Managing Cash Flow in Government Contracting

The Prompt Payment Act (31 U.S.C. § 3901–3907) requires federal agencies to pay proper invoices within 30 days of receipt, or within the period specified in the contract. If the agency fails to pay on time, it must pay interest at the rate established by the Treasury Department. In practice, the 30-day clock does not start until the agency determines the invoice is "proper" — meaning it conforms to the contract's invoicing instructions, includes all required documentation, and corresponds to accepted deliverables.

For construction contracts, the standard payment period is 14 days. For meat and perishable agricultural commodities, it is 7 days. All other contracts default to 30 days unless the contract specifies otherwise. Many contracts with complex deliverable acceptance processes effectively extend the payment cycle to 45–60 days because the acceptance period precedes the payment period. A contractor submits a deliverable, the government inspects and accepts it, the contractor then submits an invoice referencing the accepted deliverable, and the 30-day payment clock begins.

Defense Finance and Accounting Service (DFAS) processes the majority of DoD payments through the Wide Area Workflow (WAWF) system, now part of the Invoicing, Receipt, Acceptance, and Property Transfer (iRAPT) system. Civilian agencies typically use the Invoice Processing Platform (IPP). Contractors who submit invoices electronically through these systems generally experience faster processing than those using manual or email-based submission methods. Ensuring that invoicing staff are trained on the applicable system and that invoices are complete on first submission is one of the most effective ways to reduce payment delays.

The FAR provides several financing mechanisms that allow contractors to receive payments before deliverables are complete. These are critically important for contracts with long performance periods or high upfront costs. FAR Subpart 32.5 covers progress payments, which are the most common form of government contract financing for fixed-price contracts.

Progress payments based on costs are paid as the contractor incurs costs, typically at a rate of 80% of total costs incurred for large businesses and 85% for small businesses (FAR 32.501-1). The government retains a percentage to protect against overpayment. Progress payments are not profit — they are advances against the contract price that are liquidated as deliveries are made. The contractor must have an accounting system adequate to segregate costs by contract and must submit SF-1443 progress payment requests supported by cost data.

Performance-based payments (FAR Subpart 32.10) are an alternative tied to achievement of defined milestones or events rather than costs incurred. Performance-based payments are preferred by the government because they do not require the same level of cost accounting oversight. The payment amounts and events are negotiated during contract formation, and payments are made when the contractor demonstrates that the event has occurred. Performance-based payments can provide up to 90% of the contract price before final delivery.

Commercial interim payments (FAR 32.202-1) are available for commercial product and commercial service contracts. These are typically based on a percentage of the contract price and are negotiated between the parties. The commercial financing rate is not governed by the 80%/85% limitations that apply to progress payments on non-commercial contracts.

Effective cash flow forecasting for government contracts requires modeling both the timing of cost incurrence and the timing of payment receipt. A typical forecast maps each contract's planned expenditures (labor, materials, subcontractors, ODCs) against expected invoice submission dates and anticipated payment receipt dates. The gap between these curves represents the working capital requirement.

Key variables in the forecast include: the contract type (which determines when you can invoice), the invoicing frequency (monthly, upon delivery, milestone-based), the acceptance period (how long the government takes to inspect and accept), the payment period (30 days from proper invoice), and any financing mechanisms (progress payments reduce the gap). Contractors should also build in contingency for payment delays, which are common during continuing resolutions, government shutdowns, and fiscal year transitions.

For companies with multiple contracts, aggregate forecasting is essential. A company may have adequate cash flow at the portfolio level even if individual contracts have temporary shortfalls. However, relying on cross-subsidization between contracts carries risk — if two or three contracts experience simultaneous payment delays, the aggregate position can deteriorate rapidly. Maintaining a cash reserve equal to at least 60–90 days of operating expenses is a common benchmark for government contractors.

A revolving line of credit is the most flexible commercial financing tool for government contractors. Unlike term loans, a line of credit allows the contractor to draw funds as needed and repay as payments are received, paying interest only on the outstanding balance. Government contracts serve as excellent collateral because the receivables are backed by the full faith and credit of the United States.

Banks that specialize in government contractor lending understand the unique characteristics of federal receivables. These lenders typically offer asset-based lines of credit secured by the contractor's accounts receivable, with advance rates of 80–90% on government receivables (compared to 70–80% for commercial receivables). The higher advance rate reflects the lower credit risk of government receivables.

SBA loans, particularly the 7(a) program and CAPLines, provide additional options for small business government contractors. The SBA's CAPLines program specifically offers revolving credit lines for contractors who need working capital to perform on government contracts. The SBA guarantee reduces the lender's risk, which can result in more favorable terms for the borrower. However, SBA loans involve more paperwork and longer approval timelines than conventional lines of credit.

The Assignment of Claims Act (31 U.S.C. § 3727 and 41 U.S.C. § 6305) permits contractors to assign their right to receive payment under a government contract to a bank, trust company, or other financing institution. This is the legal foundation that enables both traditional asset-based lending and factoring of government receivables. FAR 32.8 implements the Assignment of Claims Act and prescribes the procedures for making valid assignments.

A valid assignment requires written notice to the contracting officer, the surety (if bonded), and the disbursing officer. The assignment must be made to a single financing institution (though the institution can subsequently participate the loan). Once a valid assignment is in place, the government will make payments directly to the assignee. The Assignment of Claims clause (FAR 52.232-23) is included in most government contracts over the simplified acquisition threshold.

Government contract factoring — selling invoices to a factor at a discount — is a more expensive but faster alternative to traditional lending. Factoring companies typically advance 80–90% of the invoice value immediately and pay the remainder (minus fees of 2–5%) when the government pays. Factoring does not create debt on the contractor's balance sheet and does not require the same creditworthiness standards as bank lending, making it accessible to newer or financially weaker contractors. However, the effective annual cost of factoring (often 20–40% annualized) makes it significantly more expensive than a line of credit.

The contract type has a profound impact on cash flow timing. Understanding these differences is essential for bidding decisions and financial planning.

Cost-reimbursement contracts offer the best cash flow profile because contractors can bill monthly for costs incurred, typically receiving reimbursement within 30 days. The contractor bills at provisional billing rates approved by DCAA, and true-up occurs when final indirect rates are established. Time-and-materials contracts also allow frequent billing but require the contractor to carry material costs until invoiced.

Firm fixed-price contracts carry the highest cash flow risk, particularly for manufacturing or development efforts where significant costs are incurred before any deliverable is complete. Without progress payments, the contractor must self-finance the entire production cycle. This is why negotiating progress payment provisions or performance-based payment schedules during contract formation is critical for FFP contracts with long performance periods.