Defense Federal Acquisition Regulation Supplement; Performance-Based Payments (DFARS Case 2011-D045), 17931-17939 [2014-07069]

Agencies

• Defense Acquisition Regulations System
• DEPARTMENT OF DEFENSE

[Federal Register Volume 79, Number 61 (Monday, March 31, 2014)]
[Rules and Regulations]
[Pages 17931-17939]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07069]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 232 and 252

RIN 0750-AH54


Defense Federal Acquisition Regulation Supplement; Performance-
Based Payments (DFARS Case 2011-D045)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to provide detailed guidance 
and instructions on the use of the performance-based payments analysis 
tool.

DATES: Effective March 31, 2014.

FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, 571-372-6099.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD published a proposed rule at 77 FR 4638 on January 30, 2012, to 
provide requirements for the use of the performance-based payments 
(PBP) analysis tool. The PBP analysis tool is a cash-flow model for 
evaluating alternative financing arrangements, and is required to be 
used by all contracting officers contemplating the use of performance-
based payments on new fixed-price type contract awards.

II. Discussion and Analysis

    DoD reviewed the public comments in the development of the final 
rule. A discussion of the comments and the changes made to the rule as 
a result of those comments is provided as follows:

A. Adequate Accounting System

    Comment: One respondent requested clarification on whether the 
proposed rule requires an accounting system deemed adequate by the 
Government.
    DoD Response: FAR 32.1007(c) requires the contracting officer to 
determine the adequacy of controls established by the contractor for 
the administration of performance-based payments. Since the contractor 
will be required to report total cost incurred to date based on its 
existing accounting system, the contracting officer must consider the 
adequacy of the contractor's accounting system for providing reliable 
cost data. DFARS 232.1003-70, Criteria for use, is added to require 
contracting officers to consider the adequacy of an offeror's or 
contractor's accounting system prior to agreeing to use performance-
based payments.

B. Administratively Burdensome and Costly

    Comment: One respondent stated that the proposed rule is 
administratively burdensome, and that implementation will surpass the 
one hour average burden per response.
    DoD Response: Performance-based payments will be paid for completed 
events, but not more frequently than monthly. Each request for a PBP 
will require the contractor to provide two dollar values: Cumulative 
value of PBP events completed to date and total cost incurred to date. 
The rule is, therefore, not administratively burdensome since it 
requires the contractor to provide information that should be readily 
available in the contractor's accounting system in the ordinary course 
of business. Accordingly, DoD estimates, on average, it will not take 
more than one hour per response.
    Comment: One respondent requested clarification regarding in what 
manner contractors will be required to verify, or otherwise state, 
total costs incurred.
    DoD Response: Each request for a PBP will require the contractor to 
provide two dollar values: Cumulative value of PBPs completed to date 
and total cost incurred to date. For DoD verification purposes, the 
final rule includes the requirement for the contractor to provide 
access, upon request of the contracting officer, to the contractor's 
books and records, as necessary, for the administration of the clause.
    Comment: One respondent expressed concern that since the proposed 
rule forces contractors to disclose extensive cost information and 
report incurred costs per milestone, the costs associated with this 
reporting obligation will increase the cost to the Government.
    DoD Response: The cost information to be provided by the contractor 
takes two forms: A projected expenditure profile of total cost per 
month which is required once when PBPs are initially proposed (i.e., as 
part of the contractor's proposed performance-based payments schedule 
that includes all performance-based payments events, completion 
criteria, event values, etc.) and cumulative value of PBPs completed to 
date and total cost incurred to date, which are required during the 
performance of the contract. The expenditure profile is a key element 
in determining the expected financing needs over time and is needed by 
both parties in order to establish appropriate

[[Page 17932]]

PBP event values. Based on DoD experience, information without an 
expenditure profile is expected to be insufficient. On fixed-price 
contracts, it is in the contractor's best interest to closely track and 
manage cost during contract performance. The entering of a total cost 
incurred-to-date value on the PBP form should not result in increased 
cost to the contractor or the Government as it merely reports the sum 
total of the accumulation of costs recorded in the contractor's 
accounting system.
    Comment: One respondent stated that the proposed rule adds to 
administrative costs by requiring two price negotiations, and by 
requiring systems to support progress payment financing to be 
reinstituted. By imposing the expense of establishing progress payment 
capabilities, this rule may drive some businesses out of the Government 
contracting market.
    DoD Response: Every price negotiation involves a discussion of 
contract cost and profit. The negotiations will be the same regardless 
of the financing method used (progress payments or PBPs). Although 
there will be two negotiations of price, there is no need to conduct 
two negotiations on cost. With regard to requiring systems to support 
financing payments, FAR 32.1007(c) requires contracting officers to 
determine the adequacy of controls established by the contractor for 
the administration of performance-based payments. Therefore, 
contracting officers must consider the adequacy of the contractor's 
accounting system for providing reliable cost data to support the 
performance-based payments. Similarly, FAR 32.503-3(b)2) requires 
contracting officers to determine the adequacy of the contractor's 
accounting system and controls for the proper administration of 
progress payments. However, contractors are not obligated to accept 
contract financing payments, whether performance-based payments, 
progress payments, or any other type of contract financing. If the 
contractor decides not to seek Government-provided contract financing 
and the associated expense of establishing and maintaining an adequate 
accounting system to substantiate the costs incurred to support the 
contract financing payments and to protect the Government's interests, 
the contractor will not incur the additional costs of those 
requirements.
    Comment: One respondent stated a concern that the proposed rule 
will result in increased costs for small businesses and prevent them 
from competing due to the adequate business system requirement.
    DoD Response: Small business will not be at a competitive 
disadvantage whether or not they decide that a performance-based 
payment funding arrangement is in their best interest. Contractors are 
not obligated to negotiate or accept a performance-based payment 
financing arrangement. However, just as with any other form of 
Government-provided contract financing, there will be some form of 
requirement for contractor business systems to substantiate the 
incurrence of the costs to support the contract financing payments and 
to protect the Government's interests. A decision not to pursue 
performance-based payments will not be held against any offeror in a 
competitive source selection.

C. Conversion to Cost-Type Contracts

    Comment: One respondent claimed that the rule effectively converts 
fixed-price contracts into cost-type contracts by focusing on incurred 
cost as opposed to completion of a subset of fixed price tasks.
    DoD Response: This rule does not convert fixed-price contracts with 
PBPs into cost-type contracts. The rule merely provides a tool for 
determining a mutually beneficial financial arrangement using 
performance-based payments. The focus on incurred costs simply provides 
a check to prevent the contract from being in an advance payment 
scenario.

D. Commercial Items

    Comment: One respondent expressed concern that the proposed rule 
may be misapplied to commercial items. The respondent recommended an 
explicit statement stating that PBPs do not apply to commercial items.
    DoD Response: FAR 32.1000 already states that FAR subpart 32.10, 
Performance-Based Payments, applies to performance-based payments under 
noncommercial purchases pursuant to FAR 32.1.

E. Competition

    Comment: One respondent stated that the economic consequences of 
the rule will add another barrier for non-traditional contractors/
businesses from entering the marketplace, stifling competition.
    DoD Response: When a contractor accepts Government-provided 
financing payments, it must accept some form of requirement for the 
oversight of business systems that substantiate the incurrence of the 
costs to support the financing payments and to protect the Government's 
interests. No contractor is under obligation to accept performance-
based payments or any other type of contract financing, and thus, avoid 
any additional economic consequence of the rule for an adequate 
accounting system. Thus, the rule is not another barrier to keep a non-
traditional contractor from entering the Government marketplace if it 
utilizes its normal private financing, and does not accept Government-
provided contract financing, i.e., the rule does not stifle 
competition.

F. Conflict With DoD's User's Guide to PBPs

    Comment: One respondent stated that the proposed rule conflicts 
with DoD's ``User's Guide to PBP'' which states that payment requests 
are event driven and contain no financial information that must be 
prepared according to financial regulations and practices dictated by 
the Government.
    DoD Response: A new PBP User's Guide has been created which is 
consistent with this rule, and is available on the DPAP Web site.

G. Contractor Risk

    Comment: One respondent asserted that the proposed rule's attempt 
to begin negotiations with the benchmark of a negotiated fixed-price 
contract based on customary progress payments is misplaced due to 
higher risk to contractors and additional administrative burden of 
PBPs.
    DoD Response: The use of a negotiated price using customary 
progress payments as the benchmark for determining a mutually 
beneficial financial arrangement using PBPs is appropriate. Customary 
progress payments will be the likely financing method utilized if 
agreement on a PBP arrangement cannot be reached. In determining the 
amount of consideration due the Government as a result of the improved 
cash flow to the contractor provided by PBPs, the parties will use the 
DoD PBP analysis tool, which is designed to allow users to objectively 
measure both the benefits and risks of the PBP arrangement.

H. Weighted Guidelines and Profit

    Comment: One respondent asserted that an alternative to the rule 
exists in the weighted guidelines method, which provides a far simpler 
and fairer profit adjustment for the value of the PBPs, as well as 
recognizing the added risk to contractors of event-based financing. The 
weighted guidelines reasonably method recognizes that performance-based 
payments impose added risk on the contractor by tying financing to 
performance. Consequently, the DFARS provides that such payments should 
lead to an increase in the negotiated profit rate.

[[Page 17933]]

    DoD Response: The weighted guidelines method is not designed to 
accurately measure the financial benefits and risks associated with a 
particular PBP arrangement. The DoD PBP analysis tool is a cash flow 
model that was specifically designed to allow users to objectively 
measure both the benefits and risks of each PBP arrangement. DoD is 
therefore amending the DFARS to improve the process of negotiating PBP 
financing arrangements. Contractors are not obligated to negotiate or 
accept a PBP financing arrangement. If a contractor determines that the 
risk of tying financing to performance is too great, the contractor may 
always choose traditional progress payments and forego the financial 
benefits of a PBP financing arrangement.
    Comment: One respondent expressed concern that the rule further 
provides unnecessary visibility into the contractor's proprietary 
profit.
    DoD Response: The rule will provide no more insight into a 
contractor's profitability than is already provided in customary 
progress payments.
    Comment: One respondent stated that the proposed rule establishes 
the Government's cash outlay under traditional progress payments as the 
cap for PBPs and does not allow any payment of profit or fee for PBPs 
until performance is completed.
    DoD Response: As previously stated, the use of a negotiated price 
using customary progress payments as the benchmark for determining a 
mutually beneficial financial arrangement using PBPs is appropriate. 
Customary progress payments will be the likely financing method 
utilized if agreement on a PBP arrangement cannot be reached. In 
determining the amount of consideration due the Government as a result 
of the improved financing provided by PBPs, the parties will use the 
DoD PBP analysis tool which is designed to allow users to objectively 
measure both the benefits and risks of the PBP financing arrangement. 
The rule does not establish the Government's cash outlay under 
customary progress payments as the cap for PBPs. The FAR limitation is 
that PBPs cannot exceed 90% of the contract price. This limitation does 
not change under this rule. Further, the rule requires that cumulative 
PBPs will not exceed the contractor's cumulative cost incurred, in 
accordance with FAR 32.104(a), which states that PBPs are to be 
provided only to the extent actually needed for prompt and efficient 
performance. Therefore, the payment of profit as part of PBPs will not 
occur.

I. Cost Risk

    Comment: One respondent expressed concern that the proposed rule 
focused on cost risk, which is a disincentive on contracts that carry a 
greater than average technical performance and schedule risk.
    DoD Response: PBPs are a method of contract financing and do not 
add or detract from the underlying cost, performance or schedule risk 
on a contract. The purpose of all contract financing is to assist the 
contractor in paying the contract cost incurred during contract 
performance. Per FAR 32.104(a), contract financing is intended to be 
provided ``only to the extent actually needed for prompt and efficient 
performance.'' Therefore, the rule appropriately links PBPs with cost 
incurred to ensure that financing is not provided to a greater extent 
than intended by FAR.

J. Early Performance Disincentive

    Comment: One respondent stated that the rule effectively eliminates 
contractor incentives to perform early and below anticipated costs, and 
in essence treats PBPs as a form of cost-type, not-to-exceed interim 
payment because it implements a policy that states: ``At no time will 
cumulative performance-based payments exceed cumulative cost incurred 
on this contract.''
    DoD Response: PBPs are a form of contract financing and not 
incentive payments. FAR 32.1004(a)(2)(iv) specifically states: 
``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.'' PBP financing that provides 
the contractor the opportunity to receive payments up to 100% of cost 
incurred, so long as they are less than 90% of the contract price, can 
be considerably more advantageous than customary progress payments, 
which cannot exceed 80% of costs incurred (or 85% of costs incurred for 
small businesses). The DoD PBP analysis tool will enable both sides to 
determine the financial value of the improved cash flow provided by 
PBPs on a given contract.

K. Executive Orders 12866 and 13563

    Comment: One respondent asserted that the proposed rule has not 
undergone a comprehensive review of the 5 U.S.C. 804 classification as 
a ``Major Rule'' as required by Executive Order (E.O.) 12866 and 13563, 
and as such, should be subject to a thorough assessment of the economic 
impact, regulatory inconsistencies, and cost-benefit evaluation of 
other options.
    DoD Response: This rule was submitted to the Office of Information 
and Regulatory Affairs (OIRA). OIRA determined that this rule is not a 
major rule under 5 U.S.C. 804, but that this is a significant 
regulatory action and, therefore, the rule was subject to review under 
section 6(b) of E.O. 12866, Regulatory Planning and Review, dated 
September 30, 1993. This rule is not a major rule under 5 U.S.C. 804.

L. FAR Preference for PBP Financing

    Comment: A number of respondents indicated that the proposed rule 
is inconsistent with the FAR preference for performance-based payments. 
One respondent recommended that a statement be added to DFARS 232.1001 
that private financing without Government guarantee is preferred.
    DoD Response: This rule does not change the FAR stated preference 
for PBPs when Government financing is determined to be appropriate. The 
first preference in FAR 32.106(a) is that the contractor should obtain 
private financing without Government guarantee. Customary contract 
financing is secondary in preference. As stated in FAR 32.1001(a), PBPs 
``are the preferred method of Government contract financing when the 
contracting officer finds them to be practical and the contractor 
agrees to their use''.

M. Limitation to PBP Financing Ceiling

    Comment: One respondent expressed concern that the proposed rule 
imposes further constraints to FAR 32.1004(b)(2)(ii) limitation of 90% 
of price. The respondent questioned why DoD contracts should have less 
favorable financing terms than other Federal contracts.
    DoD Response: This rule is consistent with the existing FAR 
requirements regarding financing in general and PBPs in particular. It 
is important to remember that the fundamental purpose of all contract 
financing is to assist the contractor in paying cost incurred during 
the performance of the contract. Per FAR 32.1004(b)(2)(i), financing is 
to be provided ``only to the extent actually needed for prompt and 
efficient performance''. In other words, the contractor should not be 
reimbursed more than its actual cost incurred at any point in time. FAR 
32.1004(b)(3)(ii) further states that the contracting officer must 
ensure that PBPs ``are not expected to result in an unreasonably low or 
negative level of contractor investment in the contract.'' Therefore, 
the proposed rule appropriately links PBPs

[[Page 17934]]

with cost incurred to ensure that financing is not provided to a 
greater extent than intended by FAR.

N. Foreign Military Sales

    Comment: One respondent stated that the application of the proposed 
rule on FMS contracts has the potential to reduce Federal income tax 
revenue. Since there is no existing regulatory or statutory requirement 
to do so, the respondent recommends exempting FMS contracts from 
performance-based payments.
    DoD Response: In accordance with DFARS 225.7303(a) the general rule 
for the pricing of FMS contracts is that they should be priced using 
the same principles used in pricing other defense contracts. Therefore, 
there would be no reason to exempt FMS contracts from the proposed 
rule. Additionally, the potential for federal income tax revenues is 
not a factor in contract pricing.

O. Government Benefits for Using PBPs

    Comment: One respondent stated that the proposed rule does not 
account for the benefits that the performance-based financing approach 
provides for the Government.
    DoD Response: PBPs, when properly structured, can provide benefits 
to both the Government and the contractor. The key benefit to the 
contractor is improved cash flow. However, there is a cost to the 
Government of providing improved contract financing to the contractor. 
Therefore, the PBP analysis tool appropriately calculates a lower 
profit to ensure that the use of PBPs provides a mutually beneficial 
financial arrangement for both parties.

P. Incurred Cost Accounting

    Comment: One respondent requests clarification on how the 
Government will treat commitments to subcontractors and/or vendors who 
have not been paid in determining total cost incurred.
    DoD Response: The definition of what constitutes an ``incurred 
cost'' is not affected by the proposed rule.

Q. Incurred Cost Limitation

    Comment: A number of respondents expressed concern with limitation 
of performance-based payments to only costs incurred. The respondents 
believe that this limitation reduces or eliminates the incentive to use 
performance-based payment financing arrangement and therefore shifts 
favor to progress payments. The incurred cost limitation eliminates the 
certainty that a contractor has in obtaining an agreed-to PBP milestone 
price, and concentrates on a contractor's incurred cost profile which 
shifts focus from performance and delivery to cost incurred in 
association to a milestone.
    DoD Response: PBPs are a form of contract financing and not 
incentive payments. FAR 32.1004(a)(2)(iv) specifically states: 
``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.'' Furthermore, FAR 32.1004(b)(3) 
states that the contracting officer shall ensure that ``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.'' These requirements limit the PBP payments 
to only costs incurred. However, PBP financing that provides the 
contractor the opportunity to receive payments up to 100% of cost 
incurred (so long as they are less than 90% of the contract price) can 
be considerably more advantageous than customary progress payments, 
(which cannot exceed 80% of costs incurred or 85% of costs incurred for 
small businesses). The DoD PBP analysis tool will enable both sides to 
determine the financial value of the improved cash flow provided by 
PBPs on a given contract. PBPs require the contractor to successfully 
complete a PBP event in accordance with the completion criteria 
specified in the contract before being paid. Therefore, the 
contractor's focus will be on successfully performing those events in a 
prompt and efficient manner. Since the purpose of all contract 
financing is to assist the contractor in paying the contract cost 
incurred during contract performance, and given that in accordance with 
FAR 32.104(a), contract financing is intended to be provided ``only to 
the extent actually needed for prompt and efficient performance,'' the 
proposed rule appropriately links PBPs with cost incurred to ensure 
that financing is not provided to a greater extent than intended by the 
FAR.

R. Invoice Delay

    Comment: One respondent expressed concern that the proposed rule 
will delay invoice payments.
    DoD Response: The rule will have no impact on the timing of invoice 
payments.

S. Better Buying Power Initiative

    Comment: One respondent claimed that the PBP Analysis Tool fails to 
address the ``Better Buying Power'' direction of flexibility to propose 
an alternative payment arrangement and innovative financing methods.
    DoD Response: The rule does not impede the flexibility to propose 
an alternative payment arrangement. In many cases, performance-based 
payment financing arrangements will be the alternative payment 
arrangement. Therefore, the rule addresses how a PBP arrangement will 
be analyzed from a cash flow perspective. A similar cash flow analysis 
would be required in any arrangement that provided improved cash flow 
to the contractor.

T. PBP Analysis Tool Assessment Accuracy

    Comment: One respondent asserted that the PBP Analysis Tool does 
not provide an accurate methodology for assessing improved cash flow. 
The respondent stated that the PBP Analysis Tool discounts the 
reduction in cash flows using an after-tax discount rate, but fails to 
account for the reduction in cash associated with applied taxes to 
earned income.
    DoD Response: The DoD PBP analysis tool compares the series of 
financing cash flows that would be generated under customary progress 
payments and PBPs. Taxes are only applicable to profit, not financing 
cash flows. Since the model already produces a mutually beneficial 
financing arrangement in which the profit is lower using PBPs than with 
customary progress payments, accounting for taxes within the model 
would only result in an even lower profit position. Although the model 
could be revised to include the reduced taxes paid by the contractor as 
a result of reduced profit in the PBP scenario, the net impact would be 
negligible and does not warrant the added complexity.
    Comment: One respondent recommended that DoD revise the cash flow 
model and its instructions to reflect the discount/interest rates 
recognized in the FAR for all other financing and cash flow valuations 
as the sole basis for consideration required (OMB A-94 or Prompt 
Payment Act Interest Rate).
    DoD Response: The cost of raising money is not the same for 
industry and the Government and therefore the time-value of money is 
not the same for each. The model will be revised as follows: The 
discount rate for contractor cash flows will be reflective of the short 
term borrowing rate as represented by the published Prime Rate adjusted 
for the corporate income tax rate of 35%. At the current Prime Rate of 
3.25%, the discount rate for contractor cash flows would be 2.11% 
[3.25% x (1 -.35)].

[[Page 17935]]

    The discount rate for Government cash flows will continue to be the 
rates published in OMB Circular A-94 Appendix C which are specified for 
use by the Government in cash flow analysis as they are reflective of 
the cost of borrowing to the Treasury. For contract periods of 
performance that fall between the rate periods identified in the 
circular, the model instructions will be revised to instruct the user 
on how to extrapolate to derive the appropriate rate for their contract 
action.

U. Overly Complex PBP Analysis Tool

    Comment: One respondent recommended that DoD redesign the cash flow 
model to make it more intuitive and correct errors that have the 
potential to overstate the consideration requirement by $200 million a 
year.
    DoD Response: The cash flow model will be used by trained 
contracting officers who will be able to walk the contractor through 
the process, if required. DoD has found no inconsistencies between the 
PBP cash-flow model and the FAR, nor has DoD found errors in the model 
that have the potential to overstate the consideration requirement by 
$200 million a year.
    Comment: One respondent asserted that if a DoD contracting officer 
is unable to develop a fair and reasonable PBP schedule, why would DoD 
believe that there would be a better outcome from this new and 
complicated process.
    DoD Response: There are a number of important aspects to 
establishing an effective and equitable PBP arrangement. The DoD PBP 
analysis tool addresses the cash flow consideration aspect of PBPs. The 
other aspects are addressed in the new PBP Users Guide.

V. Previously Implemented PBP Analysis Tool

    Comment: One respondent indicated displeasure that the proposed 
rule fails to note that the PBP analysis tool has been in effect since 
the issuance of DPAP memo mandating a cash-flow analysis for 
alternative financing arrangements for fixed price contracts. The 
respondent requested DoD provide a historical background and 
explanation for the new PBP policy.
    DoD Response: This rule provides requirements for the use of the 
performance-based payments (PBP) analysis tool. The PBP analysis tool 
is a cash-flow model for evaluating alternative financing arrangements, 
and is required to be used by all contracting officers contemplating 
the use of performance-based payments on new fixed-price type contract 
awards. The DoD PBP analysis tool has been available since the issuance 
of the DPAP memo and a cash flow analysis is mandatory when providing 
improved cash flow to the contractor.

W. Prompt Payment Act

    Comment: A respondent recommended that DoD request a statutory 
change to the Prompt Payment Act to provide interest payments to 
contractors on late or delayed performance-based payment financing.
    DoD Response: The Prompt Payment Act is not applicable to contract 
financing payments (see 31 U.S.C. 3902(a) and 5 CFR 1315.1(b)(1)). As 
PBPs are a form of contract financing, they are not subject to the 
Prompt Payment Act. DoD does not intend to seek a statutory change to, 
or a regulatory change to the implementation of, the Prompt Payment Act 
at this time to make contract financing payments subject to the Act.

X. Protracted Negotiations

    Comment: One respondent expressed concern that the proposed rule 
constrains the normal constructive evaluation and negotiation of all 
aspects of the business being put under contract.
    DoD Response: The proposed rule does not constrain the normal 
evaluation and negotiation of any other elements of the business deal. 
The proposed rule pertains to the analysis and negotiation of the 
consideration due the Government as a result of the improved cash flow 
provided by PBP financing.

Y. Timing of PBP Negotiations

    Comment: One respondent expressed concern that the proposed rule 
language at DFARS 232.1004(b)(iii) requires the Government to negotiate 
the consideration to be received by the Government if using a PBP 
financing arrangement will be more favorable to the contractor than 
customary progress payments. The respondent claimed that such 
negotiations are inappropriate since, in accordance with FAR 32.005(a), 
contract financing consideration is required after award.
    DoD Response: FAR 32.005(a) assumes that appropriate consideration 
for the contract financing included in a contract is already reflected 
in the contract price or other contract terms and conditions. The 
proposed rule simply defines the process by which contracting officers 
will determine the appropriate consideration when a contract will be 
awarded with PBP financing.

Z. Term Clarification

    Comment: One respondent took exception to the proposed language at 
DFARS 232.1004(b)(ii)(A), which states in part ``. . . If performance-
based payments are deemed practical, the Government will evaluate and 
negotiate the details of the performance-based payments schedule.'' The 
respondent believes that this introduces a nebulous new term (i.e., 
``practical'') that does not appear to be defined, and appears to be in 
conflict with basic FAR requirements. The respondent recommends that 
this statement be replaced with the following: ``If the FAR Part 32 
provisions for making contract financing payments are met, the 
Government will evaluate and may negotiate the details of the proposed 
performance-based payments schedule.''
    DoD Response: The use of PBPs is not practical for all fixed price 
contracts. The FAR already states that PBPs ``are the preferred method 
of contract financing when the contracting officer finds them to be 
practical and the contractor agrees to their use.'' Therefore, it is 
important that the contracting officer determine if PBPs are practical 
for use on the contract before proceeding further with the evaluation 
and negotiation of a PBP arrangement.

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is a significant regulatory action and, therefore, was subject to 
review under section 6(b) of E.O. 12866, Regulatory Planning and 
Review, dated September 30, 1993. This rule is not a major rule under 5 
U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD has prepared a final regulatory flexibility analysis consistent 
with 5 U.S.C. 603. A copy of the analysis may be obtained from the 
point of contact specified herein. The analysis is summarized as 
follows:
    This rule provides detailed guidance and instructions on the use of 
the performance-based payments (PBP) analysis tool. The objective of 
the rule is to amend the DFARS to provide

[[Page 17936]]

requirements for the use of the PBP analysis tool. The PBP analysis 
tool is a cash-flow model for evaluating alternative financing 
arrangements and is required to be used by all contracting officers 
contemplating the use of performance-based payments on new fixed-price 
type contract awards.
    No comments were submitted by the Chief Counsel for Advocacy of the 
Small Business Administration in response to the initial regulatory 
flexibility analysis published with the proposed rule. However, one 
respondent stated a concern that the proposed rule will result in 
increased costs for small businesses and prevent them from competing 
due to the adequate business system requirement. Small business 
contractors are not obligated to negotiate or accept a performance-
based payment financing arrangement, and a decision not to pursue 
performance-based payments will not be held against any offeror in a 
competitive source selection. Performance-based payment negotiations 
will commence only after the contracting officer and offeror have 
agreed on price using customary progress payments. Therefore, small 
business will not be at a competitive disadvantage whether or not they 
decide that a performance-based payment funding arrangement is in their 
best interest.
    DoD does not expect this rule to 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 requiring 
the use of the PBP analysis tool by all contracting officers 
contemplating the use of PBPs on new fixed-price type contract awards 
does not require contractors to expend significant effort or cost. No 
known alternatives to the rule have been identified.

V. Paperwork Reduction Act

    The rule contains new information collection requirements that 
require the approval of the Office of Management and Budget under the 
Paperwork Reduction Act (44 U.S.C. chapter 35). This information 
collection is necessary in order to use the PBP analysis tool, required 
by all contracting officers contemplating the use of PBPs on new fixed-
price type contract awards. OMB has cleared this information collection 
requirement under OMB Control Numbers 0704-0485, Performance-Based 
Payments (PBP) Analysis Tool, DFARS Part 232-Contract Financing.

List of Subjects in 48 CFR Parts 232 and 252

    Government procurement.

Manuel Quinones,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 232 and 252 are amended as follows:


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1. The authority citation for 48 CFR parts 232 and 252 continues to 
read as follows:

    Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

PART 232--CONTRACT FINANCING

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2. Amend section 232.1001 by--
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a. Adding a new paragraph (a); and
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b. Amending paragraph (d) by removing ``standard prompt payment terms'' 
and adding in its place ``standard payment terms''.
    The addition reads as follows:


232.1001  Policy.

    (a) As with all contract financing, the purpose of performance-
based payments is to assist the contractor in the payment of costs 
incurred during the performance of the contract. Therefore, 
performance-based payments should never exceed total cost incurred at 
any point during the contract. See PGI 232.1001(a) for additional 
information on use of performance-based payments.
* * * * *

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3. Add section 232.1003-70 to read as follows:


232.1003-70  Criteria for use.

    The contracting officer will consider the adequacy of an offeror's 
or contractor's accounting system prior to agreeing to use performance-
based payments.

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4. In section 232.1004, revise the section heading and add paragraph 
(b) to read as follows:


232.1004  Procedures.

    (b) Prior to using performance-based payments, the contracting 
officer shall--
    (i) Agree with the offeror on price using customary progress 
payments before negotiation begins on the use of performance-based 
payments, except for modifications to contracts that already use 
performance-based payments;
    (ii) Analyze the performance-based payment schedule using the 
performance-based payments (PBP) analysis tool. The PBP analysis tool 
is on the DPAP Web site in the Cost, Pricing & Finance section, 
Performance Based Payments--Guide Book & Analysis Tool tab, at https://www.acq.osd.mil/dpap/cpic/cp/Performance_based_payments.html.
    (A) When considering performance-based payments, obtain from the 
offeror/contractor a proposed performance-based payments schedule that 
includes all performance-based payments events, completion criteria and 
event values along with the projected expenditure profile in order to 
negotiate the value of the performance events. If performance-based 
payments are deemed practical, the Government will evaluate and 
negotiate the details of the performance-based payments schedule.
    (B) For modifications to contracts that already use performance-
based payments financing, the basis for negotiation must include 
performance-based payments. The PBP analysis tool will be used in the 
same manner to help determine the price for the modification. The only 
difference is that the baseline assuming customary progress payments 
will reflect an objective profit rate instead of a negotiated profit 
rate;
    (iii) Negotiate the consideration to be received by the Government 
if the performance-based payments payment schedule will be more 
favorable to the contractor than customary progress payments;
    (iv) Obtain the approval of the business clearance approving 
official, or one level above the contracting officer, whichever is 
higher, for the negotiated consideration; and
    (v) Document in the contract file that the performance-based 
payment schedule provides a mutually beneficial settlement position 
that reflects adequate consideration to the Government for the improved 
contractor cash flow.
* * * * *

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5. Add section 232.1005-70 to read as follows:


232.1005-70  Contract clauses.

    The contracting officer shall include the following clauses with 
appropriate fill-ins in solicitations and contracts that include 
performance-based payments:
    (a) For performance-based payments made on a whole-contract basis, 
use the clause at 252.232-7012, Performance-Based Payments--Whole-
Contract Basis.
    (b) For performance-based payments made on a deliverable-item 
basis, use the clause at 252.232-7013, Performance-Based Payments--
Deliverable-Item Basis.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

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6. Add sections 252.232-7012 and 252.232-7013 to read as follows:

[[Page 17937]]

252.232-7012  Performance-Based Payments--Whole-Contract Basis.

    As prescribed in 232.1005-70(a), use the following clause: 
PERFORMANCE-BASED PAYMENTS--WHOLE-CONTRACT BASIS (MAR 2014)

    (a) Performance-based payments shall form the basis for the 
contract financing payments provided under this contract, and shall 
apply to the whole contract. The performance-based payments schedule 
(Contract Attachment ------) describes the basis for payment, to 
include identification of the individual payment events, evidence of 
completion, and amount of payment due upon completion of each event.
    (b)(i) At no time shall cumulative performance-based payments 
exceed cumulative contract cost incurred under this contract. To 
ensure compliance with this requirement, the Contractor shall, in 
addition to providing the information required by FAR 52.232-32, 
submit supporting information for all payment requests using the 
following format:
BILLING CODE: 5001-06-P
[GRAPHIC] [TIFF OMITTED] TR31MR14.000


[[Page 17938]]


    (ii) The Contractor shall not submit payment requests more 
frequently than monthly.
    (iii) Incurred cost is determined by the Contractor's accounting 
books and records, which the contractor shall provide access to upon 
request of the Contracting Officer for the administration of this 
clause.

(End of clause)


252.232-7013  Performance-Based Payments--Deliverable-Item Basis.

    As prescribed in 232.1005-70(b), use the following clause: 
PERFORMANCE-BASED PAYMENTS--DELIVERABLE-ITEM BASIS (MAR 2014)

    (a) Performance-based payments shall form the basis for the 
contract financing payments provided under this contract and shall 
apply to Contract Line Items (CLINs) ----, ----, and ----. The 
performance-based payments schedule (Contract Attachment ----) 
describes the basis for payment, to include identification of the 
individual payment events, CLINs to which each event applies, 
evidence of completion, and amount of payment due upon completion of 
each event.
    (b)(i) At no time shall cumulative performance-based payments 
exceed cumulative contract cost incurred under CLINs ----, ----, and 
----. To ensure compliance with this requirement, the Contractor 
shall, in addition to providing the information required by FAR 
52.232-32, submit supporting information for all payment requests 
using the following format:

[[Page 17939]]

[GRAPHIC] [TIFF OMITTED] TR31MR14.001

    (ii) The Contractor shall not submit payment requests more 
frequently than monthly.
    (iii) Incurred cost is determined by the Contractor's accounting 
books and records, which the contractor shall provide access to upon 
request of the Contracting Officer for the administration of this 
clause.

(End of clause)

[FR Doc. 2014-07069 Filed 3-28-14; 8:45 am]
BILLING CODE 5001-06-C