[Federal Register Volume 64, Number 27 (Wednesday, February 10, 1999)]
[Proposed Rules]
[Pages 6758-6765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3117]



[[Page 6757]]

_______________________________________________________________________

Part III

Department of Defense

General Services Administration

National Aeronautics and Space Administration
_______________________________________________________________________



48 CFR Parts 32 and 52



Federal Acquisition Regulation: Progress Payments and Related Financing 
Policies; Proposed Rule

  Federal Register / Vol. 64, No. 27 / Wednesday, February 10, 1999 / 
Proposed Rules  

[[Page 6758]]



DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 32 and 52

[FAR Case 98-400]
RIN 9000-AI27


Federal Acquisition Regulation; Progress Payments and Related 
Financing Policies

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

ACTION: Proposed rule.

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

SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council are proposing to amend the Federal 
Acquisition Regulation (FAR) to reduce the burdens imposed on 
contractors and contracting officers by the progress payment type of 
financing; to permit the use of performance-based payments in contracts 
for research and development, and contracts awarded through competitive 
negotiation procedures; to expand the use of subcontractor performance-
based or commercial financing payments; and to simplify and clarify 
related provisions.

DATES: Comments should be submitted on or before April 12, 1999 to be 
considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments to: 
General Services Administration, FAR Secretariat (MVR), Attn: Laurie 
Duarte, 1800 F Street, NW, Room 4035, Washington, DC 20405.
    E-mail comments submitted over Internet should be addressed to: 
[email protected].
    Please cite FAR case 98-400 in all correspondence related to this 
case.

FOR FURTHER INFORMATION CONTACT: For clarification of content, contact 
Mr. Ralph De Stefano, Procurement Analyst, at (202) 501-1758. Please 
cite FAR case 98-400. For information on status or publication 
schedules, contact the FAR Secretariat, Room 4035, GS Building, 
Washington, DC 20405, (202) 501-4755.

SUPPLEMENTARY INFORMATION:

A. Background

    The Director of Defense Procurement at the Department of Defense 
established a special interagency team to review existing policies and 
procedures related to progress payments, to make them easier to 
understand and to minimize the burdens imposed on contractors and 
contracting officers. Regulatory requirements pertaining to progress 
payments that were not required by statute, required to ensure 
adequately standardized Government business practices, or required to 
protect the public interest were considered for revision or 
elimination.
    An advance notice of proposed rulemaking (ANPR) was published in 
the Federal Register on May 1, 1997 (62 FR 23740). The ANPR solicited 
comments from industry and Government personnel on how the FAR could be 
revised to result in a simplified and streamlined process of applying 
for and administering progress payments.
    After reviewing progress payment policies and public comments 
received in response to the ANPR, the team identified potential changes 
to the FAR. A second ANPR was published in the Federal Register on 
March 5, 1998 (63 FR 11074), that solicited comments on the potential 
changes identified in the notice. The ANPR also announced a public 
meeting, that was subsequently held on April 23, 1998. After 
considering written comments received in response to the two notices, 
and verbal comments provided during the public meeting, the working 
group submitted a report including a draft proposed rule for 
consideration by the Defense Acquisition Regulations Council and the 
Civilian Agency Acquisition Council.
    The councils have reviewed the report, and propose the following 
revisions to the FAR:

1. Increase Thresholds for Contract Financing and Establish a Threshold 
for Individual Progress Payment Requests

    To reduce the administrative burden that small dollar actions place 
on the contract administration and payment process, the proposed rule:
    (a) Raises the dollar threshold at FAR 32.104(d) for use of 
contract financing with large businesses, from $1 million to $2 
million. This threshold applies to an individual contract or a group of 
contracts or orders that total $2 million or more;
    (b) Revises FAR 32.104(d)(2), adds FAR 32.502-4(d), and adds 
Alternate III to the contract clause at FAR 52.232-16, Progress 
Payments, to indicate that, in calculating this $2 million threshold, 
only those groups of contracts or orders whose individual prices exceed 
the simplified acquisition threshold will be considered; and
    (c) Adds, at FAR 32.503-1 and at FAR 52.232-16, a minimum dollar 
threshold of $2,500 for individual progress payment requests, unless a 
lower amount is authorized in accordance with agency procedures.

2. Elimination of the ``Paid Cost Rule''

    Currently, a large business is required to pay a subcontractor 
before including the payment in its progress payment billings to the 
Government. This is referred to as the ``paid cost rule.'' The proposed 
FAR rule revises the contract clause at FAR 52.232-16, Progress 
Payments, to eliminate the ``paid cost rule.'' The revised clause 
allows a large business to include, in its progress payment billings, 
subcontract costs that it has incurred but not actually paid, provided 
the payment to the subcontractor will be made in the ordinary course of 
business. The proposed rule, likewise, amends the contract clauses at 
FAR 52.216-7, Allowable Cost and Payment, and at FAR 52.232-7, Payments 
Under Time-and-Materials and Labor-Hour Contracts, to provide 
consistent treatment in all payment clauses. This proposed change 
affects large businesses only. The FAR currently permits a small 
business concern to include, in its progress payment billings, 
subcontract costs that it has incurred but not actually paid.

3. Permit Subcontractor Performance-based Payments or Commercial 
Financing Payments Under Prime Contracts That Have Progress Payments or 
Cost-reimbursement Type of Financing

    The proposed rule amends FAR 32.504 and the contract clause at FAR 
52.232-16, Progress Payments, and adds FAR 32.110, to permit prime 
contractors that receive progress payments or cost-reimbursement type 
of payments to use performance-based payments or commercial financing 
payments with their subcontractors, provided the subcontracts that 
include such payments meet the same criteria and use provisions 
substantially similar to those in the prime contractor's contract.

4. Elimination of the Limitation on General and Administrative Expenses

    The proposed rule removes the limitation at FAR 32.503-7, which 
applies to only those contractors that have established an inventory 
suspense account under 48 CFR 9904.410, Allocation of Business Unit 
General and Administrative Expenses to Final Cost Objectives. This 
provision dates from 1979 and currently applies to very few remaining 
contractors.

[[Page 6759]]

5. Elimination of the Contracting Officer Review of Quarterly 
Statements

    The proposed rule removes the requirement at FAR 32.503-13 for the 
contractor to submit quarterly statements under price revision or 
redeterminable contracts. This requirement is unnecessary, as the 
Government's interests are protected adequately by the contracting 
officer that has the responsibility for administering progress 
payments.

6. Permit the Use of Performance-based Payments in Contracts for 
Research and Development, and in Contracts Awarded Through Competitive 
Negotiation Procedures

    The proposed rule amends FAR 32.1000 by removing the prohibition 
against using performance-based payments type of financing in contracts 
for research and development and contracts awarded through competitive 
negotiation procedures. In addition, the rule adds a new subsection at 
FAR 32.1004-2 and a new solicitation provision at FAR 52.232-XX, 
Invitation to Propose Performance-Based Payments, for use in 
competitive solicitations when offerors are invited to propose 
performance-based payments.
    However, the prohibition against using performance-based type of 
financing in contracts awarded using sealed bid procedures remains in 
FAR 32.1000. The evaluation process necessitates discussions when 
performance-based payments are proposed to ensure the payment events 
and payment amounts are reasonable, credible, and consistent with all 
other aspects of the offeror's proposal. Since sealed bid procedures 
are used when it is not necessary to conduct discussions with the 
responding offerors about their bids, sealed bid procedures cannot 
accommodate performance-based payments.

7. Ensure Consideration of Performance-based Payments

    The proposed rule revises FAR 32.502-1 and 32.1004 to emphasize 
that performance-based payments are the preferred method of financing; 
their use should be considered and deemed impracticable by the 
contracting officer before a decision is made to provide customary 
progress payments; and each payment amount should represent what the 
contractor could reasonably be expected to incur to achieve the payment 
event rather than resemble an advance payment or a reward to the 
contractor for achieving performance levels over and above what is 
required for successful completion of the contract.

8. Other Changes

    The proposed rule also revises FAR 32.503-6(f) to simplify and 
clarify that, on a loss contract, application of the loss ratio 
constitutes the adjustment that ensures progress payments do not exceed 
the value of work performed; amends FAR 32.501-1(a) to delete the 
authorization for the Department of Defense to establish customary 
progress payment rates for foreign military sales (FMS) and flexible 
progress payments that differ from the customary rates cited in the 
same paragraph (DoD no longer uses flexible progress payments and does 
not intend to establish alternate rates for FMS); and makes related 
editorial changes.
    This regulatory action was not subject to Office of Management and 
Budget review under Executive Order 12866, dated September 30, 1993, 
and is not a major rule under 5 U.S.C. 804.

B. Regulatory Flexibility Act

    This proposed rule is not 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 most 
contracts awarded to small entities have a dollar value less than the 
simplified acquisition threshold, and, therefore, do not require the 
progress payment or performance-based payment type of financing. 
Therefore, an Initial Regulatory Flexibility Analysis has not been 
performed. Comments are invited from small businesses and other 
interested parties. Comments from small entities concerning the 
affected FAR subparts also will be considered in accordance with 5 
U.S.C. 610. Such comments must be submitted separately and should cite 
FAR Case 98-400 in correspondence.

C. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. 3501, et seq.) is deemed to 
apply because the proposed rule contains information collection 
requirements.

1. Office of Management and Budget (OMB) Control Number 9000-0010 
(Progress Payments)

    The proposed rule decreases the collection requirements currently 
approved under OMB/Control Number 9000-0010, since the rule raises the 
threshold for permitting contract financing in the form of customary 
progress payments, and establishes a dollar threshold for contractor 
requests for progress payments. The estimated number of respondents per 
year: reduced from 27,000 to 18,090; yearly responses per respondent: 
32 (unchanged); average per response: 33 minutes (unchanged); total 
yearly burden hours: from 475,000 to 318,384; frequency: as required. 
Accordingly, a request for amendment of information collection 
requirements will be submitted to OMB at the final rule stage.

2. OMB Control Number 9000-0138 (Contract Financing)

    There is no net impact to the collection requirements currently 
approved under OMB Control Number 9000-0138. The increase in hours 
resulting from adding the provision at 52.232-XX, Invitation to Propose 
Performance-Based Payments, in competitive solicitations when the 
performance-based payment method of contract financing is used, is 
offset by the decrease in hours resulting from raising the contract 
dollar threshold for permitting performance-based payments.

D. Request for Comments Regarding Paperwork Burden

    Members of the public are invited to comment on the recordkeeping 
and information collection requirements and estimates set forth above. 
Please send comments to: Office of Information and Regulatory Affairs, 
Office of Management and Budget, Attention: Mr. Peter N. Weiss, FAR 
Desk Officer, New Executive Office Building, Room 10102, 725 17th 
Street, NW, Washington, DC 20503.
    Also send a copy of any comments to the FAR Secretariat at the 
address shown under ADDRESSES. Please cite the corresponding OMB 
clearance numbers in all correspondence related to the estimate.

List of Subjects in 48 CFR Parts 32 and 52

    Government procurement.

    Dated: February 4, 1999.
Edward C. Loeb,
Director, Federal Acquisition Policy Division.

    Therefore, it is proposed that 48 CFR Parts 32 and 52 be amended as 
set forth below:
    1. The authority citation for 48 CFR Parts 32 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 32--CONTRACT FINANCING

    2. Section 32.104 is revised to read as follows:

[[Page 6760]]

32.104   Providing contract financing.

    (a) Prudent contract financing can be a useful working tool in 
Government acquisition by expediting the performance of essential 
contracts. Government financing shall be provided only to the extent 
actually needed for prompt and efficient performance, considering the 
availability of private financing and the probable impact on working 
capital of the pre-delivery expenditures and production lead times 
associated with the contract or groups of contracts or orders (e.g., 
indefinite-delivery contracts, basic ordering agreements, or their 
equivalent). Contract financing shall be administered so as to aid, not 
impede, the acquisition. At the same time, the contracting officer 
shall avoid any undue risk of monetary loss to the Government through 
the financing. Include the form of contract financing deemed to be in 
the Government's best interest in the solicitation (see 32.106 and 
32.113). The contractor's use of the contract financing provided and 
the contractor's financial status shall be monitored.
    (b) If the contractor is a small business concern, the contracting 
officer shall give special attention to meeting the contractor's 
contract financing need. However, a contractor's receipt of a 
certificate of competency from the Small Business Administration has no 
bearing on the contractor's need for or entitlement to contract 
financing.
    (c) Subject to specific agency regulations and paragraph (d) of 
this section, 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) The contracting officer may provide contract financing in the 
form of performance-based payments (see 32.10) or customary progress 
payments (see 32.5)--
    (1) For individual contracts when the contract price is $2 million 
or more (or for small business concerns, when the contract price 
exceeds the simplified acquisition threshold) if the contractor--
    (i) Will not be able to bill for the first delivery of products for 
a substantial time after work must begin (normally 4 months or more for 
small business concerns, and 6 months or more for others), and will 
make expenditures for contract performance during the pre-delivery 
period that have a significant impact on the contractor's working 
capital; or
    (ii) Demonstrates actual financial need or the unavailability of 
private financing.
    (2) For a group of contracts or orders that total $2 million or 
more. In calculating this threshold, only those contracts or orders 
whose prices exceed the simplified acquisition threshold will be 
considered.
    3. Section 32.106 is amended by revising paragraph (b) to read as 
follows:


32.106   Order of preference.

* * * * *
    (b) Customary contract financing other than loan guarantees and 
certain advance payments (see 32.113).
* * * * *
    4. Section 32.110 is added to read as follows:


32.110   Payment of subcontractors under cost-reimbursement prime 
contracts.

    If the contractor makes financing payments to a subcontractor under 
a cost-reimbursement prime contract, the contracting officer shall 
accept the financing payments as reimbursable costs of the prime 
contract only under the following conditions--
    (a) The payments are made under the criteria in subpart 32.5 for 
customary progress payments based on costs, 32.202-1 for commercial 
item purchase financing, or 32.1003 for performance-based payments, as 
applicable.
    (b) If customary progress payments are made, the payments do not 
exceed the progress payment rate in 32.501-1, unless unusual progress 
payments to the subcontractor have been approved in accordance with 
32.501-2.
    (c) If customary progress payments are made, the subcontractor 
complies with the liquidation principles of 32.503-8, 32.503-9, and 
32.503-10.
    (d) If performance-based payments are made, the subcontractor 
complies with the liquidation principles of 32.1004-1(d).
    (e) The subcontract contains financing payments terms as prescribed 
in this section.
    5. Section 32.112 is amended by revising the section heading to 
read as follows:


32.112  Nonpayment of subcontractors under contracts for non-commercial 
items.

* * * * *
    6. Section 32.113 is amended by revising paragraph (c); 
redesignating paragraphs (d) through (g) as (e) through (h), 
respectively; and adding a new paragraph (d) to read as follows:


32.113  Customary contract financing.

* * * * *
    (c) Financing of contracts for supplies or services awarded under 
the sealed bid method of procurement in accordance with part 14 through 
progress payments based on costs in accordance with subpart 32.5;
    (d) Financing of contracts for supplies or services awarded under 
the competitive negotiation method of procurement in accordance with 
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);
* * * * *
    7. Section 32.205 is amended by revising the first sentence of 
paragraph (c)(4) to read as follows:


32.205  Procedures for offeror-proposed commercial contract financing.

* * * * *
    (c) * * *
    (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 the Office of Management and 
Budget (OMB) Circular A-94, ``Guidelines and Discount Rates for 
Benefit-Cost Analysis of Federal Programs'', appropriate to the period 
of contract financing. * * *
    8. Section 32.500 is amended by revising paragraph (a) to read as 
follows:


32.500  Scope of subpart.

* * * * *
    (a) Payments under cost-reimbursement contracts, but see 32.110 for 
progress payments made to subcontractors under cost-reimbursement prime 
contracts; or
* * * * *
    9. Section 32.501-1 is amended in paragraph (a) by removing the 
last sentence; and in paragraph (d) by revising the first sentence to 
read as follows:


32.501-1  Customary progress payment rates.

* * * * *
    (d) In accordance with 10 U.S.C. 2307(e)(2) and 41 U.S.C. 255, 
progress payments are limited to 80 percent on work accomplished under 
undefinitized contract actions. * * *
    10. Section 32.502-1 is revised to read as follows:


32.502-1  Use of customary progress payments.

    When the criteria for the use of performance-based payments are not 
met (see 32.1001(a) and 32.1003), the use of a progress payments clause 
in solicitations and resulting contracts may be considered in 
accordance with this subpart. Bids conditioned on progress payments 
when the solicitation did not provide for progress payments shall be 
rejected as nonresponsive.

[[Page 6761]]

    11. Section 32.502-4 is amended by redesignating paragraph (d) as 
(e) and adding a new paragraph (d) to read as follows:


32.502-4  Contract clauses.

* * * * *
    (d) If progress payments are authorized under an indefinite-
delivery contract, the contracting officer shall use the clause with 
its Alternate III to make progress payments applicable only to orders 
that exceed the simplified acquisition threshold.
* * * * *
    12. Section 32.503-1 is amended at the end of paragraph (b) by 
removing ``and''; in paragraph (c) by removing the period and adding 
``; and''; and adding paragraph (d) to read as follows:


32.503-1  Contractor requests.

* * * * *
    (d) Be $2,500 or more, unless a lower amount is authorized in 
accordance with agency procedures.
    13. Section 32.503-5 is amended by revising paragraph (c) to read 
as follows:


32.503-5  Administration of progress payments.

* * * * *
    (c) Progress payments made under indefinite-delivery contracts 
should be administered under each individual order as if the order 
constituted a separate contract, unless agency procedures provide 
otherwise.
    14. Section 32.503-6 is amended by revising paragraphs (f) and 
(g)(4) to read as follows:


32.503-6  Suspension or reduction of payments.

* * * * *
    (f) Fair value of undelivered work. Progress payments must be 
commensurate with the fair value of work accomplished in accordance 
with contract requirements. Governed by the principles of paragraphs 
(c) and (e) of this section, the contracting officer shall adjust 
progress payments when necessary to ensure that the fair value of 
undelivered work equals or exceeds the amount of unliquidated progress 
payments. On loss contracts, the application of a loss ratio as 
described in paragraph (g) of this section constitutes this adjustment.
    (g) * * *
    (4) The following is an example of the supplementary analysis 
required in paragraph (g)(3) of this section:


                                Section I
 
Contract price..........................................      $2,850,000
Change orders and unpriced orders (to extent funds have
 been obligated)........................................         150,000
Revised contract price..................................       3,000,000
 
                               Section II
 
Total costs incurred to date............................       2,700,000
Estimated additional costs to complete..................         900,000
Total costs to complete.................................       3,600,000
 
Loss ratio factor $3,000,000  $3,600,000 = 83.3%
 
Total costs eligible for progress payments..............       2,700,000
Loss ratio factor.......................................        x  83.3%
Recognized costs for progress payments..................       2,249,100
Progress payment rate...................................        x  80.0%
Alternate amount to be used.............................       1,799,280
 
                               Section III
 
Factored costs of items delivered*......................         750,000
Recognized costs applicable to undelivered items ......
 $2,249,100--$750,000...................................      1,499,100
 
* This amount shall be the same as the contract price of the items
  delivered.

32.503-7  [Reserved]

    15. Section 32.503-7 is removed and reserved.
    16. Section 32.503-8 is revised to read as follows:


32.503-8  Liquidation rates--ordinary method.

    Progress payments are recouped by the Government through the 
deduction of liquidations from payments that would otherwise be due to 
the contractor for completed contract items. To determine the amount of 
the liquidation, a liquidation rate is applied to the contract price of 
contract items delivered and accepted. The ordinary method is that the 
liquidation rate is the same as the progress payment rate; at the 
beginning of a contract, only this method may be used.
    17. Section 32.503-10 is amended by revising paragraphs (b)(1) and 
(b)(3) to read as follows:


32.503-10  Establishing alternate liquidation rates.

* * * * *
    (b) * * *
    (1) The contracting officer shall compute the expected progress 
payments by multiplying the estimated cost of performing the contract 
by the progress payment rate.
* * * * *
    (3) The following are examples of the computation. Assuming an 
estimated price of $2,200,000 and total estimated costs eligible for 
progress payments of $2,000,000:
    (i) If the progress payment rate is 80 percent, the minimum 
liquidation rate should be 72.7 percent, computed as follows:
[GRAPHIC] [TIFF OMITTED] TP10FE99.001

    (ii) If the progress payment rate is 85 percent, the minimum 
liquidation rate should be 77.3 percent, computed as follows:
[GRAPHIC] [TIFF OMITTED] TP10FE99.002

* * * * *


32.503-13  [Reserved]

    18. Section 32.503-13 is removed and reserved.
    19. Section 32.504 is amended by revising the section heading and 
paragraphs (a) and (b); in the second sentence of paragraph (c) by 
revising ``(j)(4)'' to read ``(j)(6)''; in the first sentence of 
paragraph (d) by removing ``progress'' and adding ``financing'', and by 
revising the second sentence; in the introductory text of paragraph (e) 
by revising the first sentence; by revising paragraph (f); and by 
adding paragraph (g) to read as follows:

[[Page 6762]]

32.504  Subcontracts under prime contracts providing progress payments.

    (a) Subcontracts may include either performance-based payments, 
provided they meet the criteria in 32.1003, or progress payments on 
terms that meet the criteria in subpart 32.5 for customary progress 
payments, but not both. Subcontracts for commercial purchases may 
include commercial item purchase financing terms, provided they meet 
the criteria in 32.202-1.
    (b) The contractor's requests for progress payments may include the 
full amount of commercial item purchase financing payments, 
performance-based payments, or progress payments to subcontractors, 
whether paid, or approved for current payment in the ordinary course of 
business, under the contract and subcontracts.
* * * * *
    (d) * * * Although the contracting officer should, to the extent 
appropriate, review the subcontract as part of the overall 
administration of progress payments in the prime contract, there is no 
special requirement for contracting officer review or consent merely 
because the subcontract includes financing payments, except as provided 
in paragraph (c) of this section. * * *
    (e) When financing payments are in the form of progress payments, 
the subcontract terms shall include the substance of the Progress 
Payments clause in the prime contract, modified to indicate that the 
contractor, not the Government, awards the subcontract and administers 
the progress payments.
* * * * *
    (f) When financing payments are in the form of performance-based 
payments, the subcontract terms shall include the substance of the 
Performance-Based Payments clause at 52.232-32, modified to indicate 
that the contractor, not the Government, awards the subcontract and 
administers the performance-based payments, and include appropriate 
wording modifications similar to those noted in paragraph (e) of this 
section.
    (g) When financing payments are in the form of commercial item 
purchase financing, the subcontract shall include a contract financing 
clause structured in accordance with 32.206.
    20. Section 32.1000 is amended at the end of paragraph (b) by 
adding ``or'' after the semicolon; removing paragraph (c) and 
redesignating paragraph (d) as (c), respectively; and revising newly 
designated (c) to read as follows:


32.1000  Scope of subpart.

* * * * *
    (c) Contracts awarded through sealed bid procedures.
    21. Section 32.1001 is amended by removing paragraph (e), 
redesignating paragraphs (a) through (d) as (b) through (e), 
respectively, and adding a new paragraph (a).
    The added text reads as follows:


32.1001  Policy.

    (a) Performance-based payments are the preferred financing method 
when the contracting officer finds them practical, and the contractor 
agrees to their use.
* * * * *


32.1004  [Amended] [Text redesignated as 32.1004-1]

    22. Section 32.1004 is amended by revising the section heading to 
read as set forth below; and the text is redesignated as 32.1004-1 and 
revised. The revisions read as follows:


32.1004  Procedures.


32.1004-1  General.

    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) Because performance-based payments are contract financing, 
events or criteria shall not serve as a vehicle to reward the 
contractor for completion of performance levels over and above what is 
required for successful completion of the contract.
    (v) If payment of performance-based finance amounts is on a 
deliverable item basis, each event or performance criterion shall be 
part of the performance necessary for that deliverable item and shall 
be identified to a specific contract line item or subline item.
    (b) Establishing performance-based finance payment amounts. (1) The 
contracting officer shall establish a complete, fully defined schedule 
of events or performance criteria and payment amounts when negotiating 
contract terms. If a contract action significantly affects the price, 
or event or performance criterion, the contracting officer responsible 
for pricing the contract modification shall adjust the performance-
based payment schedule appropriately.
    (2) Total performance-based payments shall--
    (i) Reflect prudent contract financing provided only to the extent 
needed for contract performance (see 32.104(a)); and
    (ii) Not exceed 90 percent of the contract price if on a whole 
contract basis, or 90 percent of the delivery item price if on a 
delivery item basis.
    (3) The 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

[[Page 6763]]

of the deliverable item). The payment of contract financing has a cost 
to the Government in terms of interest paid by the Treasury to borrow 
funds to make the payment. Because the contracting officer has wide 
discretion as to the timing and amount of the performance-based 
payments, the contracting officer shall ensure that--
    (i) The total contract price is fair and reasonable, all factors 
(including the financing costs to the Treasury of the performance-based 
payments) considered; and
    (ii) Performance-based payment amounts are commensurate with the 
value of the performance event or performance criterion, and will not 
result in an unreasonably low or negative level of contractor 
investment in the contract. Accordingly, contracting officers shall 
require that contractor proposals for performance-based payments 
include a profile showing projected cash flow and contractor investment 
in the contract.
    (4) 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.
    (5) 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.
    23. Section 32.1004-2 is added to read as follows:


32.1004-2  Procedures for evaluating offeror-proposed performance-based 
payments for competitive solicitations.

    Use the following procedures when offerors are invited to propose 
performance-based payments:
    (a) Solicitations. The contracting officer shall specify, in 
section M of the solicitation, the interest rate to be used in the 
evaluation of financing proposals (see paragraph (b)(4) of this 
section).
    (b) Evaluation of proposals. (1) Since performance-based payment 
terms will vary among offerors, the contracting officer shall--
    (i) Review the proposed terms to ensure they comply with 32.1004-1; 
and
    (ii) Adjust each proposed price for evaluation purposes to reflect 
the cost of providing the proposed performance-based payments to 
determine the total cost to the Government of that particular 
combination of price and performance-based financing.
    (2) The Government makes payments earlier when using the 
performance-based payments type of financing than it would if payments 
were not made until deliveries are accepted. In order to determine the 
cost to the Government of making payments earlier, the contracting 
officer shall compute the imputed cost of those performance-based 
payments and add it to the proposed price to determine the evaluated 
price for each offeror.
    (3) The imputed cost of a single performance-based financing 
payment is the amount of the payment multiplied by the annual interest 
rate, multiplied by the number of years, including fraction thereof, 
between the projected performance-based payment (invoice) date 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 
performance-based financing payments.
    (4) The time value of offeror-proposed contract financing 
arrangements shall be calculated using as the interest rate the nominal 
discount rate specified in Appendix C of the Office of Management and 
Budget (OMB) Circular A-94, ``Guidelines and Discount Rates for 
Benefit-Cost Analysis of Federal Programs'', 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 OMB.
    24. Section 32.1005 is amended by revising the section heading and 
paragraph (a) to read as follows:


32.1005  Solicitation provision and contract clauses.

    (a) If the contracting officer anticipates that performance-based 
contract financing may be provided in accordance with 32.1001, the 
contracting office 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. 
Additionally, if the procedures at 32.1004-2 are used for competitive 
solicitations, the solicitation provision at 52.232-XX, Invitation to 
Propose Performance-Based Payments, shall be included.
* * * * *


32.1006  [Removed and Reserved]

    25. Section 32.1006 is removed and reserved.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    26. Section 52.216-7 is amended by revising the date of the clause; 
by redesignating paragraphs (b)(1)(ii)(A) through (b)(1)(ii)(E) as 
(b)(1)(ii)(B) through (b)(1)(ii)(F), adding a new (b)(1)(ii)(A), and 
revising (b)(1)(iii), (b)(2), and (c) to read as follows:


52.216-7  Allowable Cost and Payment.

* * * * *

Allowable Cost and Payment (Date)

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * *
    (A) Supplies and services purchased directly for the contract;
* * * * *
    (iii) The amount of progress and other payments that have been 
paid by cash, check or other form of payment, or approved for 
current payment in the ordinary course of business, to the 
Contractor's subcontractors under similar cost standards.
    (2) Accrued costs of Contractor contributions under employee 
pension plans shall be excluded until actually paid unless--

[[Page 6764]]

    (i) The Contractor's practice is to make contributions to the 
retirement fund quarterly or more frequently; and
    (ii) The contribution does not remain unpaid 30 days after the 
end of the applicable quarter or shorter payment period (any 
contribution remaining unpaid shall be excluded from the 
Contractor's indirect costs for payment purposes).
* * * * *
    (c) Small business concerns. A small business concern may be 
paid more often than every 2 weeks.
* * * * *
    27. Section 52.232-7 is amended by revising the date of the clause, 
the fourth sentence of paragraph (b)(1) and the second sentence of 
paragraph (b)(2) to read as follows:


52.232-7  Payments Under Time-and-Materials and Labor-Hour Contracts.

* * * * *

Payments Under Time-and-Materials and Labor-Hour Contracts (Date)

* * * * *
    (b) Materials and subcontracts. (1) * * * The Contractor shall 
be reimbursed for items and services purchased directly for the 
contract only when payments of cash, checks, or other forms of 
actual payment have been made, or have been approved for current 
payment in the ordinary course of business, for such purchased items 
or services, provided the Contractor is not delinquent in paying 
such costs in the ordinary course of business. * * *
    (2) * * * Reimbursable costs in connection with subcontracts 
shall be limited to the amounts paid to the subcontractor for items 
and services purchased directly for the contract only when payments 
of cash, checks, or other forms of actual payment have been made, or 
have been approved for current payment in the ordinary course of 
business, for such purchased items or services, provided the 
Contractor is not delinquent in paying such costs in the ordinary 
course of business. * * *
* * * * *
    28. Section 52.232-16 is amended--
    a. In paragraph (b) of the introductory text by removing 
``paragraph (a)(1)'' and adding ``paragraphs (a)(1), (a)(5), and (b)'';
    b. In paragraph (c) of the introductory text by revising ``(a)(4)'' 
to read ``(a)(1)'';
    c. By removing paragraph (d) of the introductory text, and 
redesignating paragraph ``(e)'' as ``(d)'';
    d. In newly redesignated paragraph (d) by revising ``(see 
32.504(b)'' to read ``(see 32.504(c)''; and by revising ``subparagraph 
(j)(4)'' to read ``subparagraph (j)(6)'';
    e. By revising the date of the clause;
    f. In the introductory text of the clause by adding ``of $2,500 or 
more'' after ``amounts'';
    g. By revising paragraphs (a)(1) and (a)(2) of the clause, and 
adding a new paragraph (a)(7);
    h. By revising paragraph (j) of the clause;
    i. By revising Alternate I and adding Alternate III to read as 
follows:


52.232-16  Progress Payments.

* * * * *

Progress Payments (Date)

* * * * *
    (a) Computation of amounts. (1) Unless the Contractor requests a 
smaller amount, each progress payment shall be computed as 80 
percent of the Contractor's total costs incurred under this contract 
whether or not actually paid, plus financing payments to 
subcontractors (see paragraph (j) of this clause), less the sum of 
all previous progress payments made by the Government under this 
contract. Cost of money that would be allowable under 31.205-10 of 
the Federal Acquisition Regulation shall be deemed an incurred cost 
for progress payment purposes.
    (2) Accrued costs of Contractor contributions under employee 
pension plans shall be excluded until actually paid unless--
    (i) The Contractor's practice is to make contributions to the 
retirement fund quarterly or more frequently; and
    (ii) The contribution does not remain unpaid 30 days after the 
end of the applicable quarter or shorter payment period (any 
contribution remaining unpaid shall be excluded from the 
Contractor's total costs for progress payments until paid).
* * * * *
    (7) Notwithstanding any other terms of the contract, the 
Contractor agrees not to request progress payments in dollar amounts 
of less than $2,500. Exceptions may be made by the Contracting 
Officer.
* * * * *
    (j) Financing payments to subcontractors. The amounts mentioned 
in paragraph (a)(1) of this clause shall be all financing payments 
to subcontractors or divisions, if the following conditions are met:
    (1) The amounts included are limited to--
    (i) The unliquidated remainder of financing payments made; plus
    (ii) Any unpaid subcontractor requests for financing payments 
that the Contractor has approved for current payment in the ordinary 
course of business.
    (2) The subcontract or interdivisional order is expected to 
involve a minimum of approximately 6 months between the beginning of 
work and the first delivery; or, if the subcontractor is a small 
business concern, 4 months.
    (3) If the financing payments are in the form of progress 
payments, the terms of the subcontract or interdivisional order 
concerning progress payments--
    (i) Are substantially similar to the terms of the clause at 
52.232-16, Progress Payments;
    (ii) Are at least as favorable to the Government as the terms of 
this clause;
    (iii) Are not more favorable to the subcontractor or division 
than the terms of this clause are to the Contractor;
    (iv) Are in conformance with the requirements of 32.504(e) of 
the Federal Acquisition Regulation; and
    (v) Subordinate all subcontractor rights concerning property to 
which the Government has title under the subcontract to the 
Government's right to require delivery of the property to the 
Government if--
    (A) The Contractor defaults; or
    (B) The subcontractor becomes bankrupt or insolvent.
    (4) If the financing payments are in the form of performance-
based payments, the terms of the subcontract or interdivisional 
order concerning payments--
    (i) Are substantially similar to the Performance-Based Payments 
clause at 52.232-32 and meet the criteria for, and definition of, 
performance-based payments in part 32 of the Federal Acquisition 
Regulation;
    (ii) Are in conformance with the requirements of 32.504(f) of 
the Federal Acquisition Regulation; and
    (iii) Subordinate all subcontractor rights concerning property 
to which the Government has title under the subcontract to the 
Government's right to require delivery of the property to the 
Government if--
    (A) The Contractor defaults; or
    (B) The subcontractor becomes bankrupt or insolvent.
    (5) If the financing payments are in the form of commercial item 
financing payments, the terms of the subcontract or interdivisional 
order concerning payments--
    (i) Are constructed in accordance with 32.206(c) of the FAR and 
included in a subcontract for a commercial item purchase that meets 
the definition and standards for acquisition of commercial items in 
parts 2 and 12 of the Federal Acquisition Regulation;
    (ii) Are in conformance with the requirements of 32.504(g) of 
the Federal Acquisition Regulation; and
    (iii) Subordinate all subcontractor rights concerning property 
to which the Government has title under the subcontract to the 
Government's right to require delivery of the property to the 
Government if--
    (A) The Contractor defaults; or
    (B) The subcontractor becomes bankrupt or insolvent.
    (6) If financing is in the form of progress payments, the 
progress payment rate in the subcontract is the customary rate used 
by the Contracting Agency, depending on whether the subcontractor is 
or is not a small business concern.
    (7) The parties agree concerning any proceeds received by the 
Government for property to which title has vested in the Government 
under the subcontract terms, that the proceeds shall be applied to 
reducing any unliquidated financing payments by the Government to 
the Contractor under this contract.
    (8) If no unliquidated financing payments to the Contractor 
remain, but there are unliquidated financing payments that the 
Contractor has made to any subcontractor, the Contractor shall be 
subrogated to all the rights the Government obtained through the 
terms required by this clause to be in any subcontract, as if all 
such rights had been assigned and transferred to the Contractor.
    (9) The Contractor shall pay the subcontractor's financing 
payment request under paragraphs (j)(1) through (5) of this clause, 
within a reasonable time after

[[Page 6765]]

receiving the Government progress payment covering those amounts.
    (10) To facilitate small business participation in 
subcontracting under this contract, the Contractor agrees to provide 
financing payments to small business concerns, in conformity with 
the standards for customary contract financing payments stated in 
32.113 of the Federal Acquisition Regulation. The Contractor further 
agrees that the need for such financing payments shall not be 
considered as a handicap or adverse factor in the award of 
subcontracts.
* * * * *
    Alternate I (Date). If the contract is with a small business 
concern, change each mention of the progress payment and liquidation 
rates excepting paragraph (k) to the customary rate of 85 percent 
for small business concerns (see 32.501-1).
* * * * *
    Alternate III (Date). As prescribed in 32.502-4(d), add the 
following paragraph (l) to the basic clause. If Alternate II is also 
being used, redesignate the following paragraph as paragraph (n):
    (l) The provisions of this clause shall not be applicable to 
individual orders at or below the simplified acquisition threshold.

    29. Section 52.232-XX is added to read as follows:


52.232-XX  Invitation to Propose Performance-Based Payments.

    As prescribed in 32.1005, insert the following provision:

Invitation to Propose Performance-Based Payments (Date)

    (a) The offeror is invited to propose terms under which the 
Government shall make performance-based contract financing payments 
during contract performance. The performance-based payment 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 FAR clause at 52.232-32, Performance-Based Payments, 
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 FAR clause at 
52.232-32, Performance-Based Payments, the terms of the clause at 
52.232-32 shall govern.
    (c) The offeror's proposed performance-based payment 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) The terms and conditions of the performance-based payments 
must comply with FAR 32.1004-1, be reasonable and consistent with 
all other technical and cost information included in the offeror's 
proposal, and their total 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.
    (3) The terms and conditions of the performance-based financing 
must be in the best interests of the United States.
    (d) The offeror's proposal of performance-based payment 
financing shall include the following:
    (1) The proposed contractual language describing the 
performance-based payments (see FAR 32.1004-1 for appropriate 
criteria for establishing performance bases and performance-based 
finance payment amounts).
    (2) A listing of--
    (i) The projected performance-based payment dates and the 
projected payment amounts; and
    (ii) The projected delivery date and the projected payment 
amount.
    (3) A profile showing projected cash flow and contractor 
investment in the contract.
    (e) Evaluation of the offeror's proposed prices and financing 
terms shall include the following--
    (1) Whether the offeror's proposed performance-based payment 
events and payment amounts are reasonable and consistent with all 
other terms and conditions of the offeror's proposal.
    (2) The cost to the United States of the proposal using the 
interest rate and delivery schedule specified elsewhere in this 
solicitation.

(End of provision)

[FR Doc. 99-3117 Filed 2-9-99; 8:45 am]
BILLING CODE 6820-EP-P