Article

Uncommon Sense | Contract Closeouts: A source of cash during the pandemic

Authored by Jack Coviello, Elizabeth Bair, and Jen Flickinger

COVID-19 and the resulting responses to control the pandemic have ground the global economy to a near halt. Businesses across the United States must balance creative strategies to keep their workforce productive and engaged with the need to remain financially sound. Government contractors may have a peculiar solution for achieving both of these objectives: clearing that pesky contract closeout backlog. 

The contract closeout backlog is not a new or unknown phenomena. It is a problem decades in the making, perpetuated by years of insufficient action by government auditors, contracting officers, and contractors alike. The incurred cost audit backlog – as high as 21,000 rate years in fiscal year (FY) 2011 – has shrunk drastically to a mere 152 years in FY 2018, compounding this problem but creating the opportunity to finally take action. With the audit backlog mostly caught up and final rate agreements in place, contractors are on the clock to close contracts. 

But, closing contracts can be hard work – especially the old ones where businesses have changed ownership, knowledgeable employees have turned over, and enterprise resource planning systems have sunset.  Needless to say, contract data is likely incomplete or unreliable without considerable financial archeology. No wonder this issue has simmered on the backburner for so long! Here at Baker Tilly, we ask: what better time than now to act? Government stakeholders are eager to make progress towards closing contracts. Now is an ideal time to form a dedicated contract closeout team.  

Creating and executing contract closeout plans keeps employees productive and engaged with their colleagues, even if from home offices in front of tropical virtual meeting backgrounds. This work is leverageable and shouldn’t distract leaders from their focus on managing the business through the COVID-19 pandemic crisis. Plus, it’s more than just an opportunity to do what needs to be done! Final invoices can create a potentially meaningful cash flow stream for contractors with significant cash trapped in unbilled accounts receivable (AR). Unbilled AR may include indirect rate differentials, fee withholds, and retainages. This is the exact type of value-added indirect project that our colleagues recommended as part of Baker Tilly’s COVID-19 Pandemic Operational & Financial Triage Plan for Government Contractors.    

We encourage our clients to be creative. Start with the regulatory Class Deviations that eliminate the need for most of the closeout process documentation for contracts entered into more than 17 years prior to the current fiscal year. These deviations also raise the threshold for quick-closeouts. From there, contractors should propose innovative solutions. Because closeouts are generally handled on a distributed basis, contractors must otherwise initiate discussions with multiple contracting branches that often aren’t aligned on closeout approach. At Baker Tilly, we have helped our clients successfully reduce their contract closeout workload by negotiating expansions of Class Deviations, applying sampling techniques, and utilizing new technologies to generate invoices in the blink of an eye – even where multiple accounting system data sets are involved. Our clients can ditch those slow and buggy spreadsheets!

Of course this ugly contract administration mess existed before the spread of COVID-19, but now businesses are struggling to keep their workforces engaged due to social distancing and shelter-in-place orders, the ripple effects of which may impact contractor cash flows. Since every contractor will need to close those contracts sooner or later, one way or another, why not now? You’ll finally get that annoying to-do crossed off the list. And, better yet, you might solve some pressing cash collection challenges along the way.            

For more information on this topic, or to learn how Baker Tilly government contract specialists can help, contact our team.

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