[Federal Register Volume 64, Number 27 (Wednesday, February 10, 1999)]
[Proposed Rules]
[Pages 6758-6765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3117]
[[Page 6757]]
_______________________________________________________________________
Part III
Department of Defense
General Services Administration
National Aeronautics and Space Administration
_______________________________________________________________________
48 CFR Parts 32 and 52
Federal Acquisition Regulation: Progress Payments and Related Financing
Policies; Proposed Rule
Federal Register / Vol. 64, No. 27 / Wednesday, February 10, 1999 /
Proposed Rules
[[Page 6758]]
DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 32 and 52
[FAR Case 98-400]
RIN 9000-AI27
Federal Acquisition Regulation; Progress Payments and Related
Financing Policies
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Proposed rule.
-----------------------------------------------------------------------
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:
farcase.98-400@gsa.gov.
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
