Federal Acquisition Regulation; FAR Case 2005-016, Performance-Based Payments, 73219-73222 [E7-24939]
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Federal Register / Vol. 72, No. 246 / Wednesday, December 26, 2007 / Rules and Regulations
which was published in the Federal
Register at 72 FR 13586 on March 22,
2007, is adopted as a final rule without
change.
[FR Doc. E7–24938 Filed 12–21–07; 8:45 am]
BILLING CODE 6820–EP–P
DEPARTMENT OF DEFENSE
GENERAL SERVICES
ADMINISTRATION
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
48 CFR Parts 32 and 52
[FAC 2005–23; FAR Case 2005–016; Item
III; Docket 2007–0001; Sequence 13]
RIN 9000–AK64
Federal Acquisition Regulation; FAR
Case 2005–016, Performance-Based
Payments
Department of Defense (DoD),
General Services Administration (GSA),
and National Aeronautics and Space
Administration (NASA).
ACTION: Final rule.
AGENCIES:
sroberts on PROD1PC70 with RULES
SUMMARY: The Civilian Agency
Acquisition Council and the Defense
Acquisition Regulations Council
(Councils) have agreed on a final rule
amending the Federal Acquisition
Regulation (FAR) to implement
recommendations to change the
regulations related to performancebased payments.
DATES: Effective Date: January 25, 2008.
FOR FURTHER INFORMATION CONTACT: Ms.
Meredith Murphy, Procurement
Analyst, at (202) 208–6925 for
clarification of content. For information
pertaining to status or publication
schedules, contact the FAR Secretariat
at (202) 501–4755. Please cite FAC
2005–23, FAR case 2005–016.
SUPPLEMENTARY INFORMATION:
A. Background
This final rule amends the Federal
Acquisition Regulation to increase the
use of performance-based payments as
the method of contract financing on
Federal Government contracts and
improve the efficiency of performancebased payments when used on these
contracts. These changes originated
from recommendations submitted by the
Department of Defense PerformanceBased Payments Working Group in their
March 8, 2005, report.
DoD, GSA, and NASA published a
proposed rule in the Federal Register at
71 FR 75186 on December 14, 2006.
Comments were received from three
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18:52 Dec 21, 2007
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respondents in response to the proposed
rule. The Councils considered all of the
comments and recommendations in
developing the final rule. A discussion
of the comments is provided below.
1. Comment: Two commenters
addressed the issue of establishing
performance-based payments at other
than 90 percent of the contract price.
One commenter recommended revising
the rule to require contracting officers to
document the rationale for soliciting or
awarding contracts that limit
performance-based payments to less
than 90 percent of the contract price
instead of when the performance-based
payments effectively result in financing
payments that are less than the
payments that would be made with
progress payments. The ability to
receive contract financing payments at
90 percent of the contract price balances
the risk associated with performancebased payments. If the performancebased payments are less than 90 percent
of the contract costs, contractors will
not agree to their use, which is
problematic since performance-based
payments are the preferred financing
method. Another commenter said the
requirement to document the rationale
for establishing performance-based
payments when the performance-based
payments are less than 90 percent of the
contract price, or delivered-item price,
will likely result in contracting officers
artificially inflating the value of the
events to avoid having to document the
rationale.
Response: Providing performancebased payments at or below the effective
rate for progress payments does not
facilitate the use of performance-based
payments. However, performance-based
payments must reflect prudent contract
financing and are authorized only to the
extent needed for contract performance.
In addition, performance-based payment
amounts must be commensurate with
the value of the performance event or
performance criterion. Therefore, the
Councils see no reason to require
contracting officers to document the
rationale for establishing performancebased payments that are less than 90
percent of the contract price. In
addition, the Councils believe the FAR
requirements are sufficient to ensure
performance-based payments are not
artificially inflated simply to avoid
having to document the rationale for
establishing performance-based
payments that are less than 90 percent
of the contract price or delivered-item
price.
2. Comment: Two commenters
recommended eliminating the provision
in the proposed rule that precluded
limiting performance-based payments to
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73219
the contractor’s actual incurred costs
because there can never be a need for
contract financing payments in excess of
the incurred costs.
Response: Such a prohibition could
inhibit the contracting officer’s
flexibility in structuring and
administering performance-based
payments. Therefore, this provision has
been omitted from the final rule.
3. Comment: One commenter
recommended making performancebased payments the mandatory type of
financing payments whenever a
contractor requests this type of
financing because some buying
commands never authorize
performance-based payments.
Response: Performance-based
payments are the preferred Government
financing method when the contracting
officer finds them practical and the
contractor agrees to their use. However,
performance-based payments are not
always practical. Therefore, the
Government must retain the right to
determine the proper financing method.
4. Comment: One commenter
recommended revising the rule to
permit contractors to submit contract
financing payment requests on either a
fiscal or calendar month basis as long as
no more than 12 payment requests are
made annually. The commenter said the
lack of clear definition in the FAR
clause at 52.232–32(b) as to what
constitutes ‘‘monthly’’ payment requests
has resulted in inconsistencies and
confusion in enforcement. Contractors
that use fiscal months accounting to bill
contract financing payments should be
allowed to submit two payment requests
in the same calendar month to avoid
negative fluctuations in working capital.
Response: Nothing in the FAR
precludes payment on a fiscal month
basis. The Councils are not aware of any
payment issues relating to the use of the
term ‘‘monthly’’ and note that the
provision is unchanged by this rule.
Therefore, the Councils believe the
existing terminology is sufficient.
5. Comment: One commenter
recommended deleting all reference to
‘‘milestones’’ from the FAR coverage on
performance-based payments to
eliminate confusion between
performance-based financing and
commercial financing. Instead of using
the term ‘‘milestones,’’ the commenter
recommended using the terms ‘‘event’’
or ‘‘performance-based event.’’
Response: The Councils are not aware
of any issues related to the meaning of
‘‘milestones’’ and note that the
terminology is unchanged by this rule.
Therefore, the Councils believe the
existing terminology is sufficient.
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Federal Register / Vol. 72, No. 246 / Wednesday, December 26, 2007 / Rules and Regulations
6. Comment: One commenter
recommended revising the performancebased payment provisions to specify
that payment offices will pay approved
payment requests in the number of days
specified in an agency’s regulation if the
contracting officer fails to prescribe the
number of days the payment office will
pay approved requests. The default 30th
day could cause some DoD contracting
officers to refuse to include the 14th day
as prescribed in DoD regulations.
Response: Concerns over compliance
with individual agency regulations are
beyond the scope of this case. However,
the Councils are not aware of any
instances where contracting officers
have failed to include the number of
days prescribed by their agency
regulations.
7. Comment: One commenter
recommended DoD partner with
industry when it develops the training
materials and guidance referenced in
DoD’s June 2, 2005, response to public
input on performance-based payments
(70 FR 32306) because dissemination of
this information to both Government
and industry personnel would facilitate
a better understanding of the process.
Response: DoD training materials are
beyond the scope of this case. DoD will
consider whether input from industry is
needed to develop the appropriate
training.
8. Comment: One commenter
recommended requiring the FAR or
agency policy to require agency head
approval when performance-based
payments are less than 90 percent of the
contract price on foreign military sales.
Application of DoD’s weighted
guidelines generally results in FMS
contracts having lower profit margins
and FAR limitations typically provide
less favorable financing than contracts
negotiated on a direct basis with the
foreign country.
Response: Foreign military sales and
the DoD weighted guidelines are not
addressed in the FAR because they are
unique to DoD. DoD regulations are
beyond the scope of this case.
9. Comment: One commenter
recommended DoD consider revising
DoD policy to permit direct billing for
performance-based payments.
Response: DoD policy is beyond the
scope of this case. However, DoD notes
that direct billing is only authorized for
payments that require Defense Contract
Audit Agency (DCAA) provisional
approval. Performance-based payments
require the approval of the contracting
officer and not DCAA. Contracting
officer approval is a reasonable
management control as it may be
difficult to reconstruct when a
milestone was completed.
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This is not a significant regulatory
action and, therefore, was not subject to
review under Section 6(b) of Executive
Order 12866, Regulatory Planning and
Review, dated September 30, 1993. This
rule is not a major rule under 5 U.S.C.
804.
B. Regulatory Flexibility Act
The Department of Defense, the
General Services Administration, and
the National Aeronautics and Space
Administration certify that this final
rule will not have a significant
economic impact on a substantial
number of small entities within the
meaning of the Regulatory Flexibility
Act, 5 U.S.C. 601, et seq., because this
rule should reduce administrative costs
for contractors and the Government,
thus further encouraging the use of
performance-based payments.
C. Paperwork Reduction Act
The Paperwork Reduction Act does
not apply because the rule does not
impose any additional information
collection requirements that require the
approval of the Office of Management
and Budget under 44 U.S.C. 3501, et
seq.
List of Subjects in 48 CFR Parts 32 and
52
Government procurement.
Dated: December 19, 2007.
Al Matera,
Director, Office of Acquisition Policy.
Therefore, DoD, GSA, and NASA
amend 48 CFR parts 32 and 52 as set
forth below:
I 1. The authority citation for 48 CFR
parts 32 and 52 continues to read as
follows:
I
Authority: 40 U.S.C. 121(c); 10 U.S.C.
chapter 137; and 42 U.S.C. 2473(c).
PART 32—CONTRACT FINANCING
2. Revise section 32.1000 to read as
follows:
I
32.1000
Scope of subpart.
This subpart provides policy and
procedures for performance-based
payments under noncommercial
purchases pursuant to Subpart 32.1.
I 3. Amend section 32.1001 by—
I a. Removing the second sentence in
paragraph (c);
I b. Removing paragraph (d);
I c. Redesignating paragraph (e) as (d);
I d. Revising newly redesignated
paragraph (d); and
I e. Adding new paragraph (e) to read
as follows:
32.1001
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Policy.
*
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(d) Performance-based payments are
contract financing payments and,
therefore, are not subject to the interestpenalty provisions of prompt payment
(see Subpart 32.9). These payments
shall be made in accordance with
agency policy.
(e) Performance-based payments shall
not be used for—
(1) Payments under costreimbursement line items;
(2) Contracts for architect-engineer
services or construction, or for
shipbuilding or ship conversion,
alteration, or repair, when the contracts
provide for progress payments based
upon a percentage or stage of
completion; or
(3) Contracts awarded through sealed
bid procedures.
I 4. Revise section 32.1002 to read as
follows:
32.1002 Bases for performance-based
payments.
Performance-based payments may be
made on any of the following bases:
(a) Performance measured by
objective, quantifiable methods.
(b) Accomplishment of defined
events.
(c) Other quantifiable measures of
results.
I 5. Revise section 32.1003 to read as
follows:
32.1003
Criteria for use.
The contracting officer may use
performance-based payments for
individual orders and contracts
provided—
(a) The contracting officer and offeror
agree on the performance-based
payment terms;
(b) The contract, individual order, or
line item is a fixed-price type;
(c) For indefinite delivery contracts,
the individual order does not provide
for progress payments; and
(d) For other than indefinite delivery
contracts, the contract does not provide
for progress payments.
I 6. Revise section 32.1004 to read as
follows:
32.1004
Procedures.
Performance-based payments may be
made either on a whole contract or on
a deliverable item basis, unless
otherwise prescribed by agency
regulations. Financing payments to be
made on a whole contract basis are
applicable to the entire contract, and not
to specific deliverable items. Financing
payments to be made on a deliverable
item basis are applicable to a specific
individual deliverable item. (A
deliverable item for these purposes is a
separate item with a distinct unit price.
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Thus, a contract line item for 10
airplanes, with a unit price of
$1,000,000 each, has 10 deliverable
items-the separate planes. A contract
line item for 1 lot of 10 airplanes, with
a lot price of $10,000,000, has only one
deliverable item-the lot.)
(a) Establishing performance bases.
(1) The basis for performance-based
payments may be either specifically
described events (e.g., milestones) or
some measurable criterion of
performance. Each event or performance
criterion that will trigger a finance
payment shall be an integral and
necessary part of contract performance
and shall be identified in the contract,
along with a description of what
constitutes successful performance of
the event or attainment of the
performance criterion. The signing of
contracts or modifications, the exercise
of options, the passage of time, or other
such occurrences do not represent
meaningful efforts or actions and shall
not be identified as events or criteria for
performance-based payments. An event
need not be a critical event in order to
trigger a payment, but the Government
must be able to readily verify successful
performance of each such event or
performance criterion.
(2) Events or criteria may be either
severable or cumulative. The successful
completion of a severable event or
criterion is independent of the
accomplishment of any other event or
criterion. Conversely, the successful
accomplishment of a cumulative event
or criterion is dependent upon the
previous accomplishment of another
event. A contract may provide for more
than one series of severable and/or
cumulative performance events or
criteria performed in parallel. The
contracting officer shall include the
following in the contract:
(i) The contract shall not permit
payment for a cumulative event or
criterion until the dependent event or
criterion has been successfully
completed.
(ii) The contract shall specifically
identify severable events or criteria.
(iii) The contract shall specifically
identify cumulative events or criteria
and identify which events or criteria are
preconditions for the successful
achievement of each event or criterion.
(iv) Because performance-based
payments are contract financing, events
or criteria shall 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.
(v) If payment of performance-based
finance amounts is on a deliverable item
basis, each event or performance
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criterion shall be part of the
performance necessary for that
deliverable item and shall be identified
to a specific contract line item or
subline item.
(b) Establishing performance-based
finance payment amounts.
(1) The contracting officer shall
establish a complete, fully defined
schedule of events or performance
criteria and payment amounts when
negotiating contract terms. If a contract
action significantly affects the price, or
event or performance criterion, the
contracting officer responsible for
pricing the contract modification shall
adjust the performance-based payment
schedule appropriately.
(2) Total performance-based payments
shall—
(i) Reflect prudent contract financing
provided only to the extent needed for
contract performance (see 32.104(a));
and
(ii) 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.
(3) The contract shall specifically
state the amount of each performancebased payment either as a dollar amount
or as a percentage of a specifically
identified price (e.g., contract price or
unit price of the deliverable item). 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. Because the
contracting officer has wide discretion
as to the timing and amount of the
performance-based payments, the
contracting officer shall ensure that—
(i) The total contract price is fair and
reasonable, all factors considered; and
(ii) Performance-based payment
amounts are commensurate with the
value of the performance event or
performance criterion and are not
expected to result in an unreasonably
low or negative level of contractor
investment in the contract. To confirm
sufficient investment, the contracting
officer may request expenditure profile
information from offerors, but only if
other information in the proposal, or
information otherwise available to the
contracting officer, is expected to be
insufficient.
(4) Unless agency procedures
prescribe the bases for establishing
performance-based payment amounts,
contracting officers may establish them
on any rational basis, including (but not
limited to)—
(i) Engineering estimates of stages of
completion;
(ii) Engineering estimates of hours or
other measures of effort to be expended
in performance of an event or
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73221
achievement of a performance criterion;
or
(iii) The estimated projected cost of
performance of particular events.
(5) When subsequent contract
modifications are issued, the contracting
officer shall adjust the performancebased payment schedule as necessary to
reflect the actions required by those
contract modifications.
(c) Instructions for multiple
appropriations. If there is more than one
appropriation account (or subaccount)
funding payments on the contract, the
contracting officer shall provide
instructions to the Government payment
office for distribution of financing
payments to the respective funds
accounts. Distribution instructions shall
be consistent with the contract’s
liquidation provisions.
(d) Liquidating performance-based
finance payments. Performance-based
amounts shall be liquidated by
deducting a percentage or a designated
dollar amount from the delivery
payments. The contracting officer shall
specify the liquidation rate or
designated dollar amount in the
contract. The method of liquidation
shall ensure complete liquidation no
later than final payment.
(1) If the contracting officer
establishes the performance-based
payments on a delivery item basis, the
liquidation amount for each line item is
the percent of that delivery item price
that was previously paid under
performance-based finance payments or
the designated dollar amount.
(2) If the performance-based finance
payments are on a whole contract basis,
liquidation is by predesignated
liquidation amounts or liquidation
percentages.
(e) Competitive negotiated
solicitations. (1) If a solicitation requests
offerors to propose performance-based
payments, the solicitation shall
specify—
(i) What, if any, terms shall be
included in all offers; and
(ii) The extent to which and how
offeror-proposed performance-based
payment terms will be evaluated. Unless
agencies prescribe other evaluation
procedures, if the contracting officer
anticipates that the cost of providing
performance-based payments would
have a significant impact on
determining the best value offer, the
solicitation should state that the
evaluation of the offeror’s proposed
prices will include an adjustment to
reflect the estimated cost to the
Government of providing each offeror’s
proposed performance-based payments
(see Alternate I to the provision at
52.232–28).
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(2) The contracting officer shall—
(i) Review the proposed terms to
ensure they comply with this section;
and
(ii) Use the adjustment method at
32.205(c) if the price is to be adjusted
for evaluation purposes in accordance
with paragraph (e)(1)(ii) of this section.
I 7. Revise section 32.1005 to read as
follows:
32.1005 Solicitation provision and
contract clause.
(a) Insert the clause at 52.232–32,
Performance-Based Payments, in—
(1) Solicitations that may result in
contracts providing for performancebased payments; and
(2) Fixed-price contracts under which
the Government will provide
performance-based payments.
(b)(1) Insert the solicitation provision
at 52.232–28, Invitation to Propose
Performance-Based Payments, in
negotiated solicitations that invite
offerors to propose performance-based
payments.
(2) Use the provision with its
Alternate I in competitive negotiated
solicitations if the Government intends
to adjust proposed prices for proposal
evaluation purposes (see 32.1004(e)).
I 8. Revise section 32.1007 to read as
follows:
32.1007 Administration and payment of
performance-based payments.
(a) Responsibility. The contracting
officer responsible for administering
performance-based payments (see
42.302(a)(12)) for the contract shall
review and approve all performancebased payments for that contract.
(b) Approval of financing requests.
Unless otherwise provided in agency
regulations, or by agreement with the
appropriate payment official—
(1) The contracting officer shall be
responsible for receiving, approving,
and transmitting all performance-based
payment requests to the appropriate
payment office; and
(2) Each approval shall specify the
amount to be paid, necessary
contractual information, and the
appropriation account(s) (see
32.1004(c)) to be charged for the
payment.
(c) Reviews. The contracting officer is
responsible for determining what
reviews are required for protection of
the Government’s interests. The
contracting officer should consider the
contractor’s experience, performance
record, reliability, financial strength,
and the adequacy of controls established
by the contractor for the administration
of performance-based payments. Based
upon the risk to the Government, postpayment reviews and verifications
should normally be arranged as
considered appropriate by the
contracting officer. If considered
necessary by the contracting officer, prepayment reviews may be required.
(d) Incomplete performance. The
contracting officer shall not approve a
performance-based payment until the
specified event or performance criterion
has been successfully accomplished in
accordance with the contract. If an event
is cumulative, the contracting officer
shall not approve the performancebased payment unless all identified
preceding events or criteria are
accomplished.
(e) Government-caused delay.
Entitlement to a performance-based
payment is solely on the basis of
successful performance of the specified
events or performance criteria.
However, if there is a Governmentcaused delay, the contracting officer
may renegotiate the performance-based
payment schedule to facilitate
contractor billings for any successfully
accomplished portions of the delayed
event or criterion.
32.1009
[Amended]
9. Amend section 32.1009 by
removing from the first sentence in
paragraph (a) the word ‘‘must’’ and
adding ‘‘shall’’ in its place.
I
PART 52—SOLICITATION PROVISIONS
AND CONTRACT CLAUSES
10. Amend section 52.232–32 by—
a. Revising the clause date;
b. Revising the second sentence of
paragraph (c)(2); and
I c. Removing from the first sentence of
paragraph (f)(5) the word ‘‘must’’ and
adding ‘‘shall’’ in its place.
I
I
I
52.232–32
Performance-based payments.
*
*
*
*
*
PERFORMANCE–BASED PAYMENTS
(JAN 2008)
(c) * * *
(2) * * * The designated payment office
will pay approved requests on the lllll
[Contracting Officer insert day as prescribed
by agency head; if not prescribed, insert
‘‘30th’’] day after receipt of the request for
performance-based payment by the
designated payment office. * * *
*
*
*
*
*
[FR Doc. E7–24939 Filed 12–21–07; 8:45 am]
BILLING CODE 6820–EP–P
DEPARTMENT OF DEFENSE
GENERAL SERVICES
ADMINISTRATION
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
48 CFR Chapter 1
[Docket FAR–2007–0002, Sequence 9]
Federal Acquisition Regulation;
Federal Acquisition Circular 2005–23;
Small Entity Compliance Guide
Department of Defense (DoD),
General Services Administration (GSA),
and National Aeronautics and Space
Administration (NASA).
ACTION: Small Entity Compliance Guide.
AGENCIES:
SUMMARY: This document is issued
under the joint authority of the
Secretary of Defense, the Administrator
of General Services and the
Administrator of the National
Aeronautics and Space Administration.
This Small Entity Compliance Guide has
been prepared in accordance with
Section 212 of the Small Business
Regulatory Enforcement Fairness Act of
1996. It consists of a summary of rules
appearing in Federal Acquisition
Circular (FAC) 2005–23 which amend
the FAR. An asterisk (*) next to a rule
indicates that a regulatory flexibility
analysis has been prepared. Interested
parties may obtain further information
regarding these rules by referring to FAC
2005–23 which precedes this document.
These documents are also available via
the Internet at https://
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Diedra Wingate, FAR Secretariat, (202)
208–4052. For clarification of content,
contact the analyst whose name appears
in the table below.
sroberts on PROD1PC70 with RULES
LIST OF RULES IN FAC 2005–23
Item
Subject
I * .......................
II ........................
III .......................
Electronic Products Environmental Assessment Tool (EPEAT) (Interim) ..........................................
Contracts with Religious Entities ........................................................................................................
Performance-Based Payments ...........................................................................................................
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2006–030
2006–019
2005–016
Analyst
Clark.
Woodson.
Murphy.
Agencies
[Federal Register Volume 72, Number 246 (Wednesday, December 26, 2007)]
[Rules and Regulations]
[Pages 73219-73222]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24939]
-----------------------------------------------------------------------
DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 32 and 52
[FAC 2005-23; FAR Case 2005-016; Item III; Docket 2007-0001; Sequence
13]
RIN 9000-AK64
Federal Acquisition Regulation; FAR Case 2005-016, Performance-
Based Payments
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on a final rule
amending the Federal Acquisition Regulation (FAR) to implement
recommendations to change the regulations related to performance-based
payments.
DATES: Effective Date: January 25, 2008.
FOR FURTHER INFORMATION CONTACT: Ms. Meredith Murphy, Procurement
Analyst, at (202) 208-6925 for clarification of content. For
information pertaining to status or publication schedules, contact the
FAR Secretariat at (202) 501-4755. Please cite FAC 2005-23, FAR case
2005-016.
SUPPLEMENTARY INFORMATION:
A. Background
This final rule amends the Federal Acquisition Regulation to
increase the use of performance-based payments as the method of
contract financing on Federal Government contracts and improve the
efficiency of performance-based payments when used on these contracts.
These changes originated from recommendations submitted by the
Department of Defense Performance-Based Payments Working Group in their
March 8, 2005, report.
DoD, GSA, and NASA published a proposed rule in the Federal
Register at 71 FR 75186 on December 14, 2006. Comments were received
from three respondents in response to the proposed rule. The Councils
considered all of the comments and recommendations in developing the
final rule. A discussion of the comments is provided below.
1. Comment: Two commenters addressed the issue of establishing
performance-based payments at other than 90 percent of the contract
price. One commenter recommended revising the rule to require
contracting officers to document the rationale for soliciting or
awarding contracts that limit performance-based payments to less than
90 percent of the contract price instead of when the performance-based
payments effectively result in financing payments that are less than
the payments that would be made with progress payments. The ability to
receive contract financing payments at 90 percent of the contract price
balances the risk associated with performance-based payments. If the
performance-based payments are less than 90 percent of the contract
costs, contractors will not agree to their use, which is problematic
since performance-based payments are the preferred financing method.
Another commenter said the requirement to document the rationale for
establishing performance-based payments when the performance-based
payments are less than 90 percent of the contract price, or delivered-
item price, will likely result in contracting officers artificially
inflating the value of the events to avoid having to document the
rationale.
Response: Providing performance-based payments at or below the
effective rate for progress payments does not facilitate the use of
performance-based payments. However, performance-based payments must
reflect prudent contract financing and are authorized only to the
extent needed for contract performance. In addition, performance-based
payment amounts must be commensurate with the value of the performance
event or performance criterion. Therefore, the Councils see no reason
to require contracting officers to document the rationale for
establishing performance-based payments that are less than 90 percent
of the contract price. In addition, the Councils believe the FAR
requirements are sufficient to ensure performance-based payments are
not artificially inflated simply to avoid having to document the
rationale for establishing performance-based payments that are less
than 90 percent of the contract price or delivered-item price.
2. Comment: Two commenters recommended eliminating the provision in
the proposed rule that precluded limiting performance-based payments to
the contractor's actual incurred costs because there can never be a
need for contract financing payments in excess of the incurred costs.
Response: Such a prohibition could inhibit the contracting
officer's flexibility in structuring and administering performance-
based payments. Therefore, this provision has been omitted from the
final rule.
3. Comment: One commenter recommended making performance-based
payments the mandatory type of financing payments whenever a contractor
requests this type of financing because some buying commands never
authorize performance-based payments.
Response: Performance-based payments are the preferred Government
financing method when the contracting officer finds them practical and
the contractor agrees to their use. However, performance-based payments
are not always practical. Therefore, the Government must retain the
right to determine the proper financing method.
4. Comment: One commenter recommended revising the rule to permit
contractors to submit contract financing payment requests on either a
fiscal or calendar month basis as long as no more than 12 payment
requests are made annually. The commenter said the lack of clear
definition in the FAR clause at 52.232-32(b) as to what constitutes
``monthly'' payment requests has resulted in inconsistencies and
confusion in enforcement. Contractors that use fiscal months accounting
to bill contract financing payments should be allowed to submit two
payment requests in the same calendar month to avoid negative
fluctuations in working capital.
Response: Nothing in the FAR precludes payment on a fiscal month
basis. The Councils are not aware of any payment issues relating to the
use of the term ``monthly'' and note that the provision is unchanged by
this rule. Therefore, the Councils believe the existing terminology is
sufficient.
5. Comment: One commenter recommended deleting all reference to
``milestones'' from the FAR coverage on performance-based payments to
eliminate confusion between performance-based financing and commercial
financing. Instead of using the term ``milestones,'' the commenter
recommended using the terms ``event'' or ``performance-based event.''
Response: The Councils are not aware of any issues related to the
meaning of ``milestones'' and note that the terminology is unchanged by
this rule. Therefore, the Councils believe the existing terminology is
sufficient.
[[Page 73220]]
6. Comment: One commenter recommended revising the performance-
based payment provisions to specify that payment offices will pay
approved payment requests in the number of days specified in an
agency's regulation if the contracting officer fails to prescribe the
number of days the payment office will pay approved requests. The
default 30th day could cause some DoD contracting officers to refuse to
include the 14th day as prescribed in DoD regulations.
Response: Concerns over compliance with individual agency
regulations are beyond the scope of this case. However, the Councils
are not aware of any instances where contracting officers have failed
to include the number of days prescribed by their agency regulations.
7. Comment: One commenter recommended DoD partner with industry
when it develops the training materials and guidance referenced in
DoD's June 2, 2005, response to public input on performance-based
payments (70 FR 32306) because dissemination of this information to
both Government and industry personnel would facilitate a better
understanding of the process.
Response: DoD training materials are beyond the scope of this case.
DoD will consider whether input from industry is needed to develop the
appropriate training.
8. Comment: One commenter recommended requiring the FAR or agency
policy to require agency head approval when performance-based payments
are less than 90 percent of the contract price on foreign military
sales. Application of DoD's weighted guidelines generally results in
FMS contracts having lower profit margins and FAR limitations typically
provide less favorable financing than contracts negotiated on a direct
basis with the foreign country.
Response: Foreign military sales and the DoD weighted guidelines
are not addressed in the FAR because they are unique to DoD. DoD
regulations are beyond the scope of this case.
9. Comment: One commenter recommended DoD consider revising DoD
policy to permit direct billing for performance-based payments.
Response: DoD policy is beyond the scope of this case. However, DoD
notes that direct billing is only authorized for payments that require
Defense Contract Audit Agency (DCAA) provisional approval. Performance-
based payments require the approval of the contracting officer and not
DCAA. Contracting officer approval is a reasonable management control
as it may be difficult to reconstruct when a milestone was completed.
This is not a significant regulatory action and, therefore, was not
subject to review under Section 6(b) of Executive Order 12866,
Regulatory Planning and Review, dated September 30, 1993. This rule is
not a major rule under 5 U.S.C. 804.
B. Regulatory Flexibility Act
The Department of Defense, the General Services Administration, and
the National Aeronautics and Space Administration certify that this
final rule will not have a significant economic impact on a substantial
number of small entities within the meaning of the Regulatory
Flexibility Act, 5 U.S.C. 601, et seq., because this rule should reduce
administrative costs for contractors and the Government, thus further
encouraging the use of performance-based payments.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the rule does
not impose any additional information collection requirements that
require the approval of the Office of Management and Budget under 44
U.S.C. 3501, et seq.
List of Subjects in 48 CFR Parts 32 and 52
Government procurement.
Dated: December 19, 2007.
Al Matera,
Director, Office of Acquisition Policy.
0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 32 and 52 as set forth
below:
0
1. The authority citation for 48 CFR parts 32 and 52 continues to read
as follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
PART 32--CONTRACT FINANCING
0
2. Revise section 32.1000 to read as follows:
32.1000 Scope of subpart.
This subpart provides policy and procedures for performance-based
payments under noncommercial purchases pursuant to Subpart 32.1.
0
3. Amend section 32.1001 by--
0
a. Removing the second sentence in paragraph (c);
0
b. Removing paragraph (d);
0
c. Redesignating paragraph (e) as (d);
0
d. Revising newly redesignated paragraph (d); and
0
e. Adding new paragraph (e) to read as follows:
32.1001 Policy.
* * * * *
(d) Performance-based payments are contract financing payments and,
therefore, are not subject to the interest-penalty provisions of prompt
payment (see Subpart 32.9). These payments shall be made in accordance
with agency policy.
(e) Performance-based payments shall not be used for--
(1) Payments under cost-reimbursement line items;
(2) Contracts for architect-engineer services or construction, or
for shipbuilding or ship conversion, alteration, or repair, when the
contracts provide for progress payments based upon a percentage or
stage of completion; or
(3) Contracts awarded through sealed bid procedures.
0
4. Revise section 32.1002 to read as follows:
32.1002 Bases for performance-based payments.
Performance-based payments may be made on any of the following
bases:
(a) Performance measured by objective, quantifiable methods.
(b) Accomplishment of defined events.
(c) Other quantifiable measures of results.
0
5. Revise section 32.1003 to read as follows:
32.1003 Criteria for use.
The contracting officer may use performance-based payments for
individual orders and contracts provided--
(a) The contracting officer and offeror agree on the performance-
based payment terms;
(b) The contract, individual order, or line item is a fixed-price
type;
(c) For indefinite delivery contracts, the individual order does
not provide for progress payments; and
(d) For other than indefinite delivery contracts, the contract does
not provide for progress payments.
0
6. Revise section 32.1004 to read as follows:
32.1004 Procedures.
Performance-based payments may be made either on a whole contract
or on a deliverable item basis, unless otherwise prescribed by agency
regulations. Financing payments to be made on a whole contract basis
are applicable to the entire contract, and not to specific deliverable
items. Financing payments to be made on a deliverable item basis are
applicable to a specific individual deliverable item. (A deliverable
item for these purposes is a separate item with a distinct unit price.
[[Page 73221]]
Thus, a contract line item for 10 airplanes, with a unit price of
$1,000,000 each, has 10 deliverable items-the separate planes. A
contract line item for 1 lot of 10 airplanes, with a lot price of
$10,000,000, has only one deliverable item-the lot.)
(a) Establishing performance bases. (1) The basis for performance-
based payments may be either specifically described events (e.g.,
milestones) or some measurable criterion of performance. Each event or
performance criterion that will trigger a finance payment shall be an
integral and necessary part of contract performance and shall be
identified in the contract, along with a description of what
constitutes successful performance of the event or attainment of the
performance criterion. The signing of contracts or modifications, the
exercise of options, the passage of time, or other such occurrences do
not represent meaningful efforts or actions and shall not be identified
as events or criteria for performance-based payments. An event need not
be a critical event in order to trigger a payment, but the Government
must be able to readily verify successful performance of each such
event or performance criterion.
(2) Events or criteria may be either severable or cumulative. The
successful completion of a severable event or criterion is independent
of the accomplishment of any other event or criterion. Conversely, the
successful accomplishment of a cumulative event or criterion is
dependent upon the previous accomplishment of another event. A contract
may provide for more than one series of severable and/or cumulative
performance events or criteria performed in parallel. The contracting
officer shall include the following in the contract:
(i) The contract shall not permit payment for a cumulative event or
criterion until the dependent event or criterion has been successfully
completed.
(ii) The contract shall specifically identify severable events or
criteria.
(iii) The contract shall specifically identify cumulative events or
criteria and identify which events or criteria are preconditions for
the successful achievement of each event or criterion.
(iv) Because performance-based payments are contract financing,
events or criteria shall 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.
(v) If payment of performance-based finance amounts is on a
deliverable item basis, each event or performance criterion shall be
part of the performance necessary for that deliverable item and shall
be identified to a specific contract line item or subline item.
(b) Establishing performance-based finance payment amounts.
(1) The contracting officer shall establish a complete, fully
defined schedule of events or performance criteria and payment amounts
when negotiating contract terms. If a contract action significantly
affects the price, or event or performance criterion, the contracting
officer responsible for pricing the contract modification shall adjust
the performance-based payment schedule appropriately.
(2) Total performance-based payments shall--
(i) Reflect prudent contract financing provided only to the extent
needed for contract performance (see 32.104(a)); and
(ii) 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.
(3) The contract shall specifically state the amount of each
performance-based payment either as a dollar amount or as a percentage
of a specifically identified price (e.g., contract price or unit price
of the deliverable item). 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. Because the contracting officer has wide
discretion as to the timing and amount of the performance-based
payments, the contracting officer shall ensure that--
(i) The total contract price is fair and reasonable, all factors
considered; and
(ii) Performance-based payment amounts are commensurate with the
value of the performance event or performance criterion and are not
expected to result in an unreasonably low or negative level of
contractor investment in the contract. To confirm sufficient
investment, the contracting officer may request expenditure profile
information from offerors, but only if other information in the
proposal, or information otherwise available to the contracting
officer, is expected to be insufficient.
(4) Unless agency procedures prescribe the bases for establishing
performance-based payment amounts, contracting officers may establish
them on any rational basis, including (but not limited to)--
(i) Engineering estimates of stages of completion;
(ii) Engineering estimates of hours or other measures of effort to
be expended in performance of an event or achievement of a performance
criterion; or
(iii) The estimated projected cost of performance of particular
events.
(5) When subsequent contract modifications are issued, the
contracting officer shall adjust the performance-based payment schedule
as necessary to reflect the actions required by those contract
modifications.
(c) Instructions for multiple appropriations. If there is more than
one appropriation account (or subaccount) funding payments on the
contract, the contracting officer shall provide instructions to the
Government payment office for distribution of financing payments to the
respective funds accounts. Distribution instructions shall be
consistent with the contract's liquidation provisions.
(d) Liquidating performance-based finance payments. Performance-
based amounts shall be liquidated by deducting a percentage or a
designated dollar amount from the delivery payments. The contracting
officer shall specify the liquidation rate or designated dollar amount
in the contract. The method of liquidation shall ensure complete
liquidation no later than final payment.
(1) If the contracting officer establishes the performance-based
payments on a delivery item basis, the liquidation amount for each line
item is the percent of that delivery item price that was previously
paid under performance-based finance payments or the designated dollar
amount.
(2) If the performance-based finance payments are on a whole
contract basis, liquidation is by predesignated liquidation amounts or
liquidation percentages.
(e) Competitive negotiated solicitations. (1) If a solicitation
requests offerors to propose performance-based payments, the
solicitation shall specify--
(i) What, if any, terms shall be included in all offers; and
(ii) The extent to which and how offeror-proposed performance-based
payment terms will be evaluated. Unless agencies prescribe other
evaluation procedures, if the contracting officer anticipates that the
cost of providing performance-based payments would have a significant
impact on determining the best value offer, the solicitation should
state that the evaluation of the offeror's proposed prices will include
an adjustment to reflect the estimated cost to the Government of
providing each offeror's proposed performance-based payments (see
Alternate I to the provision at 52.232-28).
[[Page 73222]]
(2) The contracting officer shall--
(i) Review the proposed terms to ensure they comply with this
section; and
(ii) Use the adjustment method at 32.205(c) if the price is to be
adjusted for evaluation purposes in accordance with paragraph
(e)(1)(ii) of this section.
0
7. Revise section 32.1005 to read as follows:
32.1005 Solicitation provision and contract clause.
(a) Insert the clause at 52.232-32, Performance-Based Payments,
in--
(1) Solicitations that may result in contracts providing for
performance-based payments; and
(2) Fixed-price contracts under which the Government will provide
performance-based payments.
(b)(1) Insert the solicitation provision at 52.232-28, Invitation
to Propose Performance-Based Payments, in negotiated solicitations that
invite offerors to propose performance-based payments.
(2) Use the provision with its Alternate I in competitive
negotiated solicitations if the Government intends to adjust proposed
prices for proposal evaluation purposes (see 32.1004(e)).
0
8. Revise section 32.1007 to read as follows:
32.1007 Administration and payment of performance-based payments.
(a) Responsibility. The contracting officer responsible for
administering performance-based payments (see 42.302(a)(12)) for the
contract shall review and approve all performance-based payments for
that contract.
(b) Approval of financing requests. Unless otherwise provided in
agency regulations, or by agreement with the appropriate payment
official--
(1) The contracting officer shall be responsible for receiving,
approving, and transmitting all performance-based payment requests to
the appropriate payment office; and
(2) Each approval shall specify the amount to be paid, necessary
contractual information, and the appropriation account(s) (see
32.1004(c)) to be charged for the payment.
(c) Reviews. The contracting officer is responsible for determining
what reviews are required for protection of the Government's interests.
The contracting officer should consider the contractor's experience,
performance record, reliability, financial strength, and the adequacy
of controls established by the contractor for the administration of
performance-based payments. Based upon the risk to the Government,
post-payment reviews and verifications should normally be arranged as
considered appropriate by the contracting officer. If considered
necessary by the contracting officer, pre-payment reviews may be
required.
(d) Incomplete performance. The contracting officer shall not
approve a performance-based payment until the specified event or
performance criterion has been successfully accomplished in accordance
with the contract. If an event is cumulative, the contracting officer
shall not approve the performance-based payment unless all identified
preceding events or criteria are accomplished.
(e) Government-caused delay. Entitlement to a performance-based
payment is solely on the basis of successful performance of the
specified events or performance criteria. However, if there is a
Government-caused delay, the contracting officer may renegotiate the
performance-based payment schedule to facilitate contractor billings
for any successfully accomplished portions of the delayed event or
criterion.
32.1009 [Amended]
0
9. Amend section 32.1009 by removing from the first sentence in
paragraph (a) the word ``must'' and adding ``shall'' in its place.
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
0
10. Amend section 52.232-32 by--
0
a. Revising the clause date;
0
b. Revising the second sentence of paragraph (c)(2); and
0
c. Removing from the first sentence of paragraph (f)(5) the word
``must'' and adding ``shall'' in its place.
52.232-32 Performance-based payments.
* * * * *
PERFORMANCE-BASED PAYMENTS (JAN 2008)
(c) * * *
(2) * * * The designated payment office will pay approved
requests on the ---------- [Contracting Officer insert day as
prescribed by agency head; if not prescribed, insert ``30th''] day
after receipt of the request for performance-based payment by the
designated payment office. * * *
* * * * *
[FR Doc. E7-24939 Filed 12-21-07; 8:45 am]
BILLING CODE 6820-EP-P