News and Events : PVBS Newsletter June 2008

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Article 1: Strategies to Help Prepare for Credit Market Changes

This article was submitted by Michael Marsden, Vice President, Wells Fargo Business Credit-Government Services Group (McLean, VA). Marsden can be reached at michael.a.marsden@wellsfargo.com or 703.462.2313.

During current market conditions, many government contractors utilize the financial leverage found in credit as the main source of capital to fund their growth. The state of the credit markets will most often move in tandem with the general economy, so when the general economy softens, as it appears to be currently, the availability of credit typically tightens. Thus, companies need to be continually aware of the dynamics of the credit markets so they can manage risks that arise from the uncertainty of credit availability during downturns in the credit cycle.

Sources of Capital

The overall sources of capital for loans have changed quite dramatically. According to the Wall Street Journal, today, institutional investors provide roughly $2 for every $1 provided by more traditional lenders, including banks. In 2002, that ratio was markedly different as traditional lenders provided $4 for every $1 provided by institutional investors. Many institutional lenders have little to no experience in managing loans through a credit market downturn.

Many companies, especially within the government contractor market, usually will have access to traditional sources of capital to fund working capital needs and growth. Examples of non-traditional capital include: commercial finance units inside traditional banks, asset-based lenders, and factoring companies. The rates and structures of non-traditional financing usually depend on many factors, such as: 1) the size of the financing need; 2) contract mix and backlog; 3) past contract performance and management backgrounds; and 4) profitability.

Preparing for Credit Market Changes

A government contractor that seeks growth needs to realize that access to credit capital could change and is currently in a cycle of change due to the economic downturn. To prepare, here are some suggested actions that government contractors should consider:

Engage your financing source in open and honest dialogue. Discuss strategies and plans and disclose any problems as well as successes with equal weight. Above all, find out how your financing source would react if the plans and strategies don’t play out exactly as you have planned.
Maintain close relationships with those firms that you’ve screened and are considered immediate “go to” sources of alternative financing.
Seek to maximize as much flexibility as possible in your financing agreements now rather than waiting until you have no choice. Prepare for the tightening phase early to allow for some “wiggle” room in case your business plans are not executed as planned.
Make sure you are working with a lender that understands your market. You may have seasonality issues, or work on “black world” contracts. Working with an inexperienced, or “fair weather” lender, or a bank that has onerous covenants in its documentation should be avoided.

The strength of the relationship between a growth-oriented government contractor and its capital providers cannot be overemphasized. Building the right relationships takes time and resources and there is no time like the present to start or expand those efforts.

The opinions expressed in this document are general in nature and not intended to provide specific advice or recommendations for any individual or association. Contact your banker, attorney, accountant or tax advisor with regard to your individual situation. The opinions of the author do not necessarily reflect those of Wells Fargo Business Credit or any other Wells Fargo entity.

Article 2: House Votes Broad Contracting Changes that Will Impact Sole-Source and Cost-Plus Contracts

This article was submitted by Warren Corbett, Business Research Services Inc. (Bethesda, MD), publishers of Set-Aside Alert. Subscription information can be found at www.setasidealert.com.

The House has approved far-reaching changes in contracting rules as part of the 2009 Defense authorization bill.

The "Clean Contracting" amendment requires agencies to minimize the use of sole-source and cost-plus contracts and mandates that all contractors on multiple award contracts be given a fair opportunity to bid on task orders. The bill would impose a three-year moratorium on public-private job competitions in the Defense Department, and directs the Army to adopt contracting changes recommended by the Gansler Commission. Those recommendations include putting general officers in charge of procurement, allowing expedited hiring authority for acquisition personnel, and creating a fund to train the acquisition workforce. The Army has already begun implementing some of the changes.
Its provisions, according to a summary released by the Oversight Committee:

Enhanced Competition

Minimizing sole-source contracts. This section requires large federal agencies to implement a plan to promote competition and minimize the use of noncompetitive contracts. Waxman said noncompetitive contracts have soared from $67 billion in 2000 to $207 billion in 2006.
Limiting the length of non-competitive contracts. This section would limit the duration of no-bid contracts awarded in emergencies such as Hurricane Katrina to nine months.
Enhancing competition in multiple award contracts. This section would give all contractors under a multiple award contract a fair opportunity to bid for work under the contract.

Curbing Abuse-Prone Contracts

Minimizing cost-plus contracts. This section would require agencies to minimize the use of cost-reimbursement-type contracts. “Cost-plus contracts leave the government vulnerable to wasteful spending since they provide the contractor with little or no incentive to control costs,” Waxman said. “Spending on this type of contract rose from $62 billion in 2000 to $110 billion in 2005.”
Limiting lead-system integrators. This section would prohibit contracts that rely on private contractors to serve as “lead-system integrators” who both manage and perform the contract. Waxman charges that LSI contracts, such as the Coast Guard’s “Deepwater,” have led to billions in wasteful spending.
Prohibiting excessive pass-through charges. This section would require regulations to prevent contractors from billing taxpayers for excessive markups on work that is done by subcontractors. Waxman said, “This provision would prevent the abuses that occurred after Hurricane Katrina, where taxpayers were charged $2,480 for “blue roofs” that actually cost under $300.”
Minimizing abuse of commercial item authority. This section would require additional cost and pricing information for goods and services “of a type” found in the commercial market place, requiring contractors to justify prices for items that are not regularly sold to commercial customers.
Restricting interagency contracts. This section would require regulations to prevent abuse of interagency contracts. Waxman said the provision is designed to prevent abuses like the one that occurred when the Department of Defense hired interrogators at Iraq’s Abu Ghraib prison under a contract to provide information technology run by the Department of the Interior.
Linking award fees to acquisition outcomes. This section would require award fees to be paid only when a contractor has at least a satisfactory level of performance. A series of audit reports have documented that contractors often receive large bonuses even on contracts that are far behind schedule and over budget.

Contract Transparency

Disclosure of CEO salaries. This section requires privately held contractors who hold at least $25 million in federal contracts and derive 80% of their revenue from the government to disclose the compensation of their top executives.
Database for suspension and debarment. This section would create a single governmentwide database listing companies that have been suspended or disbarred.
Improvements to the Federal Procurement Data System. This section enhances the transparency of multiple-award and interagency contracts by requiring additional reporting to the existing federal procurement database.

Anti-Fraud Provisions

Whistleblower protection for contractor employees. This section would provide whistleblower protections for all federal contractor employees. Waxman said it is a response to testimony that contractors working for KBR “were fired after reporting egregious examples of wasteful spending.”
Mandatory fraud reporting. This section would require both domestic and overseas contractors to report violations of federal criminal law and overcharging.
Preventing contractor conflicts of interest. This section requires federal regulations to prevent organizational and personal conflicts of interest among contractor employees. The Government Accountability Office has found that there are no rules governing personal conflicts of interest by contractors.
GAO access to contractor employees. This section would give GAO the authority to interview contractor employees.
Acquisition Workforce Improvements
Acquisition workforce development fund. This section would require agencies to devote at least an additional 2% of their service contracting budgets to oversight, planning and administration. Waxman said the provision is designed to relieve pressure on “a greatly over-extended workforce.”
Contingency contracting corps. This section would authorize the establishment of a contingency contracting corps that would handle contracting in a national emergency.

Article 3: SmartPay and SmartPay2 Make it Easier for Agencies to Buy

This article was submitted by Wade Tetsuka, Executive Vice President and Susan Otim, Account Manager, Diamond Mind, Inc. (888) 566-0945 ext. 705.

Companies selling to the Government still have a chance to increase booked revenue opportunities for this year. Remember two important dates (September 30 and November 30, 2008), and take a couple of simple steps to make it easier for the Government Agencies to choose you over your competitors.

First, September 30, 2008 fiscal year end of the federal government is rapidly approaching. Government Contractors should look to set up Level III capability for Purchase Card ("P-Card") acceptance as soon as possible. In August and September, government agencies are looking to spend their final appropriations for the fiscal year which invariable leads to a substantial spike in P-Card spending.. Providing Level III data reduces costs and improves cash flow, while P-Card acceptance in general increases your chances for micro-purchase revenue (up to $3,000 per transaction).

Much like a detailed invoice, Level III line item detail defines “What” is being purchased and combines that information with the payment transaction and delivers it seamlessly and electronically to the appropriate agency personnel. Does it cost more to provide Level III information? No. In fact, it will cost much less than processing a commercial Purchase or Credit Card transaction through a credit card terminal or keyed-in to standard credit card processing software (generally as much as 1/3rd less in total fees).

Second, November 30, 2008 is the start of the new SmartPay2 program. The new program will add enhanced features to P-Card usage by the Agencies which means that there will be greater incentive for Contracting Officers to pay for goods and services with the P-Card. Publicize that you gladly welcome the government P-Card and you send a clear message that it is easier for the Agency to do business with you over your competitor.

“Three out of five GSA schedule vendors have been set up to accept Purchasing Cards improperly” according to Mark Amtower, publisher of FederalDirect and author of Government Marketing Best Practices”. Amtower goes on to say that suppliers are losing sales because Agencies are starting to actively look for vendors of goods and services which provide Level-III on their purchases. Procurement officials may refer to the Visa International database that reflects vendors that can offer Level III line item detail, and you will not be there! In addition, you will pay too much in processing fees because your rates will be as much as one-third higher than a competitor which has been set up properly. Make sure you are accepting and make sure you provide Level III data.

PVBS also offers an automated Level III processing and credit card acceptance within the Dynamics-NAV solution. With an integrated solution, the cost savings (measured in time and credit card processing fees) can be thousands of dollars annually.