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Attachment 2 - Payment Schedules Policy
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Note: This policy will be incorporated into the Security Assistance Management Manual (DoD 5105.38-M) and Volume 15 of the DoD Financial Management Regulation (DoD 7000.14-R).
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Definitions
In order to ensure common understanding of the terms utilized throughout this policy guidance, the IPT developed a lexicon defining those terms. The lexicon is furnished at Attachment 2A.
Implementation Guidelines for DEPSECDEF 13 Dec 99 Memorandum
On 13 Dec 99, the DEPSECDEF issued a memorandum concerning FMS financial management. That memorandum mandated the periodic revision of payment schedules and described the reconciliation requirements for major cases. This policy memorandum provides implementation guidelines for effectively executing those requirements.
Case Reviews. All FMS cases must be reviewed. A review shall occur at least annually either (a) on the anniversary of basic case implementation; (b) in preparation for a formal review with the FMS customer; or (c) when the case value adjusts by ten percent or more. Attachment 2B provides the minimum review items that, taken together, constitute a review of an FMS case. The IAs should develop checklists that incorporate the Attachment 2B case review items, and issue detailed procedural guidance that provides supplementary information unique to each IA. Each checklist shall be signed and dated by the case manager conducting the review, and shall become an official document within the applicable case file.
Additional Major Case Requirement. In addition to the guidance specified above, a quarterly payment schedule variance report was developed to signify major cases for which discrepancies between the payment schedule and financial requirements appear to exist. A sample of this report, along with a lexicon defining each data element thereon, is furnished at Attachment 2C. The report will be comprised of two sections: (1) the universe of all open FMS cases; and (2) a filtered version. The filtered version identifies only those cases meeting the following criteria:
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Is a major case as defined in Attachment 2A and
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Type of Assistance code is not equal to '3' (i.e., Cash with Acceptance) or 'U' (FMSO I) and
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Expenditures do not exceed 80 percent of the total LOA value and
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The variance between the payment schedule and financial requirements exceeds 25 percent for the average of the past three quarters.
This filtered version should be considered as the actionable version. It will be generated and distributed by DSCA. The IAs will use this report to issue workflow tasks in DSAMS that will bring these variances to the attention of case managers for their analysis and, as appropriate, revision to the corresponding payment schedules via a modification or (if a scope adjustment is being done concurrently) an amendment.
Case Reconciliations. While all cases must be reviewed, not all cases need to be reconciled. A reconciliation is required only when errors or discrepancies are found during the review. The IPT identified those reconciliation actions, correlated them with the aforementioned case review actions, and combined them into a single matrix (see Attachment 2B). This matrix describes what needs to be done to correct situations found during the review. As with the case review checklist, the IAs should develop procedural guidance that provides a "how to" primer on fixing errors discovered during the review. Many of these tools are already being taught in the DISAM-CR (Case Reconciliation/Closure) course and should be promulgated throughout the FMS community. (To that end, DISAM should incorporate the Attachment 2B matrix into its CR course curriculum.)
Payment Schedule Format
Through the IPT's discussions and the simultaneous rewrite of Volume 15 to the DoD Financial Management Regulation (DoD 7000.14-R), revisions to the payment schedule format were made. Attachment 2D illustrates those revisions contained in Chapter 4 of the rewritten Volume 15. For example, use of the term "Initial Deposit" no longer applies to LOA amendments; instead, the new language is "Due with Amendment Acceptance." This change eliminates the confusion that "Initial Deposits" as related to amendments oftentimes caused. Another key formatting change regards cases subject to the Standby Letter of Credit (SBLC); refer to Attachment 1 for more information. Other fundamental revisions to the payment schedule methodology are articulated in ensuing sections of this document.
Factors/Variables
Life Cycle Matrix. The relevance of payment schedules spans from pre-LOR through active case reconciliation. Attachment 2E provides a matrix delineating the general actions relative to payment schedules during each stage of an FMS case.
Line Level. A basic shift in the culture of developing payment schedules concerns the baseline for how they will be developed. In the past, payment schedules were predominantly developed at the case level; while they considered line-level activity, there was no requirement to analyze the future requirements for each line. For the future, however, the general policy rule is that schedules will be built at least at the line level (and could be constructed at the sub-line or delivery set level). For multi-line LOAs, the individual line-level schedules will be rolled-up to reflect a consolidated case-level schedule. (For cases with only one line, construct at the case level is appropriate.) From a systems perspective, DSAMS already has the capability to use curves to compute projected line-level financial requirements that would, in turn, be combined to form a case-level payment schedule. Attachment 2F illustrates the concept of the line-level roll-up methodology using quarterly estimated expenditures for each line; this manual process will be incorporated into a future DSAMS release. On an exception basis, case managers will be allowed to construct payment schedules at the case level.
Collections. A primary principle of payment schedule logic is that it is intended to reflect the timeline and amounts to be paid from the FMS customer. While this statement seems fairly obvious, the absence of recording what the customer has already paid when adjusting those schedules can result in a misleading representation of future payment requirements. Thus, we have incorporated the requirement that, for payment schedule revisions reflected on LOA amendments and modifications, the amount paid from the FMS purchaser will be shown on those LOA documents. That said, the infusion of collections is the last sequential component in developing the future stream of payments. In other words, the case/program manager develops the payment schedule based on the forecasted expenditure requirements remaining on that LOA. Once those requirements are solidified in the form of a case-level schedule, the amount paid by the FMS purchaser is then factored into the equation. Whether the collections to date equal, exceed or are less than the financial requirements for the next payment due on the case has a corresponding influence on the future payment schedule. Revisions B through G on Attachment 2D illustrate the impact collections have on the payment schedule. Regardless of collections, revision B reflects the projected expenditure requirements. The collection status is then used to determine which payment schedule computation logic (i.e., revisions B through G) applies.
Parameters/Assumptions. In order to construct as accurate a payment schedule as possible, the proper assumptions must be used and loaded into DSAMS. This touches on lead times (both administrative and procurement); period of performance; progress payment schedules; delivery schedules; and when commitments, obligations and expenditures are anticipated to be incurred. The inadvertent use of inaccurate parameters will likely result in inaccurate payment schedules. The case manager should at all times be able to validate the assumptions used to create a payment schedule.
Information Exchange. In many organizations, personnel responsible for the development and preparation of LOA documents are different from those who negotiate contracts, schedule training, determine follow-on and concurrent spare parts requirements, etc. It is critical that the full package of information necessary to develop the payment schedule portion of LOA documents be provided to the case writers. Examples of information are: contractor progress payment schedules; contractor termination schedules (used in the termination liability worksheet); lead times/availability; periods of performance; delivery schedules; estimated contract award dates; customer requested payment schedules and organizational approvals; and disbursement histories for like-item cases or lines already implemented. As noted above, provision of this information needs to be at the line-level, not just the case-level. The more information furnished to the case writers, the more complete the analysis - which should correspond to a better representation of future payment needs.
Curve Validation. Payment schedule curves (most of which reside in DSAMS) exist as a means of profiling the expenditure patterns for types of cases/weapon systems. These curves can then be used as a means for computing expenditure patterns for similar types of cases/systems, without having to "re-create the wheel" each time. The IPT reviewed some curves currently used and conducted a limited sampling of cases that used each curve. In general, the findings were that the curves studied required relatively minor adjustments. However, it is important to note that the sampling was extremely small in scope and that time precluded a thorough review of all curves in existence. Also, it was discovered that there was no systemic procedure for validating the accuracy of curves. Accordingly, each payment schedule curve must be validated every two years by conducting a random sampling of cases that used each curve, comparing the actual performance of those cases with the curve, and adjusting the curve based on those findings. A statistically valid sample (e.g., a sufficient number of cases are analyzed when compared to the total population of cases using a given curve) is important to provide sufficient analytic data and to document whatever adjustments to the curve resulted during the validation process.
New curves proposed by the IAs should be sent to the Headquarters component for assessment. The IAs should validate the need for a new curve (to include affirming that it will be used frequently enough to merit its creation) and verify the basis for how the proposed curve was constructed. After the IA review is completed, it should be sent to DSCA (COMPT-FM) for approval.
Termination Liability (T/L). T/L applies to procurement-based FMS cases and, when added to the disbursements projected for a given quarter, constitute the total payment due for that quarter. The use of contractor termination schedules is the preferred baseline document for calculating the T/L that would apply at a given point in time for a specific FMS case. The next preferred method is using the T/L component of the payment schedule curve being used. The least preferred method, to be used only in the absence of any other documentation, is the "DoD Standard Curve" shown in Chapter 4, Volume 15, of the DoD FMR.
This policy memorandum deletes the requirement for the T/L Worksheets to be furnished with LOA documents sent to DSCA for electronic countersignature. However, T/L Worksheets must be prepared whenever a case contains a Pricing Element Code (PEC) of 'CC'. The T/L Worksheets must reside in DSAMS. On an ad hoc basis, DSCA will print the T/L Worksheets from DSAMS.
As noted above, T/L Worksheets are prepared for cases containing a PEC of 'CC'. Moreover, T/L does not apply to any PEC other than 'CC'. This business rule must be followed to help ensure accurate pricing of the item and to help reflect an accurate portrayal of financial requirements owed under the LOA. If a specific case, or line within a case, contains multiple PECs, to include 'CC', care must be taken to appropriately pro-rate the 'CC' component for the purpose of computing the T/L.
'BK' Transactions. The 'BK' transaction, aka "K" cards, represent committed unfilled requisitions. These requisitions apply to the Cooperative Logistics Supply Support Arrangement requisitioning cases (FMSO II) and some blanket order cases. Through the IPT's discussions, it was agreed that the 'BK' billing process was more convoluted than necessary. As such, the 'BK' transaction/'K' card feed from the IAs to DFAS will in all instances form the basis for what is billed to the FMS customer. In addition, payment schedules for the 'BK transaction-based cases shall include a note directly underneath the schedule that states the following: "This schedule represents the USG's best approximation only, and is ultimately determined by actual FMS customer requisitioning." Significant variances that arise on 'BK'-based cases will, if meeting the criteria for the payment schedule variance filtered report, require revisions to the approximate payments for the remainder of that case.
Customer Requests. On occasion, the FMS customer may submit its requested payment schedule for a given case. This schedule may be based on its internal budgetary allocation, reflect other constraints or may reflect a desire to pay on an accelerated basis. In all instances, the IA should analyze the customer's request in the context of whether the desired incoming cash flow ensures sufficient funds are available throughout the life of the case. This requires a comparison with the payment schedule the USG would have otherwise developed on its own. Every effort should be made to accommodate customer requests. If minor adjustments should be made to satisfy our requirements, a dialogue with the customer should commence; an outright rejection should not be initiated. Most obstacles will be overcome through clear and open communication in advance of an offered LOA.
To the extent customer-requested schedules that deviate from the USG's schedule are used, only the customer-requested schedule will appear on the LOA (except for certain Japan cases under its Planned Payment Schedule concept). The case manager must document, either through DSAMS or in the case file, the USG-developed payment schedule that would have otherwise been used had the customer not requested a unique schedule. A note underneath the schedule is required to confirm usage of the customer-requested schedule (provide a reference) and USG approval (provide name of organization and approval date). In addition, a second note to be placed underneath that schedule shall be worded as follows: "The USG reserves the right to bill for additional amounts if, during the execution phase, actual costs materialize at a rate that cannot be supported by the customer-based schedule." That said, it is understood that dialogue with the FMS customer will occur in advance of modifying the payment schedule to reflect a profile not based on our prior arrangement.
Lastly, customer-based schedules will impact the T/L Worksheet. The IA should first develop the T/L Worksheet based on the payment schedule the USG would have otherwise developed (to include contractor termination costs). Then, the customer-based schedule should be overlaid and used to re-calculate what the T/L profile will be based on that schedule. In other words, the T/L "curve" will change to accommodate and align with the customer-based schedule.
Updates. Updates to payment schedules are an integral part of keeping the FMS customer informed as to changes during the execution phase of an LOA. These changes may be necessary to reflect revisions to delivery schedules (for example) and also adjusted scopes. For major cases, this includes the payment schedule variance filtered report discussed above. For all cases, the payment schedule review occurs at least annually, and is one item found on the case review checklist (Attachment 2B).
Special Billing Arrangements (SBAs). Over 30 countries have SBAs that serve as alternate billing arrangements with DSCA and DFAS. These SBAs were created primarily as a result of customer dissatisfaction with the payment schedule process. We believe that the improved policies and methodologies will likely, over time, obviate the need for SBAs from a USG perspective. However, ultimate decision on whether to continue or terminate an individual SBA rests with the applicable FMS customer. No SBA will be terminated unilaterally.
DSAMS and DIFS. The policy revisions articulated in this guidance necessitated a number of revisions and corrections to the DSAMS (and to a lesser extent, DIFS) constructs. These issues were explored in detail with the DSAMS programmers earlier this year. The meeting with DIFS programmers has not yet been held. However, due to the relative complexity of some programming requirements, not all of the policy revisions can be implemented immediately. DSCA will send a formal memorandum announcing deployment of the release that incorporates these changes. Refer to the "Implementation" section below for additional information on when the policies announced herein will be effective.
Implementation
The following policies are effective immediately upon the USG FMS community being adequately trained on these requirements, and in any event not later than 31 December 2001:
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Case review and case reconciliation requirements (including the checklists).
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Use of, and taskings through DSAMS based on, the payment schedule variance report (filtered/actionable version).
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Reference to the life cycle matrix.
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Construct of payment schedules from the line-level using curves in DSAMS, rolled-up to the case-level.
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Use of valid/proper parameters and assumptions when building schedules.
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Information exchange requirements between case writers and information providers.
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Curve validation process.
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Elimination of requirement to provide T/L worksheet with LOA packages sent to DSCA for countersignature.
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Inclusion of notes underneath LOA payment schedules for 'BK' transaction-based cases and also for customer-requested schedules.
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Payment schedule update requirements.
The following policies are effective when DSAMS or DIFS are reprogrammed, the corresponding releases are deployed, and DSCA notifies the FMS community:
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Reformatted payment schedules (to include insertion of collection data) (DSAMS).
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Construct of payment schedules from the line-level using manually-entered quarterly financial expenditures, rolled-up to the case-level (DSAMS).
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Computing T/L amounts based only on PEC of 'CC' (DSAMS).
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Reformatted T/L worksheets (DSAMS).
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Recomputed billing methodology for 'BK' transaction-based cases (DIFS).
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