Overview
FAR Subpart 32.10 outlines the policies and procedures for Performance-Based Payments (PBPs), which are the government's preferred method of contract financing for noncommercial, fixed-price contracts. Unlike progress payments that are based on costs incurred, PBPs are tied to the achievement of specific, objective, and quantifiable milestones or performance results.
Key Rules
- Preference and Applicability: PBPs are the preferred financing method when practical but are restricted to fixed-price contracts. They cannot be used for cost-reimbursement contracts, sealed bid procedures, architect-engineer services, construction, or shipbuilding/repair.
- Payment Limits: Total PBPs cannot exceed 90% of the total contract price or 90% of the price of a specific deliverable item.
- Exclusion from Prompt Payment Act: Because PBPs are considered contract financing rather than payments for accepted items, they are not subject to the interest-penalty provisions of the Prompt Payment Act.
- Prohibited Milestones: Payments cannot be triggered by non-performance events such as the signing of a contract or modification, the exercise of an option, or the mere passage of time.
- Liquidation: PBPs are "liquidated" (recovered by the government) by deducting a specified percentage or dollar amount from the final payments made upon the delivery and acceptance of goods or services.
- Recovery and Title: PBPs are fully recoverable by the government in the event of contractor default. Additionally, the government takes title to the property/work-in-progress associated with these payments.
Responsibilities
- Contracting Officer (CO):
- Determines if PBPs are practical and negotiates terms with the contractor.
- Ensures that milestones are meaningful, quantifiable, and readily verifiable.
- Establishes the liquidation rate and ensures total payments do not exceed the 90% cap.
- Reviews and approves all PBP requests and verifies that events have been successfully accomplished before authorizing payment.
- Administers the distribution of payments across multiple appropriation accounts if necessary.
- Contractor/Offeror:
- Proposes the performance-based payment schedule, often including an expenditure profile to justify the financing.
- Responsible for the risk of loss of property, even if the government holds the title.
- Must certify that the government’s title to property is not compromised by other encumbrances (liens).
- Payment Office:
- Distributes financing payments to the correct funds accounts based on the CO’s instructions.
Practical Implications
- Cash Flow vs. Compliance: For contractors, PBPs provide significant cash flow advantages without the administrative burden of tracking every penny of cost (as required by progress payments). However, it shifts the risk to the contractor’s ability to perform; if a milestone isn't met, no payment is made, regardless of how much money the contractor has spent.
- Precision in Drafting: Successful PBP arrangements require highly specific "Definitions of Success." Vague milestones lead to disputes and payment delays. Both parties must agree on exactly what documentation or physical evidence constitutes the "accomplishment" of an event.
- Evaluation Factor: In competitive solicitations, the government may evaluate the "cost of money" for PBPs. If one contractor asks for more frequent or higher-value financing than another, the government may adjust their proposed price upward for evaluation purposes to account for the interest the Treasury loses by paying early.
- Default Risk: Because PBPs are not "earned" until final acceptance, a contractor that defaults may be required to repay all unliquidated PBPs, which can be financially catastrophic for a struggling firm.