CLC057 PERFORMANCE BASED PAYMENTS

Expenditure Profile

...

Advantanges of PBPs

1. Enhanced Technical and Schedule Focus focus attention on accomplishing meaningful and measurable technical progress and on meeting contract schedule commitment. 2. Broadened Contractor Participation the contractor's accounting system status is no longer a precondition of the financial relationship between the parties. 3. Potentially Improve Cash Flow Under current Federal Acquisition Regulation (FAR) Subpart 32.10, PBPs can be made for up to a specified portion of the contract or line item price (currently 90%), whereas traditional progress payments are limited to a fixed percentage of incurred costs (currently 80% for DoD). This can have a substantial positive cash-flow advantage for a contractor. 4. Reduce Costs of Oversight and Compliance Because the contractor's accounting and related systems are not integral or required when making PBPs, the contractor does not have to expend resources or make special accommodations to comply with many of the government's cost-based oversight and compliance programs (e.g., Cost Accounting Standards (CAS), Material Management and Accounting Systems (MMAS), Contractor Insurance and Pension Reviews (CIPRs)). This can free up administrative resources to provide better overall value and possibly reduced costs

Time Between Award and First Delivery

1. Financing is normally not provided unless the contractor cannot bill the first delivery of products for a substantial time after work must begin. This is normally 4 months or more for a small business and 6 months or more for a large business. 2. However, there are exceptions. For example, if the contractor demonstrates an actual financial need or the access to private financing is unavailable

Specific Events and Acceptance Criteria

1. PBP events may be either specifically described events (e.g. milestones) or some measurable criterion of performance. Each event or criterion must be an integral and necessary part of contract performance, though it need not be a critical event. 2. The events must be identified in the contract along with a description of what constitutes successful performance of the event. The Government must be able to readily verify successful performance. 3. The signing of contracts or modifications, the exercise of options, or other such actions must not be used for PBP events or criteria. [Ref: FAR 32.1004(a)]

Specification of Severable or Cumulative Events

1. The successful completion of a severable event is independent of the accomplishment of any other event. Conversely, the successful accomplishment of a cumulative event or criterion is dependent upon the previous accomplishment of another event. Both severable and cumulative events may be used in the same PBP agreement and they may also run in parallel. 2. The contract must specifically identify which events are severable. It must also identify which events are preconditions for the successful completion of each cumulative event. The contract must not permit payment for a cumulative event until the dependent event has been successfully completed. [Ref: FAR 32.1004(a)(2) thru (2)(iii)]

Obtaining Expenditure Profiles

1. To ensure that PBP amounts do not exceed the contractor's financing needs, a Director of Defense Procurement memo, dated November 9, 1998, encourages KOs to consider obtaining expenditure forecasts from the contractor as a part of a complete evaluation of proposed PBPs. 2. If information in the proposal, or otherwise, is insufficient or expected to be insufficient, then expenditure profile information may be requested from the offeror to confirm sufficient contractor investment. [Ref: FAR 32.1004(b)(3)(ii)]

The Policy for PBP

According to FAR 32.1001, PBPs are the preferred method of Government financing for fixed price, non-commercial items when: 1.The contracting officer finds them practical, and 2.The contractor agrees to their use. Performance Based Payments are financing payments. They are not payments made for accepted items. Like other forms of financing, they are fully recoverable in the event of default termination. For Government accounting purposes, PBPs should be treated like progress payments.

The Criteria for Using PBP

According to FAR 32.1003, "The contracting officer may use performance based payments only if the following conditions are met: •The contracting officer and offeror are able to agree on the performance based payment terms; •The contract is a fixed-price type contract; and •The contract does not provide for other methods of contract financing, except that advance payments in accordance with Subpart 32.4, or guaranteed loans in accordance with Subpart 32.3 may be used." If the parties fail to agree on PBP terms, they will normally resort to using traditional progress payments.

Do Not Result in Unreasonably Low Contractor Investment

Along with requiring the amounts to be commensurate with the value of the event, FAR 32.1004(b)(3) also requires the PBP amounts not result in an unreasonably low, or negative, contractor investment. Thus, it is expected that the contractor invest some level of their own financing needs to cover the cost of performance

The Bases for PBP

As stated in FAR 32.1002: "Performance Based Payments may be made on any of the following bases: 1.Performance measured by objective, quantifiable methods such as delivery of acceptable items, work measurement, or statistical process controls. 2.Accomplishment of defined events. 3.Other quantifiable measures of results." Federal statutes clearly encourage the use of PBPs and require completion of meaningful work for payments. They are not based on the mere incurrence of cost or passing of time.

Government Contract Payment

Authorized government disburement of money to a contractor prior to acceptance of supplies or services

Normal Performance

Because PBPs are contract financing, events or criteria must not serve as a vehicle to reward the contractor for completion of performance levels over and above what is required for successful completion of the contract.

FAR Part 32

Contract Financing

Contract Price, Contractor Investment, and Cost to the Treasury

Contract financing has a cost to the Government in terms of interest paid by the Treasury to borrow funds to make the payment. Consequently, the contracting officer must ensure that: •The total contract price is fair and reasonable, all factors considered (including the PBP). •The PBP amounts are commensurate with the value of the event. •The PBP amounts are not expected to result in an unreasonably low or negative level of contractor investment. [Ref: FAR 32.1004(b)(3)]

Order of Preference

Contractors should first obtain private financing; however, private financing at unreasonable rates or from other agencies is not required. Also, the KO must consider "customary" contract financing (e.g. PBP and progress payments) before contemplating loan guarantees, unusual contract financing, or advance payments. Customary contract financing is financing that is normally available for use by the KO without specific review or approval by higher management. Unusual contract financing is any arrangement that deviates from FAR Part 32 and requires approval by the head of the agency.

Provided Only to Extent Needed

FAR 32.1004(b)(1) states total PBPs must "reflect prudent contract financing provided only to the extent needed for contract performance." It is within this context that the 90% of price limitation is indeed a maximum and not a default percentage. For example, if you have a contract cost of $10M and profit at 15% for a contract price of $11.5M, the contractor's cost as a percentage of the price is about 87%. Financing provided at the FAR limit of 90% of price would result in the Government financing more than the contractor's cost to perform the contract. To provide financing at the 90% of price NTE, you would also need to ask yourself whether financing is being provided only to the extent needed for contract performance

Payment Amounts Commensurate with Value of Event

FAR 32.1004(b)(3) requires payment amounts to be commensurate with the value of the performance event or performance criterion. Overvaluing an event can increase the risk of unacceptable performance, perhaps to the detriment of the overall effort.

Result in Fair Contract Price

FAR 32.1004(b)(3) states, "the payment of contract financing has a cost to the Government in terms of interest paid by the Treasury to borrow funds to make the payment." Therefore, the negotiated price should take the cost to the treasury into consideration.

Customary Contract Financing (Non Commercial)

Financing is deemed by an agency to be available,

Intended Use of Financing

Financing is expected to be self-liquidating (i.e. paid back) through contract performance. Thus, it should only be used for financing the contractor's investment in material, labor and other costs as required for successful event completion stipulated in the contract. It is not intended to be provided for the expansion of facilities or the acquisition of fixed assets. Should such expansion be relatively minor, or otherwise appropriate, Government Loan Guarantees, another form of financing, are available for that purpose.

Defined on Basis of Whole Contract or Deliverable Item

PBPs may be made on either a whole contract, or on a deliverable item basis. For example, a contract line item for 10 aircraft has 10 deliverable items while a contract for 1 lot of 10 aircraft has only one deliverable item. A PBP made on a whole contract basis is applicable to the entire contract. A PBP made on a deliverable item basis is specific to a specific individual deliverable item. The PBP agreement must clearly state what basis was used and integrated with the line item structure of the contract. (Ref: FAR 32.1004)

Undefinitized Contracts

Should be awarded using progress payments. Would provide the contractor with adequate financing

Steps in Progress Payments

Step 1 Establish a detail program Step 2 Identify PBS event Step 3 Establish the completion criteria for PBP event Step 4 Evaluate the Monthly Expenditures Step 5 Establish Event Values Step 6 Develop Special Contract Provision

Production Contract

The ideal candidate for a PBP where fabrication, assembly and test processes are well established. The Contractor would have already completed a one or more production lots.

Dollar Limitation

The individual contract value, or the aggregate value of all orders expected to be placed under an indefinite-delivery contract, must be two million dollars ($2M) or more. For small business, the value must only exceed the Simplified Acquisition Threshold (SAT)

Need for Financing Not a Deterrent

The need for contract financing cannot be used as an evaluation criterion, or responsibility factor. In competitive acquisitions, the KO shall not treat a contractor's need for financing as a handicap for contract award. Furthermore, a contractor should not be disqualified from obtaining contract financing solely because they failed to indicate a need for financing before the contract was awarded. However, when a contract is modified to provide improved financing (e.g. converting from progress payments to PBP), the Government is entitled to consideration

Not to Exceed (NTE) 90% of Contract Price

This NTE is a regulatory MAXIMUM being stipulated by FAR 32.1004(b)(2). It is not a default amount, a formula for determining payment amounts, nor is it a substitute for thoughtfully considering the true value of the events and the extent of financing needed for contract performance.

Limits on PBP Values

Total PBP payments must: •Reflect prudent contract financing provided only to the extent need for contract performance. •Not exceed 90 percent of the contract price if on a whole contract basis, or 90 percent of the delivery item price if on a delivery item basis. [Ref: FAR 32.1004(b)(2)]

Customary Contract

financing is financing that is normally available for use by the KO without specific review or approval by higher management.

Integrated Master Schedule

is a networked multilayered schedule generated by the contractor that begins with all identified IMP events, accomplishments and criteria. It shows the expected start and finish dates of the events. It contains all contractually required events/milestones such as reviews, tests, completion dates, and deliveries specified in the program Work Breakdown Structure (WBS).

Integrated Master Plan

is an effective program management tool. It is the contractor's event-based plan for accomplishing the Statement of Objectives (SOO) and the Statement of Work (SOW). It identifies the key activities, events, milestones and reviews that make up the program.

Unusual contract financing

is any arrangement that deviates from FAR Part 32 and requires approval by the head of the agency.

Contract Financing?

is covered in FAR Part 32 and is defined as the Government authorized payment of funds to the contractor prior to acceptance of supplies or services by the Government. Contract financing does not include invoice payments, payments for partial acceptance or lease or rental payments.

Monthly Expenditure profile build up

material, subconstractor, engineering labor, manufacturing labor, allocable overhead, general and administrative cost

Competitive Solicitation

significant discussion between government and offeror is required, recommended that solicitation statement states that contract award is based on progress payments and after the contract if needed the government can modify the contract for contract financing.

Performance Based Payments

to assist the contractor in paying costs incurred during the performance of the contract. FAR 32.104(a)(1) states that when contract financing is provided it should be provided only to the extent actually needed for prompt and efficient performance.

Purpose and Scope of Contract Financing

to assist the contractor in paying costs incurred during the performance of the contract. FAR 32.104(a)(1) states that when contract financing is provided it should be provided only to the extent actually needed for prompt and efficient performance.

Contract for Services (Developmental Contracts)

would be practical for PBP (fixed price contracts)

Contracting Officer Considerations to Provide Financing

•Provide financing only to the extent actually needed for prompt and efficient performance •Administer in a way so as to aid, not impede, the acquisition •Avoid any undue risk of monetary loss to the Government •Include the form deemed to be in the Government's best interest •Monitor the contractor's use of the financing and their financial status