[Federal Register Volume 60, Number 186 (Tuesday, September 26, 1995)]
[Rules and Regulations]
[Pages 49707-49720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23866]



-----------------------------------------------------------------------


DEPARTMENT OF DEFENSE
48 CFR Parts 1, 32, 42, and 52

[FAC 90-33; FAR Case 94-764; Item I]
RIN 9000-AG36


Federal Acquisition Regulation; Contract Financing

AGENCIES: Department of Defense (DOD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule is issued pursuant to the Federal Acquisition 
Streamlining Act of 1994, Public Law 103-355 (the Act). The Federal 
Acquisition Regulatory Council is amending the Federal Acquisition 
Regulation (FAR) pertaining to Contract Financing as a result of 
changes to 10 U.S.C. 2307 and 41 U.S.C. 255 by sections 2001 and 2051 
of the Act. This regulatory action was subject to Office of Management 
and Budget review under Executive Order 12866, dated September 30, 
1993.

EFFECTIVE DATE: October 1, 1995.

FOR FURTHER INFORMATION CONTACT: Mr. John Galbraith, Contract 
Financing/

[[Page 49708]]
Payment Team Leader, at (703) 697-6710 in reference to this FAR case. 
For general information, contact the FAR Secretariat, room 4037, GS 
Building, Washington, DC 20405; (202) 501-4755. Please cite FAC 90-33; 
FAR case 94-764.

SUPPLEMENTARY INFORMATION:

A. Background

    The Federal Acquisition Streamlining Act of 1994, Pub. L. 103-355 
(the Act), provides authorities that streamline the acquisition process 
and minimize burdensome government-unique requirements.
    This rule implements sections 2001 and 2051 of the Act which 
substantially changed the statutory authorities for Government 
financing of contracts. Subsections 2001(f) and 2051(e) provide 
specific authority for Government financing of purchases of commercial 
items, and subsections 2001(b) and 2051(b) substantially revise the 
authority for Government financing of purchases of non-commercial 
items.
    Subsections 2001(f) and 2051(e) amend 10 U.S.C. 2307 and 41 U.S.C. 
255 by adding a new paragraph, Conditions for Payments for Commercial 
Items, to each. These paragraphs authorize the Government to provide 
contract financing with certain limitations:
     The financing must be in the best interest of the 
Government;
     The financing cannot exceed 15 percent until some 
performance of work under the contract;
     The terms and conditions must be appropriate or customary 
in the commercial marketplace.
    The above statutory provisions also remove from financing of 
commercial purchases certain restrictions applicable to financing of 
non-commercial purchases by other provisions of 10 U.S.C. 2307 and 41 
U.S.C. 255.
    Subsections 2001(b) and 2051(b) amend the authority for Government 
financing of non-commercial purchases by authorizing financing on the 
basis of certain classes of measures of performance.
    The statutory changes create a fundamental distinction between 
financing of purchases of commercial and non-commercial items. As a 
result, the subparts of part 32, Contract Financing, fall into three 
logical categories:
     Subparts applicable to both commercial and non-commercial 
financing;
     Subparts applicable to only commercial financing; and
     Subparts applicable to only non-commercial financing.

The specific subparts in each category are identified at 32.002 
(Applicability of subparts).

Subpart Discussion

    Sections 32.000 thru 32.005 now contain the general policy and 
guidance which is applicable to Government contract financing of both 
commercial and non-commercial items.
    Subpart 32.1 (Non-commercial Item Purchase Financing) now contains 
the general policy and guidance applicable to non-commercial purchases. 
The content of this subpart reflects existing policy and guidance that 
previously appeared in other locations in part 32. These policies have 
been moved to subpart 32.1 to give them general applicability to all 
forms of financing of non-commercial items.
    Subpart 32.2 (Commercial Item Purchase Financing) contains the 
policy and guidance applicable to contract financing of commercial 
purchases. This subpart is wholly new. The new statute places 
Government financing of commercial purchases on a different statutory 
basis than for non-commercial purchases. As a result, the new subpart 
provides several alternative procedures for establishing contract 
financing terms for commercial items. The new subpart also provides 
standard terms for use of contracting officers in establishing 
financing in contracts.
    The installment payment clause permits contracting officers to 
incorporate financing into contracts for commercial items without any 
administrative effort beyond incorporation of the clause.
    Subpart 32.4 has been renamed ``Advanced Payments for Non-
Commercial Items'', in order to reduce the confusion between this 
financing mechanism and commercial advance payments under subpart 32.2. 
Subpart 32.4 does not apply to commercial advance payments.
    Subpart 32.5 (Progress Payments Based on Costs) has been slightly 
modified to reflect the separation of commercial from non-commercial 
items and to reflect the general policy in 32.1 for availability of 
financing for non-commercial purchases.
    Subpart 32.10 (Performance-Based Payments) contains the policy and 
guidance applicable to contract financing through performance-based 
payments. This is a wholly new subpart which provides the policy and 
procedures for establishing and administering performance-based 
payments. Performance-based payments under this subpart are applicable 
only to non-commercial purchases.
    Subpart 42.3 (Contract Administration) is amended to reflect 
delegations of functions for commercial financing and for performance 
based payments.
    FAR 52.232 is amended to add the additional clauses and 
solicitation provisions required to implement the new statutory 
authorities. For performance-based financing and commercial financing 
(except for installment payments), contracting officers will have to 
determine the form of contract financing and write individualized 
contract terms establishing the computation of amounts and certain 
other contract financing terms.

B. Regulatory Flexibility Act

    This rule is expected 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 the proposed 
implementation of subsection 2001(f) and subsection 2051(e) of the 
Federal Acquisition Streamlining Act of 1994 (Act) (Public Law 103-355) 
will substantially increase the availability of Government contract 
financing for purchases of commercial items, thereby benefiting many 
small entities making commercial sales; and because the implementation 
of subsection 2001(b) and subsection 2051(b) of the Act permits 
contract financing of purchases of non-commercial items upon the basis 
of performance, without requiring contractor cost accounting systems 
for the contract financing, thereby benefiting many small entities who 
do not use such systems. A Final Regulatory Flexibility Analysis (FRFA) 
has been performed and will be provided to the Chief Counsel for 
Advocacy for the Small Business Administration. A copy of the FRFA may 
be obtained from the FAR Secretariat.

C. Paperwork Reduction Act

    The Paperwork Reduction Act (Pub. L. 96-511) is deemed to apply 
because the rule contains information collection requirements. A 
request for approval of the information collection requirement 
concerning Contract Financing was submitted to OMB and approved through 
May 31, 1998, OMB Control 9000-0138. Public comments concerning this 
request were invited through a Federal Register notice at 60 FR 14171, 
March 15, 1995.

D. Public Comments

    A proposed rule was published in the Federal Register at 60 FR 
14156, March 

[[Page 49709]]
15, 1995. During the public comment period, 263 comments were received.

Agency Discretion

    A number of commentors expressed concern over the provisions for 
agency discretion in the coverage. This discretion is unavoidable. The 
changes in the statutes cause contract financing to become a larger 
issue in conducting procurements. Given the wide differences in the 
various parts of the Executive Branch, and the even wider differences 
in the things many of them procure and finance, Government-wide 
regulation could not reasonably provide the breadth and depth of 
coverage needed to avoid the use of agency discretion.

Subcontracting Financing

    A number of commentors raised the issue of Government contract 
financing for commercial subcontractors. The most recent comments have 
also raised the issue of commercial subcontracts under cost-
reimbursement contracts, and subcontractor performance-based payments. 
While a recommendation to adopt these policies may be made, they are a 
refinement of policy, not essential to the initial implementation of 
the Act. The FARC will consider addressing the issue of subcontractor 
financing policy changes as a new policy issue at a later time.

Policy for Use of Contract Financing

    FAR 32.203 (Determining Contract Financing Terms) has been 
extensively streamlined to increase the contracting officer's 
discretion in using financing for commercial item purchases. A major 
factor was industry advice that generally there are no organized 
markets with ``customary'' financing terms. In most situations 
financing terms are highly elastic and mutable; depending upon the 
relative size of the purchase, the relative costs of capital of the 
respective parties, the internal management objectives of the parties, 
the state of the world, national, and local economies and business 
cycles, the financial rating and reputation of the buyer and seller, 
and the parties' relative bargaining powers. It was concluded that it 
is not feasible at the beginning of this policy to establish at the 
Federal level a hard rule, for use of financing for all commercial 
purchases, that will always be in the best interests of the Government. 
It is expected that individual agencies will begin to discover markets 
and products where there is some consistency of practice (without anti-
trust implications). The results of this exploration of commercial item 
purchasing may ultimately be collectable at the FAR level.

Guidance on Security

    A number of commentors discussed the guidance on security for 
commercial item financing. The authorizing statute explicitly requires 
security for all commercial financing. The rule provides the widest 
discretion to the contracting officers in complying with this 
requirement, however, it is necessarily different from the practices of 
profit-making businesses. It should be noted that in business, losses, 
from credit risk are a cost of sales. In business, credit losses are 
offset by resulting profits. In Government, credit losses are absolute, 
there are no offsetting profits. Thus, security will always be more 
critical to the Government.
    Previous comments had complained that the OMB A-94 Circular rate 
previously proposed was not widely available. Those comments had lead 
to the adoption of the Treasury Note rate as being widely available in 
many newspapers throughout the country. However, in view of the advice 
that this rate is not uniformly reported, and to insure an 
authoritative interest rate for evaluating the cost to the Government 
of offeror-proposed financing, the coverage has been changed to specify 
the OMB A-94 interest rate for this evaluation.

Installment Payments

    A number of commentors have recommended the extension of the 
concept of installment payments to non-commercial item financing. For a 
number of legal and practical reasons, that cannot be done. However, 
this final rule contains the installment payment provisions of the 
proposed rule for use in commercial item purchases.

Relation to Other Agency-Specific Financing Methods

    Comments were received concerning the relationship of performance-
based payments as implemented in subpart 32.10, to other agency-
specific, or product-specific forms of performance-based financing. 
There are a number of specialized forms of contract financing, such as 
shipbuilding progress payments and construction progress payments, that 
are based on measures of contractor performance, such as percentage of 
completion. In addition, some agencies have also developed specialized 
financing terms that are based on measures of contractor performance, 
for example, milestone billings. Subpart 32.10 is designed for use with 
any of the bases for measuring contractor performance provided for in 
the Act. It is therefore broader and more general than specifically 
tailored contract financing provisions. The policy and procedures in 
subpart 32.10 do not supersede or alter the existing forms of 
performance-based contract financing, nor are agencies restricted in 
future developments of innovative policy.

Combinations of Types of Financing

    A large number of commentors urged allowing both progress payments 
based on costs, and performance-based payments, in the same contract. 
Previous review of the legal, computational, payment, and liquidation 
aspects of such a combination has indicated it is not practical. The 
issue has been reconsidered and no change is warranted.

Performance-Based Financing on Undefinitized Contracts

    Some commentors raised the issue of performance-based payments on 
undefinitized contracts, arguing that this should be allowed. While the 
rule does not accept the concept of performance-based payments during 
the period the contract is undefinitized, the clause prescription has 
been modified to facilitate the negotiation of the Performance-Based 
Payment schedule for use after definitization.

Performance-Based Payments as Delivery Payments

    A number of commentors recommended, rather than treating 
performance-based payments as contract financing payments, that they be 
treated as delivery payments. This idea, while attractive from an 
accounting standpoint, is not new. It has been repeatedly considered 
over the years. However, there are a number of essentially legal issues 
that have discouraged creation of a ``delivery payment contract 
financing'' mechanism. Both agency and industry commentors were invited 
to propose specific contractual language and provide the legal analysis 
needed to consider such a concept. The FAR Council will, in the future, 
consider such proposals, should they be submitted.

List of Subjects in 48 CFR Parts 1, 32, 42, and 52

    Government procurement.

    Dated: September 20, 1995.
Edward C. Loeb,
Deputy Project Manager for the Implementation of the Federal 
Acquisition Streamlining Act of 1994.

    Therefore, 48 CFR parts 1, 32, 42, and 52 are amended as set forth 
below: 

[[Page 49710]]

    1. The authority citation for 48 CFR parts 1, 32, 42, and 52 
continues to read as follows:

    Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

PART 1--FEDERAL ACQUISITION REGULATIONS SYSTEM

    2. The table in section 1.106 is amended under the ``FAR Segment'' 
and ``OMB Control Number'' columns by revising entries ``32.1'' and 
``32.5'' and adding entries, in numerical order, to read as follows:


1.106  OMB approval under the Paperwork Reduction Act.

* * * * *

------------------------------------------------------------------------
                    FAR segment                        OMB control No   
------------------------------------------------------------------------
                                                                        
                  *        *        *        *        *                 
32.000............................................  9000-0138.          
32.1..............................................  9000-0070 and 9000- 
                                                     0138.              
32.2..............................................  9000-0138.          
                                                                        
                  *        *        *        *        *                 
32.5..............................................  9000-0010 and 9000- 
                                                     0138.              
                                                                        
                  *        *        *        *        *                 
32.10.............................................  9000-0138.          
                                                                        
                  *        *        *        *        *                 
52.232-29.........................................  9000-0138.          
52.232-30.........................................  9000-0138.          
52.232-31.........................................  9000-0138.          
52.232-32.........................................  9000-0138.          
------------------------------------------------------------------------

* * * * *

PART 32--CONTRACT FINANCING

    3. Section 32.000 is amended at the end of paragraph (e) by 
removing the word ``and''; in paragraph (f) by removing the period and 
inserting a semicolon in its place; and by adding paragraphs (g) and 
(h) to read as follows:


32.000  Scope of part.

* * * * *
    (g) Financing of purchases of commercial items; and
    (h) Performance-based payments.
    4. Section 32.001 is amended by revising the section heading and 
adding, in alphabetical order, the definitions ``customary contract 
financing'' and ``unusual contract financing'' to read as follows:


32.001  Definitions.

* * * * *
    Customary contract financing means that financing deemed by an 
agency to be available for routine use by contracting officers. Most 
customary contract financing arrangements should be usable by 
contracting officers without specific reviews or approvals by higher 
management.
    Unusual contract financing means any financing not deemed customary 
contract financing by the agency. Unusual contract financing is 
financing that is legal and proper under applicable laws, but that the 
agency has not authorized contracting officers to use without specific 
reviews or approvals by higher management.
    5. Sections 32.002 through 32.005 are added to read as follows:

Sec.
32.002  Applicability of subparts.
32.003  Simplified acquisition procedures financing.
32.004  Contract performance in foreign countries.
32.005  Consideration for contract financing.


32.002  Applicability of subparts.

    (a) The following sections and subparts of this part are applicable 
to all purchases subject to part 32:
    (1) Sections 32.000 through 32.005.
    (2) Subpart 32.3, Loan Guarantees for Defense Production.
    (3) Subpart 32.6, Contract Debts.
    (4) Subpart 32.7, Contract Funding.
    (5) Subpart 32.8, Assignment of Claims.
    (6) Subpart 32.9, Prompt Payment.
    (b) Subpart 32.2, Commercial Item Purchase Financing, is applicable 
only to purchases of commercial items under authority of part 12.
    (c) The following subparts of this part are applicable to all 
purchases made under any authority other than part 12:
    (1) Subpart 32.1, Non-Commercial Item Purchase Financing.
    (2) Subpart 32.4, Advance Payments For Non-Commercial Items.
    (3) Subpart 32.5, Progress Payments Based on Costs.
    (4) Subpart 32.10, Performance-Based Payments.


32.003  Simplified acquisition procedures financing.

    Unless agency regulations otherwise permit, contract financing 
shall not be provided for purchases made under the authority of part 
13.


32.004  Contract performance in foreign countries.

    The enforceability of contract provisions for security of 
Government financing in a foreign jurisdiction is dependent upon local 
law and procedure. Prior to providing contract financing where foreign 
jurisdictions may become involved, the contracting officer shall ensure 
the Government's security is enforceable. This may require the 
provision of additional or different security than that normally 
provided for in the standard contract clauses.


32.005  Consideration for contract financing.

    (a) Requirement. When a contract financing clause is included at 
the inception of a contract, there shall be no separate consideration 
for the contract financing clause. The value of the contract financing 
to the contractor is expected to be reflected in either
    (1) A bid or negotiated price that will be lower than such price 
would have been in the absence of the contract financing, or
    (2) Contract terms and conditions, other than price, that are more 
beneficial to the Government than they would have been in the absence 
of the contract financing. Adequate new consideration is required for 
changes to, or the addition of, contract financing after award.
    (b) Amount of new consideration. The contractor may provide new 
consideration by monetary or nonmonetary means, provided the value is 
adequate. The fair and reasonable consideration should approximate the 
amount by which the price would have been less had the contract 
financing terms been contained in the initial contract. In the absence 
of definite information on this point, the contracting officer should 
apply the following criteria in evaluating whether the proposed new 
consideration is adequate:
    (1) The value to the contractor of the anticipated amount and 
duration of the contract financing at the imputed financial costs of 
the equivalent working capital.
    (2) The estimated profit rate to be earned through contract 
performance.
    (c) Interest. Except as provided in subpart 32.4, Advance Payments 
for Non-Commercial Items, the contract shall not provide for any other 
type of specific charges, such as interest, for contract financing.
    6. Subpart 32.1 heading and section 32.100 are revised to read as 
follows:

Subpart 32.1--Non-Commercial Item Purchase Financing


32.100  Scope of subpart.

    This subpart provides policies and procedures applicable to 
contract financing and payment for any purchases other than purchases 
of commercial items in accordance with part 12.


32.101  [Amended]

    7. Section 32.101 is amended by removing the period at the end of 
the section and inserting in its place ``, as amended.''
    8. Section 32.102 is amended in the last sentence of paragraph (a) 
by 

[[Page 49711]]
removing the word ``subadvances'' and inserting in its place 
``advances''; in paragraph (b)(2) by removing the word ``or''; in 
paragraph (b)(3) by removing the period and inserting in its place ``; 
or''; adding paragraphs (b)(4) and (f); and in paragraph (d) by adding 
at the end of the first sentence ``and 10 U.S.C. 2307''. The revised 
text reads as follows:


32.102  Description of contract financing methods.

* * * * *
    (b) * * *
    (4) Performance-based payments.
* * * * *
    (f) Performance-based payments are contract financing payments made 
on the basis of--
    (1) Performance measured by objective, quantifiable methods;
    (2) Accomplishment of defined events; or
    (3) Other quantifiable measures of results.


32.103  Progress payments under construction contracts.

    8. Section 32.103 is amended by revising the section heading to 
read as set forth above.
    9. Section 32.104 is amended by adding paragraphs (c) and (d) to 
read as follows:


32.104  Providing contract financing.

* * * * *
    (c) Subject to specific agency regulations, the contracting officer 
may provide customary contract financing in accordance with 32.113. 
Unusual contract financing shall not be provided except as authorized 
in 32.114.
    (d) Unless otherwise authorized by agency regulation, contract 
financing may be provided for contracts with--
    (1) Small business concerns, when the contract price will be 
greater than the simplified acquisition threshold; or
    (2) Other than small business concerns, when the contract price 
will be $1 million or more, or for a group of contracts, whose prices 
are greater than the simplified acquisition threshold, that total $1 
million or more.
    9. Section 32.106 is amended in the introductory text by inserting 
after ``Government's'' the word ``best''; and by revising paragraphs 
(b) and (d) to read as follows:


32.106  Order of preference.

* * * * *
    (b) Customary contract financing (see 32.113).
* * * * *
    (d) Unusual contract financing (see 32.114).
* * * * *


32.110  [Reserved]

    10. Section 32.110 is removed and reserved.


32.111  Contract clauses for non-commercial purchases.

    11. The section heading for 32.111 is revised to read as set forth 
above.
    12. Sections 32.113 and 32.114 are added to read as follows:


32.113  Customary contract financing.

    The following contract financing arrangements are customary 
contract financing when provided in accordance with this part and 
agency regulations:
    (a) Financing of shipbuilding, or ship conversion, alteration, or 
repair, when agency regulations provide for progress payments based on 
a percentage or stage of completion;
    (b) Financing of construction or architect-engineer services 
purchased under the authority of part 36;
    (c) Financing of contracts for supplies or services awarded under 
the sealed bid method of procurement in accordance with part 14, or 
under the competitive negotiation method of procurement in accordance 
with part 15, through progress payments based on costs in accordance 
with subpart 32.5;
    (d) Financing of contracts for supplies or services awarded under a 
sole-source acquisition as defined in part 6 and using the procedures 
of part 15, through either progress payments based on costs in 
accordance with subpart 32.5, or performance-based payments in 
accordance with subpart 32.10 (but not both). Performance-based 
payments are the preferred method when the contracting officer finds 
them practical, and the contractor agrees to their use;
    (e) Financing of contracts for supplies or services through advance 
payments in accordance with subpart 32.4;
    (f) Financing of contracts for supplies or services through 
guaranteed loans in accordance with subpart 32.3; or
    (g) Financing of contracts for supplies or services through any 
appropriate combination of advance payments, guaranteed loans, and 
either performance-based payments or progress payments (but not both) 
in accordance with their respective subparts.


32.114  Unusual contract financing.

    Any contract financing arrangement that deviates from this part is 
unusual contract financing. Unusual contract financing shall be 
authorized only after approval by the head of the agency or as provided 
for in agency regulations.
    13. Subpart 32.2, consisting of sections 32.200 through 32.207, is 
added to read as follows:

Subpart 32.2--Commercial Item Purchase Financing

Sec.
32.200  Scope of subpart.
32.201  Statutory authority.
32.202  General.
32.202-1  Policy.
32.202-2  Types of payments for commercial item purchases.
32.202-3  Conducting market research about financing terms.
32.202-4  Security for Government financing.
32.203  Determining contract financing terms.
32.204  Procedures for contracting officer-specified commercial 
contract financing.
32.205  Procedures for offeror-proposed commercial contract 
financing.
32.206  Solicitation provisions and contract clauses.
32.207  Administration and payment of commercial financing payments.

Subpart 32.2--Commercial Item Purchase Financing


32.200  Scope of subpart.

    This subpart provides policies and procedures for commercial 
financing arrangements under commercial purchases pursuant to Part 12.


32.201  Statutory authority.

    10 U.S.C. 2307(f) and 41 U.S.C. 255(f) provide that payment for 
commercial items may 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 interest of the United 
States.


32.202  General.


32.202-1  Policy.

    (a) Use of financing in contracts. It is the responsibility of the 
contractor to provide all resources needed for performance of the 
contract. Thus, for purchases of commercial items, financing of the 
contract is normally the contractor's responsibility. However, in some 
markets the provision of financing by the buyer is a commercial 
practice. In these circumstances, the contracting officer may include 
appropriate financing terms in contracts for commercial purchases when 
doing so will be in the best interest of the Government.
    (b) Authorization. Commercial interim payments and commercial 
advance payments may be made under the following circumstances--
    (1) The contract item financed is a commercial supply or service;
    (2) The contract price exceeds the simplified acquisition threshold 
in part 13;
    (3) The contracting officer determines that it is appropriate or 
customary in the 

[[Page 49712]]
commercial marketplace to make financing payments for the item;
    (4) Authorizing this form of contract financing is in the best 
interest of the Government (see paragraph (e) of this subsection);
    (5) Adequate security is obtained (see 32.202-4);
    (6) Prior to any performance of work under the contract, the 
aggregate of commercial advance payments shall not exceed 15 percent of 
the contract price;
    (7) The contract is awarded on the basis of competitive procedures 
or, if only one offer is solicited, adequate consideration is obtained 
(based on the time value of the additional financing to be provided) if 
the financing is expected to be substantially more advantageous to the 
offeror than the offeror's normal method of customer financing; and
    (8) The contracting officer obtains concurrence from the payment 
office concerning liquidation provisions when required by 32.206(e).
    (c) Difference from non-commercial financing. Government financing 
of commercial purchases under this subpart is expected to be different 
from that used for non-commercial purchases under subpart 32.1 and its 
related subparts. While the contracting officer may adapt techniques 
and procedures from the non-commercial 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.
    (d) Unusual contract financing. Any contract financing arrangement 
not in accord with the requirements of agency regulations or this part 
is unusual contract financing and requires advance approval in 
accordance with agency procedures. If not otherwise specified, such 
unusual contract financing shall be approved by the head of the 
contracting activity.
    (e) Best interest of the Government. The statutes cited in 32.201 
do not allow contract financing by the Government unless it is in the 
best interest of the United States. Agencies may establish standards to 
determine whether contract financing is in the best interest of the 
Government. These standards may be for certain types of procurements, 
certain types of items, or certain dollar levels of procurements.


32.202-2  Types of payments for commercial item purchases.

    These definitions incorporate the requirements of the statutory 
commercial financing authority and the implementation of the Prompt 
Payment Act.
    Commercial advance payment means a payment made before any 
performance of work under the contract. The aggregate of these payments 
shall not exceed 15 percent of the contract price. These payments are 
contract financing payments for prompt payment purposes (i.e., not 
subject to the interest penalty provisions of the Prompt Payment Act in 
accordance with subpart 32.9). These payments are not subject to 
subpart 32.4, Advance Payments for Non-Commercial Items.
    Commercial interim payment means any payment that is not a 
commercial advance payment or a delivery payment. These payments are 
contract financing payments for prompt payment purposes (i.e., not 
subject to the interest penalty provisions of the Prompt Payment Act in 
accordance with subpart 32.9). A commercial interim payment is given to 
the contractor after some work has been done, whereas a commercial 
advance payment is given to the contractor when no work has been done.
    Delivery payment means a payment for accepted supplies or services, 
including payments for accepted partial deliveries. Commercial 
financing payments are liquidated by deduction from these payments. 
Delivery payments are invoice payments for prompt payment purposes.


32.202-3  Conducting market research about financing terms.

    Contract financing may be a subject included in the market research 
conducted in accordance with part 10. If market research for contract 
financing is conducted, the contracting officer should consider--
    (a) The extent to which other buyers provide contract financing for 
purchases in that market;
    (b) The overall level of financing normally provided;
    (c) The amount or percentages of any payments equivalent to 
commercial advance payments (see 32.202-2);
    (d) The basis for any payments equivalent to commercial interim 
payments (see 32.202-2), as well as the frequency, and amounts or 
percentages; and
    (e) Methods of liquidation of contract financing payments and any 
special or unusual payment terms applicable to delivery payments (see 
32.202-2).


32.202-4  Security for Government financing.

    (a) Policy. (1) 10 U.S.C. 2307(f) and 41 U.S.C. 255(f) require the 
Government to obtain adequate security for Government financing. The 
contracting officer shall specify in the solicitation the type of 
security the Government will accept. If the Government is willing to 
accept more than one form of security, the offeror shall be required to 
specify the form of security it will provide. If acceptable to the 
contracting officer, the resulting contract shall specify the security 
(see 32.206(b)(1)(iv)).
    (2) Subject to agency regulations, the contracting officer may 
determine the offeror's financial condition to be adequate security, 
provided the offeror agrees to provide additional security should that 
financial condition become inadequate as security (see paragraph (c) of 
the clause at 52.232-29, Terms for Financing of Purchases of Commercial 
Items). Assessment of the contractor's financial condition shall 
consider both net worth and liquidity. If the contracting officer finds 
the offeror's financial condition is not adequate security, the 
contracting officer shall require other adequate security. Paragraphs 
(b), (c), and (d) of this subsection list other (but not all) forms of 
security that the contracting officer may find acceptable.
    (3) The value of the security must be at least equal to the maximum 
unliquidated amount of contract financing payments to be made to the 
contractor. The value of security may be adjusted periodically during 
contract performance, as long as it is always equal to or greater than 
the amount of unliquidated financing.
    (b) Paramount lien. (1) The statutes cited in 32.201 provide that 
if the Government's security is in the form of a lien, such lien is 
paramount to all other liens and is effective immediately upon the 
first payment, without filing, notice, or other action by the United 
States.
    (2) When the Government's security is in the form of a lien, the 
contract shall specify what the lien is upon, e.g., the work in 
process, the contractor's plant, or the contractor's inventory. 
Contracting officers may be flexible in the choice of assets. The 
contract must also give the Government a right to verify the existence 
and value of the assets.
    (3) Provision of Government financing shall be conditioned upon a 
contractor certification that the assets subject to the lien are free 
from any prior encumbrances. Prior liens may result from such things as 
capital equipment loans, installment purchases, working capital loans, 
various lines of credit, and revolving credit arrangements.
    (c) Other assets as security. Contracting officers may consider the 
guidance at 28.203-2, 28.203-3, and 28.204 in determining which types 
of 

[[Page 49713]]
assets may be acceptable as security. For the purpose of applying the 
guidance in part 28 to this subsection, the term ``surety'' and/or 
``individual surety'' should be interpreted to mean ``offeror'' and/or 
``contractor.''
    (d) Other forms of security. Other acceptable forms of security 
include--
    (1) An irrevocable letter of credit from a federally insured 
financial institution;
    (2) A bond from a surety, acceptable in accordance with part 28 
(note that the bond must guarantee repayment of the unliquidated 
contract financing);
    (3) A guarantee of repayment from a person or corporation of 
demonstrated liquid net worth, connected by significant ownership to 
the contractor; or
    (4) Title to identified contractor assets of adequate worth.
    (e) Management of risk and security. In establishing contract 
financing terms, the contracting officer must be aware of certain 
risks. For example, very high amounts of financing early in the 
contract (front-end loading) may unduly increase the risk to the 
Government. The security and the amounts and timing of financing 
payments must be analyzed as a whole to determine whether the 
arrangement will be in the best interest of the Government.


32.203  Determining contract financing terms.

    When the criteria in 32.202-1(b) are met, the contracting officer 
may either specify the financing terms in the solicitation (see 32.204) 
or permit each offeror to propose its own customary financing terms 
(see 32.205). When the contracting officer has sufficient information 
on financing terms that are customary in the commercial marketplace for 
the item, those terms may be specified in the solicitation.


32.204  Procedures for contracting officer-specified commercial 
contract financing.

    The financing terms shall be included in the solicitation. Contract 
financing shall not be a factor in the evaluation of resulting 
proposals, and proposals of alternative financing terms shall not be 
accepted (but see 14.208 and 15.606 concerning amendments of 
solicitations). However, an offer stating that the contracting officer-
specified contract financing terms will not be used by the offeror does 
not alter the evaluation of the offer, nor does it render the offer 
nonresponsive or otherwise unacceptable. In the event of award to an 
offeror who declined the proposed contract financing, the contract 
financing provisions shall not be included in the resulting contract. 
Contract financing shall not be a basis for adjusting offerors' 
proposed prices, because the effect of contract financing is reflected 
in each offeror's proposed prices.


32.205  Procedures for offeror-proposed commercial contract financing.

    (a) Under this procedure, each offeror may propose financing terms. 
The contracting officer must then determine which offer is in the best 
interests of the United States.
    (b) Solicitations. The contracting officer shall include in the 
solicitation the provision at 52.232-31, Invitation to Propose 
Financing Terms. The contracting officer shall also--
    (1) Specify the delivery payment (invoice) dates that will be used 
in the evaluation of financing proposals; and
    (2) Specify the interest rate to be used in the evaluation of 
financing proposals (see paragraph (c)(4) of this section).
    (c) Evaluation of proposals. (1) When contract financing terms vary 
among offerors, the contracting officer must adjust each proposed price 
for evaluation purposes to reflect the cost of providing the proposed 
financing in order to determine the total cost to the Government of 
that particular combination of price and financing.
    (2) Contract financing results in the Government making payments 
earlier than it otherwise would. In order to determine the cost to the 
Government of making payments earlier, the contracting officer must 
compute the imputed cost of those financing payments and add it to the 
proposed price to determine the evaluated price for each offeror.
    (3) The imputed cost of a single financing payment is the amount of 
the payment multiplied by the annual interest rate, multiplied by the 
number of years, or fraction thereof, between the date of the financing 
payment and the date the amount would have been paid as a delivery 
payment. The imputed cost of financing is the sum of the imputed costs 
of each of the financing payments.
    (4) The time value of proposal-specified contract financing 
arrangements shall be calculated using as the interest rate the Nominal 
Discount Rate specified in Appendix C of OMB Circular A-94, ``Benefit-
Cost Analysis of Federal Programs; Guidelines and Discounts'', 
appropriate to the period of contract financing. Where the period of 
proposed financing does not match the periods in the OMB Circular, the 
interest rate for the period closest to the finance period shall be 
used. Appendix C is updated yearly, and is available from the Office of 
Economic Policy in the Office of Management and Budget (OMB).


32.206  Solicitation provisions and contract clauses.

    (a) The contract shall contain the paragraph entitled ``Payment'' 
of the clause at 52.212-4, Contract Terms and Conditions--Commercial 
Items. If the contract will provide for contract financing, the 
contracting officer shall construct a solicitation provision and 
contract clause. This solicitation provision shall be constructed in 
accordance with 32.204 or 32.205. If the procedure at 32.205 is used, 
the solicitation provision at 52.232-31, Invitation to Propose 
Financing Terms, shall be included. The contract clause shall be 
constructed in accordance with the requirements of this subpart and any 
agency regulations.
    (b) Each contract financing clause shall include:
    (1) A description of the--
    (i) Computation of the financing payment amounts (see paragraph (c) 
of this section);
    (ii) Specific conditions of contractor entitlement to those 
financing payments (see paragraph (c) of this section);
    (iii) Liquidation of those financing payments by delivery payments 
(see paragraph (e) of this section);
    (iv) Security the contractor will provide for financing payments 
and any terms or conditions specifically applicable thereto (see 
32.202-4); and
    (v) Frequency, form, and any additional content of the contractor's 
request for financing payment (in addition to the requirements of the 
clause at 52.232-29, Terms for Financing of Purchases of Commercial 
Items; and
    (2) Unless agency regulations authorize alterations, the unaltered 
text of the clause at 52.232-29, Terms for Financing of Purchases of 
Commercial Items.
    (c) Computation of amounts, and contractor entitlement provisions. 
(1) Contracts shall provide that delivery payments shall be made only 
for completed supplies and services accepted by the Government in 
accordance with the terms of the contract. Contracts may provide for 
commercial advance and commercial interim payments based upon a wide 
variety of bases, including (but not limited to) achievement or 
occurrence of specified events, the passage of time, or specified times 
prior to the delivery date(s). The basis for payment must be 
objectively determinable. The clause written by the contracting officer 
shall specify, to the extent access is necessary, the information and/
or facilities to which the Government shall have access for the purpose 
of verifying 

[[Page 49714]]
the contractor's entitlement to payment of contract financing.
    (2) If the contract is awarded using the offeror-proposed procedure 
at 32.205, the clause constructed by the contracting officer under 
paragraph (b)(1) of this section shall contain the following:
    (i) A statement that the offeror's proposed listing of earliest 
times and greatest amounts of projected financing payments submitted in 
accordance with paragraph (d)(2) of the provision at 52.232-31, 
Invitation to Propose Financing Terms, is incorporated into the 
contract, and
    (ii) A statement that financing payments shall be made in the 
lesser amount and on the later of the date due in accordance with the 
financing terms of the contract, or in the amount and on the date 
projected in the listing of earliest times and greatest amounts 
incorporated in the contract.
    (3) If the security accepted by the contracting officer is the 
contractor's financial condition, the contracting officer shall 
incorporate in the clause constructed under paragraph (b)(1) of this 
section the following--
    (i) A statement that the contractor's financial condition has been 
accepted as adequate security for commercial financing payments; and
    (ii) A statement that the contracting officer may exercise the 
Government's rights to require other security under paragraph (c), 
Security for Government Financing, of the clause at 52.232-29, Terms 
for Financing of Purchases of Commercial Items, in the event the 
contractor's financial condition changes and is found not to be 
adequate security.
    (d) Instructions for multiple appropriations. If contract financing 
is to be computed for the contract as a whole, and if there is more 
than one appropriation account (or subaccount) funding payments under 
the contract, the contracting officer shall include, in the contract, 
instructions for distribution of financing payments to the respective 
funds accounts. Distribution instructions and contract liquidation 
instructions must be mutually consistent.
    (e) Liquidation. Liquidation of contract financing payments shall 
be on the same basis as the computation of contract financing payments; 
that is, financing payments computed on a whole contract basis shall be 
liquidated on a whole contract basis; and a payment computed on a line 
item basis shall be liquidated against that line item. If liquidation 
is on a whole contract basis, the contracting officer shall use a 
uniform liquidation percentage as the liquidation method, unless the 
contracting officer obtains the concurrence of the cognizant payment 
office that the proposed liquidation provisions can be executed by that 
office, or unless agency regulations provide alternative liquidation 
methods.
    (f) Prompt payment for commercial purchase payments. The provisions 
of subpart 32.9, Prompt Payment, apply to contract financing and 
invoice payments for commercial purchases in the same manner they apply 
to non-commercial purchases. The contracting officer is responsible for 
including in the contract all the information necessary to implement 
prompt payment. In particular, contracting officers must be careful to 
clearly differentiate in the contract between contract financing and 
invoice payments and between items having different prompt payment 
times.
    (g) Installment payment financing for commercial items. Contracting 
officers may insert the clause at 52.232-30, Installment Payments for 
Commercial Items, in solicitations and contracts in lieu of 
constructing a specific clause in accordance with paragraphs (b) 
through (e) of this section, if the contract action qualifies under the 
criteria at 32.202-1(b) and installment payments for the item are 
either customary or are authorized in accordance with agency 
procedures.
    (1) Description. Installment payment financing is payment by the 
Government to a contractor of a fixed number of equal interim financing 
payments prior to delivery and acceptance of a contract item. The 
installment payment arrangement is designed to reduce administrative 
costs. However, if a contract will have a large number of deliveries, 
the administrative costs may increase to the point where installment 
payments are not in the best interests of the Government.
    (2) Authorized types of installment payment financing and rates. 
Installment payments may be made using the clause at 52.232-30, 
Installment Payments for Commercial Items, either at the 70 percent 
financing rate cited in the clause or at a lower rate in accordance 
with agency procedures.
    (3) Calculating the amount of installment financing payments. The 
contracting officer shall identify in the contract schedule those items 
for which installment payment financing is authorized. Monthly 
installment payment amounts are to be calculated by the contractor 
pursuant to the instructions in the contract clause only for items 
authorized to receive installment payment financing.
    (4) Liquidating installment payments. If installment payments have 
been made for an item, the amount paid to the contractor upon 
acceptance of the item by the Government shall be reduced by the amount 
of installment payments made for the item. The contractor's request for 
final payment for each item is required to show this calculation.


32.207  Administration and payment of commercial financing payments.

    (a) Responsibility. The contracting officer responsible for 
administration of the contract shall be responsible for review and 
approval of contract financing requests.
    (b) Approval of financing requests. Unless otherwise provided in 
agency regulations, or by agreement with the appropriate payment 
official--
    (1) The contracting officer shall be responsible for receiving, 
approving, and transmitting all contract financing requests to the 
appropriate payment office; and
    (2) Each approval shall specify the amount to be paid, necessary 
contractual information, and the account(s) (see 32.206(d)) to be 
charged for the payment.
    (c) Management of security. After contract award, the contracting 
officer responsible for approving requests for financing payments shall 
be responsible for determining that the security continues to be 
adequate. If the contractor's financial condition is the Government's 
security, this contracting officer is also responsible for monitoring 
the contractor's financial condition.

Subpart 32.4--Advance Payments for Non-Commercial Items

    14. Subpart 32.4 heading is revised to read as set forth above.
    15. Section 32.400 is amended by adding a third sentence to read as 
follows:


32.400  Scope of subpart.

    * * * This subpart does not apply to commercial advance payments, 
which are subject to subpart 32.2.
    16. Section 32.501-1 is amended by revising paragraph (d) to read 
as follows:


32.501-1  Customary progress payment rates.

* * * * *
    (d) In accordance with the Defense Procurement Improvement Act of 
1986 (Public Law 99-145), as amended, and for civilian agencies, in 
accordance with 41 U.S.C. 255, as amended, progress payments are 
limited to 80 percent on work accomplished under undefinitized contract 
actions. A higher rate is not authorized under unusual progress 
payments or other customary progress payments for the undefinitized 
actions. 

[[Page 49715]]



32.501-4  [Reserved]

    17. Section 32.501-4 is removed and reserved.
    18. Section 32.502-1 is amended in paragraph (a) introductory text 
by removing the phrase ``paragraphs (b) and (c) below,'' and inserting 
in its place ``paragraph (b) of this subsection,''; by revising 
paragraph (b) introductory text and (b)(1); by removing paragraph (c); 
by redesignating paragraph (d) as paragraph (c); and in newly 
designated paragraph (c)(1) by removing the phrase ``through (c) 
above,'' and inserting in its place ``and (b) of this subsection,''. 
The revised text reads as follows:


32.502-1  Use of customary progress payments.

* * * * *
    (b) To reduce undue administrative effort and expense, unless 
otherwise provided in agency regulations, the contracting officer shall 
not provide for progress payments on contracts of less than $1 million 
unless--
    (1) The contractor is a small business concern and the contract 
will be equal to or greater than the simplified acquisition threshold; 
or
* * * * *
    19. Subpart 32.10, consisting of sections 32.1000 through 32.1010, 
is added to read as follows:

Subpart 32.10--Performance-Based Payments

Sec.
32.1000  Scope of subpart.
32.1001  Policy.
32.1002  Bases for performance-based payments.
32.1003  Criteria for use.
32.1004  Procedure.
32.1005  Contract clauses.
32.1006  Agency approvals.
32.1007  Administration and payment of performance-based payments.
32.1008  Suspension or reduction of performance-based payments.
32.1009  Title.
32.1010  Risk of loss.


32.1000  Scope of subpart.

    This subpart provides policy and procedures for performance-based 
payments under non-commercial purchases pursuant to subpart 32.1. This 
subpart does not apply to--
    (a) Payments under cost-reimbursement contracts;
    (b) Contracts for architect-engineer services or construction, or 
for shipbuilding or ship conversion, alteration, or repair, when the 
contracts provide for progress payments based upon a percentage or 
stage of completion;
    (c) Contracts for research or development; or
    (d) Contracts awarded through sealed bid or competitive negotiation 
procedures.


32.1001  Policy.

    (a) Performance-based payments are contract financing payments that 
are not payment for accepted items.
    (b) Performance-based payments are fully recoverable, in the same 
manner as progress payments, in the event of default. Except as 
provided in 32.1003(c), performance-based payments shall not be used 
when other forms of contract financing are provided.
    (c) For Government accounting purposes, performance-based payments 
should be treated like progress payments based on costs under subpart 
32.5.
    (d) Performance-based payments are contract financing payments and, 
therefore, are not subject to the interest-penalty provisions of prompt 
payment (see subpart 32.9). However, these payments shall be made in 
accordance with the agency's policy for prompt payment of contract 
financing payments.
    (e) Performance-based payments are the preferred financing method 
when the contracting officer finds them practical, and the contractor 
agrees to their use.


32.1002  Bases for performance-based payments.

    Performance-based payments may be made on any of the following 
bases:
    (a) Performance measured by objective, quantifiable methods;
    (b) Accomplishment of defined events; or
    (c) Other quantifiable measures of results.


32.1003  Criteria for use.

    Performance-based payments shall be used only if the following 
conditions are met:
    (a) The contracting officer and offeror are able to agree on the 
performance-based payment terms;
    (b) The contract is a definitized fixed-price type contract (but 
see 32.1005(b)); and
    (c) The contract does not provide for other methods of contract 
financing, except that advance payments in accordance with subpart 
32.4, or guaranteed loans in accordance with subpart 32.3 may be used.


32.1004  Procedure.

    Performance-based payments may be made either on a whole contract 
or on a deliverable item basis, unless otherwise prescribed by agency 
regulations. Financing payments to be made on a whole contract basis 
are applicable to the entire contract, and not to specific deliverable 
items. Financing payments to be made on a deliverable item basis are 
applicable to a specific individual deliverable item. (A deliverable 
item for these purposes is a separate item with a distinct unit price. 
Thus, a contract line item for 10 airplanes, with a unit price of 
$1,000,000 each, has ten deliverable items--the separate planes. A 
contract line item for 1 lot of 10 airplanes, with a lot price of 
$10,000,000, has only one deliverable item--the lot.)
    (a) Establishing performance bases. (1) The basis for performance-
based payments may be either specifically described events (e.g., 
milestones) or some measurable criterion of performance. Each event or 
performance criterion that will trigger a finance payment shall be an 
integral and necessary part of contract performance and shall be 
identified in the contract, along with a description of what 
constitutes successful performance of the event or attainment of the 
performance criterion. The signing of contracts or modifications, the 
exercise of options, or other such actions shall not be events or 
criteria for performance-based payments. An event need not be a 
critical event in order to trigger a payment, but successful 
performance of each such event or performance criterion shall be 
readily verifiable.
    (2) Events or criteria may be either severable or cumulative. The 
successful completion of a severable event or criterion is independent 
of the accomplishment of any other event or criterion. Conversely, the 
successful accomplishment of a cumulative event or criterion is 
dependent upon the previous accomplishment of another event. A contract 
may provide for more than one series of severable and/or cumulative 
performance events or criteria performed in parallel. The following 
shall be included in the contract:
    (i) The contract shall not permit payment for a cumulative event or 
criterion until the dependent event or criterion has been successfully 
completed.
    (ii) Severable events or criteria shall be specifically identified 
in the contract.
    (iii) The contract shall identify which events or criteria are 
preconditions for the successful achievement of each cumulative event 
or criterion.
    (iv) If payment of performance-based finance amounts is on a 
deliverable item basis, each event or performance criterion shall be 
part of the performance necessary for that 

[[Page 49716]]
deliverable item and shall be identified to a specific contract line 
item or subline item.
    (b) Establishing performance-based finance payment amounts. (1) The 
contracting officer shall establish a complete, fully defined schedule 
of events or performance criteria and payment amounts when negotiating 
contract terms. If a contract action significantly affects the price, 
or event or performance criterion, the contracting officer responsible 
for pricing the contract modification shall adjust the performance-
based payment schedule appropriately.
    (2) Total performance-based payments shall not exceed 90 percent of 
the contract price if on a whole contract basis, or 90 percent of the 
delivery item price if on a delivery item basis. The amount of each 
performance-based payment shall be specifically stated either as a 
dollar amount or as a percentage of a specifically identified price 
(e.g., contract price, or unit price of the deliverable item). The 
payment of contract financing has a cost to the Government in terms of 
interest paid by the Treasury to borrow funds to make the payment. 
Because the contracting officer has wide discretion as to the timing 
and amount of the performance-based payments, the contracting officer 
must ensure that the total contract price is fair and reasonable, all 
factors (including the financing costs to the Treasury of the 
performance-based payments) considered. Performance-based payment 
amounts may be established on any rational basis determined by the 
contracting officer, or agency procedures, which may include (but are 
not limited to)--
    (i) Engineering estimates of stages of completion;
    (ii) Engineering estimates of hours or other measures of effort to 
be expended in performance of an event or achievement of a performance 
criterion; or
    (iii) The estimated projected cost of performance of particular 
events.
    (3) When subsequent contract modifications are issued, the 
performance-based payment schedule shall be adjusted as necessary to 
reflect the actions required by those contract modifications.
    (c) Instructions for multiple appropriations. If there is more than 
one appropriation account (or subaccount) funding payments on the 
contract, the contracting officer shall provide instructions to the 
Government payment office for distribution of financing payments to the 
respective funds accounts. Distribution instructions must be consistent 
with the contract's liquidation provisions.
    (d) Liquidating performance-based finance payments. Performance-
based amounts shall be liquidated by deducting a percentage or a 
designated dollar amount from the delivery payments. The contracting 
officer shall specify the liquidation rate or designated dollar amount 
in the contract. The method of liquidation shall ensure complete 
liquidation no later than final payment.
    (1) If the performance-based payments are established on a delivery 
item basis, the liquidation amount for each line item shall be the 
percent of that delivery item price that was previously paid under 
performance-based finance payments or the designated dollar amount.
    (2) If the performance-based finance payments are on a whole 
contract basis, liquidation shall be by predesignated liquidation 
amounts or liquidation percentages.


32.1005  Contract clauses.

    (a) If performance-based contract financing will be provided, the 
contracting officer shall insert the clause at 52.232-32, Performance-
Based Payments, in the solicitation and contract with the description 
of the basis for payment and liquidation as required in 32.1004.
    (b) In solicitations for undefinitized contracts, the contracting 
officer may include the clause at 52.232-32, Performance-Based 
Payments, with a provision that the clause is not effective until the 
contract is definitized and the performance-based payment schedule is 
included in the contract.


32.1006  Agency approvals.

    The contracting officer shall obtain such approvals as are required 
by agency regulations.


32.1007  Administration and payment of performance-based payments.

    (a) Responsibility. The contracting officer responsible for 
administration of the contract shall be responsible for review and 
approval of performance-based payments.
    (b) Approval of financing requests. Unless otherwise provided in 
agency regulations, or by agreement with the appropriate payment 
official--
    (1) The contracting officer shall be responsible for receiving, 
approving, and transmitting all performance-based payment requests to 
the appropriate payment office; and
    (2) Each approval shall specify the amount to be paid, necessary 
contractual information, and the appropriation account(s) (see 
32.1004(c)) to be charged for the payment.
    (c) Reviews. The contracting officer is responsible for determining 
what reviews are required for protection of the Government's interests. 
The contracting officer should consider the contractor's 0experience, 
performance record, reliability, financial strength, and the adequacy 
of controls established by the contractor for the administration of 
performance-based payments. Based upon the risk to the Government, 
post-payment reviews and verifications should normally be arranged as 
considered appropriate by the contracting officer. If considered 
necessary by the contracting officer, pre-payment reviews may be 
required.
    (d) Incomplete performance. The contracting officer shall not 
approve a performance-based payment until the specified event or 
performance criterion has been successfully accomplished in accordance 
with the contract. If an event is cumulative, the contracting officer 
shall not approve the performance-based payment unless all identified 
preceding events or criteria are accomplished.
    (e) Government-caused delay. Entitlement to a performance-based 
payment is solely on the basis of successful performance of the 
specified events or performance criteria. However, if there is a 
Government-caused delay, the contracting officer may renegotiate the 
performance-based payment schedule, to facilitate contractor billings 
for any successfully accomplished portions of the delayed event or 
criterion.


32.1008  Suspension or reduction of performance-based payments.

    The contracting officer shall apply the policy and procedures in 
paragraphs (a), (b), (c), and (e) of 32.503-6, Suspension or reduction 
of payments, whenever exercising the Government's rights to suspend or 
reduce performance-based payments in accordance with paragraph (e) of 
the clause at 52.232-32, Performance-Based Payments.


32.1009  Title.

    (a) Since the clause at 52.232-32, Performance-Based Payments, 
gives the Government title to the property described in paragraph (f) 
of the clause, the contracting officer must ensure that the Government 
title is not compromised by other encumbrances. Ordinarily, the 
contracting officer, in the absence of reason to believe otherwise, may 
rely upon the contractor's certification contained in the payment 
request. 

[[Page 49717]]

    (b) If the contracting officer becomes aware of any arrangement or 
condition that would impair the Government's title to the property 
affected by the Performance-Based Payments clause, the contracting 
officer shall require additional protective provisions.
    (c) The existence of any such encumbrance is a violation of the 
contractor's obligations under the contract, and the contracting 
officer may, if necessary, suspend or reduce payments under the terms 
of the Performance-Based Payments clause covering failure to comply 
with a material requirement of the contract. In addition, if the 
contractor fails to disclose an existing encumbrance in the 
certification, the contracting officer should consult with legal 
counsel concerning possible violation of 31 U.S.C. 3729, the False 
Claims Act.


32.1010  Risk of loss.

    (a) Under the clause at 52.232-32, Performance-Based Payments, and 
except for normal spoilage, the contractor bears the risk for loss, 
theft, destruction, or damage to property affected by the clause, even 
though title is vested in the Government, unless the Government has 
expressly assumed this risk. The clauses prescribed in this regulation 
related to performance-based payments, default, and terminations do not 
constitute a Government assumption of risk.
    (b) If a loss occurs in connection with property for which the 
contractor bears the risk, and the property is needed for performance, 
the contractor is obligated to repay the Government the performance-
based payments related to the property.
    (c) The contractor is not obligated to pay for the loss of property 
for which the Government has assumed the risk of loss. However, a 
serious loss may impede the satisfactory progress of contract 
performance, so that the contracting officer may need to act under 
paragraph (e)(2) of the Performance-Based Payments clause. In addition, 
while the contractor is not required to repay previous performance-
based payments in the event of a loss for which the Government has 
assumed the risk, such a loss may prevent the contractor from making 
the certification required by the Performance-Based Payments clause.

PART 42--CONTRACT ADMINISTRATION

    20. Section 42.302 is amended by revising paragraph (a)(12) and 
adding (a)(69) to read as follows:


42.302  Contract administration functions.

    (a) * * *
    (12) Review and approve or disapprove the contractor's requests for 
payments under the progress payments or performance-based payments 
clauses.
* * * * *
    (69) Administer commercial financing provisions and monitor 
contractor security to ensure its continued adequacy to cover 
outstanding payments, when on-site review is required.
* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    21. Sections 52.232-29 through 52.232-32 are added to read as 
follows:


52.232-29  Terms for Financing of Purchases of Commercial Items.

    As prescribed in 32.206(b)(2), insert the following clause:

Terms for Financing of Purchases of Commerical Items (Oct 1995)

    (a) Contractor entitlement to financing payments. The Contractor 
may request, and the Government shall pay, a contract financing 
payment as specified elsewhere in this contract when: the payment 
requested is properly due in accordance with this contract; the 
supplies deliverable or services due under the contract will be 
delivered or performed in accordance with the contract; and there 
has been no impairment or diminution of the Government's security 
under this contract.
    (b) Special terms regarding termination for cause. If this 
contract is terminated for cause, the Contractor shall, on demand, 
repay to the Government the amount of unliquidated contract 
financing payments. The Government shall be liable for no payment 
except as provided by the Termination for Cause paragraph of the 
clause at 52.212-4, Contract Terms and Conditions--Commercial Items.
    (c) Security for Government financing. In the event the 
Contractor fails to provide adequate security, as required in this 
contract, no financing payment shall be made under this contract. 
Upon receipt of adequate security, financing payments shall 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.
    (d) Reservation of rights. (1) No payment or other action by the 
Government under this clause shall (i) excuse the Contractor from 
performance of obligations under this contract, or (ii) constitute a 
waiver of any of the rights or remedies of the parties under the 
contract.
    (2) The Government's rights and remedies under this clause (i) 
shall not be exclusive, but rather shall be in addition to any other 
rights and remedies provided by law or this contract; and (ii) shall 
not be affected by delayed, partial, or omitted exercise of any 
right, remedy, power, or privilege, nor shall such exercise or any 
single exercise preclude or impair any further exercise under this 
clause or the exercise of any other right, power, or privilege of 
the Government.
    (e) Content of Contractor's request for financing payment. The 
Contractor's request for financing payment shall contain the 
following:
    (1) The name and address of the Contractor;
    (2) The date of the request for financing payment;
    (3) The contract number and/or other identifier of the contract 
or order under which the request is made; and
    (4) An appropriately itemized and totaled statement of the 
financing payments requested and such other information as is 
necessary for computation of the payment, prepared in accordance 
with the direction of the Contracting Officer.
    (f) Limitation on frequency of financing payments. Contractor 
financing payments shall be provided no more frequently than 
monthly. -
    (g) In the event of any conflict between the terms proposed by 
the offeror in response to an invitation to propose financing terms 
(52.232-31) and the terms in this clause, the terms of this clause 
shall govern.

(End of clause)


52.232-30  Installment Payments for Commercial Items.

    As prescribed in 32.206(g), insert the following clause:

Installment Payments for Commerical Items (Oct 1995)

    (a) Contractor entitlement to financing payments. The Contractor 
may request, and the Government shall pay, a contract financing 
installment payment as specified in this contract when: the payment 
requested is properly due in accordance with this contract; the 
supplies deliverable or services due under the contract will be 
delivered or performed in accordance with the contract; and there 
has been no impairment or diminution of the Government's security 
under this contract.
    (b) Computation of amounts. Installment payment financing shall 
be paid to the Contractor when requested for each separately priced 
unit of supply (but not for services) of each contract line item in 
amounts approved by the Contracting Officer pursuant to this clause.
    (1) Number of installment payments for each contract line item. 
Each separately priced unit of each contract line item is authorized 
a fixed number of monthly 

[[Page 49718]]
installment payments. The number of installment payments authorized for 
each unit of a contract line item is equal to the number of months 
from the date of contract award to the date one month before the 
first delivery of the first separately priced unit of the contract 
line item. For example, if the first scheduled delivery of any 
separately priced unit of a contract line item is 9 months after 
award of the contract, all separately priced units of that contract 
line item are authorized 8 installment payments.
    (2) Amount of each installment payment. The amount of each 
installment payment for each separately priced unit of each contract 
line item is equal to 70 percent of the unit price divided by the 
number of installment payments authorized for that unit.
    (3) Date of each installment payment. Installment payments for 
any particular separately priced unit of a contract line item begin 
the number of months prior to the delivery of that unit that are 
equal to the number of installment payments authorized for that 
unit. For example, if 8 installment payments are authorized for each 
separately priced unit of a contract line item, the first 
installment payment for any particular unit of that contract line 
item would be 8 months before the scheduled delivery date for that 
unit. The last installment payment would be 1 month before scheduled 
delivery of a unit.
    (4) Limitation on payment. Prior to the delivery payment for a 
separately priced unit of a contract line item, the sum of all 
installment payments for that unit shall not exceed 70 percent of 
the price of that unit.
    (c) Contractor request for installment payment. The Contractor 
may submit requests for payment of installment payments not more 
frequently than monthly, in a form and manner acceptable to the 
Contracting Officer. Unless otherwise authorized by the Contracting 
Officer, all installment payments in any month for which payment is 
being requested shall be included in a single request, appropriately 
itemized and totaled.
    (d) Dates for payment. An installment payment under this clause 
is a contract financing payment under the Prompt Payment clause of 
this contract, and except as provided in paragraph (e) of this 
clause, approved requests shall be paid within 30 days of submittal 
of a proper request for payment.
    (e) Liquidation of installment payments. Installment payments 
shall be liquidated by deducting from the delivery payment of each 
item the total unliquidated amount of installment payments made for 
that separately priced unit of that contract line item. The 
liquidation amounts for each unit of each line item shall be clearly 
delineated in each request for delivery payment submitted by the 
Contractor.
    (f) Security for installment payment financing. In the event the 
Contractor fails to provide adequate security as required in this 
contract, no financing payment shall be made under this contract. 
Upon receipt of adequate security, financing payments shall be made, 
including all previous payments to which the Contractor is entitled, 
in accordance with the terms of the contract. 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; the Contractor shall repay to the 
Government the amount of unliquidated financing payments as the 
Contracting Officer at his sole discretion deems repayable.
    (g) Special terms regarding termination for cause. If this 
contract is terminated for cause, the Contractor shall, on demand, 
repay to the Government the amount of unliquidated installment 
payments. The Government shall be liable for no payment except as 
provided by the Termination for Cause paragraph of the clause at 
52.212-4, Contract Terms and Conditions--Commercial Items.
    (h) Reservation of rights. (1) No payment, vesting of title 
under this clause, or other action taken by the Government under 
this clause shall (i) excuse the Contractor from performance of 
obligations under this contract, or (ii) constitute a waiver of any 
of the rights or remedies of the parties under the contract.
    (2) The Government's rights and remedies under this clause (i) 
shall not be exclusive, but rather shall be in addition to any other 
rights and remedies provided by law or this contract, and (ii) shall 
not be affected by delayed, partial, or omitted exercise of any 
right, remedy, power, or privilege, nor shall such exercise or any 
single exercise preclude or impair any further exercise under this 
clause or the exercise of any other right, power, or privilege of 
the Government.
    (i) Content of Contractor's request for installment payment. The 
Contractor's request for installment payment shall contain the 
following:
    (1) The name and address of the Contractor;
    (2) The date of the request for installment payment;
    (3) The contract number and/or other identifier of the contract 
or order under which the request is made; and
    (4) An itemized and totaled statement of the items, installment 
payment amount, and month for which payment is being requested, for 
each separately priced unit of each contract line item.

(End of clause)


52.232-31  Invitation to Propose Financing Terms.

    As prescribed in 32.205(b) and 32.206, insert the following 
provision:

Invitation to Propose Financing Terms (Oct 1995)

    (a) The offeror is invited to propose terms under which the 
Government shall make contract financing payments during contract 
performance. The financing terms proposed by the offeror shall be a 
factor in the evaluation of the offeror's proposal. The financing 
terms of the successful offeror and the clause, Terms for Financing 
of Purchases of Commercial Items, at 52.232-29, shall be 
incorporated in any resulting contract.
    (b) The offeror agrees that in the event of any conflict between 
the terms proposed by the offeror and the terms in the clause at 
52.232-29, Terms for Financing of Purchases of Commercial Items, the 
terms of the clause at 52.232-29 shall govern.
    (c) Because of statutory limitations (10 U.S.C. 2307(f) and 41 
U.S.C. 255(f)), the offeror's proposed financing shall not be 
acceptable if it does not conform to the following limitations:
    (1) Delivery payments shall be made only for supplies delivered 
and accepted, or services rendered and accepted in accordance with 
the payment terms of this contract;
    (2) Contract financing payments shall not exceed 15 percent of 
the contract price in advance of any performance of work under the 
contract;
    (3) The terms and conditions of the contract financing must be 
appropriate or customary in the commercial marketplace; and
    (4) The terms and conditions of the contract financing must be 
in the best interests of the United States.
    (d) The offeror's proposal of financing terms shall include the 
following:
    (1) The proposed contractual language describing the contract 
financing (see FAR 32.202-2 for appropriate definitions of types of 
payments); and
    (2) A listing of the earliest date and greatest amount at which 
each contract financing payment may be payable and the amount of 
each delivery payment. Any resulting contract shall provide that no 
contract financing payment shall be made at any earlier date or in a 
greater amount than shown in the offeror's listing.
    (e) The offeror's proposed prices and financing terms shall be 
evaluated to determine the cost to the United States of the proposal 
using the interest rate and delivery schedule specified elsewhere in 
this solicitation.

(End of provision)


52.232-32  Performance-Based Payments.

    As prescribed in 32.1005, insert the following clause:

Performance-Based Payments (Oct 1995)

    (a) Amount of payments and limitations on payments. Subject to 
such other limitations and conditions as are specified in this 
contract and this clause, the amount of payments and limitations on 
payments shall be specified in the contract's description of the 
basis for payment.
    (b) Contractor request for performance-based payment. The 
Contractor may submit requests for payment of performance-based 
payments not more frequently than monthly, in a form and manner 
acceptable to the Contracting Officer. Unless otherwise authorized 
by the Contracting Officer, all performance-based payments in any 
period for which payment is being requested shall be included in a 
single request, appropriately itemized and totaled. The Contractor's 
request shall contain the information and certification detailed in 
paragraphs (l) and (m) of this clause.
    (c) Approval and payment of requests. (1) The Contractor shall 
not be entitled to payment of a request for performance-based 

[[Page 49719]]
payment prior to successful accomplishment of the event or performance 
criterion for which payment is requested. The Contracting Officer 
shall determine whether the event or performance criterion for which 
payment is requested has been successfully accomplished in 
accordance with the terms of the contract. The Contracting Officer 
may, at any time, require the Contractor to substantiate the 
successful performance of any event or performance criterion which 
has been or is represented as being payable.
    (2) A payment under this performance-based payment clause is a 
contract financing payment under the Prompt Payment clause of this 
contract, and approved requests shall be paid in accordance with the 
prompt payment period and provisions specified for contract 
financing payments by that clause. However, if the Contracting 
Officer requires substantiation as provided in paragraph (c)(1) of 
this clause, or inquires into the status of an event or performance 
criterion, or into any of the conditions listed in paragraph (e) of 
this clause, or into the Contractor certification, payment is not 
required, and the prompt payment period shall not begin until the 
Contracting Officer approves the request.
    (3) The approval by the Contracting Officer of a request for 
performance-based payment does not constitute an acceptance by the 
Government and does not excuse the Contractor from performance of 
obligations under this contract.
    (d) Liquidation of performance-based payments. (1) Performance-
based finance amounts paid prior to payment for delivery of an item 
shall be liquidated by deducting a percentage or a designated dollar 
amount from the delivery payment. If the performance-based finance 
payments are on a delivery item basis, the liquidation amount for 
each such line item shall be the percent of that delivery item price 
that was previously paid under performance-based finance payments or 
the designated dollar amount. If the performance-based finance 
payments are on a whole contract basis, liquidation shall be by 
either predesignated liquidation amounts or a liquidation 
percentage.
    (2) If at any time the amount of payments under this contract 
exceeds any limitation in this contract, the Contractor shall repay 
to the Government the excess. Unless otherwise determined by the 
Contracting Officer, such excess shall be credited as a reduction in 
the unliquidated performance-based payment balance(s), after 
adjustment of invoice payments and balances for any retroactive 
price adjustments.
    (e) Reduction or suspension of performance-based payments. The 
Contracting Officer may reduce or suspend performance-based 
payments, liquidate performance-based payments by deduction from any 
payment under the contract, or take a combination of these actions 
after finding upon substantial evidence any of the following 
conditions:
    (1) The Contractor failed to comply with any material 
requirement of this contract (which includes paragraphs (h) and (i) 
of this clause).
    (2) Performance of this contract is endangered by the 
Contractor's (i) failure to make progress, or (ii) unsatisfactory 
financial condition.
    (3) The Contractor is delinquent in payment of any subcontractor 
or supplier under this contract in the ordinary course of business.
    (f)(1) Title. Title to the property described in this paragraph 
(f) shall vest in the Government. Vestiture shall be immediately 
upon the date of the first performance-based payment under this 
contract, for property acquired or produced before that date. 
Otherwise, vestiture shall occur when the property is or should have 
been allocable or properly chargeable to this contract.
    (2) Property, as used in this clause, includes all of the 
following described items acquired or produced by the Contractor 
that are or should be allocable or properly chargeable to this 
contract under sound and generally accepted accounting principles 
and practices:
    (i) Parts, materials, inventories, and work in process;
    (ii) Special tooling and special test equipment to which the 
Government is to acquire title under any other clause of this 
contract;
    (iii) Nondurable (i.e., noncapital) tools, jigs, dies, fixtures, 
molds, patterns, taps, gauges, test equipment and other similar 
manufacturing aids, title to which would not be obtained as special 
tooling under subparagraph (f)(2)(ii) of this clause; and
    (iv) Drawings and technical data, to the extent the Contractor 
or subcontractors are required to deliver them to the Government by 
other clauses of this contract.
    (3) Although title to property is in the Government under this 
clause, other applicable clauses of this contract (e.g., the 
termination or special tooling clauses) shall determine the handling 
and disposition of the property.
    (4) The Contractor may sell any scrap resulting from production 
under this contract, without requesting the Contracting Officer's 
approval, provided that any significant reduction in the value of 
the property to which the Government has title under this clause is 
reported in writing to the Contracting Officer.
    (5) In order to acquire for its own use or dispose of property 
to which title is vested in the Government under this clause, the 
Contractor must obtain the Contracting Officer's advance approval of 
the action and the terms. If approved, the basis for payment (the 
events or performance criteria) to which the property is related 
shall be deemed to be not in compliance with the terms of the 
contract and not payable (if the property is part of or needed for 
performance), and the Contractor shall refund the related 
performance-based payments in accordance with paragraph (d) of this 
clause.
    (g) Risk of loss. Before delivery to and acceptance by the 
Government, the Contractor shall bear the risk of loss for property, 
the title to which vests in the Government under this clause, except 
to the extent the Government expressly assumes the risk. If any 
property is damaged, lost, stolen, or destroyed, the basis of 
payment (the events or performance criteria) to which the property 
is related shall be deemed to be not in compliance with the terms of 
the contract and not payable (if the property is part of or needed 
for performance), and the Contractor shall refund the related 
performance-based payments in accordance with paragraph (d) of this 
clause.
    (h) Records and controls. The Contractor shall maintain records 
and controls adequate for administration of this clause. The 
Contractor shall have no entitlement to performance-based payments 
during any time the Contractor's records or controls are determined 
by the Contracting Officer to be inadequate for administration of 
this clause.
    (i) Reports and Government access. The Contractor shall promptly 
furnish reports, certificates, financial statements, and other 
pertinent information requested by the Contracting Officer for the 
administration of this clause and to determine that an event or 
other criterion prompting a financing payment has been successfully 
accomplished. The Contractor shall give the Government reasonable 
opportunity to examine and verify the Contractor's records and to 
examine and verify the Contractor's performance of this contract for 
administration of this clause.
    (j) Special terms regarding default. If this contract is 
terminated under the Default clause, (1) the Contractor shall, on 
demand, repay to the Government the amount of unliquidated 
performance-based payments, and (2) title shall vest in the 
Contractor, on full liquidation of all performance-based payments, 
for all property for which the Government elects not to require 
delivery under the Default clause of this contract. The Government 
shall be liable for no payment except as provided by the Default 
clause.
    (k) Reservation of rights. (1) No payment or vesting of title 
under this clause shall (i) excuse the Contractor from performance 
of obligations under this contract, or (ii) constitute a waiver of 
any of the rights or remedies of the parties under the contract.
    (2) The Government's rights and remedies under this clause (i) 
shall not be exclusive, but rather shall be in addition to any other 
rights and remedies provided by law or this contract, and (ii) shall 
not be affected by delayed, partial, or omitted exercise of any 
right, remedy, power, or privilege, nor shall such exercise or any 
single exercise preclude or impair any further exercise under this 
clause or the exercise of any other right, power, or privilege of 
the Government.
    (l) Content of Contractor's request for performance-based 
payment. The Contractor's request for performance-based payment 
shall contain the following:
    (1) The name and address of the Contractor;
    (2) The date of the request for performance-based payment;
    (3) The contract number and/or other identifier of the contract 
or order under which the request is made;
    (4) Such information and documentation as is required by the 
contract's description of the basis for payment; and
    (5) A certification by a Contractor official authorized to bind 
the Contractor, as specified in paragraph (m) of this clause.
    (m) Content of Contractor's certification. As required in 
paragraph (l)(5) of this clause, 

[[Page 49720]]
the Contractor shall make the following certification in each request 
for performance-based payment:
    I certify to the best of my knowledge and belief that--
    (1) This request for performance-based payment is true and 
correct; this request (and attachments) has been prepared from the 
books and records of the Contractor, in accordance with the contract 
and the instructions of the Contracting Officer;
    (2) (Except as reported in writing on ______________), all 
payments to subcontractors and suppliers under this contract have 
been paid, or will be paid, currently, when due in the ordinary 
course of business;
    (3) There are no encumbrances (except as reported in writing on 
______________) against the property acquired or produced for, and 
allocated or properly chargeable to, the contract which would affect 
or impair the Government's title;
    (4) There has been no materially adverse change in the financial 
condition of the Contractor since the submission by the Contractor 
to the Government of the most recent written information dated 
______________; and
    (5) After the making of this requested performance-based 
payment, the amount of all payments for each deliverable item for 
which performance-based payments have been requested will not exceed 
any limitation in the contract, and the amount of all payments under 
the contract will not exceed any limitation in the contract.

(End of clause)

[FR Doc. 95-23866 Filed 9-25-95; 8:45 am]
BILLING CODE 6820-EP-P