Federal Acquisition Regulation; Progress Payments and Related Financing Policies

SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council are proposing to amend the Federal

Acquisition Regulation (FAR) to reduce the burdens imposed on

contractors and contracting officers by the progress payment type of

financing; to permit the use of performance-based payments in contracts

for research and development, and contracts awarded through competitive

negotiation procedures; to expand the use of subcontractor performance-

based or commercial financing payments; and to simplify and clarify

related provisions.

DATES: Comments should be submitted on or before April 12, 1999 to be

considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments to:

General Services Administration, FAR Secretariat (MVR), Attn: Laurie

Duarte, 1800 F Street, NW, Room 4035, Washington, DC 20405.

E-mail comments submitted over Internet should be addressed to:

[email protected].

Please cite FAR case 98-400 in all correspondence related to this

case.

FOR FURTHER INFORMATION CONTACT: For clarification of content, contact

Mr. Ralph De Stefano, Procurement Analyst, at (202) 501-1758. Please

cite FAR case 98-400. For information on status or publication

schedules, contact the FAR Secretariat, Room 4035, GS Building,

Washington, DC 20405, (202) 501-4755.

SUPPLEMENTARY INFORMATION:

A. Background

The Director of Defense Procurement at the Department of Defense

established a special interagency team to review existing policies and

procedures related to progress payments, to make them easier to

understand and to minimize the burdens imposed on contractors and

contracting officers. Regulatory requirements pertaining to progress

payments that were not required by statute, required to ensure

adequately standardized Government business practices, or required to

protect the public interest were considered for revision or

elimination.

An advance notice of proposed rulemaking (ANPR) was published in

the Federal Register on May 1, 1997 (62 FR 23740). The ANPR solicited

comments from industry and Government personnel on how the FAR could be

revised to result in a simplified and streamlined process of applying

for and administering progress payments.

After reviewing progress payment policies and public comments

received in response to the ANPR, the team identified potential changes

to the FAR. A second ANPR was published in the Federal Register on

March 5, 1998 (63 FR 11074), that solicited comments on the potential

changes identified in the notice. The ANPR also announced a public

meeting, that was subsequently held on April 23, 1998. After

considering written comments received in response to the two notices,

and verbal comments provided during the public meeting, the working

group submitted a report including a draft proposed rule for

consideration by the Defense Acquisition Regulations Council and the

Civilian Agency Acquisition Council.

The councils have reviewed the report, and propose the following

revisions to the FAR:

1. Increase Thresholds for Contract Financing and Establish a Threshold

for Individual Progress Payment Requests

To reduce the administrative burden that small dollar actions place

on the contract administration and payment process, the proposed rule:

(a) Raises the dollar threshold at FAR 32.104(d) for use of

contract financing with large businesses, from $1 million to $2

million. This threshold applies to an individual contract or a group of

contracts or orders that total $2 million or more;

(b) Revises FAR 32.104(d)(2), adds FAR 32.502-4(d), and adds

Alternate III to the contract clause at FAR 52.232-16, Progress

Payments, to indicate that, in calculating this $2 million threshold,

only those groups of contracts or orders whose individual prices exceed

the simplified acquisition threshold will be considered; and

(c) Adds, at FAR 32.503-1 and at FAR 52.232-16, a minimum dollar

threshold of $2,500 for individual progress payment requests, unless a

lower amount is authorized in accordance with agency procedures.

2. Elimination of the ``Paid Cost Rule''

Currently, a large business is required to pay a subcontractor

before including the payment in its progress payment billings to the

Government. This is referred to as the ``paid cost rule.'' The proposed

FAR rule revises the contract clause at FAR 52.232-16, Progress

Payments, to eliminate the ``paid cost rule.'' The revised clause

allows a large business to include, in its progress payment billings,

subcontract costs that it has incurred but not actually paid, provided

the payment to the subcontractor will be made in the ordinary course of

business. The proposed rule, likewise, amends the contract clauses at

FAR 52.216-7, Allowable Cost and Payment, and at FAR 52.232-7, Payments

Under Time-and-Materials and Labor-Hour Contracts, to provide

consistent treatment in all payment clauses. This proposed change

affects large businesses only. The FAR currently permits a small

business concern to include, in its progress payment billings,

subcontract costs that it has incurred but not actually paid.

3. Permit Subcontractor Performance-based Payments or Commercial

Financing Payments Under Prime Contracts That Have Progress Payments or

Cost-reimbursement Type of Financing

The proposed rule amends FAR 32.504 and the contract clause at FAR

52.232-16, Progress Payments, and adds FAR 32.110, to permit prime

contractors that receive progress payments or cost-reimbursement type

of payments to use performance-based payments or commercial financing

payments with their subcontractors, provided the subcontracts that

include such payments meet the same criteria and use provisions

substantially similar to those in the prime contractor's contract.

4. Elimination of the Limitation on General and Administrative Expenses

The proposed rule removes the limitation at FAR 32.503-7, which

applies to only those contractors that have established an inventory

suspense account under 48 CFR 9904.410, Allocation of Business Unit

General and Administrative Expenses to Final Cost Objectives. This

provision dates from 1979 and currently applies to very few remaining

contractors.

[[Page 6759]]

5. Elimination of the Contracting Officer Review of Quarterly

Statements

The proposed rule removes the requirement at FAR 32.503-13 for the

contractor to submit quarterly statements under price revision or

redeterminable contracts. This requirement is unnecessary, as the

Government's interests are protected adequately by the contracting

officer that has the responsibility for administering progress

payments.

6. Permit the Use of Performance-based Payments in Contracts for

Research and Development, and in Contracts Awarded Through Competitive

Negotiation Procedures

The proposed rule amends FAR 32.1000 by removing the prohibition

against using performance-based payments type of financing in contracts

for research and development and contracts awarded through competitive

negotiation procedures. In addition, the rule adds a new subsection at

FAR 32.1004-2 and a new solicitation provision at FAR 52.232-XX,

Invitation to Propose Performance-Based Payments, for use in

competitive solicitations when offerors are invited to propose

performance-based payments.

However, the prohibition against using performance-based type of

financing in contracts awarded using sealed bid procedures remains in

FAR 32.1000. The evaluation process necessitates discussions when

performance-based payments are proposed to ensure the payment events

and payment amounts are reasonable, credible, and consistent with all

other aspects of the offeror's proposal. Since sealed bid procedures

are used when it is not necessary to conduct discussions with the

responding offerors about their bids, sealed bid procedures cannot

accommodate performance-based payments.

7. Ensure Consideration of Performance-based Payments

The proposed rule revises FAR 32.502-1 and 32.1004 to emphasize

that performance-based payments are the preferred method of financing;

their use should be considered and deemed impracticable by the

contracting officer before a decision is made to provide customary

progress payments; and each payment amount should represent what the

contractor could reasonably be expected to incur to achieve the payment

event rather than resemble an advance payment or a reward to the

contractor for achieving performance levels over and above what is

required for successful completion of the contract.

8. Other Changes

The proposed rule also revises FAR 32.503-6(f) to simplify and

clarify that, on a loss contract, application of the loss ratio

constitutes the adjustment that ensures progress payments do not exceed

the value of work performed; amends FAR 32.501-1(a) to delete the

authorization for the Department of Defense to establish customary

progress payment rates for foreign military sales (FMS) and flexible

progress payments that differ from the customary rates cited in the

same paragraph (DoD no longer uses flexible progress payments and does

not intend to establish alternate rates for FMS); and makes related

editorial changes.

This regulatory action was not subject to Office of Management and

Budget review under Executive Order 12866, dated September 30, 1993,

and is not a major rule under 5 U.S.C. 804.

B. Regulatory Flexibility Act

This proposed rule is not expected to have a significant economic

impact on a substantial number of small entities within the meaning of

the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because most

contracts awarded to small entities have a dollar value less than the

simplified acquisition threshold, and, therefore, do not require the

progress payment or performance-based payment type of financing.

Therefore, an Initial Regulatory Flexibility Analysis has not been

performed. Comments are invited from small businesses and other

interested parties. Comments from small entities concerning the

affected FAR subparts also will be considered in accordance with 5

U.S.C. 610. Such comments must be submitted separately and should cite

FAR Case 98-400 in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act (44 U.S.C. 3501, et seq.) is deemed to

apply because the proposed rule contains information collection

requirements.

1. Office of Management and Budget (OMB) Control Number 9000-0010

(Progress Payments)

The proposed rule decreases the collection requirements currently

approved under OMB/Control Number 9000-0010, since the rule raises the

threshold for permitting contract financing in the form of customary

progress payments, and establishes a dollar threshold for contractor

requests for progress payments. The estimated number of respondents per

year: reduced from 27,000 to 18,090; yearly responses per respondent:

32 (unchanged); average per response: 33 minutes (unchanged); total

yearly burden hours: from 475,000 to 318,384; frequency: as required.

Accordingly, a request for amendment of information collection

requirements will be submitted to OMB at the final rule stage.

2. OMB Control Number 9000-0138 (Contract Financing)

There is no net impact to the collection requirements currently

approved under OMB Control Number 9000-0138. The increase in hours

resulting from adding the provision at 52.232-XX, Invitation to Propose

Performance-Based Payments, in competitive solicitations when the

performance-based payment method of contract financing is used, is

offset by the decrease in hours resulting from raising the contract

dollar threshold for permitting performance-based payments.

D. Request for Comments Regarding Paperwork Burden

Members of the public are invited to comment on the recordkeeping

and information collection requirements and estimates set forth above.

Please send comments to: Office of Information and Regulatory Affairs,

Office of Management and Budget, Attention: Mr. Peter N. Weiss, FAR

Desk Officer, New Executive Office Building, Room 10102, 725 17th

Street, NW, Washington, DC 20503.

Also send a copy of any comments to the FAR Secretariat at the

address shown under ADDRESSES. Please cite the corresponding OMB

clearance numbers in all correspondence related to the estimate.

List of Subjects in 48 CFR Parts 32 and 52

Government procurement.

Dated: February 4, 1999.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, it is proposed that 48 CFR Parts 32 and 52 be amended as

set forth below:

1. The authority citation for 48 CFR Parts 32 and 52 continues to

read as follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42

U.S.C. 2473(c).

PART 32--CONTRACT FINANCING

2. Section 32.104 is revised to read as follows:

[[Page 6760]]

32.104 Providing contract financing.

(a) Prudent contract financing can be a useful working tool in

Government acquisition by expediting the performance of essential

contracts. Government financing shall be provided only to the extent

actually needed for prompt and efficient performance, considering the

availability of private financing and the probable impact on working

capital of the pre-delivery expenditures and production lead times

associated with the contract or groups of contracts or orders (e.g.,

indefinite-delivery contracts, basic ordering agreements, or their

equivalent). Contract financing shall be administered so as to aid, not

impede, the acquisition. At the same time, the contracting officer

shall avoid any undue risk of monetary loss to the Government through

the financing. Include the form of contract financing deemed to be in

the Government's best interest in the solicitation (see 32.106 and

32.113). The contractor's use of the contract financing provided and

the contractor's financial status shall be monitored.

(b) If the contractor is a small business concern, the contracting

officer shall give special attention to meeting the contractor's

contract financing need. However, a contractor's receipt of a

certificate of competency from the Small Business Administration has no

bearing on the contractor's need for or entitlement to contract

financing.

(c) Subject to specific agency regulations and paragraph (d) of

this section, the contracting officer may provide customary contract

financing in accordance with 32.113. Unusual contract financing shall

not be provided except as authorized in 32.114.

(d) The contracting officer may provide contract financing in the

form of performance-based payments (see 32.10) or customary progress

payments (see 32.5)--

(1) For individual contracts when the contract price is $2 million

or more (or for small business concerns, when the contract price

exceeds the simplified acquisition threshold) if the contractor--

(i) Will not be able to bill for the first delivery of products for

a substantial time after work must begin (normally 4 months or more for

small business concerns, and 6 months or more for others), and will

make expenditures for contract performance during the pre-delivery

period that have a significant impact on the contractor's working

capital; or

(ii) Demonstrates actual financial need or the unavailability of

private financing.

(2) For a group of contracts or orders that total $2 million or

more. In calculating this threshold, only those contracts or orders

whose prices exceed the simplified acquisition threshold will be

considered.

3. Section 32.106 is amended by revising paragraph (b) to read as

follows:

32.106 Order of preference.

* * * * *

(b) Customary contract financing other than loan guarantees and

certain advance payments (see 32.113).

* * * * *

4. Section 32.110 is added to read as follows:

32.110 Payment of subcontractors under cost-reimbursement prime

contracts.

If the contractor makes financing payments to a subcontractor under

a cost-reimbursement prime contract, the contracting officer shall

accept the financing payments as reimbursable costs of the prime

contract only under the following conditions--

(a) The payments are made under the criteria in subpart 32.5 for

customary progress payments based on costs, 32.202-1 for commercial

item purchase financing, or 32.1003 for performance-based payments, as

applicable.

(b) If customary progress payments are made, the payments do not

exceed the progress payment rate in 32.501-1, unless unusual progress

payments to the subcontractor have been approved in accordance with

32.501-2.

(c) If customary progress payments are made, the subcontractor

complies with the liquidation principles of 32.503-8, 32.503-9, and

32.503-10.

(d) If performance-based payments are made, the subcontractor

complies with the liquidation principles of 32.1004-1(d).

(e) The subcontract contains financing payments terms as prescribed

in this section.

5. Section 32.112 is amended by revising the section heading to

read as follows:

32.112 Nonpayment of subcontractors under contracts for non-commercial

items.

* * * * *

6. Section 32.113 is amended by revising paragraph (c);

redesignating paragraphs (d) through (g) as (e) through (h),

respectively; and adding a new paragraph (d) to read as follows:

32.113 Customary contract financing.

* * * * *

(c) Financing of contracts for supplies or services awarded under

the sealed bid method of procurement in accordance with part 14 through

progress payments based on costs in accordance with subpart 32.5;

(d) Financing of contracts for supplies or services awarded under

the competitive negotiation method of procurement in accordance with

part 15, through either progress payments based on costs in accordance

with subpart 32.5, or performance-based payments in accordance with

subpart 32.10 (but not both);

* * * * *

7. Section 32.205 is amended by revising the first sentence of

paragraph (c)(4) to read as follows:

32.205 Procedures for offeror-proposed commercial contract financing.

* * * * *

(c) * * *

(4) The time value of proposal-specified contract financing

arrangements shall be calculated using as the interest rate the Nominal

Discount Rate specified in Appendix C of the Office of Management and

Budget (OMB) Circular A-94, ``Guidelines and Discount Rates for

Benefit-Cost Analysis of Federal Programs'', appropriate to the period

of contract financing. * * *

8. Section 32.500 is amended by revising paragraph (a) to read as

follows:

32.500 Scope of subpart.

* * * * *

(a) Payments under cost-reimbursement contracts, but see 32.110 for

progress payments made to subcontractors under cost-reimbursement prime

contracts; or

* * * * *

9. Section 32.501-1 is amended in paragraph (a) by removing the

last sentence; and in paragraph (d) by revising the first sentence to

read as follows:

32.501-1 Customary progress payment rates.

* * * * *

(d) In accordance with 10 U.S.C. 2307(e)(2) and 41 U.S.C. 255,

progress payments are limited to 80 percent on work accomplished under

undefinitized contract actions. * * *

10. Section 32.502-1 is revised to read as follows:

32.502-1 Use of customary progress payments.

When the criteria for the use of performance-based payments are not

met (see 32.1001(a) and 32.1003), the use of a progress payments clause

in solicitations and resulting contracts may be considered in

accordance with this subpart. Bids conditioned on progress payments

when the solicitation did not provide for progress payments shall be

rejected as nonresponsive.

[[Page 6761]]

11. Section 32.502-4 is amended by redesignating paragraph (d) as

(e) and adding a new paragraph (d) to read as follows:

32.502-4 Contract clauses.

* * * * *

(d) If progress payments are authorized under an indefinite-

delivery contract, the contracting officer shall use the clause with

its Alternate III to make progress payments applicable only to orders

that exceed the simplified acquisition threshold.

* * * * *

12. Section 32.503-1 is amended at the end of paragraph (b) by

removing ``and''; in paragraph (c) by removing the period and adding

``; and''; and adding paragraph (d) to read as follows:

32.503-1 Contractor requests.

* * * * *

(d) Be $2,500 or more, unless a lower amount is authorized in

accordance with agency procedures.

13. Section 32.503-5 is amended by revising paragraph (c) to read

as follows:

32.503-5 Administration of progress payments.

* * * * *

(c) Progress payments made under indefinite-delivery contracts

should be administered under each individual order as if the order

constituted a separate contract, unless agency procedures provide

otherwise.

14. Section 32.503-6 is amended by revising paragraphs (f) and

(g)(4) to read as follows:

32.503-6 Suspension or reduction of payments.

* * * * *

(f) Fair value of undelivered work. Progress payments must be

commensurate with the fair value of work accomplished in accordance

with contract requirements. Governed by the principles of paragraphs

(c) and (e) of this section, the contracting officer shall adjust

progress payments when necessary to ensure that the fair value of

undelivered work equals or exceeds the amount of unliquidated progress

payments. On loss contracts, the application of a loss ratio as

described in paragraph (g) of this section constitutes this adjustment.

(g) * * *

(4) The following is an example of the supplementary analysis

required in paragraph (g)(3) of this section:

Section I

Contract price.......................................... $2,850,000

Change orders and unpriced orders (to extent funds have

been obligated)........................................ 150,000

Revised contract price.................................. 3,000,000

Section II

Total costs incurred to date............................ 2,700,000

Estimated additional costs to complete.................. 900,000

Total costs to complete................................. 3,600,000

Loss ratio factor $3,000,000 $3,600,000 = 83.3%

Total costs eligible for progress payments.............. 2,700,000

Loss ratio factor....................................... x 83.3%

Recognized costs for progress payments.................. 2,249,100

Progress payment rate................................... x 80.0%

Alternate amount to be used............................. 1,799,280

Section III

Factored costs of items delivered*...................... 750,000

Recognized costs applicable to undelivered items ......

$2,249,100--$750,000................................... 1,499,100

* This amount shall be the same as the contract price of the items

delivered.

32.503-7 [Reserved]

15. Section 32.503-7 is removed and reserved.

16. Section 32.503-8 is revised to read as follows:

32.503-8 Liquidation rates--ordinary method.

Progress payments are recouped by the Government through the

deduction of liquidations from payments that would otherwise be due to

the contractor for completed contract items. To determine the amount of

the liquidation, a liquidation rate is applied to the contract price of

contract items delivered and accepted. The ordinary method is that the

liquidation rate is the same as the progress payment rate; at the

beginning of a contract, only this method may be used.

17. Section 32.503-10 is amended by revising paragraphs (b)(1) and

(b)(3) to read as follows:

32.503-10 Establishing alternate liquidation rates.

* * * * *

(b) * * *

(1) The contracting officer shall compute the expected progress

payments by multiplying the estimated cost of performing the contract

by the progress payment rate.

* * * * *

(3) The following are examples of the computation. Assuming an

estimated price of $2,200,000 and total estimated costs eligible for

progress payments of $2,000,000:

(i) If the progress payment rate is 80 percent, the minimum

liquidation rate should be 72.7 percent, computed as follows:

[GRAPHIC] [TIFF OMITTED] TP10FE99.001

(ii) If the progress payment rate is 85 percent, the minimum

liquidation rate should be 77.3 percent, computed as follows:

[GRAPHIC] [TIFF OMITTED] TP10FE99.002

* * * * *

32.503-13 [Reserved]

18. Section 32.503-13 is removed and reserved.

19. Section 32.504 is amended by revising the section heading and

paragraphs (a) and (b); in the second sentence of paragraph (c) by

revising ``(j)(4)'' to read ``(j)(6)''; in the first sentence of

paragraph (d) by removing ``progress'' and adding ``financing'', and by

revising the second sentence; in the introductory text of paragraph (e)

by revising the first sentence; by revising paragraph (f); and by

adding paragraph (g) to read as follows:

[[Page 6762]]

32.504 Subcontracts under prime contracts providing progress payments.

(a) Subcontracts may include either performance-based payments,

provided they meet the criteria in 32.1003, or progress payments on

terms that meet the criteria in subpart 32.5 for customary progress

payments, but not both. Subcontracts for commercial purchases may

include commercial item purchase financing terms, provided they meet

the criteria in 32.202-1.

(b) The contractor's requests for progress payments may include the

full amount of commercial item purchase financing payments,

performance-based payments, or progress payments to subcontractors,

whether paid, or approved for current payment in the ordinary course of

business, under the contract and subcontracts.

* * * * *

(d) * * * Although the contracting officer should, to the extent

appropriate, review the subcontract as part of the overall

administration of progress payments in the prime contract, there is no

special requirement for contracting officer review or consent merely

because the subcontract includes financing payments, except as provided

in paragraph (c) of this section. * * *

(e) When financing payments are in the form of progress payments,

the subcontract terms shall include the substance of the Progress

Payments clause in the prime contract, modified to indicate that the

contractor, not the Government, awards the subcontract and administers

the progress payments.

* * * * *

(f) When financing payments are in the form of performance-based

payments, the subcontract terms shall include the substance of the

Performance-Based Payments clause at 52.232-32, modified to indicate

that the contractor, not the Government, awards the subcontract and

administers the performance-based payments, and include appropriate

wording modifications similar to those noted in paragraph (e) of this

section.

(g) When financing payments are in the form of commercial item

purchase financing, the subcontract shall include a contract financing

clause structured in accordance with 32.206.

20. Section 32.1000 is amended at the end of paragraph (b) by

adding ``or'' after the semicolon; removing paragraph (c) and

redesignating paragraph (d) as (c), respectively; and revising newly

designated (c) to read as follows:

32.1000 Scope of subpart.

* * * * *

(c) Contracts awarded through sealed bid procedures.

21. Section 32.1001 is amended by removing paragraph (e),

redesignating paragraphs (a) through (d) as (b) through (e),

respectively, and adding a new paragraph (a).

The added text reads as follows:

32.1001 Policy.

(a) Performance-based payments are the preferred financing method

when the contracting officer finds them practical, and the contractor

agrees to their use.

* * * * *

32.1004 [Amended] [Text redesignated as 32.1004-1]

22. Section 32.1004 is amended by revising the section heading to

read as set forth below; and the text is redesignated as 32.1004-1 and

revised. The revisions read as follows:

32.1004 Procedures.

32.1004-1 General.

Performance-based payments may be made either on a whole contract

or on a deliverable item basis, unless otherwise prescribed by agency

regulations. Financing payments to be made on a whole contract basis

are applicable to the entire contract, and not to specific deliverable

items. Financing payments to be made on a deliverable item basis are

applicable to a specific individual deliverable item. (A deliverable

item for these purposes is a separate item with a distinct unit price.

Thus, a contract line item for 10 airplanes, with a unit price of

$1,000,000 each, has ten deliverable items--the separate planes. A

contract line item for 1 lot of 10 airplanes, with a lot price of

$10,000,000, has only one deliverable item--the lot.)

(a) Establishing performance bases. (1) The basis for performance-

based payments may be either specifically described events (e.g.,

milestones) or some measurable criterion of performance. Each event or

performance criterion that will trigger a finance payment shall be an

integral and necessary part of contract performance and shall be

identified in the contract, along with a description of what

constitutes successful performance of the event or attainment of the

performance criterion. The signing of contracts or modifications, the

exercise of options, or other such actions shall not be events or

criteria for performance-based payments. An event need not be a

critical event in order to trigger a payment, but successful

performance of each such event or performance criterion shall be

readily verifiable.

(2) Events or criteria may be either severable or cumulative. The

successful completion of a severable event or criterion is independent

of the accomplishment of any other event or criterion. Conversely, the

successful accomplishment of a cumulative event or criterion is

dependent upon the previous accomplishment of another event. A contract

may provide for more than one series of severable and/or cumulative

performance events or criteria performed in parallel. The following

shall be included in the contract:

(i) The contract shall not permit payment for a cumulative event or

criterion until the dependent event or criterion has been successfully

completed.

(ii) Severable events or criteria shall be specifically identified

in the contract.

(iii) The contract shall identify which events or criteria are

preconditions for the successful achievement of each cumulative event

or criterion.

(iv) Because performance-based payments are contract financing,

events or criteria shall not serve as a vehicle to reward the

contractor for completion of performance levels over and above what is

required for successful completion of the contract.

(v) If payment of performance-based finance amounts is on a

deliverable item basis, each event or performance criterion shall be

part of the performance necessary for that deliverable item and shall

be identified to a specific contract line item or subline item.

(b) Establishing performance-based finance payment amounts. (1) The

contracting officer shall establish a complete, fully defined schedule

of events or performance criteria and payment amounts when negotiating

contract terms. If a contract action significantly affects the price,

or event or performance criterion, the contracting officer responsible

for pricing the contract modification shall adjust the performance-

based payment schedule appropriately.

(2) Total performance-based payments shall--

(i) Reflect prudent contract financing provided only to the extent

needed for contract performance (see 32.104(a)); and

(ii) Not exceed 90 percent of the contract price if on a whole

contract basis, or 90 percent of the delivery item price if on a

delivery item basis.

(3) The amount of each performance-based payment shall be

specifically stated either as a dollar amount or as a percentage of a

specifically identified price (e.g., contract price, or unit price

[[Page 6763]]

of the deliverable item). The payment of contract financing has a cost

to the Government in terms of interest paid by the Treasury to borrow

funds to make the payment. Because the contracting officer has wide

discretion as to the timing and amount of the performance-based

payments, the contracting officer shall ensure that--

(i) The total contract price is fair and reasonable, all factors

(including the financing costs to the Treasury of the performance-based

payments) considered; and

(ii) Performance-based payment amounts are commensurate with the

value of the performance event or performance criterion, and will not

result in an unreasonably low or negative level of contractor

investment in the contract. Accordingly, contracting officers shall

require that contractor proposals for performance-based payments

include a profile showing projected cash flow and contractor investment

in the contract.

(4) Performance-based payment amounts may be established on any

rational basis determined by the contracting officer, or agency

procedures, which may include (but are not limited to)--

(i) Engineering estimates of stages of completion;

(ii) Engineering estimates of hours or other measures of effort to

be expended in performance of an event or achievement of a performance

criterion; or

(iii) The estimated projected cost of performance of particular

events.

(5) When subsequent contract modifications are issued, the

performance-based payment schedule shall be adjusted as necessary to

reflect the actions required by those contract modifications.

(c) Instructions for multiple appropriations. If there is more than

one appropriation account (or subaccount) funding payments on the

contract, the contracting officer shall provide instructions to the

Government payment office for distribution of financing payments to the

respective funds accounts. Distribution instructions must be consistent

with the contract's liquidation provisions.

(d) Liquidating performance-based finance payments. Performance-

based amounts shall be liquidated by deducting a percentage or a

designated dollar amount from the delivery payments. The contracting

officer shall specify the liquidation rate or designated dollar amount

in the contract. The method of liquidation shall ensure complete

liquidation no later than final payment.

(1) If the performance-based payments are established on a delivery

item basis, the liquidation amount for each line item shall be the

percent of that delivery item price that was previously paid under

performance-based finance payments or the designated dollar amount.

(2) If the performance-based finance payments are on a whole

contract basis, liquidation shall be by predesignated liquidation

amounts or liquidation percentages.

23. Section 32.1004-2 is added to read as follows:

32.1004-2 Procedures for evaluating offeror-proposed performance-based

payments for competitive solicitations.

Use the following procedures when offerors are invited to propose

performance-based payments:

(a) Solicitations. The contracting officer shall specify, in

section M of the solicitation, the interest rate to be used in the

evaluation of financing proposals (see paragraph (b)(4) of this

section).

(b) Evaluation of proposals. (1) Since performance-based payment

terms will vary among offerors, the contracting officer shall--

(i) Review the proposed terms to ensure they comply with 32.1004-1;

and

(ii) Adjust each proposed price for evaluation purposes to reflect

the cost of providing the proposed performance-based payments to

determine the total cost to the Government of that particular

combination of price and performance-based financing.

(2) The Government makes payments earlier when using the

performance-based payments type of financing than it would if payments

were not made until deliveries are accepted. In order to determine the

cost to the Government of making payments earlier, the contracting

officer shall compute the imputed cost of those performance-based

payments and add it to the proposed price to determine the evaluated

price for each offeror.

(3) The imputed cost of a single performance-based financing

payment is the amount of the payment multiplied by the annual interest

rate, multiplied by the number of years, including fraction thereof,

between the projected performance-based payment (invoice) date and the

date the amount would have been paid as a delivery payment. The imputed

cost of financing is the sum of the imputed costs of each of the

performance-based financing payments.

(4) The time value of offeror-proposed contract financing

arrangements shall be calculated using as the interest rate the nominal

discount rate specified in Appendix C of the Office of Management and

Budget (OMB) Circular A-94, ``Guidelines and Discount Rates for

Benefit-Cost Analysis of Federal Programs'', appropriate to the period

of contract financing. Where the period of proposed financing does not

match the periods in the OMB Circular, the interest rate for the period

closest to the finance period shall be used. Appendix C is updated

yearly, and is available from the Office of Economic Policy in OMB.

24. Section 32.1005 is amended by revising the section heading and

paragraph (a) to read as follows:

32.1005 Solicitation provision and contract clauses.

(a) If the contracting officer anticipates that performance-based

contract financing may be provided in accordance with 32.1001, the

contracting office shall insert the clause at 52.232-32, Performance-

Based Payments, in the solicitation and contract with the description

of the basis for payment and liquidation as required in 32.1004.

Additionally, if the procedures at 32.1004-2 are used for competitive

solicitations, the solicitation provision at 52.232-XX, Invitation to

Propose Performance-Based Payments, shall be included.

* * * * *

32.1006 [Removed and Reserved]

25. Section 32.1006 is removed and reserved.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

26. Section 52.216-7 is amended by revising the date of the clause;

by redesignating paragraphs (b)(1)(ii)(A) through (b)(1)(ii)(E) as

(b)(1)(ii)(B) through (b)(1)(ii)(F), adding a new (b)(1)(ii)(A), and

revising (b)(1)(iii), (b)(2), and (c) to read as follows:

52.216-7 Allowable Cost and Payment.

* * * * *

Allowable Cost and Payment (Date)

* * * * *

(b) * * *

(1) * * *

(ii) * * *

(A) Supplies and services purchased directly for the contract;

* * * * *

(iii) The amount of progress and other payments that have been

paid by cash, check or other form of payment, or approved for

current payment in the ordinary course of business, to the

Contractor's subcontractors under similar cost standards.

(2) Accrued costs of Contractor contributions under employee

pension plans shall be excluded until actually paid unless--

[[Page 6764]]

(i) The Contractor's practice is to make contributions to the

retirement fund quarterly or more frequently; and

(ii) The contribution does not remain unpaid 30 days after the

end of the applicable quarter or shorter payment period (any

contribution remaining unpaid shall be excluded from the

Contractor's indirect costs for payment purposes).

* * * * *

(c) Small business concerns. A small business concern may be

paid more often than every 2 weeks.

* * * * *

27. Section 52.232-7 is amended by revising the date of the clause,

the fourth sentence of paragraph (b)(1) and the second sentence of

paragraph (b)(2) to read as follows:

52.232-7 Payments Under Time-and-Materials and Labor-Hour Contracts.

* * * * *

Payments Under Time-and-Materials and Labor-Hour Contracts (Date)

* * * * *

(b) Materials and subcontracts. (1) * * * The Contractor shall

be reimbursed for items and services purchased directly for the

contract only when payments of cash, checks, or other forms of

actual payment have been made, or have been approved for current

payment in the ordinary course of business, for such purchased items

or services, provided the Contractor is not delinquent in paying

such costs in the ordinary course of business. * * *

(2) * * * Reimbursable costs in connection with subcontracts

shall be limited to the amounts paid to the subcontractor for items

and services purchased directly for the contract only when payments

of cash, checks, or other forms of actual payment have been made, or

have been approved for current payment in the ordinary course of

business, for such purchased items or services, provided the

Contractor is not delinquent in paying such costs in the ordinary

course of business. * * *

* * * * *

28. Section 52.232-16 is amended--

a. In paragraph (b) of the introductory text by removing

``paragraph (a)(1)'' and adding ``paragraphs (a)(1), (a)(5), and (b)'';

b. In paragraph (c) of the introductory text by revising ``(a)(4)''

to read ``(a)(1)'';

c. By removing paragraph (d) of the introductory text, and

redesignating paragraph ``(e)'' as ``(d)'';

d. In newly redesignated paragraph (d) by revising ``(see

32.504(b)'' to read ``(see 32.504(c)''; and by revising ``subparagraph

(j)(4)'' to read ``subparagraph (j)(6)'';

e. By revising the date of the clause;

f. In the introductory text of the clause by adding ``of $2,500 or

more'' after ``amounts'';

g. By revising paragraphs (a)(1) and (a)(2) of the clause, and

adding a new paragraph (a)(7);

h. By revising paragraph (j) of the clause;

i. By revising Alternate I and adding Alternate III to read as

follows:

52.232-16 Progress Payments.

* * * * *

Progress Payments (Date)

* * * * *

(a) Computation of amounts. (1) Unless the Contractor requests a

smaller amount, each progress payment shall be computed as 80

percent of the Contractor's total costs incurred under this contract

whether or not actually paid, plus financing payments to

subcontractors (see paragraph (j) of this clause), less the sum of

all previous progress payments made by the Government under this

contract. Cost of money that would be allowable under 31.205-10 of

the Federal Acquisition Regulation shall be deemed an incurred cost

for progress payment purposes.

(2) Accrued costs of Contractor contributions under employee

pension plans shall be excluded until actually paid unless--

(i) The Contractor's practice is to make contributions to the

retirement fund quarterly or more frequently; and

(ii) The contribution does not remain unpaid 30 days after the

end of the applicable quarter or shorter payment period (any

contribution remaining unpaid shall be excluded from the

Contractor's total costs for progress payments until paid).

* * * * *

(7) Notwithstanding any other terms of the contract, the

Contractor agrees not to request progress payments in dollar amounts

of less than $2,500. Exceptions may be made by the Contracting

Officer.

* * * * *

(j) Financing payments to subcontractors. The amounts mentioned

in paragraph (a)(1) of this clause shall be all financing payments

to subcontractors or divisions, if the following conditions are met:

(1) The amounts included are limited to--

(i) The unliquidated remainder of financing payments made; plus

(ii) Any unpaid subcontractor requests for financing payments

that the Contractor has approved for current payment in the ordinary

course of business.

(2) The subcontract or interdivisional order is expected to

involve a minimum of approximately 6 months between the beginning of

work and the first delivery; or, if the subcontractor is a small

business concern, 4 months.

(3) If the financing payments are in the form of progress

payments, the terms of the subcontract or interdivisional order

concerning progress payments--

(i) Are substantially similar to the terms of the clause at

52.232-16, Progress Payments;

(ii) Are at least as favorable to the Government as the terms of

this clause;

(iii) Are not more favorable to the subcontractor or division

than the terms of this clause are to the Contractor;

(iv) Are in conformance with the requirements of 32.504(e) of

the Federal Acquisition Regulation; and

(v) Subordinate all subcontractor rights concerning property to

which the Government has title under the subcontract to the

Government's right to require delivery of the property to the

Government if--

(A) The Contractor defaults; or

(B) The subcontractor becomes bankrupt or insolvent.

(4) If the financing payments are in the form of performance-

based payments, the terms of the subcontract or interdivisional

order concerning payments--

(i) Are substantially similar to the Performance-Based Payments

clause at 52.232-32 and meet the criteria for, and definition of,

performance-based payments in part 32 of the Federal Acquisition

Regulation;

(ii) Are in conformance with the requirements of 32.504(f) of

the Federal Acquisition Regulation; and

(iii) Subordinate all subcontractor rights concerning property

to which the Government has title under the subcontract to the

Government's right to require delivery of the property to the

Government if--

(A) The Contractor defaults; or

(B) The subcontractor becomes bankrupt or insolvent.

(5) If the financing payments are in the form of commercial item

financing payments, the terms of the subcontract or interdivisional

order concerning payments--

(i) Are constructed in accordance with 32.206(c) of the FAR and

included in a subcontract for a commercial item purchase that meets

the definition and standards for acquisition of commercial items in

parts 2 and 12 of the Federal Acquisition Regulation;

(ii) Are in conformance with the requirements of 32.504(g) of

the Federal Acquisition Regulation; and

(iii) Subordinate all subcontractor rights concerning property

to which the Government has title under the subcontract to the

Government's right to require delivery of the property to the

Government if--

(A) The Contractor defaults; or

(B) The subcontractor becomes bankrupt or insolvent.

(6) If financing is in the form of progress payments, the

progress payment rate in the subcontract is the customary rate used

by the Contracting Agency, depending on whether the subcontractor is

or is not a small business concern.

(7) The parties agree concerning any proceeds received by the

Government for property to which title has vested in the Government

under the subcontract terms, that the proceeds shall be applied to

reducing any unliquidated financing payments by the Government to

the Contractor under this contract.

(8) If no unliquidated financing payments to the Contractor

remain, but there are unliquidated financing payments that the

Contractor has made to any subcontractor, the Contractor shall be

subrogated to all the rights the Government obtained through the

terms required by this clause to be in any subcontract, as if all

such rights had been assigned and transferred to the Contractor.

(9) The Contractor shall pay the subcontractor's financing

payment request under paragraphs (j)(1) through (5) of this clause,

within a reasonable time after

[[Page 6765]]

receiving the Government progress payment covering those amounts.

(10) To facilitate small business participation in

subcontracting under this contract, the Contractor agrees to provide

financing payments to small business concerns, in conformity with

the standards for customary contract financing payments stated in

32.113 of the Federal Acquisition Regulation. The Contractor further

agrees that the need for such financing payments shall not be

considered as a handicap or adverse factor in the award of

subcontracts.

* * * * *

Alternate I (Date). If the contract is with a small business

concern, change each mention of the progress payment and liquidation

rates excepting paragraph (k) to the customary rate of 85 percent

for small business concerns (see 32.501-1).

* * * * *

Alternate III (Date). As prescribed in 32.502-4(d), add the

following paragraph (l) to the basic clause. If Alternate II is also

being used, redesignate the following paragraph as paragraph (n):

(l) The provisions of this clause shall not be applicable to

individual orders at or below the simplified acquisition threshold.

29. Section 52.232-XX is added to read as follows:

52.232-XX Invitation to Propose Performance-Based Payments.

As prescribed in 32.1005, insert the following provision:

Invitation to Propose Performance-Based Payments (Date)

(a) The offeror is invited to propose terms under which the

Government shall make performance-based contract financing payments

during contract performance. The performance-based payment financing

terms proposed by the offeror shall be a factor in the evaluation of

the offeror's proposal. The financing terms of the successful

offeror and the FAR clause at 52.232-32, Performance-Based Payments,

shall be incorporated in any resulting contract.

(b) The offeror agrees that in the event of any conflict between

the terms proposed by the offeror and the terms in the FAR clause at

52.232-32, Performance-Based Payments, the terms of the clause at

52.232-32 shall govern.

(c) The offeror's proposed performance-based payment financing

shall not be acceptable if it does not conform to the following

limitations:

(1) Delivery payments shall be made only for supplies delivered

and accepted, or services rendered and accepted in accordance with

the payment terms of this contract.

(2) The terms and conditions of the performance-based payments

must comply with FAR 32.1004-1, be reasonable and consistent with

all other technical and cost information included in the offeror's

proposal, and their total shall not exceed 90 percent of the

contract price if on a whole contract basis, or 90 percent of the

delivery item price if on a delivery item basis.

(3) The terms and conditions of the performance-based financing

must be in the best interests of the United States.

(d) The offeror's proposal of performance-based payment

financing shall include the following:

(1) The proposed contractual language describing the

performance-based payments (see FAR 32.1004-1 for appropriate

criteria for establishing performance bases and performance-based

finance payment amounts).

(2) A listing of--

(i) The projected performance-based payment dates and the

projected payment amounts; and

(ii) The projected delivery date and the projected payment

amount.

(3) A profile showing projected cash flow and contractor

investment in the contract.

(e) Evaluation of the offeror's proposed prices and financing

terms shall include the following--

(1) Whether the offeror's proposed performance-based payment

events and payment amounts are reasonable and consistent with all

other terms and conditions of the offeror's proposal.

(2) The cost to the United States of the proposal using the

interest rate and delivery schedule specified elsewhere in this

solicitation.

(End of provision)

[FR Doc. 99-3117 Filed 2-9-99; 8:45 am]

BILLING CODE 6820-EP-P