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  • Question

    Can the contractor be paid in advance for the year of maintenance support? If yes, under what conditions?


    Answer

    Yes, advance payments may be possible.  Advance payments are a method of contract financing.  It is the least desired method to be used by the government.  There are numerous requirements to be met to allow such financing depending on the nature of the goods or services being obtained.  Here are some of the methods that can be used to pay up front, depending on the type of products or services being purchased.

    Commercial Items Option:

    FAR 32.201 Statutory authority.

    10 U.S.C.2307(f) and 41 U.S.C.4505 provide that payment for commercial items may be made under such terms and conditions as the head of the agency determines are appropriate or customary in the commercial marketplace and are in the best interest of the United States.

    However, the FAR 32.202-1 Policy limits such advanced payments to 15% of the total contract price.

    To pay the entire amount up front, you would be moving into:

    FAR 32.202-1(d) Unusual contract financing. Any contract financing arrangement not in accord with the requirements of agency regulations or this part is unusual contract financing and requires advance approval in accordance with agency procedures. If not otherwise specified, such unusual contract financing shall be approved by the head of the contracting activity. 

    For Commercial Items, If the Head of the Contracting Activity authorizes the payment in accordance with the specific agency procedures for unusual contract financing, typically a justification for this specific contract, the advance payment could be made.

    Non-commercial Items Option:

    FAR Subpart 32.4 provides for advance payments for non-commercial items.  It requires the availability of security from the contractor to protect the government’s interests.  Advance payments under these circumstances may be made only on adequate security and a determination by the agency head that to do so would be in the public interest.

    The NMCARS in SUBPART 5232.4—ADVANCE PAYMENTS FOR NON-COMMERCIAL ITEMS provides specific instructions on how this is done.  It includes Submitting the request ASN(FM&C) via DASN(P) by email at RDAJ&As.fct@navy.mil with the subject “[Activity Name] FAR 32.402 – Advance Payments Request.”

    National Defense Contracts Option:

    Obtain permission from the Secretary of the Navy’s duly authorized representative with the justification that this contract facilitates the national defense.

    Congress passed Title 50. WAR AND NATIONAL DEFENSE, Chapter 29. NATIONAL DEFENSE CONTRACTS, Section 1431. Authorization; official approval; Congressional action: notification of committees of certain proposed obligations, resolution of disapproval, continuity of session, computation of period.

    The President may authorize any department or agency of the Government which exercises functions in connection with the national defense, acting in accordance with regulations prescribed by the President for the protection of the Government, to enter into contracts or into amendments or modifications of contracts heretofore or hereafter made and to make advance payments thereon, without regard to other provisions of law relating to the making, performance, amendment, or modification of contracts, whenever he deems that such action would facilitate the national defense.  The authority conferred by this section shall not be utilized to obligate the United States in an amount in excess of $50,000 without approval by an official at or above the level of an Assistant Secretary or his Deputy, or an assistant head or his deputy, of such department or agency, or by a Contract Adjustment Board established therein. [Emphasis added] The President in turn issued Executive Order Ex. Ord. No. 10789. Contracting Authority of Government Agencies in Connection With National Defense Functions, November 14, 1958 (With amendments over the years):

    The Department of Defense is authorized, within the limits of the amounts appropriated and the contract authorization provided therefor, to enter into contracts and into amendments or modifications of contracts heretofore or hereafter made, and to make advance payments thereon, without regard to the provisions of law relating to the making, performance, amendment, or modification of contracts, whenever, in the judgment of the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy, or the Secretary of the Air Force, or the duly authorized representative of any such Secretary, the national defense will be facilitated thereby. 

    Electronic and Information Technology Option:

    Software related maintenance services fall under the direction of the DFARS 208.7402 General. (1) Departments and agencies shall fulfill requirements for commercial software and related services, such as software maintenance, in accordance with the DoD Enterprise Software Initiative (ESI).

     SUBPART 39.2—ELECTRONIC AND INFORMATION TECHNOLOGY 39.201 Scope of subpart. (S-91) Unless there is an associated service being offered with a software subscription or software maintenance agreement, and that associated service is billed separately, the acquisition of software subscriptions or software maintenance agreements will be acquired as a product.  Further, ITVAR excepted acquisitions with the NAICS code 541519 will be acquired as a product.   

    You are purchasing a package that includes inspections. If it was purchased under the ESI it would be considered software related maintenance.  The access to remote support on an as needed basis at no additional cost is part of the product.  It would appear that there will be no other billing associated with this agreement, no per call charge or incremental charges for use of the support services.  These indicate that you are buying a product and products are billed at the time of purchase.

    BPA Option:

    If your procurement doesn’t fit into the categories above, then the best course of action is likely a Blanket Purchase Agreement.  This is the most common way to handle maintenance agreements.

    As always, please consult with your legal representative before taking action.

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