A. Evaluating the Expenditure Profile
Since the purpose is to assist in the payment of contract costs, and the PBP amounts for each event will be established upfront, it is important for the contractor to provide its expenditure profile of the contract cost expected to be incurred by month.
The expenditure profile represents the expected financing need over the life of the contract. The contractor should be prepared to explain and support how the monthly expenditures were estimated. The Government must evaluate the expenditure profile for reasonableness. DCAA may be able to provide assistance in the review of the expenditure profile.
An expenditure profile is not the same as a Termination Liability schedule or profile. Termination liability will always be greater than expenditures early in the program as it reflects what future costs the contractor would be responsible for in the event of a contract termination at any point in time. The contractor needs financing to cover expenditures, not termination liability.
Keep in mind that history has shown that predicting monthly expenditures with any precision is extremely difficult unless there is actual history on prior contracts for the same item. This lack of precision is irrelevant when using progress payments as they are based on actual cost incurred each month and not a forecast of monthly costs. However, when using PBPs, the accuracy of the expenditure profile can significantly affect the reasonableness of the entire PBP arrangement.
A. Evaluating the Expenditure Profile
When the contract is for production and the contractor has produced the same item under prior contracts, the contractor should be able to demonstrate the reasonableness of the proposed expenditure profile by providing the actual cost by month on each previous contract. A stable production program with established material lead times and manufacturing processes should exhibit a fairly consistent expenditure profile from one lot to the next (e.g. 10% of total contract costs incurred in first 6 months, 25% by month 12 etc). On any follow-on production contract, under the Truth in Negotiations Act (TINA), the Government would be entitled to the actual cost on prior contracts as cost or pricing data on the pending contract to help determine the reasonableness of the proposed costs on the pending contract. Obtaining the actual cost by month on those prior contracts will allow the contracting officer to also determine the reasonableness of the expenditure profile on the pending contract.
When there are no prior contracts for the same or similar items, the reliability of the expenditure profile is harder to ascertain. The first check for reasonableness is against the contractor’s cost proposal. Most cost proposals will segregate costs by contractor fiscal year which is usually the calendar year. For all cost proposals requiring certified cost and pricing data, Table 15-2 of FAR 15.408 requires the “time phasing” of contractors’ cost proposals. The proposed monthly expenditures in the expenditure profile should align with the contractor’s proposed cost by year. That means if the contractor proposed $22 million in CY 2011 and $37 million in 2012, the cumulative expenditure profile should total $22 million on December 31, 2011 and $59 million on December 31, 2012. If the expenditure profile is consistent with the proposal on a year-to-year basis, the next step is to assess the projected monthly values within each year. Unusual spikes or front loaded expenditures within a year should be cause for concern.
As noted earlier, in the absence of an expenditure profile based on actual cost on prior relevant contracts, accurately predicting expenditures by month is very difficult for both sides even when there is a high degree of confidence in the reasonableness of the total cost. History has shown that even when expenditure profiles are consistent with the cost proposal on a year-to-year basis and monthly values appear easonable, there is a strong possibility for the actual cost by month and by year to be significantly different from the profile even when the work is completed on schedule. When actual expenditures turn out to be incurred later than forecasted in the expenditure profile, the contractor could receive payments well in excess of its cost early in the program.
To gauge the contractor’s general ability to predict the timing of actual expenditures, the contractor could be requested to provide actual versus predicted monthly expenditures on prior contracts using PBPs. In the absence of prior PBP contracts, the contractor could be asked to provide the proposed versus actual cost by year on other similar fixed price contracts From the Government perspective, if the data shows that actual expenditures consistently occur later than predicted or proposed, there is reason to suspect that the current expenditure profile is also front-loaded.
When the Government and contractor have significant differences of opinion regarding the expenditure profile, PBP financing may not be practical.
