Federal Register, Volume 85 Issue 68 (Wednesday, April 8, 2020)

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

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

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

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

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

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

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the Defense Federal
Acquisition Regulation Supplement

[[Page 19682]]

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

DATES: Effective April 8, 2020.

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

SUPPLEMENTARY INFORMATION:

I. Background

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

II. Discussion and Analysis

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

A. Summary of Significant Changes From the Proposed Rule

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

B. Analysis of Public Comments

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

[[Page 19683]]

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

[[Page 19684]]

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

[[Page 19685]]

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

[[Page 19686]]

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

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

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

IV. Expected Cost Impact

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

[[Page 19687]]

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

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

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

V. Executive Orders 12866 and 13563

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

VI. Executive Order 13771

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

VII. Regulatory Flexibility Act

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

VIII. Paperwork Reduction Act

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

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

Government procurement.

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

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

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

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

PART 202--DEFINITIONS OF WORDS AND TERMS

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

202.101 Definitions.

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

PART 204--ADMINISTRATIVE AND INFORMATION MATTERS

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

204.1202 Solicitation provision and contract clause.

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

[[Page 19688]]

PART 212--ACQUISITION OF COMMERCIAL ITEMS

212.001 [Amended]

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

PART 232--CONTRACT FINANCING

0
5. In section 232.1001, revise paragraph (a) to read as follows:

232.1001 Policy.

(a) As with all contract financing, the purpose of performance-
based payments is to assist the contractor in the payment of costs
incurred during the performance of the contract. See PGI 232.1001(a)
for additional information on use of performance-based payments.
However, in accordance with 10 U.S.C. 2307(b)(2), performance-based
payments shall not be conditioned upon costs incurred in contract
performance, but on the achievement of performance outcomes. Subject to
the criteria in 232.1003-70, all companies, including nontraditional
defense contractors, are eligible for performance-based payments,
consistent with best commercial practices.
* * * * *

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

232.1003-70 Criteria for use.

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

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

232.1004 Procedures.

(b) Establishing performance-based finance payment amounts. (i) The
contracting officer should include in a solicitation both the progress
payments and performance-based payments provisions and clauses
prescribed in this part, when considering both types of payment
methods. Only one type of financing will be included in the resultant
contract, except as may be authorized on separate orders subject to FAR
32.1003(c)).
(ii) The contracting officer shall analyze the performance-based
payment schedule using the performance-based payments (PBP) analysis
tool. The PBP analysis tool is on the DPC website in the Cost, Pricing
& Finance section, Performance Based Payments--Guide Book & Analysis
Tool tab, at http://www.acq.osd.mil/dpap/cpic/cp/Performance_based_payments.html.
(A) When considering performance-based payments, obtain from the
offeror/contractor a proposed performance-based payments schedule that
includes all performance-based payments events, completion criteria and
event values along with the projected monthly expenditure profile in
order to negotiate the value of the performance events such that the
performance-based payments are not expected to result in an
unreasonably low or negative level of contractor investment in the
contract. If performance-based payments are deemed practical, the
Government will evaluate and negotiate the details of the performance-
based payments schedule.
(B) For modifications to contracts that already use performance-
based payments financing, the basis for negotiation must include
performance-based payments. The PBP analysis tool will be used in the
same manner to help determine the price for the modification.
(iii) The contracting officer shall document in the contract file
that the performance-based payment schedule provides a mutually
beneficial settlement position that reflects adequate consideration to
the Government for the improved contractor cash flow.
* * * * *

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

232.1005-70 Solicitation provisions and contract clauses.

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

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

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

252.204-7007 Alternate A, Annual Representations and Certifications.

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

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

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

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

[[Page 19689]]

[GRAPHIC] [TIFF OMITTED] TR08AP20.002

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

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

[[Page 19690]]

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

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

[[Page 19691]]

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

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

252.232-7015 Performance-Based Payments--Representation

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

Performance-Based Payments--Representation (APR 2020)

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

(End of provision)

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

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

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

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

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

(End of provision)

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