Overview
FAR Subpart 32.5 prescribes the policies and procedures for providing contract financing through progress payments based on costs incurred by the contractor. This subpart applies primarily to fixed-price contracts and excludes cost-reimbursement contracts, construction, and shipbuilding where payments are typically based on percentages or stages of completion.
Key Rules
- Customary Rates: The standard progress payment rate is 80% for large businesses and 85% for small business concerns.
- Undefinitized Actions: Progress payments for work accomplished under undefinitized contract actions (e.g., letter contracts) are strictly capped at 80%.
- Unusual Progress Payments: Any rate higher than the customary rate is considered "unusual" and requires documented proof of need, large predelivery expenditures, and approval by the Head of the Contracting Activity (HCA).
- Accounting System Requirement: To receive progress payments, a contractor must maintain an adequate accounting system and controls. If the system is deemed inadequate, the Contracting Officer (CO) must suspend or reduce payments.
- Liquidation: The Government recoups progress payments by deducting a percentage (the liquidation rate) from payments made for delivered and accepted items. The liquidation rate is usually identical to the progress payment rate.
- Loss Contracts: If a contract is expected to result in a loss (costs exceed price), the CO must apply a "loss ratio factor" to reduce progress payments proportionately, ensuring the Government does not overpay.
Responsibilities
- Contracting Officer (CO/ACO):
- Inserts appropriate solicitation provisions (52.232-13, -14, or -15) and contract clauses (52.232-16).
- Determines the adequacy of the contractor's accounting system (often relying on audit agencies).
- Approves progress payment requests, typically relying on contractor certification for reliable firms.
- Supervises the contractor’s financial condition and performance to protect Government interests.
- Calculates loss ratios and adjusts liquidation rates when necessary.
- Head of Contracting Activity (HCA): Responsible for approving any "unusual" progress payment requests.
- Contract Finance Office: Must provide clearance for unusual rates, deviations from standard terms, or providing payments to contractors with doubtful financial health.
- Contractor:
- Must maintain an efficient and reliable accounting system.
- Must certify that the costs requested are eligible, allocable, and reasonable.
- Must document "actual need" if requesting unusual progress payments.
Practical Implications
- Cash Flow Management: For contractors, progress payments are a critical tool for financing long-lead production items and labor costs before delivery. However, because payments only cover 80-85% of costs, contractors must still have sufficient working capital to fund the remaining 15-20%.
- Administrative Burden: The requirement for an "adequate accounting system" means that small or commercial-item contractors may find it difficult to qualify for progress payments without significant investment in government-compliant accounting software and processes.
- Risk of Suspension: Progress payments are not guaranteed; they are a contract "right" that can be suspended unilaterally by the CO for unsatisfactory performance, financial instability, or failure to pay subcontractors.
- The "Loss Ratio" Trap: If a contractor underbids a job, the Government’s use of the loss ratio factor will further tighten the contractor's cash flow exactly when they are most financially vulnerable, as the Government will pay even less than the customary 80/85% to ensure they don't exceed the total contract price.