Comments on Proposed Modifications to Defense Contract Financing Regulations

GAO was asked for comments on proposed modifications to defense contract financing regulations regarding milestone billing arrangements. The purpose of a milestone billing arrangement is to alleviate inordinately high contractor financing that would otherwise result by limiting payments to the customary progress payments in the performance of a defense contract with an exceptionally long leadtime between initiation of contract performance and commencement of deliveries of contract end items. The stated objective of the proposed changes is to ensure greater consistency in the application of such arrangements to individual contracts. GAO believes that the proposed modifications represent an improvement over the existing regulations. However, the proposed rules do not provide adequate guidance on the important concept of contractor investment. There is no adequate definition of what is an appropriate level of contractor investment in work-in-process inventories. In this regard, the guidance provided is subject to varying interpretations. GAO suggested that additional clarifying guidance be contained in the regulations to assist contracting officers in making these determinations.