Defense Federal Acquisition Regulation Supplement: Performance-Based Payments (DFARS Case 2019-D002), 19681-19691 [2020-06728]

Agencies

• Defense Acquisition Regulations System
• DEPARTMENT OF DEFENSE

[Federal Register Volume 85, Number 68 (Wednesday, April 8, 2020)]
[Rules and Regulations]
[Pages 19681-19691]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06728]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 202, 204, 212, 232, and 252

[Docket DARS-2019-0019]
RIN 0750-AK37


Defense Federal Acquisition Regulation Supplement: Performance-
Based Payments (DFARS Case 2019-D002)

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

[[Page 19682]]

(DFARS) to implement a section of the National Defense Authorization 
Act for Fiscal Year 2017 that amends 10 U.S.C. 2307 to address the use 
of performance-based payments.

DATES: Effective April 8, 2020.

FOR FURTHER INFORMATION CONTACT: Ms. Amy Williams, DPC/DARS, at 571-
372-6106.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule in the Federal Register at 84 FR 
18221 on April 30, 2019, to implement section 831 of the National 
Defense Authorization Act (NDAA) for Fiscal Year (FY) 2017, which 
amends 10 U.S.C. 2307 to address the use of performance-based payments 
(PBPs).
    Eleven respondents submitted public comments in response to the 
proposed rule.

II. Discussion and Analysis

    DoD reviewed the public comments in the development of the final 
rule. There was widespread support for the proposed implementation of 
10 U.S.C. 2307(b)(2) requirement that PBPs shall not be conditioned 
upon costs incurred in contract performance, but on achievement of 
performance outcomes (232.1001(a)). A number of changes are made in the 
final rule, which are expected to increase support for the rule, such 
as permitting alternate forms of security for performance-based 
payments and clarifying that an acceptable accounting system is not 
required for incurred costs under the performance-based payments 
clause. A discussion of the comments and the changes made to the rule 
as a result of the comments received is provided, as follows:

A. Summary of Significant Changes From the Proposed Rule

    1. The requirement for compliance with Generally Accepted 
Accounting Principles (GAAP) in order to receive performance-based 
payments at DFARS 232.1003-70 and in the representation at 252.232-7015 
has been modified to apply to the contractor's financial statements, 
rather than the ``output'' of the contractor's accounting system, and 
the requirement that compliance with GAAP must be evidenced by audited 
financial statements has been removed.
    2. The procedures at DFARS 232.1004 are modified to eliminate the 
requirement to first agree on price using customary progress payments 
and then require consideration if performance-based payments are 
subsequently negotiated. In addition, contracting officers are 
encouraged to use both the progress payments and performance based 
payments clauses and provisions, when considering both types of 
financing methods.
    3. The DFARS clauses 252.232-7012, Performance-Based Payments--
Whole-Contract Basis, and 252.232-7013, Performance-Based Payments--
Deliverable Items, are modified to specifically state that it is not 
necessary to have a Government-unique cost accounting system in order 
to report incurred costs under the clause.
    4. A new paragraph (d) is added in DFARS 252.232-7012 and 252.232-
7013 that provides some flexibility with regard to acceptable security, 
although title to the property described in paragraph (f) of the clause 
at FAR 52.232-32, Performance-Based Payments, is still the preferred 
security for receipt of performance-based payments.
    5. A new provision is added at DFARS 252.232-7016, Notice of 
Progress Payments or Performance-Based Payments, to be used in lieu of 
FAR 52.232-13, Notice of Progress Payments, when the solicitation 
contains clauses for progress payments and performance-based payments, 
to explain that only one type of financing will be included in the 
resultant contract, except as may be authorized on separate orders 
subject to FAR 32.1003(c).

B. Analysis of Public Comments

1. General Support for the Rule
    a. Generally support the rule.
    Comment: Various respondents expressed general support for the 
rule, particularly the removal of the requirement to limit PBP 
financing to costs incurred. One respondent stated that the proposed 
rule is a significant improvement over the current DFARS, creating a 
more inviting marketplace for private sector entities and 
nontraditional defense contractors. Another respondent wholeheartedly 
supported amending the DFARS to implement section 831 of the NDAA for 
FY 2017.
    Response: Noted.
    b. Generally oppose the rule.
    Comment: One respondent stated that this rule is worse than the 
previous rule (DFARS Case 2017-D019, published 8/24/2018, withdrawn 10/
4/2018), and against the original genuine intent of simplification to 
motivate the performance of the supplier. Another respondent 
recommended adopting the revisions to the DFARS proposed in DFARS Case 
2017-D019 that implement section 831, while disregarding those changes 
that were outside the scope of section 831.
    One respondent stated that when DoD issued the proposed rule under 
DFARS case 2017-D019, DoD explained that the proposed rule would 
``relieve the administrative burden on contractors'' by deleting the 
current regulations relating to performance-based payments at DFARS 
subpart 232.10 and the associated clauses at DFARS 252.232-7012 and 
252.232-7013. This respondent recommended that DoD should repeal in 
their entirety the current DFARS regulations related to PBPs and the 
associated clauses, and any associated Procedures, Guidance, and 
Information (PGI), because existing FAR regulations are sufficient.
    Response: It is the intent of this rule to implement section 831 of 
the NDAA for FY 2017. The prior DFARS Case 2017-D019 presented a 
cohesive approach to contract financing, in order to increase DoD's 
business effectiveness and efficiency as well as to provide an 
opportunity for both small and other than small entities to qualify for 
increased customary progress payment rates and maximum performance-
based payment rates, based on whether the offeror/contractor has met 
certain performance criteria. The provisions of that rule were 
interdependent upon each other, and DoD cannot segregate out specific 
aspects of that rule in the absence of the criteria that were intended 
to motivate performance.
    In response to the comment that DoD should repeal in their entirety 
the current DFARS regulations relating to performance-based payments, 
DoD does not consider this to be in the best interest of DoD or of 
contractors. DFARS coverage, as modified by this final rule, provides 
needed clarification and also provides flexibility with regard to 
security for performance-based payments. The following discussion will 
address more specific concerns about the proposed rule.
2. Make PBPs the Preferred Method of Contract Finance
    Many respondents stated that DoD should clearly establish PBPs as 
the default choice for contract financing.
    a. Benefits of performance-based payments.
    Comment: Several respondents particularly emphasized the benefits 
of PBPs. These respondents stated that PBPs better align the interests 
of the Government and the contractors. According to these respondents, 
by effectively attributing the payments to the work performance, rather 
than just costs incurred, the Government receives tangible product 
deliverables and the

[[Page 19683]]

contractor receives cash payment tied to performance, which encourages 
the timely execution of the contract. One respondent stated that PBPs 
may reduce costs for Government oversight and compliance, encourage 
nontraditional and small business entities to enter the Federal 
marketplace, and facilitate contractor financing and performance of 
contracts.
    Response: DoD agrees that appropriate use of PBPs has benefits. 
This rule is consistent with the statutory preference for PBP; however, 
the Government reserves the right to determine the best option for 
contract financing based on the individual contract action. Due to the 
evaluation criteria required to determine whether PBP is the best 
method of contract financing, DoD will not direct that PBP is the 
default choice for contracts.
    b. Eliminate the requirement for two-step negotiation and 
consideration.
    Comment: Although not addressed in the proposed rule, many 
respondents were concerned that the existing procedures at DFARS 
232.1004 pose hindrances to the preference for PBPs. Specifically, many 
respondents were concerned about retention of the procedures at DFARS 
232.1004, which require initial agreement on price using customary 
progress payments before negotiations begin on the usage of 
performance-based payments. One respondent stated that the two-step 
negotiation process is unjustifiably unique to DoD.
    Furthermore, the DFARS currently requires negotiation of 
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. Two respondents stated that this process 
is counter to the system outlined in FAR 32.005(a). One of these 
respondents stated that performance-based payments are a program 
management tool, whereas progress payments simply reimburse contractors 
for costs incurred. Therefore, according to the respondent, comparing 
the payments schedule of one to the other is not an ``apples-to-
apples'' comparison. Performance goals required by PBPs serve as 
additional requirements placed on the contractor that offset the 
payment schedule difference offered by PBPs compared to progress 
payments. Requiring additional consideration erodes the potential 
benefits of PBPs relative to the increased risk accepted by 
contractors, and undermines the policy objective to incentivize 
performance. Several respondents stated that DoD added this policy 
specifically to reverse the preference for PBPs.
    Response: DoD has removed this requirement in the final rule (see 
DFARS 232.1004).
    c. Eliminate or completely overhaul the PBP analysis tool.
    Comment: Several respondents specifically recommended eliminating 
or completely overhauling the PBP analysis tool, which DoD developed to 
allow the contracting officer and industry to compare the financial 
cost and benefits of using PBPs versus customary progress payments. 
While one respondent acknowledged that slight changes have been made to 
improve the tool, the respondent still finds the ``conceptual 
shortcomings'' of DoD's policy unchanged. One respondent offered the 
following detailed criticisms of the PBP Tool:
     The tool assumes if there are costs in the first month of 
the program there will be a Progress Based Payment in the first month 
of the program. Invoices for PBP's are submitted after the end of the 
month and thus cannot be paid before about the middle of the 2nd month 
of the program. This flaw skews the results by assuming the contractor 
receives payment nearly a month before it is possible. The tool does 
not provide a mechanism for adjusting calculations based on specific 
contract requirements when such requirements impact payment lag time 
either positively or negatively.
     The PBP tool is intentionally structured to keep a 
contractor cash flow negative regardless of how well the contractor 
performs.
    Response: The DoD tool takes into account a 22-day lag time between 
when expenditures occur and when progress payments are made. This 
accounts for the fact that all expenditures do not occur on the first 
day of a month or the last day. This is an industry average, and does 
not accommodate unique lag times by contract.
    Contractors are supposed to have a positive investment in the 
effort. FAR 32.1004(b)(3)(ii) 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, contracting officers are still required to use the PBP 
analysis tool to objectively measure both the benefits and risks of the 
PBP financing arrangement, and negotiate a mutually beneficial 
settlement position that reflects adequate consideration to the 
Government for the improved contractor cash flow. However, the PBP Tool 
has been revised to remove the cost limitation in accordance with this 
final rule.
3. Compliance With Generally Accepted Accounting Principles
    a. Audited financial statement.
    Comment: One respondent found the requirement to evidence 
compliance with Generally Accepted Accounting Principles (GAAP) through 
audited financial statements burdensome to the contractor.
    Response: The requirement that the contractors compliance with GAAP 
must be evidenced through audited financial statements has been removed 
from the final rule.
    b. Make language of rule mirror the statute.
    Comment: One respondent was concerned that the proposed DFARS rule 
does not exactly mirror the statute when it requires that ``the output 
of a contractor's accounting system'' shall be in compliance with GAAP, 
whereas the statute requires ``a contractor's accounting system'' to be 
in compliance (or noncompliance) with GAAP.
    Response: The wording of the statute is imprecise, because an 
accounting system cannot be in compliance with GAAP. Compliance with 
GAAP means that the financial statements are fairly presented, i.e., 
that the information contained within the financial statements complies 
with GAAP in all material respects. Therefore, in order to improve the 
clarity of the final rule, the requirement for compliance with GAAP in 
order to receive PBPs is now applied to ``the contractor's financial 
statements'' rather than ``the output of the contractor's accounting 
system'' (see 232.1003-70 and 252.232-7015).
    c. Representation is unnecessary.
    Comment: One respondent stated that the proposed representation at 
DFARS 252.232-7015 with regard to compliance with GAAP is unnecessary, 
since costs incurred have no bearing on the amounts billed under PBPs.
    Response: The fact that incurred costs no longer have bearing on 
the amounts billed under PBPs has no relevance to the requirement for 
representation by the offeror that its financial statements are, or are 
not, in compliance with GAAP. Section 831, as codified at 10 U.S.C. 
2307(b)(4), requires compliance with GAAP in order to receive 
performance-based payments. Providing a representation is one of the 
least burdensome ways to demonstrate compliance with GAAP.
4. Reporting of Incurred Costs
    Most respondents had objections to the continued requirement for 
reporting of incurred costs in the clauses at

[[Page 19684]]

DFARS 252.232-7012 and 252.232-7013.
    a. Requirement for Government-unique accounting system.
    Comment: One respondent noted that 10 U.S.C. 2307 expressly states 
that the Secretary of Defense shall ensure that nontraditional defense 
contractors and other private sector companies are eligible for 
performance-based payments and that there shall be no requirements for 
a contractor to develop Government-unique accounting systems or 
practice as a prerequisite for agreeing to receive PBPs. Some 
respondents believed that retention of the requirement to report 
cumulative contract costs incurred to date, as a condition of receiving 
PBPs, imposes a requirement to develop a Government-unique accounting 
system, and therefore is inconsistent with 10 U.S.C. 2307(b)(4)(A), as 
amended by section 831. For example, one respondent stated that the 
cost reporting in the proposed rule would require a Government-unique 
job order cost accounting system to generate FAR- and DFARS-compliant 
cost reports.
    Response: The reporting of incurred costs does not require a 
Government-unique cost accounting system. Systems that identify costs 
with the projects for which they are incurred (``job costing,'' as a 
broad term) are not at all unique to Government requirements. It would 
be highly unlikely for a fiscally sound company to have no means of 
identifying the costs of performing a contract. Furthermore, the rule 
does not require any particular accounting system; rather, the rule 
states that ``incurred cost is determined by the Contractor's 
accounting books and records.''
    Comment: One respondent while expressing concern that the reporting 
requirement could be interpreted to require the submission of FAR part 
31 compliant costs, stated that costs generated by a GAAP-compliant 
system should be sufficient to provide DoD with data necessary for 
negotiation of PBPs in future contracts. This respondent recommended 
clarification that a contractor may report costs from its GAAP-
compliant system, adjusted by a decrement factor to reflect estimated 
unallowable costs as appropriate.
    Response: The clauses in the final rule have been revised to 
specify that if the Contractor's accounting system is not capable of 
tracking costs on a job order basis, the Contractor shall provide a 
realistic approximation of the allocation of incurred costs 
attributable to this contract in accordance with the Contractor's 
accounting system.
    DoD considers that it would constitute excessive risk to the 
Government and would be an impediment to issuing financing payments to 
a company if that company is unable to comply with this requirement, 
even when it is properly understood that this clause does not require a 
``Government-unique'' accounting system. To the extent that a company 
is unable to report the costs of performance at all, relying on its own 
accounting books and records, this will make it impossible for the 
Government to have any confidence that complete performance of the 
contract is assured, or that the negotiated events ``reflect prudent 
contract financing'' (FAR 32.1004(b)(2)(i)) and do not ``result in an 
unreasonably low or negative level of contractor investment in the 
contract'' (FAR 32.1004(b)(3)(ii)).
    b. Disincentive to use of PBPs, rather than a preference.
    Comment: One respondent stated that nontraditional entities may be 
disinterested in expending time and resources to implement business 
systems to collect and report costs on a contract basis, which are 
beyond the system necessary to comply with GAAP. Similarly, another 
respondent stated that the requirement to report incurred costs 
undermines the stated preference for PBPs, could deter contractors from 
pursuing PBPs because contractors with only fixed-price contracts are 
unlikely to track costs on a contract-by-contract basis, and 
effectively would require many contractors to add business and 
compliance systems if they were to pursue PBPs. They suggest that this 
is therefore contrary to the statutory preference at 10 U.S.C. 2307 for 
PBPs as a means of financing.
    Response: If the contractor's financial statements are in 
compliance with GAAP, it is likely that the contractor, even a 
nontraditional defense contractor, will have some means of providing a 
realistic approximation of the allocation of incurred costs. While it 
is possible that some contractors will have no such system at all, 
rather than only no ``Government-unique'' system, DoD does not believe 
it is reasonable, necessary, or the intent of Congress, to issue 
Government financing when the recipient has no such visibility over its 
costs.
    c. Unnecessary and irrelevant.
    Comment: Most respondents contended that the requirement to report 
incurred costs was unnecessary. For example, one respondent stated that 
the Government should recognize the limits of the cost data collected 
when using it to inform negotiations on future contracts utilizing 
PBPs. This respondent contended that collecting costs incurred at each 
milestone payment represents an incomplete picture of total costs 
incurred by a contractor to complete a project. According to the 
respondent, at least 10 percent of the contract costs are incurred 
between the last PBP milestone payment and the end of the program. 
Additionally, there are other factors such as rate adjustments which 
later affect the total costs incurred.
    Another respondent stated that there is no need to use a comparison 
of a prior contract's PBP values and incurred costs in the negotiation 
of future contracts' PBP values.
    Many respondents stated that what happened on the prior contract is 
simply not relevant to negotiation of the current contract's PBP event 
values. One respondent noted that a requirement to use information on 
incurred costs is not found in the DoD User's Guide to performance-
Based Payments, nor is it found in the current (or proposed) DFARS 
language, nor is it found in the current PGI associated with PBPs. 
Several respondents also pointed out that because these are firm-fixed-
price contracts, neither the contractor nor the Government have a need 
to track contract costs or report them in the manner required by the 
proposed rule.
    Response: It would not be appropriate to collect this information 
on incurred costs as a means to condition payment of the current PBP 
events on incurred costs. The events are negotiated in advance of 
performance, and will not be changed merely on the basis of incurred 
costs. However, aside from the value to Government negotiators of being 
able to evaluate current proposals for PBP milestone values against 
past experience, it remains important for the Government to know the 
risk it is incurring when it makes payments that may be 
disproportionate to the contractor's investment in contract 
performance. That is why the amounts assigned to PBP events must be 
``commensurate with the value of the performance event or performance 
criterion'' (FAR 32.1004(b)(3)(ii)). DoD does not believe that Congress 
was unconcerned with ensuring some degree of accountability; if it had 
been, there would have been no purpose to the statutory requirement 
that ``in order to receive performance-based payments, a contractor's 
accounting system shall be in compliance with Generally Accepted 
Accounting Principles.''
    d. Use of incurred cost data in negotiations.
    Comment: One respondent was concerned that use of prior incurred 
costs in negotiation will create ``never-ending discussions, allowing 
an excuse to prime contractors and contracting

[[Page 19685]]

officer to delay payments and requiring in any case the burden on data 
collecting, validating, etc. on both the Supplier and the Buyer.'' This 
respondent also raised the issue of how data on incurred costs will be 
stored and managed and who will have access to the database created 
with these costs. The respondent questioned how the contracting officer 
will be able to find applicable previous cases.
    Response: In accordance with FAR 15.403-3(b), the contracting 
officer may require data other than certified cost or pricing data to 
support a determination of a fair and reasonable price. In 
negotiations, one way to ensure a fair and reasonable price is through 
the use of various price analysis techniques and procedures to include 
a comparison of proposed prices to historical prices (i.e., incurred 
costs) paid for the same or similar items. Use of prior incurred costs 
in negotiations are not meant to create ``never-ending'' discussions, 
but to facilitate negotiation of a fair and reasonable price for all 
concerned parties. The requirement to provide incurred cost data is not 
a new requirement, and this data has been available for use in 
negotiations for many years. As with any sensitive information, all 
incurred cost data will be maintained in the official contract file for 
official use only. There is no intent to create a new database.
5. Requirement for Title
    Comment: Two respondents addressed the requirement in FAR 52.232-
32(f) that the Government take title to work in progress immediately 
upon the date of the receipt of a PBP payment.
    Two respondents stated that the requirement for title conflicts 
with 10 U.S.C. 2307(b)(4)(A), which states that in order to receive 
performance-based payments, a contractor's accounting system shall be 
in compliance with GAAP, and there shall be no requirement for a 
contractor to develop Government-unique accounting systems or practices 
as a prerequisite for agreeing to receive performance-based payments. 
According to the respondents, because many GAAP-compliant accounting 
systems are unable to isolate the work in process associated with a 
particular unit from the rest of the supply chain until delivery, 
requiring a contractor to deliver title to such goods is therefore de 
facto requirement for a Government-unique accounting system.
    One respondent also stated that requiring title to work in process 
immediately upon receipt of a PBP payment represents bad policy. 
According to the respondent, allowing contractors to aggregate 
component purchases across multiple contracts can reduce costs and 
improve schedules. To maximize this flexibility, contractors need to be 
able to reallocate common parts between contracts based on customer 
needs and vendor availability. This benefits DoD.
    Two respondents pointed out that DoD has existing flexibility in 10 
U.S.C. 2307(d) to accept alternate forms of security for PBPs instead 
of taking title. According to these respondents, such alternate forms 
of security are common in the commercial marketplace, and allowing 
contractors without Government-unique accounting systems to provide an 
alternate form of security is the only way to implement the mandate 
from Congress to open PBP access to all contractors with GAAP-compliant 
systems.
    Response: While title to the property described in paragraph (f) of 
the clause at FAR 52.232-32, Performance-Based Payments, is the 
preferred security for receipt of progress payments, the final rule 
(DFARS 252.232-7012 and 252.232-7013) addresses the concerns and 
comments expressed concerning title by allowing the use of other forms 
of security if the contractor's accounting system is not capable of 
identifying and tracking through the build cycle the property that is 
allocable and properly chargeable to the contract.
6. Definition of ``Nontraditional Defense Contractor''
    Comment: Two respondents stated that the DFARS does not define 
``nontraditional defense contractor'' and recommended inclusion in the 
DFARS of the definition at 10 U.S.C. 2302(9).
    Response: The definition of ``nontraditional defense contractor'' 
at 10 U.S.C. 2302(9) is incorporated in the DFARS at 212.001. However, 
since the term is now used in part 232, this final rule moves the 
definition from DFARS 212.001 to DFARS 202.101, so that the definition 
is applicable throughout the DFARS.
7. Ceiling of 90 Percent
    Comment: One respondent recommended revision to the proposed rule 
to provide clarity on the financial ceiling of 90 percent provided for 
in the FAR. According to the respondent, the DFARS should clearly state 
that performance-based payments will be based on a percentage of price, 
and that the ceiling for the basis will be 90 percent (FAR 
32.1004(b)(2)(ii)).
    Response: The DFARS does not restate the 90 percent ceiling that is 
already stated in FAR 32.1004(b)(2)(ii) and doing so is unnecessary 
because the DFARS supplements the FAR. Further, performance-based 
payments are not based on a percentage of price. The bases for 
performance-based payments are clearly defined in FAR 32.1002.
8. Selection and Valuation of Milestone Events
    Comment: One respondent recommended that the final rule should 
clarify in the DFARS that a PBP payment associated with a particular 
milestone should reflect the value of all work accomplished by the 
contractor at the time it meets the milestone. This is consistent with 
current guidance in the PBP Guide, but the respondent has still 
encountered widespread confusion. According to the respondent, 
clarifying this interpretation can reduce the administrative burden by 
allowing flexibility to choose fewer and more meaningful milestones.
    Response: DoD has considered this comment and concludes that no 
further clarification is required in the final rule. The DoD 
Performance Based Payment Guide contains sufficient direction with 
regard to identifying PBP events, establishing completion criteria for 
PBP events, and establishing PBP event values. PBP events are 
established as representative milestones that may reflect the total 
effort needed to accomplish not only that particular milestone, but 
other activities through that timeframe; milestone events or criteria 
may be either severable or cumulative, and the contract should state 
which applies (FAR 32.1004(a)(2)). However, care must be taken to 
ensure that there is reasonable consistency in event valuation and that 
valuation of events is reflective of their relative value to the 
successful performance of the contract, so that the contractor's 
financial focus is in basic alignment with programmatic priorities.
9. Training and Guidance
    Several respondents recommended additional training and guidance on 
PBPs to both program managers and contracting officers.
    a. PBP process.
    Comment: One respondent recommended training on the PBP milestone 
process because the respondent has encountered reluctance on the part 
of the Government due to lack of experience in use of PBPs and concern 
for administrative burden on the Government. Another respondent noted 
that establishing proper milestones requires an understanding of what 
it takes to perform the contract and how much it will cost. However, it 
also requires understanding of how

[[Page 19686]]

businesses operate and why they need certain funding when they do. 
Therefore, the respondent recommended guidance and training to 
procurement personnel on how to reach the proper balance between DoD 
and contractor needs.
    Response: Each DFARS case is reviewed for training requirements/
changes to current Defense Acquisition University training. In addition 
to the Continuing Learning Course (CLC 026), Performance Based Payment 
Overview, the Performance Based Payment Guide, and Guide for 
Performance Based Service Acquisitions, courses in the Contracting and 
Program Management curriculum contain appropriate information on PBPs 
to align with course goals. The changes in the DFARS will prompt 
changes in the guides and course to ensure the workforce understands 
the processes.
    b. Cash flow.
    Comment: One respondent recommended guidance to contracting 
officers that a slightly positive cash flow is acceptable and 
encouraged, since it further incentivizes performance. Another 
respondent when addressing training also noted that limiting reasonable 
cash flow to contractors may result in deferring expenditures, which 
could result in late delivery.
    Response: FAR 32.1004(b)(2)(i) states that performance-based 
payments shall reflect prudent contract financing provided only to the 
extent needed for contract performance, and FAR 32.1004(b)(3)(ii) 
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. DoD is not trying to limit reasonable cash flow with this 
rule as it does not differ from FAR 32.1004 (b)(2)(ii) which limits 
contract financing to 90% of price. Any training provided will be done 
so in accordance with the rules in the FAR and DFARS.
10. Applicability to Acquisition of Commercial Items
    Comment: One respondent recommended that DoD should consider making 
PBPs available to commercial item contracts that are large in terms of 
scope and dollar value when the contractor needs early funding of the 
facilities, equipment, supplies and the like for performance. The 
respondent requested that DoD should provide guidance for such use of 
PBPs.
    Response: The law contemplates the use of financing similar to 
performance based payments on commercial item as well as other 
contracts. However, it also requires that payments for commercial items 
``be made under such terms and conditions as the head of the agency 
determines are appropriate or customary in the commercial marketplace 
and are in the best interests of the United States'' (10 U.S.C. 
2307(f)(1)). It is impossible to specify in the DFARS what specific 
terms and conditions for PBPs ``are appropriate or customary in the 
commercial marketplace,'' since we assume they may vary widely 
depending on the marketplace for the kind of supply or service item 
being purchased. For this reason, the FAR and DFARS do not provide 
further detailed guidance other than what is already prescribed in FAR 
32.2 and DFARS 232.2, ``Commercial Item Purchase Financing.''

III. Applicability to Contracts at or Below the Simplified Acquisition 
Threshold and for Commercial Items, Including Commercially Available 
Off-the-Shelf Items

    This rule amends the clauses at DFARS 252.232-7012 and 252.232-7013 
and adds a new provision at DFARS 252.232-7015, Performance-Based 
Payments--Representation. These clauses and provision do not apply to 
contracts at or below the simplified acquisition threshold or for the 
acquisition of commercial items. In accordance with 10 U.S.C. 2307(f) 
and 41 U.S.C. 4505, FAR 32.201 provides that payment for commercial 
items may be made under such terms and conditions as the agency head 
determines are appropriate or customary in the commercial marketplace 
and are in the best interest of the United States. Furthermore, FAR 
32.202-1 states that Government financing of commercial purchases is 
expected to be different from that used for noncommercial purchases. 
While the contracting officer may adapt techniques and procedures from 
the noncommercial subparts for use in implementing commercial contract 
financing arrangements, the contracting officer must have a full 
understanding of effects of the differing contract environments and of 
what is needed to protect the interests of the Government in commercial 
contract financing.

IV. Expected Cost Impact

    This rule amends the DFARS to implement changes to performance-
based payment policies for DoD contracts by amending the policy on 
performance-based payments at DFARS 232.1001 and amending the clauses 
at DFARS 252.232-7012, Performance-Based Payments--Whole Contract 
Basis, and 252.232-7013, Performance-Based Payments--Deliverable Item 
Basis.
    This rule may benefit contractors who receive contract financing 
from the Government in the form of performance-based payments. 
Performance-based payments do not apply to--
     Payments under cost-reimbursement line-items;
     Contracts awarded under the authority of FAR part 12 or 
part 13;
     Contracts for architect-engineer services or construction, 
or for shipbuilding or ship repair, when the contract provides for 
progress payments based upon a percentage or stage of completion.
    Performance-based payments are tied to the achievement of specific, 
measurable events or accomplishments that are defined and valued in 
advance by the parties to the contract. Total performance-based 
payments cannot exceed 90 percent of the contract price.
    This rule removes the DFARS restrictions that limit performance-
based payments to amounts not greater than costs incurred up to the 
time of payment.
    If performance-based payments to the contractor based on the 
negotiated value of completed milestone events are allowed to exceed 
the total costs incurred up to the time of payment, the cost to the 
contractor of short-term borrowing will decrease and the cost to the 
Government of borrowing will increase.
    In addition, there is a minimal cost to offerors and the Government 
related to a new provision at DFARS 252.232-7015, Performance-Based 
Payments--Representation, which requires each offeror responding to a 
solicitation that may result in a contract providing performance-based 
financing to represent whether the offeror's financial statements are 
in compliance with Generally Accepted Accounting Principles.
    This final rule includes additional amendments in response to 
industry feedback on the proposed rule, which are described in section 
II.A. of this preamble. In particular, one of the amendments provides 
alternative forms of security, in lieu of the requirements of paragraph 
(f) of the clause at FAR 52.232-32. The amendment to the rule will 
facilitate the use of performance-based payments by contractors that 
may not have accounting systems designed for FAR part 15 cost-
reimbursement work, and contractors without job-cost accounting systems 
that can associate work in progress with a specific contract. One 
company expressed

[[Page 19687]]

support for this specific amendment at an E.O. 12866 meeting on the 
final rule.
    DoD has performed a regulatory cost analysis on this rule. The 
following is a summary of the estimated public cost savings and 
Government costs in millions calculated in perpetuity in 2016 dollars 
at a 7-percent discount rate:

----------------------------------------------------------------------------------------------------------------
                             Summary                                  Public        Government         Total
----------------------------------------------------------------------------------------------------------------
Present Value...................................................        -$53.971         $27.338        -$26.633
Annualized Costs................................................          -3.778          -1.914          -1.864
Annualized Value Costs (as of 2016 if Year 1 is 2020)...........          -2.882          -1.460          -1.422
----------------------------------------------------------------------------------------------------------------

    To access the complete Regulatory Cost Analysis, go to the Federal 
eRulemaking Portal at www.regulations.gov, search for ``DFARS Case 
2019-D002,'' click ``Open Docket,'' and view ``Supporting Documents.''

V. 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.

VI. Executive Order 13771

    This rule is an E.O. 13771, Reducing Regulation and Controlling 
Regulatory Costs, deregulatory action. We estimate that this rule 
generates $1.4 million in annualized cost savings, discounted at 7 
percent relative to year 2016, over a perpetual time horizon. Details 
on the estimated cost savings can be found in section IV. of this 
preamble.

VII. Regulatory Flexibility Act

    A final regulatory flexibility analysis (FRFA) has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. 
The FRFA is summarized as follows:
    This rule implements section 831 the National Defense Authorization 
Act (NDAA) for Fiscal Year (FY) 2017, which amends 10 U.S.C. 2307 to 
address the use of performance-based payments. The primary objective of 
this rule is to remove the restrictions at DFARS 232.1001(a) and the 
clauses at 252.232-7012(b)(i) and 252.232-7013(b)(i) that limit 
performance-based payments to amounts not greater than costs incurred 
up to the time of payment, as required 10 U.S.C. 2307.
    There were no significant issues raised by the public comments in 
response to the initial regulatory flexibility analysis.
    This rule will apply to approximately 55 small entities per year 
that are awarded contracts that provide performance-based contract 
payments from DoD.
    This rule adds a reporting requirement that will require an entry 
in the annual representations and certifications with regard to whether 
the offeror's financial statements are in compliance with Generally 
Accepted Accounting Principles. DoD estimates that the skill necessary 
for this requirement is at the journeyman level and that each entry 
will require an average of 6 minutes.
    This rule will not have a significant economic impact on small 
entities. There are no significant alternatives consistent with the 
stated objectives of the statute.

VIII. Paperwork Reduction Act

    This rule affects the information collection requirements at DFARS 
subpart 232.10 (and associated clauses at DFARS 252.232-7012 and 
252.232-7013, currently approved under OMB Control Number 0704-0359, 
DFARS Part 232, Contract Financing. The impact, however, is negligible, 
because only the last three lines of the table are deleted, which do 
not impose the predominance of the burden. This rule also adds a new 
information collection requirement that has been approved by the Office 
of Management and Budget under the Paperwork Reduction Act (44 U.S.C. 
chapter 35). This information collection requirement has been assigned 
OMB Control Number 0750-0001, entitled ``Defense Federal Acquisition 
Regulation Supplement (DFARS), Performance-Based Payments--
Representation.''

List of Subjects in 48 CFR Parts 202, 204, 212, 232, and 252

    Government procurement.

Jennifer Lee Hawes,
Regulatory Control Officer, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 202, 204, 212, 232, and 252 are amended as 
follows:

0
1. The authority citation for 48 CFR parts 202, 204, 212, 232, and 252 
continues to read as follows:

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

PART 202--DEFINITIONS OF WORDS AND TERMS

0
2. Amend section 202.101 by adding in alphabetical order a definition 
for ``Nontraditional defense contractor'' to read as follows:


202.101   Definitions.

* * * * *
    Nontraditional defense contractor means an entity that is not 
currently performing and has not performed any contract or subcontract 
for DoD that is subject to full coverage under the cost accounting 
standards prescribed pursuant to 41 U.S.C. 1502 and the regulations 
implementing such section, for at least the 1-year period preceding the 
solicitation of sources by DoD for the procurement (10 U.S.C. 2302(9)).
* * * * *

PART 204--ADMINISTRATIVE AND INFORMATION MATTERS

0
3. Amend section 204.1202 by--
0
a. Revising the section heading;
0
b. Redesignating paragraph (2)(xv) as (2)(xvi); and
0
c. Adding a new paragraph (2)(xv).
    The revision and addition read as follows:


204.1202   Solicitation provision and contract clause.

* * * * *
    (2) * * *
    (xv) 252.232-7015, Performance-Based Payments--Representation.
* * * * *

[[Page 19688]]

PART 212--ACQUISITION OF COMMERCIAL ITEMS


212.001   [Amended]

0
4. Amend section 212.001 by removing the definition of ``Nontraditional 
defense contractor''.

PART 232--CONTRACT FINANCING

0
5. In section 232.1001, revise paragraph (a) to read 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. See PGI 232.1001(a) 
for additional information on use of performance-based payments. 
However, in accordance with 10 U.S.C. 2307(b)(2), performance-based 
payments shall not be conditioned upon costs incurred in contract 
performance, but on the achievement of performance outcomes. Subject to 
the criteria in 232.1003-70, all companies, including nontraditional 
defense contractors, are eligible for performance-based payments, 
consistent with best commercial practices.
* * * * *

0
6. Revise section 232.1003-70 to read as follows:


232.1003-70   Criteria for use.

    In accordance with 10 U.S.C. 2307(b)(4)(A), a contractor's 
financial statements shall be in compliance with Generally Accepted 
Accounting Principles in order to receive performance-based payments. 
10 U.S.C. 2307(b)(4)(B) specifies that it does not grant the Defense 
Contract Audit Agency the authority to audit compliance with Generally 
Accepted Accounting Principles.

0
7. In section 232.1004, revise paragraph (b) to read as follows:


232.1004   Procedures.

    (b) Establishing performance-based finance payment amounts. (i) The 
contracting officer should include in a solicitation both the progress 
payments and performance-based payments provisions and clauses 
prescribed in this part, when considering both types of payment 
methods. Only one type of financing will be included in the resultant 
contract, except as may be authorized on separate orders subject to FAR 
32.1003(c)).
    (ii) The contracting officer shall analyze the performance-based 
payment schedule using the performance-based payments (PBP) analysis 
tool. The PBP analysis tool is on the DPC website 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 monthly expenditure profile in 
order to negotiate the value of the performance events such that the 
performance-based payments are not expected to result in an 
unreasonably low or negative level of contractor investment in the 
contract. 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.
    (iii) The contracting officer shall 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.
* * * * *

0
8. Amend section 232.1005-70 by--
0
a. Revising the section heading;
0
b. Redesignating the introductory text as paragraph (a);
0
c. Redesignating paragraphs (a) and (b) as paragraphs (a)(1) and (2), 
respectively; and
0
d. Adding new paragraph (b) and paragraph (c).
    The revision and additions read as follows:


232.1005-70   Solicitation provisions and contract clauses.

* * * * *
    (b) Use the provision at 252.232-7015, Performance-Based Payments--
Representation, in solicitations where the resulting contract may 
include performance-based payments.
    (c) Use the provision at 252.232-7016, Notice of Progress Payments 
or Performance-Based Payments, in lieu of FAR 52.232-13, Notice of 
Progress Payments, when the solicitation contains clauses for progress 
payments and performance-based payments (only one type of financing 
will be included in the resultant contract, except as may be authorized 
on separate orders subject to FAR 32.1003(c)).

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
9. Amend section 252.204-7007 by--
0
a. Removing the provision date of ``(DEC 2019)'' and adding ``(APR 
2020)'' in its place; and
0
b. Adding paragraph (d)(2)(vii) to read as follows:


252.204-7007   Alternate A, Annual Representations and Certifications.

* * * * *
    (d) * * *
    (2) * * *
    (vii) 252.232-7015, Performance-Based Payments--Representation.
* * * * *

0
10. Amend section 252.232-7012 by--
0
a. In the introductory text, removing ``232.1005-70(a)'' and adding 
``232.1005-70(a)(1)'' in its place;
0
b. Removing the clause date of ``(MAR 2014)'' and adding ``(APR 2020)'' 
in its place;
0
c. Redesignating paragraph (b) as (c);
0
d. Adding a new paragraph (b);
0
e. Revising the newly redesignated paragraph (c); and
0
f. Adding paragraph (d).
    The additions and revision read as follows:


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

* * * * *
    (b) In accordance with 10 U.S.C. 2307(b)(4)(A), the Contractor's 
financial statements shall be in compliance with Generally Accepted 
Accounting Principles in order to receive performance-based payments.
    (c)(1) The Contractor shall, in addition to providing the 
information required by FAR 52.232-32, submit information for all 
payment requests using the following format:

[[Page 19689]]

[GRAPHIC] [TIFF OMITTED] TR08AP20.002

    (2) Incurred cost is determined by the Contractor's accounting 
books and records, to which the Contractor shall provide access upon 
request of the Contracting Officer. An acceptable accounting system in 
accordance with DFARS 252.242-7006 is not required for reporting of 
incurred costs under this clause. If the Contractor's accounting system 
is not capable of tracking costs on a job order basis, the Contractor 
shall provide a realistic approximation of the allocation of incurred 
costs attributable to this contract in accordance with the Contractor's 
accounting system. FAR 52.232-32(m) does not require certification of 
incurred costs.
    (d) Security for financing. (1) Title to the property described in 
paragraph (f) of the clause at FAR 52.232-32, Performance-Based 
Payments, is the preferred security for receipt of performance-based 
payments.
    (2)(i) If the Contractor's accounting system is not capable of 
identifying and tracking through the build cycle the property that is 
allocable and properly chargeable to this contract, the Contracting 
Officer may consider acceptance of one or a combination of the 
following alternative forms of security sufficient to constitute 
adequate security for the performance-based payments and so specify in 
the contract, consistent with FAR 32.202-4:
    (A) A paramount lien on assets.
    (B) An irrevocable letter of credit from a federally insured 
financial institution.
    (C) A bond from a surety, acceptable in accordance with FAR part 
28.
    (D) A guarantee of repayment from a person or corporation of 
demonstrated liquid net worth, connected by significant ownership 
interest to the Contractor.
    (E) Title to identified Contractor assets of adequate worth.
    (ii) Paragraph (f) of the clause at FAR 52.232-32 does not apply to 
the extent that the Contractor and the Contracting Officer agree on 
alternative forms of security. In the event the Contractor fails to 
provide adequate security, as required in this contract, no financing 
payment will be made under this contract. Upon receipt of adequate 
security, financing payments will be made, including all previous 
payments to which the Contractor is entitled, in accordance with the 
terms of the provisions for contract financing. If at any time the 
Contracting Officer determines that the security provided by the 
Contractor is insufficient, the Contractor shall promptly provide such 
additional security as the Contracting Officer determines necessary. In 
the event the Contractor fails to provide such additional security, the 
Contracting Officer may collect or liquidate such security that has 
been provided and suspend further payments to the Contractor; and the 
Contractor shall repay to the Government the amount of unliquidated 
financing payments as the Contracting Officer at his sole discretion 
deems repayable.

0
11. Amend section 252.232-7013 by--
0
a. In the clause introductory text, removing ``232.1005-70(b)'' and 
adding ``232.1005-70(a)(2)'' in its place;

[[Page 19690]]

0
b. Removing the clause date of ``(APR 2014)'' and adding ``(APR 2020)'' 
in its place;
0
c. Redesignating paragraph (b) as (c);
0
d. Adding a new paragraph (b);
0
e. Revising the newly redesignated paragraph (c); and
0
f. Adding paragraph (d).
    The additions and revision read as follows:


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

* * * * *
    (b) In accordance with 10 U.S.C. 2307(b)(4)(A), the Contractor's 
financial statements shall be in compliance with Generally Accepted 
Accounting Principles in order to receive performance-based payments.
    (c)(1) The Contractor shall, in addition to providing the 
information required by FAR 52.232-32, submit information for all 
payment requests using the following format:
[GRAPHIC] [TIFF OMITTED] TR08AP20.003

    (2) Incurred cost is determined by the Contractor's accounting 
books and records, to which the Contractor shall provide access upon 
request of the Contracting Officer. An acceptable accounting system in 
accordance with DFARS 252.242-7006 is not required for reporting of 
incurred costs under this clause. If the Contractor's accounting system 
is not capable of tracking costs on a job order basis, the Contractor 
shall provide a realistic approximation of the allocation of incurred 
costs attributable to this contract in accordance with the Contractor's 
accounting system. FAR 52.232-32(m) does not require certification of 
incurred costs.
    (d) Security for financing. (1) Title to the property described in 
paragraph (f) of the clause at FAR 52.232-32, Performance-Based 
Payments, is the preferred security for receipt of performance-based 
payments.
    (2)(i) If the Contractor's accounting system is not capable of 
identifying and tracking through the build cycle the property that is 
allocable and properly chargeable to this contract, the Contracting 
Officer may consider acceptance of one or a combination of the 
following alternative forms of security sufficient to constitute 
adequate security for the performance-based payments and so specify in 
the contract, consistent with FAR 32.202-4:
    (A) A paramount lien on assets.
    (B) An irrevocable letter of credit from a federally insured 
financial institution.
    (C) A bond from a surety, acceptable in accordance with FAR part 
28.
    (D) A guarantee of repayment from a person or corporation of 
demonstrated

[[Page 19691]]

liquid net worth, connected by significant ownership interest to the 
Contractor.
    (E) Title to identified Contractor assets of adequate worth.
    (ii) Paragraph (f) of the clause at FAR 52.232-32 does not apply to 
the extent that the Contractor and the Contracting Officer agree on 
alternative forms of security. In the event the Contractor fails to 
provide adequate security, as required in this contract, no financing 
payment will be made under this contract. Upon receipt of adequate 
security, financing payments will be made, including all previous 
payments to which the Contractor is entitled, in accordance with the 
terms of the provisions for contract financing. If at any time the 
Contracting Officer determines that the security provided by the 
Contractor is insufficient, the Contractor shall promptly provide such 
additional security as the Contracting Officer determines necessary. In 
the event the Contractor fails to provide such additional security, the 
Contracting Officer may collect or liquidate such security that has 
been provided and suspend further payments to the Contractor; and the 
Contractor shall repay to the Government the amount of unliquidated 
financing payments as the Contracting Officer at his sole discretion 
deems repayable.

0
12. Add section 252.232-7015 to read as follows:


252.232-7015   Performance-Based Payments--Representation

    As prescribed in 232.1005-70(b), use the following provision:

Performance-Based Payments--Representation (APR 2020)

    (a) In accordance with 10 U.S.C. 2307(b)(4)(A), the Contractor's 
financial statements shall be in compliance with Generally Accepted 
Accounting Principles in order to receive performance-based 
payments.
    (b) The Offeror represents that its financial statements are [ ] 
are not [ ] in compliance with Generally Accepted Accounting 
Principles.


(End of provision)


0
13. Add section 252.232-7016 to read as follows:


252.232-7016   Notice of Progress Payments or Performance-Based 
Payments

    As prescribed in 232.1005-70(c), insert the following provision:

Notice of Progress Payments or Performance-Based Payments (APR 2020)

    (a) The need for customary progress payments in accordance with 
subpart 32.5 of the Federal Acquisition Regulation (FAR) or 
performance-based payments in accordance with FAR subpart 32.10 will 
not be considered as a handicap or adverse factor in the award of 
the contract.
    (b) This solicitation includes a FAR and Defense Federal 
Acquisition Regulation Supplement (DFARS) clause for performance-
based payments and a FAR clause for progress payments. The resultant 
contract will include either performance-based payments or progress 
payments, not both, except as may be authorized on separate orders 
subject to FAR 32.1003(c).
    (1) The performance-based payments clauses will be included in 
the contract if--
    (i) The Offeror has provided positive representation in response 
to DFARS 252.232-7015, Performance-Based Payments--Representation;
    (ii) The Offeror proposes a performance-based payment 
arrangement in accordance with FAR 52.232-28, Invitation to Propose 
Performance-Based Payments, including proposed events and timing, 
event completion criteria, event values, and expected expenditure 
profile; and
    (iii) The Offeror and the Government reach agreement on all 
aspects of the arrangement.
    (2) If performance-based payments clauses are not included in 
the resultant contract, the progress payments clause included in 
this solicitation will be included in any resultant contract, 
modified or altered if necessary in accordance with FAR 52.232-16 
and its Alternate I. Even though the progress payments clause is 
included in the contract, the clause shall be inoperative during any 
time the contractor's accounting system and controls are determined 
by the Government to be inadequate for segregation and accumulation 
of contract costs.


(End of provision)

[FR Doc. 2020-06728 Filed 4-7-20; 8:45 am]
 BILLING CODE 5001-06-P