Recommendation 79: Enable enhanced use of advanced payments, at time of contract award, to small businesses.

Small businesses have limited cash flow, and DoD is very slow to pay invoices.1 The costs incurred by small companies to borrow money to continue operations can be substantial. Without an initial upfront payment on contract awards, small businesses may not bid on government contracts because they cannot afford to buy the material, produce the product, and then wait to get paid by the government.2 Additionally, the government pays after the invoice is officially received by the government, whereas industry pays at the invoice creation date.3 This delay discourages small businesses from DoD contracts, creates a barrier to entry and decreases competition, potentially depriving warfighters of new and innovative solutions to their technology and innovation requirements. One solution is advance payments as covered in law and regulation under contract financing.

Small businesses are incubators of innovation; they account for an average of 13 more patents per employee than large firms. The Small Business Act codifies the government’s interest in obtaining innovation and solutions from small businesses. Large-scale DoD policy initiatives like Better Buying Power Initiative have made attracting small business entry into DoD contracting a major goal.

Numerous laws and regulations exist to promote small business participation in government contracting:

Despite these laws, regulations, and policies, studies indicate small business participation in DoD is still not as robust as it could be, leaving DoD unable to tap potential innovation and solutions.

Small businesses report the time required to receive payments impedes their ability to do business with DoD.6 Unlike large companies, small businesses do not have cash flow available at contract execution to cover expenses that arise before they can submit their first invoice. Small businesses need incentives to risk bidding on DoD contracts that advance contract payments can offer.

DoD encounters obstacles when using the existing federal and departmental regulations that allow advance payments. Current regulations designate the head of an agency as the decision authority for advance payment use. Requiring this level of authority makes it impractical to get necessary approvals. Reaching the head of an agency requires, in most cases, eight to 12 independent reviews and approvals for a single document. In some cases, more layers of review may be required, depending on the size of the contracting activity.

Because of the time and manpower required, acquisition personnel rarely consider routing a document up the chain of command seeking approval for advanced payments. Most of these types of actions involve contracts valued at less than the Simplified Acquisition Threshold (SAT) and are often small business set-asides. Many of these types of contract actions occur at the end of the fiscal year, which further constrains the amount of time personnel have to obtain this level of review and approval.

Regardless of company size, emerging technologies and research and development move at a rapid pace, often much faster than federal procurement and payment timelines. Emerging small technology businesses often require capital in advance of performance to stay in the forefront of technological advances and cannot borrow operational capital for months at a time while awaiting contract payments from the government without jeopardizing their future viability as a business. A more flexible advanced payment policy that authorizes approval at lower levels than the head of the agency will encourage greater use of advanced payments to finance small businesses and provide the capital needed to develop innovative ideas and solutions.

The statute allows for advance payments up to the total price of the contract, but currently limits advance payments for commercial items to 15 percent of the contract price. Raising the advance payment threshold to 20 percent for small businesses offering commercial items in addition to the general authority up to 100 percent of the contract price will add even more flexibility in cases where innovation is dependent on the modification or integration of commercial products or services into a new product. Modifying existing regulations and guidance on advanced payments will also make it easier to identify and approve eligible small businesses and create more of a marketplace for small businesses to engage in DOD innovation.