Overview
This section establishes performance-based payments (PBPs) as the Government's preferred method of contract financing, provided they are practical and mutually agreed upon. It distinguishes PBPs from payments for accepted items and outlines specific scenarios and contract types where their use is prohibited.
Key Rules
- Preferred Method: PBPs are the primary choice for financing when the contractor agrees and the Contracting Officer deems them feasible.
- Nature of Payment: PBPs are classified as contract financing, not as payment for the delivery or acceptance of goods or services.
- Recoverability: In the event of a contractor default, the Government has the right to fully recover PBPs in the same manner as progress payments.
- Prompt Payment Act Exclusion: Because they are financing payments, PBPs are not subject to interest penalties under the Prompt Payment Act.
- Prohibitions: PBPs cannot be used for:
- Cost-reimbursement line items.
- Contracts for architect-engineer services, construction, or shipbuilding/repair that utilize progress payments based on percentage of completion.
- Contracts awarded via sealed bidding.
Practical Implications
- Contractors must prioritize establishing clear, objective milestones during negotiations, as PBPs offer a more favorable financing structure than traditional progress payments but require rigorous verification of performance.
- Because PBPs lack Prompt Payment Act interest protection, contractors should ensure their internal cash flow management accounts for the fact that late financing payments do not accrue government-paid interest.