How the cash advance on a case is calculated

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1. Three kinds of case value

The cash a purchaser advances on a case is worked out by a set method. The Financial Management Regulation starts by dividing the case value into three broad categories, each tied to a section of the Arms Export Control Act (AECA) (FMR Vol. 15, Ch. 4, para. 5.1). Section 21 covers sales from Defense Department inventories and the services of Department personnel. Section 22 covers procurement of hardware or contractor services for the purchaser. Section 29 covers design and construction services from Department resources.

Each category is estimated through the same horizon. The advance must reach through the 3-month period after the payment due date of the billing statement issued by the Defense Finance and Accounting Service (FMR Vol. 15, Ch. 4, para. 5.1.1 and FMR Vol. 15, Ch. 4, para. 5.1.2.1). The quarterly billing cycle behind those dates is covered in payment schedules, billing and late payment.

2. Stock and Department services

For a sale from inventory, the drop from inventory creates the earned reimbursement, including the administrative surcharge and accessorial charges (FMR Vol. 15, Ch. 4, para. 5.1.1.1). The case manager therefore estimates the cash needed from the dates requisitions are expected to be released. For Department services, the estimate rests on the share of the services expected to occur in the billing period (FMR Vol. 15, Ch. 4, para. 5.1.1.2). That applies both to services given directly to the purchaser and to services supporting a section 22 contract.

3. Procurement, and the money held against a stop

Procurement brings a second element into the estimate. The advance must cover expected payments on contractor invoices (FMR Vol. 15, Ch. 4, para. 5.1.2.1). It must also cover what the government could owe contractors if the purchaser stops depositing cash on time or cancels the case. Those potential disbursements include contract holdbacks and the termination costs that would arise if work stopped once the cash ran out.

The regulation defines potential termination costs as the government’s liability to contractors if termination occurs (FMR Vol. 15, Ch. 4, para. 5.1.2.2.1). They include accrued direct and indirect costs, and profits and subcontracts not covered by progress payments, plus any penalty charges. "Potential termination costs do not include price increases to other ongoing contracts resulting from reductions in procurement quantities" (FMR Vol. 15, Ch. 4, para. 5.1.2.2.1).

Estimates for procurements rest on normal administrative and procurement lead times for the commodity (FMR Vol. 15, Ch. 4, para. 5.1.2.2). Progress payment schedules from contractors, where available, are preferred over default cost curves. The regulation’s own tables give cumulative payments and the termination liability share as percentages of contract cost, for lead times from 6 to 60 months (FMR Vol. 15, Ch. 4, para. 5.1.2.2.3). The implementing agencies must exhaust other sources of contractor and historical data before using those tables (FMR Vol. 15, Ch. 4, para. 5.1.2.2.2). The termination liability share declines toward the end of the life of the case (FMR Vol. 15, Ch. 4, para. 5.1.2.2.4).

4. The surcharge in the first deposit

The initial deposit that accompanies the Letter of Offer and Acceptance (LOA) includes the administrative surcharge expense and the cash needed until the first payment due date (FMR Vol. 15, Ch. 4, para. 5.2). Where the calculated surcharge is $30,000 or less, all of it is collected in the initial deposit (FMR Vol. 15, Ch. 4, para. 5.2.1). A case with a small case management line also has the whole of that line collected up front.

For larger surcharges the sources disagree. Chapter 4 says that where the calculated surcharge is greater than $30,000, one-half is recouped in the initial deposit (FMR Vol. 15, Ch. 4, para. 5.2.2). Chapter 3 of the same volume states that 35 percent is collected when the case is implemented (FMR Vol. 15, Ch. 3, para. 4.8.1.1.2). The Security Assistance Management Manual also puts 35 percent in the initial deposit (SAMM C9.9.1.5.2.8). Chapter 4 recovers the remainder in proportion to deliveries in later years, and Chapter 3 accrues it over the life of the case.

Nonrecurring cost recoupment charges follow title. They are earned when title passes to the purchaser and should be collected within 30 calendar days (FMR Vol. 15, Ch. 4, para. 5.3). Title normally passes at the point of origin, when the item leaves Department inventory or when the vendor ships it.

5. The termination liability reserve

Each quarter an amount of the purchaser’s prepayments is placed in a termination liability reserve (FMR Vol. 15, Ch. 4, para. 6.0). A purchaser with a Federal Reserve Bank account keeps the reserve there if enough funds are on deposit, and otherwise in a reserve account in the trust fund. The regulation is explicit about what the reserve is not. "The TL Reserve is not an additional charge or cost" (FMR Vol. 15, Ch. 4, para. 6.0). The funds are fenced for potential termination costs, may not pay for ordinary deliveries or surcharges, and do not necessarily cover the entire cost of cancelling a contract.

Supply support cases get their own warning. Payment schedules on requisition cases, such as those under Cooperative Logistics Supply Support Arrangements, tend to be overstated, because requisitioning and supply actions vary (FMR Vol. 15, Ch. 4, para. 5.4). Each implementing agency must review and update those schedules to prevent substantial over-billing.

6. One contract, several customers

A single Defense Department contract may buy for the Department and for one or more sales purchasers (FMR Vol. 15, Ch. 4, para. 7.0). Each bill is then allocated between them. The part applicable to a purchaser can be paid only to the extent that purchaser has enough cash in its trust fund account.

The contract clause on progress payments for sales acquisitions, DFARS 252.232-7002, sets what the contractor must do (FMR Vol. 15, Ch. 4, para. 7.1). The contractor submits a separate progress payment request for each progress payment rate (FMR Vol. 15, Ch. 4, para. 7.1.1). A supporting schedule distributes each request among the countries’ requirements (FMR Vol. 15, Ch. 4, para. 7.1.2). Each request identifies whether it applies to sales or government requirements, and costs are distributed in a way the Administrative Contracting Officer accepts (FMR Vol. 15, Ch. 4, para. 7.1.3 and FMR Vol. 15, Ch. 4, para. 7.1.5). Payment offices must require every bill to carry the correct accounting classification reference number and contract line item (FMR Vol. 15, Ch. 4, para. 7.3).

Key terms

Earned reimbursement	The amount a Defense Department account earns when stock is dropped or a service is performed for a case.
Potential termination costs	The government’s liability to contractors if a contract is terminated, reserved for in the cash advance.
Termination liability (TL) reserve	Prepayments fenced each quarter for potential termination costs, not an extra charge.
Nonrecurring cost recoupment	A charge earned when title passes, and collected within 30 calendar days.
DFARS 252.232-7002	The contract clause that governs progress payments on contracts that include sales requirements.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

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