets.
Contract Assignment
Assign contract payments to a lender as security for a loan. Requires government consent under Assignment of Claims Act.
Bank Lines of Credit
Traditional credit facilities from banks familiar with government contracting.
Assignment of Claims Act
Federal contracts contain anti-assignment provisions. To assign contract payments to a lender, you must notify the contracting officer and comply with the Assignment of Claims Act requirements.
Managing Cash Flow
Invoice Promptly
Submit invoices immediately upon earning. Government pays within 30 days under Prompt Payment Act (7 days for progress payments).
Request Financing Clauses
Ask for progress payment or PBP clauses during negotiations. Don't wait until cash flow problems arise.
Monitor Working Capital
Track cash position weekly. Model cash needs before accepting new contracts to avoid overextension.
Negotiate Subcontractor Terms
Align subcontractor payment terms with your contract payments. Use flow-down clauses where appropriate.
Build Cash Reserves
Maintain 3-6 months of operating expenses in reserve. Government payment delays and disputes do occur.
Establish Credit Early
Set up credit facilities before you need them. Banks prefer lending to healthy businesses, not desperate ones.
Frequently Asked Questions
How quickly does the government pay invoices?
Under the Prompt Payment Act, agencies must pay proper invoices within 30 days or pay interest. Progress payment requests must be paid within 7 days. Many agencies now use accelerated payment (15 days) for small business invoices.
Can I get progress payments on a fixed-price contract?
Yes, progress payments are typically available on fixed-price contracts over $3,500 with performance periods over 6 months. The contract must include the appropriate progress payment clause.
What accounting system do I need for progress payments?
You need an accounting system that can identify costs by contract, segregate direct and indirect costs, and track costs by cost element. For larger contracts, you may need DCAA-approved systems.
What happens if the government delays payment?
You're entitled to interest on late payments under the Prompt Payment Act. Contact your contracting officer or payment office to resolve delays. Document everything for potential claims.
Can subcontractors get progress payments?
Subcontractors may receive progress payments from the prime contractor if the subcontract includes such provisions. These are negotiated between prime and sub—not directly with the government.
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