Overview
FAR 32.1004 outlines the administrative and technical procedures for implementing performance-based payments (PBPs), focusing on the establishment of measurable milestones, payment limits, and liquidation methods. This section ensures that PBP schedules are structured as contract financing rather than rewards, remaining commensurate with the value of the work performed.
Key Rules
- Basis of Payment: PBPs can be applied to the "whole contract" or on a "deliverable item" basis (where a deliverable item is a separate unit with a distinct price).
- Performance Bases: Payments must be triggered by specifically described, measurable, and verifiable events or criteria that are integral to performance; administrative actions (e.g., signing a contract) or the passage of time are prohibited as triggers.
- Severable vs. Cumulative: Events may be independent (severable) or dependent on prior actions (cumulative); if cumulative, payment is prohibited until all precursor milestones are met.
- 90% Cap: Total financing payments may not exceed 90% of the total contract price or the individual deliverable item price.
- Valuation: Payment amounts must be a fixed dollar amount or percentage and must be commensurate with the value of the milestone to ensure the contractor maintains a sufficient level of investment in the contract.
- Liquidation: PBPs are liquidated by deducting specific amounts or percentages from the final delivery payments, ensuring the government fully recoups the financing by the end of the contract.
- Competitive Evaluation: In negotiated solicitations, the government may adjust an offeror’s proposed price for evaluation purposes to reflect the cost of the interest the government incurs by providing the financing.
Practical Implications
- Contracting Officers (COs) and contractors must develop highly detailed, objective milestone descriptions during negotiations to avoid disputes during the verification and payment phase.
- Because PBPs require the government to verify performance rather than audit costs, the technical team plays a larger role in the payment process than in traditional cost-reimbursement or progress payment structures.