Overview
FAR 32.501 establishes the foundational framework for contract financing via progress payments based on costs, distinguishing between customary and unusual payment arrangements. It defines the standard percentages allowed, the criteria for exceeding those standards, and how "contract price" is calculated for various contract types to determine payment limitations.
Key Rules
- Customary Rates: The standard progress payment rate is 80% for large businesses and 85% for small business concerns, applicable to total performance costs.
- Undefinitized Actions: Progress payments for work performed under undefinitized contract actions (e.g., letter contracts) are strictly limited to 80%, regardless of business size or unusual circumstances.
- Unusual Progress Payments: Any rate higher than the customary rate is "unusual" and requires documentation of actual financial need, large predelivery expenditures relative to working capital, and approval by the Head of the Contracting Activity (HCA).
- Contract Price Determination:
- FFP: Current fixed amount plus unpriced modifications.
- Incentive: Target price (can be increased to ceiling if costs exceed target).
- Letter Contracts/BOAs: Maximum amount obligated.
- Funding Limitation: Progress payments can never exceed the total funds obligated under the contract.
- Protective Terms: Contracting officers have the authority to require additional security, such as personal/corporate guarantees or special bank accounts, to protect the government's interest.
Practical Implications
- Cash Flow Management: Contractors must understand that progress payments are a method of financing, not full reimbursement; small businesses receive a 5% higher rate to mitigate their typically more constrained working capital.
- Administrative Burden: Seeking "unusual" progress payments is a high-hurdle process requiring significant financial disclosure and high-level agency approval, making it a rare exception rather than a standard negotiation point.
- Risk Mitigation: The 80% cap on undefinitized actions serves as a financial incentive for contractors to reach a definitive agreement quickly, as their cash flow is restricted until the contract is definitized.