§ 1-30.211 Financial responsibility of

contractors.

Procuring activities in placing contracts shall give due regard to the financial capabilities of the supplier. Financial difficulties encountered by contractors and subcontractors may (a) disrupt production schedules, (b) cause wastage of manpower and materials, and (c) if connected with guaranteed loans, advance payments, or progress payments, result in monetary loss to the Government. Also, if financial crises occur in the course of a contractor's production, the need for continued production may make guaranteed loans or advance payments imperative for continuance of such production, even though monetary losses may be likely under the circumstances. In order to reduce these hazards so far as possible, contracts should be entered into only with those potential contractors who meet the requirements of § 1-1.1204 or § 1-2.407, and who have the financial capacity or credit (giving due regard to the availability of progress payments, guaranteed loans, and advance payments), technical skill, management competence, and plant capacity and facilities (including subcontracting capacity) reasonably to assure their ability to perform their contracts in accordance with their terms. Care should be taken also to the extent practicable to avoid the placement of additional contracts or subcontracts with contractors in situations where additional contracts will overload the contractor's production capacity, overextend his financial resources and credit, and thus tend to interfere with timely performance of contracts on hand, and create need for additional contract financing arrangements, which may be impossible to establish on a prudent basis. In all cases, whether involving formal advertising or negotiation, it must be determined that the contractor is financially and otherwise able to perform the contract. In addition, consideration must be given to the judgment, skill, and integrity of the potential contractor, and to his reputation and experience, including prior work of a similar nature done by him, and the other factors set forth in §§ 1-1.1203, 1-2.407, and 1-3.102, as appropriate. Persons placing subcontracts, at all levels of subcontracting, should be encouraged to apply these standards in placing subcontracts. Some practical examples of important points which should be kept in

mind are set out in §§ 1-30.211-1 through 1-30.211-6.

[36 F.R. 17422, Aug. 31, 1971]

§ 1-30.211-1 Small volume of work.

Unduly small volume of work, in relation to amount of overhead expense, may result in losses to such extent as to interfere with or prevent performance of contracts. The order backlog on hand and reasonably foreseeable should be sufficient to enable operations to continue at least through the contemplated term of the contracts for which contract filnancing is being considered.

§ 1-30.211-2 Large volume of work.

Unduly large volume of work to be performed concurrently with a contract may result in insufficiency of cash or credit to support the work, or in delays or collapse on account of inadequacy of plant space, production equipment, engineering or production personnel, or unavailability of materials, parts, or components. An apparently unduly

large backlog may or may not be a deterrent, depending upon the relationship of the scheduling of all the work to the available credit, facilities, personnel, supplies, and subcontractors.

§ 1-30.211-3 Unrealistic cost estimates.

Incompetence, carelessness, or over optimism of management may cause or permit the making of bids or proposals for work involving techniques, processes or "know-how" on which the contractor has not had sufficient experience. Such work may be for the end items under a Government contract or for end items under other contracts (whether existing or prospective). In either case, unforeseen difficulties of performance and unanticipated excess of costs over contract prices may prove ruinous. In such cases, the proposed price, or cost estimates, whether or not based on past performance and experience of quailfied competent contractors for the same or similar kinds of end items, may be unrealistic for the inexperienced contractor and may make the company's financial projections completely unrealistic. Comparative bids or proposals by others are important and useful factors in evaluation of the adequacy or inadequacy of proposed prices. However, a proposed price that seems unduly low may in fact be founded solidly on superior efficiency or on the discovery of new and improved

techniques or processes that will enable the contractor to perform at costs substantially less than those of other contractors.

§ 1-30.211-4 Technical and engineering evaluation.

While management and technical competence must be evaluated largely on the basis of past performance of management and technical personnel, in doubtful cases financial forecasts cannot be analyzed adequately without the benefit of technical and engineering judgments based upon detailed scrutiny of the contractor's production plans and contemplated processes in relation to the quantity and quality of available facilities and personnel. However, while inexperience of the contractor in production of a contemplated end item or similar kinds of end items is a danger signal requiring close collaboration of all personnel concerned with the various elements of contract awards and contract financing, close analysis of the facts may provide sound reasons for belief that the prospective contractor, with proper and prudent contract financing assistance, will be able to perform on terms and conditions, including price, beneficial to the Government.

§ 1-30.211-5 Importance of type of contract-development.

The type of contract may constitute the dividing line for decision as to ability or inability to perform and the related question of the prudence or imprudence of providing contract financing. If the contemplated end items are essentially development items-whether or not the contract is labeled a development contract-a fixed-price type of contract, whether firm fixed-price, fix-price with escalation, or fixed-price subject to price revision with a ceiling, may prove impossible of performance within the contract price and may result in nondelivery of acceptable end 'tems and in disaster to the contractor. Except for those contractors who are exceptionally strong financially, it is imperative in these cases that financial analysis and evaluation be based upon the closest possible scrutiny by, and stated judgments of, qualified engineering and technical personnel with regard to the details and difficulties of performance and their relation to projected costs of the work.

§ 1-30.211-6 Engineering, production, and purchase plans.

Company plans may contemplate engineering costs, direct labor costs, or prices of materials, parts or components that are unduly low. Financial forecasts cannot be made intelligently or usefully without the benefit of careful and competent analysis of all significant elements of the engineering, production, and purchasing aspects-by qualified technical personnel. Such analysis

would need to evaluate the company's estimated costs for each significant performance element against the probable costs to be encountered for all elements necessary for actual performance. It may, for example, be foreseeable upon analysis that the company has materially underestimated the amount of engineering and testing necessary for completition of a satisfactory preproduction model, or the quantity and quality of special tooling or other manufacturing aids that may be required for production of the end items, or the amount of direct labor that will be required, or the purchase price of necessary materials. parts or components. The company may also have been in error as to the probable technical ability of contemplated subcontractors to provide acceptable parts or components. The company may even-in some cases-be expecting to have significant portions of the work done by technically or financially irresponsible subcontractors, some of whom may be affiliated with the contractor or related financially to the contractor's ownership or management. All these elements. in appropriate cases, require analysis and evaluation by competent engineering and technical personnel and bear upon the soundness or lack of soundness of the evaluations of financial capability and of the risks of monetary losses that would be involved in contract financing.

ments, that financing for performance of contemplated contracts and subcontracts is reasonably assured prior to or contemporaneously with the making of contracts. In those exceptional cases where there is substantial doubt that a prospective contractor has the financial capacity or credit resources essential to the performance of the contemplated contract, the interested contracting officer, after having determined that no satisfactory alternative sources of supply are readily available on terms equally as favorable to the Government, should prior to placement of the contract, consult with the appropriate contract financing office of the procuring activity to determine whether financing can prudently be arranged. In such consultation it should be resolved, if placement of the contract is deemed beneficial to the interests of the Government, whether and by what means financing should be provided.

(a) The necessity for financial information and analysis, and the scope, depth, and detail of analysis of the financial capability of contractors, for contract financing purposes, must vary reasonably with the circumstances of particular cases. The extent of accumulation of data, and the evaluation thereof, must necessarily be determined by the informed judgment of competent, responsible personnel. Essentially, this process must be neither over-done nor under-done. For example, financial analysis would serve no useful purpose in connection with provision of progress payments:

(1) For contractors who are known from experience to be so strong and so competently managed as to be fairly relied upon to perform their contracts satisfactorily, or

(2) For contractors who are known to be in satisfactory financial condition and operating profitably, where the items Involved are regularly produced by the contractor and the contract amounts are well within the normal sales volume of the contractor. In such cases, the financial evaluation might well consist of no more than scrutiny of readily available published balance sheets and operating statements. In doubtful cases, the financial analysis would have

to be as broad, and as meticulously and painstakingly detailed, as is necessary to fit the circumstances of the case. The obtaining of information relevant to financial capability, and the analysis and proper evaluation of that data, are of particular importance where:

(1) The contractor is a new supplier to the procuring activity;

(ii) The contractor has not supplied the item or a substantially similar item to the procuring activity within the preceding 12 months;

(ii) The contractor is a newly organized concern;

(iv) The contractor is on a list requiring pre-award clearances or special clearance prior to awards;

(v) The contractor is on any current list indicating current or past contract defaults or delinquencies;

(vi) The contractor is known to be involved in performance difficulties as a supplier or subcontractor for private customers on either Government or commercial work;

(vii) The contractor is listed on the consolidated list of contractors indebted to the United States (Hold-up List);

(viii) There are any known facts or circumstances which support reasonable doubts as to the contractor's financial capability of performance.

(b) When only minimum information is reasonably necessary, such as a current balance sheet and operating statement and similar financial statements for the next preceding fiscal year, these may be either published statements, audited statements, certified statements, or any combination of those, from any convenient source.

§ 1-30.214 Appropriate information

purposes.

The kinds of information and data that may be appropriate under the circumstances of particular cases (see § 1-30.213) for adequate disclosure of the contractor's financial condition, for full understanding of the propriety and reasonable necessity for contract financing, for evaluation of the contractor's ability to perform his contracts without loss to the Government, and for informed judgment with regard to the terms, conditions and protective provisions that may be appropriate and prudent for the protection of the Government, are outlined below. It is emphasized that only

those items which are appropriate to the particular case will be required.

(a) Balance sheet and profit and loss statement for the most recent fiscal year prepared and certified by an independent public accountant (including his comments, if any), and, if available, similar financial data for the two previous years; also latest available interim balance sheet and profit and loss statement of the current fiscal year; also a separate statement of amounts of defense and commercial sales. If audit reports are not available, then corresponding statements should be submitted, certified by an authorized officer, partner, or individual proprietor as truly and fully setting forth the financial condition and operating results of the applicant; also, if a proprietorship, partnership or joint venture, personal financial statements of the proprietor, partners, or members of the joint venture and description of individual liabilities of the partners or members of the joint venture on contracts of the partnership or joint venture;

(b) Summary history of the contractor and his principal management personnel, indicating particularly any past insolvencies of the contractor, or a predecessor, or of the officers, partners, or proprietors; also, a description of his products or services;

(c) Statement of all affiliates of the contractor, showing financial interests of the contractor in affiliates and of affiliates in the contractor, and also mutual officers, directors, and major stockholders or owners, and disclosing character and amount of business transactions with affiliates or with officers, directors, major stockholders or owners of the contractor, or his affiliates; also. if a corporation, a list of major stockholders, and shares held:

(d) Statement of compensation payable to each officer, partner, proprietor, and principal executive, and to each key employee receiving comparable compensation, including bonus, commission, and profit-sharing arrangements, together with similar data for the past 2 years; also past and projected dividends, unless obtained with paragraph (a) of this § 1-30.214:

(e) Schedule of principal contracts and orders on hand, showing defense orders and civilian orders separately, and showing face amounts, unfinished

amounts, and unliquidated advance or progress payments, and also indicating bids outstanding and contemplated and explanation concerning contracts under negotiation;

(f) Cash forecast, showing estimated disbursements and receipts for the period or periods involved (see §§ 1-30.214-1 and 1-30.214-2);

(g) Estimated profit and loss statements and estimated balance sheets (see 1-30.214-3);

(h) Comparison of past financial results with estimates previously furnished by the contractor;

(1) Credit agency ratings of the contractor, and, when significant, credit agency ratings of principal subcontractors and of principal business customers (defense and commercial) of the contractor;

(j) Existing and contemplated credit or financing arrangements, names of parties and relationship, if any, to contractor, amounts available or to be available, periods of availability, and required or contemplated payments, including: (1) Loans and credits;

(2) Advances and progress payments; (3) Projected equity capital increases; (4) Deferred trade credit, if any; (5) Creditor subordinations or standbys; and

(6) Mortgages, liens, pledges, assignments, conditional sales, lease-purchases, hypothecations, and other encumbrances or security arrangements, both existing and contemplated.

(k) Status of all tax accounts, particularly Federal income, excise, and withholding taxes, and social security taxes or contributions (including verification with Internal Revenue Service, when appropriate) with special attention to the matter of Federal tax delinquencies (which are covered by the lien and right of distraint and levy provided by sections 6321 and 6331 of the Internal Revenue Code);

(1) Appropriate information, explanation and schedules to indicate:

(1) Leases, deferred purchase arrangements, and patent or royalty arrangements, outlining terms and showing relationship, if any, of other parties to the contractor;

(2) Insurance maintained and to be maintained;

(3) Contemplated capital expenditures, debt reduction or retirement, and acquisitions of capital stock;

(4) Delinquencies on contracts, subcontracts, or purchase orders, and status thereof;

(5) Pending or anticipated liability for contract price refunds, or for renegotiation, or for other Government claims;

(6) Anticipated losses on contracts; (7) Contingent liabilities, including those on endorsements, guarantees, warranties, surety bonds, and material litigation pending or threatened;

(8) Aging and collectibility of accounts and notes receivable, status of disputed receivables, identification of any amounts included in receivables but not currently due and payable;

(9) Obsolescence of inventory and method of valuing inventory;

(10) Aging of accounts and notes payable, identifying major creditors and interest rates and other charges, if any and status of significant disputed items: (11) Adequacy of reserves for depreciation;

(12) Analysis of surplus.

(m) Significant ratios such as:
(1) Inventory to annual sales:

(2) Inventory to current assets; (3) Liquid assets to current assets: (4) Liquid assets to current liabilities. (5) Current assets to current liabilities; and

(6) Net worth to debt.

(n) Comments and opinion of pertinent audit activity concerning contractor's accounting system and controls, and available audit activity analysis of important elements of financial statements or projections;

§ 1

(0) Other facts that may be appropriate for the purposes stated at the beginning of this § 1-30.214. (See 30.211-1 to 1-30.211-6, inclusive.) § 1-30.214-1 Cash flow forecast, and estimated financial statements.

In doubtful cases, an estimated cash budget (Cash Flow Forecast) and related estimated Profit and Loss Statements and estimated Balance Sheets prepared by the contractor, will be very useful for the purpose of arriving at an Informed judgment as to the cash requirements (both for the contract and for the contractor's other activities), cash receipts for the contract period,

and cash or credit needed to supply any excess of projected expenditures over projected receipts. When considered useful or necessary, such estimates should be requested from the prospective contractor, analyzed by financial personnel, and discussed to the extent necessary or appropriate with the prospective contractor. Many contractors will have such projections readily available, perhaps not including estimated balance sheets. The failure of the contractor to have prepared such estimates, or resistance to their preparation, or difficultles and delays in preparation, or poor quality of the projections, or the use of unreasonable or unrealistic assumptions in their preparation, may well constitute warning signals that the company's planning has been insufficient and that significant financial troubles may be encountered during the contemplated period of contract performance.

§ 1-30.214-2 Realistic assumptions.

Cash forecasts can, of course, be no more reliable and representative of probable financial developments than the assumptions on which these forecasts are based. Each cash forecast and related projection should disclose the Important underlying assumptions. The more important of these assumptions

are:

(a) Estimated amounts and timing of purchases of materials, parts, components, subassemblies, services, and payments therefor;

(b) Estimated amounts and timing of purchases of machinery and equipment, other production or test facilities, other fixed assets, and purchases or production of special tooling, and payments therefor;

(c) Schedule of fixed cash charges, such as debt installments, interest, rentals, and taxes:

(d) Projected manufacturing and production schedules;

(e) Projected shipments, or delivery acceptances;

(f) Estimated amounts and timing of billings to customers (including progress payments), and customer payments;

(g) Estimated amounts and timing of cash receipts from lenders or other credit sources, and liquidation of loans: and

(h) Estimated amounts and timing of cash receipts from other sources. The