100 word reply to each question
Your company has a sole source contract to build a new weapon system for the military. Midway through the contract the government wants to make a significant change to the design to incorporate some new technology. You submit a Change Proposal for the impact – millions of dollars – and negotiations take months. You finally reach a handshake. Prior to signing the mod you receive information that shows your costs will be a couple million dollars less than you thought. Good news, right? What might be some issues?
The Truth-in-Negotiations Act (TINA) protects the government from defective pricing. In this scenario, DeVecchio’s DEFECTIVE PRICING: A VERY SHORT COURSE, states “all facts existing as of the shake-hands date must be disclosed, but new facts occurring after the shake-hand date need not be disclosed, although prudence dictates in some cases that they should be”. However, based on TINA (Breakout Session – ncmahq.org, n.d.), if the company misrepresents information, such as in this case, by not disclosing the price change, the company will have acted with the intent to deceive. This is because we knew the costs would be lower but failed to disclose this information, exposing the company to legal consequences.
Breakout Session – ncmahq.org. (n.d.). Retrieved November 9, 2016, from http://www.ncmahq.org/docs/default-source/default-document-library/pdfs/b10—enhance-your-understanding-of-the-truth-in-negotiation-act-(tina)
DeVecchio, W. (n.d.). DEFECTIVE PRICING: A VERY SHORT COURSE. Retrieved November 9, 2016, from http://macpamedia.org/media/downloads/2012GVC/devecchio_handout_Defective_Pricing.pdf
The cash flow of the company is determined by expenses incurred on the project. The company can negotiate favorable credit terms with suppliers and customers in order to change your cash flow situation. The organization also creates long- term cash flow projections using the last year’s payables and receivables histories, provided they will be similar during the coming year (Chen, & Chen, 2012). The company may buy at competitive price the material to be used in the project by searching and negotiating the supplier. The company may lower the labor cost to be incurred on the project by hiring labor at lower rates and also by making sure that they work efficiently. After controlling cost, the company may stretch the payable by asking maximum time period to pay to supplier of material purchased.
Without doubt, the company would need funds for at least 180 days or 210 days, as the payment will be received after 6 months and 30 days. The company will need to have funds for 210 days, if no credit is available from supplier and if 30 days credit is available from supplier, the company will need funds for 210-30 = 180 days. The organization should also meet with the lenders such as the commercial banks, or open up a new business credit card, to use until paid. Moreover, reduce the interest on the credit you use by using short- term bridge loans and the credit cards you pay off quickly (Chen, & Chen, 2012). The company may issue notes payable for 180 or 210 days. The company may use the surplus cash if available from other sources of the business. The owner or partner of the business may also provide capital or provide loan to the company on short term basis.
Chen, H. J., & Chen, S. J. (2012). Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series. Journal of Financial Economics, 103(2), 393-410.