[Federal Register Volume 65, Number 59 (Monday, March 27, 2000)]
[Rules and Regulations]
[Pages 16276-16285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7309]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 32 and 52

[FAC 97-16; FAR Case 1998-400 (98-400); Item II]
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: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have agreed on a final rule

[[Page 16277]]

amending 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 and commercial financing payments; and to simplify 
and clarify related provisions.

DATES: Effective Date: March 27, 2000.
    Applicability Date: The FAR, as amended by this rule, is mandatory 
for solicitations issued on or after May 26, 2000. Contracting officers 
may, at their discretion, include the clauses and provisions in this 
rule in solicitations issued before May 26, 2000.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS 
Building, Washington, DC, 20405, (202) 501-4755, for information 
pertaining to status or publication schedules. For clarification of 
content, contact Mr. Jeremy Olson, at (202) 501-0692. Please cite FAC 
97-16, FAR case 1998-400.

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. This Progress Payment Rewrite Team considered for 
revision or elimination those 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.
    The Progress Payment Rewrite Team published an advance notice of 
proposed rulemaking (ANPR) 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. They published a second ANPR 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 Progress 
Payment Rewrite Team submitted a report including a draft proposed rule 
for consideration by the Councils.
    The Councils reviewed the team's recommendations and published a 
proposed rule in the Federal Register on February 10, 1999 (64 FR 
6758). Fifteen respondents submitted public comments to the proposed 
rule. Several respondents expressed concern that the use of 
performance-based payments in competitive negotiations may lengthen the 
competitive process and complicate proposal evaluation. The Councils 
believe that potential procedural impacts are among the factors (along 
with such issues as the potential impact on small business 
competitiveness) that the contracting officer may consider when 
assessing the practicality of the use of performance-based payments 
under FAR 32.1001. However, the Councils also believe that performance-
based payments can be used effectively in competitive negotiations, and 
that their use may attract new sources, including small businesses, 
whose accounting systems do not support cost-based financing. 
Consequently, the Councils concluded the existing FAR prohibition 
against use of performance-based payments in competitive negotiations 
is inappropriate. The final rule differs from the proposed rule by 
making a number of nonsubstantive, clarifying changes.
    The final rule revises the FAR to:
    1. Ensure consideration of performance-based payments. The rule 
emphasizes that--
    (a) Performance-based payments are the preferred method of 
financing;
    (b) Their use should be considered and deemed impracticable by the 
contracting officer before a decision is made to provide customary 
progress payments; and
    (c) 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.
    2. Increase the threshold 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 final rule--
    (a) Raises the dollar threshold for use of contract financing with 
large businesses from $1 million to $2 million; and
    (b) Adds a minimum dollar threshold of $2,500 for individual 
progress payment requests, unless a lower amount is authorized in 
accordance with agency procedures.
    3. Eliminate the ``paid cost rule.'' Prior to implementation of 
this final rule, a large business was required to pay a subcontractor 
before including the payment in its billings to the Government. This is 
referred to as the ``paid cost rule.'' The final FAR rule allows a 
large business to include, in its billings, subcontract costs that it 
has incurred but not actually paid, provided the payment to the 
subcontractor will be made in accordance with the terms and conditions 
of a subcontract or invoice, and ordinarily prior to the submission of 
the contractor's next payment request to the Government.
    4. Permit subcontractor performance-based payments or commercial 
financing payments under prime contracts that have progress payments or 
cost-reimbursement type of financing. The final rule permits prime 
contractors that receive progress payments or cost-reimbursement type 
of payments to use performance-based payments or commercial financing 
payments with their subcontractors.
    5. Eliminate the limitation on general and administrative expenses. 
The 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.
    6. Eliminate the contracting officer review of quarterly 
statements. The rule removes the requirement for the contracting 
officer to review 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.
    7. Permit the use of performance-based payments in contracts for 
research and development, and in contracts awarded through competitive 
negotiation procedures. The rule removes the prohibition against using 
performance-based payments type of financing in contracts for research 
and development, and contracts awarded

[[Page 16278]]

through competitive negotiation procedures.
    8. Simplify and clarify. The rule also simplifies and clarifies the 
concept 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; deletes 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 FAR 32.501-1(a) (DoD no longer uses 
flexible progress payments and does not intend to establish alternate 
rates for FMS); and makes a number of editorial changes.
    This rule was not subject to Office of Management and Budget review 
under Section 6(b) of Executive Order 12866, Regulatory Planning and 
Review, dated September 30, 1993. This rule is not a major rule under 5 
U.S.C. 804.

B. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration stated in the 
proposed rule that the rule was 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. However, some of the commentors expressed the concern that 
elimination of the ``paid cost rule'' may have a significant impact on 
a substantial number of small entities. Accordingly, even though an 
Initial Regulatory Flexibility Analysis had not been done, the Councils 
prepared a Final Regulatory Flexibility Analysis (FRFA) as a result of 
those comments. The FRFA is summarized as follows:

    The small entities that may be impacted by elimination of the 
``paid cost rule'' are subcontractors to large businesses. That is, 
the current FAR requires large businesses to pay its subcontractors 
by cash or check before the large business can request payment from 
the Government under cost reimbursement contracts or progress 
payments for amounts owed to subcontractors. The final rule will 
permit prime contractors to request payment of those amounts from 
the Government when it incurs a cost based on a request for payment 
from its subcontractors.
    We do not have any reporting mechanisms or central data 
collections that reveal how many subcontractors may be impacted by 
this rule. However, we have concluded that the number may be 
substantial.
    In order to mitigate any potential impact this portion of the 
rule may have on small businesses, the Councils adopted a range of 
safeguards to provide further assurances that payments to 
subcontractors will not be delayed. These safeguards were adopted 
rather than merely applying the policies previously used for small 
businesses that permitted small business prime contractors to 
recognize subcontract costs immediately after they were incurred, 
even if they were not yet paid to the subcontractor. This final rule 
requires that both large and small business prime contractors pay 
these incurred subcontract amounts in accordance with the terms of 
the subcontract and ordinarily before submittal of the next payment 
request sent to the Government.
    The FAR Secretariat has submitted a copy of the FRFA to the 
Chief Counsel for Advocacy of the Small Business Administration.

C. Paperwork Reduction Act

    The Paperwork Reduction Act (Pub. L. 104-13) applies because the 
final rule contains information collection requirements.
    1. Office of Management and Budget (OMB) Control Number 9000-0010. 
The final rule decreases the collection requirements under the 
previously approved OMB Control No. 9000-0010, since the rule raises 
the threshold for permitting contract financing in the form of progress 
payments based on costs, and establishes a dollar threshold for 
contractor requests for progress payments. OMB approved the revised 
information collection requirement through September 30, 2002. 
Estimated number of respondents: reduced from 27,000 to 18,090; yearly 
responses per respondent: 32 (unchanged); average time per response: 33 
minutes (unchanged); total yearly burden hours: reduced from 475,000 to 
318,384; frequency of report; on occasion.
    2. Office of Management and Budget (OMB) Control Number 9000-0138. 
There is no net impact to the collection requirements currently 
approved under OMB Control No. 9000-0138. The increase in hours 
associated with the addition of the provision at FAR 52.232-28, 
Invitation to Propose Performance-Based Payments, is offset by the 
decrease in hours resulting from raising the contract dollar threshold 
for permitting performance-based payments.

List of Subjects in 48 CFR Parts 32 and 52

    Government procurement.

    Dated: March 20, 2000.
Edward C. Loeb,
Director, Federal Acquisition Policy Division.

    Therefore, DoD, GSA, and NASA amend 48 CFR parts 32 and 52 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. Revise section 32.104 to read as follows:


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. Contracting officers must consider the criteria in this part 
in determining whether to include contract financing in solicitations 
and contracts. Resolve reasonable doubts by including contract 
financing in the solicitation. The contracting officer must--
    (1) Provide Government financing 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 
predelivery expenditures and production lead-times associated with the 
contract, or groups of contracts or orders (e.g., issued under 
indefinite-delivery contracts, basic ordering agreements, or their 
equivalent);
    (2) Administer contract financing so as to aid, not impede, the 
acquisition;
    (3) Avoid any undue risk of monetary loss to the Government through 
the financing;
    (4) Include the form of contract financing deemed to be in the 
Government's best interest in the solicitation (see 32.106 and 32.113); 
and
    (5) Monitor the contractor's use of the contract financing provided 
and the contractor's financial status.
    (b) If the contractor is a small business concern, the contracting 
officer must 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--
    (1) May provide customary contract financing in accordance with 
32.113; and

[[Page 16279]]

    (2) Must not provide unusual contract financing except as 
authorized in 32.114.
    (d) Unless otherwise authorized by agency procedures, the 
contracting officer may provide contract financing in the form of 
performance-based payments (see subpart 32.10) or customary progress 
payments (see subpart 32.5) if the following conditions are met:
    (1) 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 predelivery 
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) If the contractor is not a small business concern--
    (i) For an individual contract, the contract price is $2 million or 
more; or
    (ii) For an indefinite-delivery contract, a basic ordering 
agreement or a similar ordering instrument, the contracting officer 
expects the aggregate value of orders or contracts that individually 
exceed the simplified acquisition threshold to have a total value of $2 
million or more. The contracting officer must limit financing to those 
orders or contracts that exceed the simplified acquisition threshold.
    (3) If the contractor is a small business concern--
    (i) For an individual contract, the contract price exceeds the 
simplified acquisition threshold; or
    (ii) For an indefinite-delivery contract, a basic ordering 
agreement or a similar ordering instrument, the contracting officer 
expects the aggregate value of orders or contracts to exceed the 
simplified acquisition threshold.
    3. Amend section 32.106 in the introductory paragraph by removing 
``shall'' and adding ``must'' in its place; and by revising paragraphs 
(a) and (b) to read as follows:


32.106  Order of preference.

* * * * *
    (a) Private financing without Government guarantee. It is not 
intended, however, that the contracting officer require the contractor 
to obtain private financing--
    (1) At unreasonable terms; or
    (2) From other agencies.
    (b) Customary contract financing other than loan guarantees and 
certain advance payments (see 32.113).
* * * * *
    4. Add section 32.110 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 should 
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(d).
    (e) The subcontract contains financing payments terms as prescribed 
in this part.
    5. Revise the section heading at 32.112 to read as follows:


32.112  Nonpayment of subcontractors under contracts for noncommercial 
items.

* * * * *
    6. Revise section 32.113 to read as follows:


32.113  Customary contract financing.

    The solicitation must specify the customary contract financing 
offerors may propose. The following 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 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).
    (e) 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).
    (f) Financing of contracts for supplies or services through advance 
payments in accordance with subpart 32.4.
    (g) Financing of contracts for supplies or services through 
guaranteed loans in accordance with subpart 32.3.
    (h) 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.
    7. Amend section 32.205 in the introductory text of paragraph (b) 
by removing ``shall'' each time it is used (twice) and adding ``must'' 
in its place; and 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 contracting officer must calculate the time value of 
proposal-specified contract financing arrangements 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. Amend section 32.500 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. Revise section 32.501-1 to read as follows:


32.501-1  Customary progress payment rates.

    (a) The customary progress payment rate is 80 percent, applicable 
to the total

[[Page 16280]]

costs of performing the contract. The customary rate for contracts with 
small business concerns is 85 percent.
    (b) The contracting officer must--
    (1) Consider any rate higher than those permitted in paragraph (a) 
of this section an unusual progress payment; and
    (2) Not include a higher rate in a contract unless advance agency 
approval is obtained as prescribed in 32.501-2.
    (c) When advance payments and progress payments are authorized 
under the same contract, the contracting officer must not authorize a 
progress payment rate higher than the customary rate.
    (d) In accordance with 10 U.S.C. 2307(e)(2) and 41 U.S.C. 255, the 
limit for progress payments is 80 percent on work accomplished under 
undefinitized contract actions. The contracting officer must not 
authorize a higher rate under unusual progress payments or other 
customary progress payments for the undefinitized actions.
    10. Revise section 32.502-1 to read as follows:


32.502-1  Use of customary progress payments.

    The contracting officer may use a Progress Payments clause in 
solicitations and contracts, in accordance with this subpart. The 
contracting officer must reject as nonresponsive bids conditioned on 
progress payments when the solicitation did not provide for progress 
payments.
    11. Revise section 32.502-4 to read as follows:


32.502-4  Contract clauses.

    (a)(1) Insert the clause at 52.232-16, Progress Payments, in--
    (i) Solicitations that may result in contracts providing for 
progress payments based on costs; and
    (ii) Fixed-price contracts under which the Government will provide 
progress payments based on costs.
    (2) If advance agency approval has been given in accordance with 
32.501-1, the contracting officer may substitute a different customary 
rate for other than small business concerns for the progress payment 
and liquidation rate indicated.
    (3) If an unusual progress payment rate is approved for the prime 
contractor (see 32.501-2), substitute the approved rate for the 
customary rate in paragraphs (a)(1), (a)(5), and (b) of the clause.
    (4) If the liquidation rate is changed from the customary progress 
payment rate (see 32.503-8 and 32.503-9), substitute the new rate for 
the rate in paragraphs (a)(1), (a)(5), and (b) of the clause.
    (5) If an unusual progress payment rate is approved for a 
subcontract (see 32.504(c) and 32.501-2), modify paragraph (j)(6) of 
the clause to specify the new rate, the name of the subcontractor, and 
that the new rate shall be used for that subcontractor in lieu of the 
customary rate.
    (b) If the contractor is a small business concern, use the clause 
with its Alternate I.
    (c) If the contract is a letter contract, use the clause with its 
Alternate II.
    (d) If the contractor is not a small business concern, and progress 
payments are authorized under an indefinite-delivery contract, basic 
ordering agreement, or their equivalent, use the clause with its 
Alternate III.
    (e) If the nature of the contract necessitates separate progress 
payment rates for portions of work that are clearly severable and 
accounting segregation would be maintained (e.g., annual production 
requirements), describe the application of separate progress payment 
rates in a supplementary special provision within the contract. The 
contractor must submit separate progress payment requests and 
subsequent invoices for the severable portions of work in order to 
maintain accounting integrity.
    12. Revise section 32.503-1 to read as follows:


32.503-1  Contractor requests.

    Each contractor request for progress payment must--
    (a) Be submitted on Standard Form 1443, Contractor's Request for 
Progress Payment, in accordance with the form instructions and the 
contract terms;
    (b) Include any additional information reasonably requested by the 
contracting officer; and
    (c) Be $2,500 or more, unless agency procedures authorize a lower 
amount.
    13. Amend section 32.503-5 by revising paragraph (c) to read as 
follows:


32.503-5  Administration of progress payments.

* * * * *
    (c) Under indefinite-delivery contracts, the contracting officer 
should administer progress payments made under each individual order as 
if the order constituted a separate contract, unless agency procedures 
provide otherwise.
    14. Amend section 32.503-6 in paragraph (e)(3) by removing 
``paragraph (a)(2)'' and adding ``paragraph (a)(3)'' in its place; and 
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 subsection, the contracting officer must 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 subsection constitutes this 
adjustment.
    (g) * * *
    (4) The following is an example of the supplementary analysis 
required in paragraph (g)(3) of this subsection:

                               Section I
Contract price..........................................      $2,850,000
Change orders and unpriced orders (to extent funds have          150,000
 been obligated)........................................
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
 
 

                                                          [GRAPHIC] [TIFF OMITTED] TR27MR00.000
                                                          

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              1,499,100
 ($2,249,100-750,000)...................................
 
* This amount must be the same as the contract price of the items
  delivered.

32.503-7  [Reserved]

    15. Remove and reserve section 32.503-7.
    16. Revise section 32.503-8 to read as follows:


32.503-8  Liquidation rates--ordinary method.

    The Government recoups progress payments 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, the contracting officer applies a liquidation rate to the 
contract price of contract

[[Page 16281]]

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, the contracting officer must use this method.
    17. Amend section 32.503-10 in the introductory text of paragraph 
(a) by removing ``shall'' and adding ``must'' in its place; by revising 
paragraph (b)(1); in paragraph (b)(2) by removing ``shall'' and adding 
``must'' in its place; and by revising paragraph (b)(3) to read as 
follows:


32.503-10  Establishing alternate liquidation rates.

* * * * *
    (b) * * *
    (1) The contracting officer must 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] TR27MR00.001

    (ii) If the progress payment rate is 85 percent, the minimum 
liquidation rate should be 77.3 percent, computed as follows:
[GRAPHIC] [TIFF OMITTED] TR27MR00.002

* * * * *


32.503-13  [Reserved]

    18. Remove and reserve section 32.503-13.
    19. Revise the section heading and text of section 32.504 to read 
as follows:


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, 
provided they 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 a subcontractor, 
whether paid or unpaid, provided that unpaid amounts are limited to 
amounts that the contractor will pay--
    (1) In accordance with the terms and conditions of a subcontract or 
invoice; and
    (2) Ordinarily prior to the submission of the contractor's next 
progress payment request to the Government.
    (c) If the contractor is considering making unusual progress 
payments to a subcontractor, the parties will be guided by the policies 
in 32.501-2. If the Government approves unusual progress payments for 
the subcontract, the contracting officer must issue a contract 
modification to specify the new rate in paragraph (j)(6) of the clause 
at 52.232-16, Progress Payments, in the prime contract. This will allow 
the contractor to include the progress payments to the subcontractor in 
the cost basis for progress payments by the Government. This 
modification is not a deviation and does not require the clearance 
prescribed in 32.502-2(b).
    (d) The contractor has a duty to ensure that financing payments to 
subcontractors conform to the standards and principles prescribed in 
paragraph (j) of the Progress Payments clause in the prime contract. 
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. However, the contracting officer must 
ensure that the contractor has installed the necessary management 
control systems, including internal audit procedures.
    (e) When financing payments are in the form of progress payments, 
the Progress Payments clause at 52.232-16 requires that the subcontract 
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. The 
following exceptions apply to wording modifications:
    (1) The subcontract terms on title to property under progress 
payments shall provide for vesting of title in the Government, not the 
contractor, as in paragraph (d) of the Progress Payments clause in the 
prime contract. A reference to the contractor may, however, be 
substituted for ``Government'' in paragraph (d)(2)(iv) of the clause.
    (2) In the subcontract terms on reports and access to records, the 
contractor shall not delete the references to ``Contracting Officer'' 
and ``Government'' in adapting paragraph (g) of the Progress Payments 
clause in the contract, but may expand the terms as follows:
    (i) The term ``Contracting Officer'' may be changed to 
``Contracting Officer or Prime Contractor.''
    (ii) The term ``the Government'' may be changed to ``the Government 
or Prime Contractor.''
    (3) The subcontract special terms regarding default shall include 
paragraph (h) of the Progress Payments clause in the contract through 
its subdivision (i). The rest of paragraph (h) is optional.
    (f) When financing payments are in the form of performance-based 
payments, the Performance-Based Payments clause at 52.232-32 requires 
that the subcontract terms include the substance of the Performance-
Based Payments clause, modified to indicate that the contractor, not 
the Government, awards the subcontract and administers the performance-
based payments, and include appropriately worded 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 must include a contract financing 
clause structured in accordance with 32.206.
    20. Amend section 32.1000--
    a. In the introductory paragraph by removing the word ``non-
commercial'' and adding ``noncommercial'' in its place;
    b. At the end of paragraph (b) by adding ``or'' after the 
semicolon;
    c. By removing paragraph (c) and redesignating paragraph
    (d) as paragraph (c); and
    d. By revising newly designated (c) to read as follows:


32.1000  Scope of subpart.

* * * * *
    (c) Contracts awarded through sealed bid procedures.
    21. Revise section 32.1001 to read as follows:


32.1001  Policy.

    (a) Performance-based payments are the preferred Government 
financing method when the contracting officer finds them practical, and 
the contractor agrees to their use.
    (b) Performance-based payments are contract financing payments that 
are not payment for accepted items.
    (c) Performance-based payments are fully recoverable, in the same 
manner as

[[Page 16282]]

progress payments, in the event of default. Except as provided in 
32.1003(c), the contracting officer must not use performance-based 
payments when other forms of contract financing are provided.
    (d) For Government accounting purposes, the Government should treat 
performance-based payments like progress payments based on costs under 
subpart 32.5.
    (e) 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, each agency must make these 
payments in accordance with the agency's policy for prompt payment of 
contract financing payments.


32.1003  [Amended]

    22. Amend section 32.1003 in paragraph (b) by removing ``(but see 
32.1005(b))''.
    23. Revise the section headings and text of sections 32.1004 and 
32.1005 to read as follows:


32.1004  Procedures.

    Performance-based payments may be made either on a whole contract 
or on a deliverable item basis, unless otherwise prescribed by agency 
regulations. Financing payments to be made on a whole contract basis 
are applicable to the entire contract, and not to specific deliverable 
items. Financing payments to be made on a deliverable item basis are 
applicable to a specific individual deliverable item. (A deliverable 
item for these purposes is a separate item with a distinct unit price. 
Thus, a contract line item for 10 airplanes, with a unit price of 
$1,000,000 each, has 10 deliverable items--the separate planes. A 
contract line item for 1 lot of 10 airplanes, with a lot price of 
$10,000,000, has only one deliverable item--the lot.)
    (a) Establishing performance bases. (1) The basis for performance-
based payments may be either specifically described events (e.g., 
milestones) or some measurable criterion of performance. Each event or 
performance criterion that will trigger a finance payment must be an 
integral and necessary part of contract performance and must 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 must not be events or 
criteria for performance-based payments. An event need not be a 
critical event in order to trigger a payment, but the Government must 
be able to readily verify successful performance of each such event or 
performance criterion.
    (2) Events or criteria may be either severable or cumulative. The 
successful completion of a severable event or criterion is independent 
of the accomplishment of any other event or criterion. Conversely, the 
successful accomplishment of a cumulative event or criterion is 
dependent upon the previous accomplishment of another event. A contract 
may provide for more than one series of severable and/or cumulative 
performance events or criteria performed in parallel. The contracting 
officer must include the following in the contract:
    (i) The contract must not permit payment for a cumulative event or 
criterion until the dependent event or criterion has been successfully 
completed.
    (ii) The contract must specifically identify severable events or 
criteria.
    (iii) The contract must 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 must 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 must be 
part of the performance necessary for that deliverable item and must be 
identified to a specific contract line item or subline item.
    (b) Establishing performance-based finance payment amounts. (1) The 
contracting officer must 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 must adjust the performance-based 
payment schedule appropriately.
    (2) Total performance-based payments must--
    (i) Reflect prudent contract financing provided only to the extent 
needed for contract performance (see 32.104(a)); and
    (ii) Not exceed 90 percent of the contract price if on a whole 
contract basis, or 90 percent of the delivery item price if on a 
delivery item basis.
    (3) The contract must specifically state the amount of each 
performance-based payment either as a dollar amount or as a percentage 
of a specifically identified price (e.g., contract price, or unit price 
of the deliverable item). The payment of contract financing has a cost 
to the Government in terms of interest paid by the Treasury to borrow 
funds to make the payment. Because the contracting officer has wide 
discretion as to the timing and amount of the performance-based 
payments, the contracting officer must ensure that--
    (i) The total contract price is fair and reasonable, all factors 
considered; and
    (ii) Performance-based payment amounts are commensurate with the 
value of the performance event or performance criterion, and are not 
expected to result in an unreasonably low or negative level of 
contractor investment in the contract. To confirm sufficient 
investment, the contracting officer may request expenditure profile 
information from offerors, but only if other information in the 
proposal, or information otherwise available to the contracting 
officer, is expected to be insufficient.
    (4) Unless agency procedures prescribe the bases for establishing 
performance-based payment amounts, contracting officers may establish 
them on any rational basis, including (but not limited to)--
    (i) Engineering estimates of stages of completion;
    (ii) Engineering estimates of hours or other measures of effort to 
be expended in performance of an event or achievement of a performance 
criterion; or
    (iii) The estimated projected cost of performance of particular 
events.
    (5) When subsequent contract modifications are issued, the 
contracting officer must adjust the performance-based payment schedule 
as necessary to reflect the actions required by those contract 
modifications.
    (c) Instructions for multiple appropriations. If there is more than 
one appropriation account (or subaccount) funding payments on the 
contract, the contracting officer must 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 must be liquidated by deducting a percentage or a 
designated dollar amount from the delivery payments. The contracting 
officer must specify the liquidation rate or

[[Page 16283]]

designated dollar amount in the contract. The method of liquidation 
must ensure complete liquidation no later than final payment.
    (1) If the contracting officer establishes the performance-based 
payments on a delivery item basis, the liquidation amount for each line 
item is the percent of that delivery item price that was previously 
paid under performance-based finance payments or the designated dollar 
amount.
    (2) If the performance-based finance payments are on a whole 
contract basis, liquidation is by predesignated liquidation amounts or 
liquidation percentages.
    (e) Competitive negotiated solicitations. (1) If a solicitation 
requests offerors to propose performance-based payments, the 
solicitation must specify--
    (i) What, if any, terms must be included in all offers; and
    (ii) The extent to which and how offeror-proposed performance-based 
payment terms will be evaluated. Unless agencies prescribe other 
evaluation procedures, if the contracting officer anticipates that the 
cost of providing performance-based payments would have a significant 
impact on determining the best value offer, the solicitation should 
include an adjustment of proposed prices to reflect the estimated cost 
to the Government of providing each offeror's proposed performance-
based payments (see Alternate I to the provision at 52.232-28).
    (2) The contracting officer must--
    (i) Review the proposed terms to ensure they comply with this 
section; and
    (ii) Use the adjustment method in 32.205(c) if the price is to be 
adjusted for evaluation purposes in accordance with paragraph 
(e)(1)(ii) of this section.


32.1005  Solicitation provision and contract clause.

    (a) Insert the clause at 52.232-32, Performance-Based Payments, 
with the description of the basis for payment and liquidation as 
required in 32.1004 in--
    (1) Solicitations that may result in contracts providing for 
performance-based payments; and
    (2) Fixed-price contracts under which the Government will provide 
performance-based payments.
    (b)(1) Insert the solicitation provision at 52.232-28, Invitation 
to Propose Performance-Based Payments, in negotiated solicitations that 
invite offerors to propose performance-based payments.
    (2) Use the provision with its Alternate I in competitive 
negotiated solicitations if the Government intends to adjust proposed 
prices for proposal evaluation purposes (see 32.1004(e)).


32.1006  [Removed and Reserved]

    24. Remove and reserve section 32.1006.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    25. Amend section 52.216-7 by--
    a. Revising the date of the clause;
    b. In the introductory text of paragraph (b)(1) by removing 
``subparagraph (2) below'' and adding ``paragraph (b)(2) of the 
clause'' in its place;
    c. Redesignating paragraphs (b)(1)(ii)(A) through (b)(1)(ii)(E) as 
(b)(1)(ii)(B) through (b)(1)(ii)(F);
    d. Adding a new paragraph (b)(1)(ii)(A); and
    e. Revising paragraphs (b)(1)(iii), (b)(2), and (c) to read as 
follows:


52.216-7  Allowable Cost and Payment.

* * * * *

ALLOWABLE COST AND PAYMENT     (MAR 2000)

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * *
    (A) Supplies and services purchased directly for the contract 
and associated financing payments to subcontractors, provided 
payments will be made--
    (1) In accordance with the terms and conditions of a subcontract 
or invoice; and
    (2) Ordinarily prior to the submission of the Contractor's next 
payment request to the Government;
* * * * *
    (iii) The amount of financing payments that have been paid by 
cash, check, or other forms of payment to subcontractors.
    (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 indirect costs for payment purposes).
* * * * *
    (c) Small business concerns. A small business concern may 
receive more frequent payments than every 2 weeks.
* * * * *
    26. Amend section 52.216-26 by--
    a. Revising the introductory paragraph and the date of the clause;
    b. Removing ``shall'' and adding ``will'' in the introductory text 
of paragraph (a) of the clause; and
    c. Revising paragraphs (a)(1), (d)(2), (d)(3), and (e) of the 
clause to read as follows:


52.216-26  Payments of Allowable Costs Before Definitization.

    As prescribed in 16.603-4(c), insert the following clause:

PAYMENTS OF ALLOWABLE COSTS BEFORE DEFINITIZATION (MAR 2000)

* * * * *
    (a) * * *
    (1) One hundred percent of approved costs representing financing 
payments to subcontractors under fixed-price subcontracts, provided 
that the Government's payments to the Contractor will not exceed 80 
percent of the allowable costs of those subcontractors.
* * * * *
    (d) * * *
    (2) When the Contractor is not delinquent in payment of costs of 
contract performance in the ordinary course of business, costs 
incurred, but not necessarily paid, for--
    (i) Supplies and services purchased directly for the contract, 
provided payments will be made--
    (A) In accordance with the terms and conditions of a subcontract 
or invoice; and
    (B) Ordinarily prior to the submission of the Contractor's next 
payment request to the Government;
    (ii) Materials issued from the Contractor's stores inventory and 
placed in the production process for use on the contract;
    (iii) Direct labor;
    (iv) Direct travel;
    (v) Other direct in-house costs; and
    (vi) Properly allocable and allowable indirect costs as shown on 
the records maintained by the Contractor for purposes of obtaining 
reimbursement under Government contracts; and
    (3) The amount of financing payments that the Contractor has 
paid by cash, check, or other forms of payment to subcontractors.
    (e) Small business concerns. A small business concern may 
receive more frequent payments than every 2 weeks.
* * * * *
    27. Amend section 52.232-7 by revising the date of the clause; in 
the introductory paragraph by removing ``shall'' and adding ``will'' in 
its place; and by revising paragraph (b) and Alternate I of the clause 
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 (MAR 2000)

* * * * *
    (b) Materials and subcontracts. (1) The Contracting Officer will 
determine allowable costs of direct materials in accordance with 
Subpart 31.2 of the Federal Acquisition Regulation (FAR) in effect 
on the date of this contract. Direct materials, as used in this 
clause, are those materials that enter directly

[[Page 16284]]

into the end product, or that are used or consumed directly in 
connection with the furnishing of the end product.
    (2) The Contractor may include reasonable and allocable material 
handling costs in the charge for material to the extent they are 
clearly excluded from the hourly rate. Material handling costs are 
comprised of indirect costs, including, when appropriate, general 
and administrative expense allocated to direct materials in 
accordance with the Contractor's usual accounting practices 
consistent with Subpart 31.2 of the FAR.
    (3) The Government will reimburse the Contractor for items and 
services purchased directly for the contract only when payments of 
cash, checks, or other forms of payment have been made for such 
purchased items or services.
    (4)(i) The Government will reimburse the Contractor for costs of 
subcontracts that are authorized under the subcontracts clause of 
this contract, provided that the costs are consistent with paragraph 
(b)(5) of this clause.
    (ii) The Government will limit reimbursable costs in connection 
with subcontracts to the amounts paid for items and services 
purchased directly for the contract only when the Contractor has 
made or will make payments of cash, checks, or other forms of 
payment to the subcontractor--
    (A) In accordance with the terms and conditions of a subcontract 
or invoice; and
    (B) Ordinarily prior to the submission of the Contractor's next 
payment request to the Government.
    (iii) The Government will not reimburse the Contractor for any 
costs arising from the letting, administration, or supervision of 
performance of the subcontract, if the costs are included in the 
hourly rates payable under paragraph (a)(1) of this clause.
    (5) To the extent able, the Contractor shall--
    (i) Obtain materials at the most advantageous prices available 
with due regard to securing prompt delivery of satisfactory 
materials; and
    (ii) Take all cash and trade discounts, rebates, allowances, 
credits, salvage, commissions, and other benefits. When unable to 
take advantage of the benefits, the Contractor shall promptly notify 
the Contracting Officer and give the reasons. The Contractor shall 
give credit to the Government for cash and trade discounts, rebates, 
scrap, commissions, and other amounts that have accrued to the 
benefit of the Contractor, or would have accrued except for the 
fault or neglect of the Contractor. The Contractor shall not deduct 
from gross costs the benefits lost without fault or neglect on the 
part of the Contractor, or lost through fault of the Government.
* * * * *
(End of clause)

    Alternate I (Mar 2000). If the nature of the work to be 
performed requires the Contractor to furnish material that the 
Contractor regularly sells to the general public in the normal 
course of business, and the price is under the limitations 
prescribed in 16.601(b)(3), add the following paragraph (6) to 
paragraph (b) of the basic clause:
    (b)(6) If the nature of the work to be performed requires the 
Contractor to furnish material that the Contractor regularly sells 
to the general public in the normal course of business, the price to 
be paid for such material, notwithstanding the other requirements of 
this paragraph (b), shall be on the basis of an established catalog 
or list price, in effect when the material is furnished, less all 
applicable discounts to the Government, provided that in no event 
shall such price be in excess of the Contractor's sales price to its 
most favored customer for the same item in like quantity, or the 
current market price, whichever is lower.
* * * * *
    28. Amend section 52.232-16 by--
    a. Removing the introductory text, consisting of paragraphs (a) 
through (e) and adding in its place a prescription;
    b. Revising the date of the clause;
    c. Revising the introductory text of the clause;
    d. Revising paragraphs (a)(1) and (a)(2) of the clause;
    e. Redesignating paragraphs (a)(3) through (a)(6) of the clause as 
(a)(4) through (a)(7) and adding new paragraphs (a)(3) and (a)(8);
    f. Revising the introductory text of newly redesignated paragraph 
(a)(4);
    g. Revising paragraph (j) of the clause; and
    h. Revising Alternate I and adding Alternate III to read as 
follows:


52.232-16  Progress Payments.

    As prescribed in 32.502-4(a), insert the following clause:

PROGRESS PAYMENTS (MAR 2000)

    The Government will make progress payments to the Contractor 
when requested as work progresses, but not more frequently than 
monthly, in amounts of $2,500 or more approved by the Contracting 
Officer, under the following conditions:
    (a) Computation of amounts. (1) Unless the Contractor requests a 
smaller amount, the Government will compute each progress payment 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. The Contracting Officer will consider cost of money that 
would be allowable under FAR 31.205-10 as an incurred cost for 
progress payment purposes.
    (2) The amount of financing and other payments for supplies and 
services purchased directly for the contract are limited to the 
amounts that have been paid by cash, check, or other forms of 
payment, or that will be paid to subcontractors--
    (i) In accordance with the terms and conditions of a subcontract 
or invoice; and
    (ii) Ordinarily prior to the submission of the Contractor's next 
payment request to the Government.
    (3) The Government will exclude accrued costs of Contractor 
contributions under employee pension plans 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).
    (4) The Contractor shall not include the following in total 
costs for progress payment purposes in paragraph (a)(1) of this 
clause:
* * * * *
    (8) Notwithstanding any other terms of the contract, the 
Contractor agrees not to request progress payments in dollar amounts 
of less than $2,500. The Contracting Officer may make exceptions.
* * * * *
    (j) Financing payments to subcontractors. The financing payments 
to subcontractors mentioned in paragraphs (a)(1) and (a)(2) 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.
    (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 this clause for 
any subcontractor that is a large business concern, or this clause 
with its Alternate I for any subcontractor that is a small business 
concern;
    (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 FAR 32.504(e); 
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 FAR 52.232-32 and meet the criteria for, and definition 
of, performance-based payments in FAR Part 32;
    (ii) Are in conformance with the requirements of FAR 32.504(f); 
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--

[[Page 16285]]

    (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 FAR 32.206(c) and 
included in a subcontract for a commercial item purchase that meets 
the definition and standards for acquisition of commercial items in 
FAR Parts 2 and 12;
    (ii) Are in conformance with the requirements of FAR 32.504(g); 
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) Concerning any proceeds received by the Government for 
property to which title has vested in the Government under the 
subcontract terms, the parties agree 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) To facilitate small business participation in subcontracting 
under this contract, the Contractor shall provide financing payments 
to small business concerns, in conformity with the standards for 
customary contract financing payments stated in FAR 32.113. The 
Contractor shall not consider the need for such financing payments 
as a handicap or adverse factor in the award of subcontracts.
* * * * *
(End of clause)

    Alternate I (Mar 2000). 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 FAR 32.501-1).
* * * * *
    Alternate III (Mar 2000). 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 will not be applicable to 
individual orders at or below the simplified acquisition threshold.

    29. Add section 52.232-28 to read as follows:


52.232-28  Invitation to Propose Performance-Based Payments.

    As prescribed in 32.1005(b)(1), insert the following provision:

Invitation to Propose Performance-Based Payments (Mar 2000)

    (a) The Government invites the offeror to propose terms under 
which the Government will make performance-based contract financing 
payments during contract performance. The Government will consider 
performance-based payment financing terms proposed by the offeror in 
the evaluation of the offeror's proposal. The Contracting Officer 
will incorporate the financing terms of the successful offeror and 
the FAR clause, Performance-Based Payments, at FAR 52.232-32, in any 
resulting contract.
    (b) In the event of any conflict between the terms proposed by 
the offeror and the terms in the clause at FAR 52.232-32, 
Performance-Based Payments, the terms of the clause at FAR 52.232-32 
shall govern.
    (c) The Contracting Officer will not accept the offeror's 
proposed performance-based payment financing if the financing does 
not conform to the following limitations:
    (1) The Government will make delivery payments 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--
    (i) Comply with FAR 32.1004;
    (ii) Be reasonable and consistent with all other technical and 
cost information included in the offeror's proposal; and
    (iii) 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 Government.
    (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 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) Information addressing the Contractor's investment in the 
contract.
    (e) Evaluation of the offeror's proposed prices and financing 
terms will include 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.
(End of provision)

    Alternate I (Mar 2000). As prescribed in FAR 32.1005(b)(2), add 
the following paragraph (f) to the basic provision:
    (f) The Government will adjust each proposed price 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. The Government 
will make the adjustment using the procedure described in FAR 
32.205(c).

[FR Doc. 00-7309 Filed 3-24-00; 8:45 am]
BILLING CODE 6820-EP-U