[Federal Register: December 26, 2007 (Volume 72, Number 246)]
[Rules and Regulations]               
[Page 73219-73222]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]





48 CFR Parts 32 and 52

[FAC 2005-23; FAR Case 2005-016; Item III; Docket 2007-0001; Sequence 
RIN 9000-AK64

Federal Acquisition Regulation; FAR Case 2005-016, Performance-
Based Payments

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

ACTION: Final rule.


SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have agreed on a final rule 
amending the Federal Acquisition Regulation (FAR) to implement 
recommendations to change the regulations related to performance-based 

DATES: Effective Date: January 25, 2008.

FOR FURTHER INFORMATION CONTACT: Ms. Meredith Murphy, Procurement 
Analyst, at (202) 208-6925 for clarification of content. For 
information pertaining to status or publication schedules, contact the 
FAR Secretariat at (202) 501-4755. Please cite FAC 2005-23, FAR case 


A. Background

    This final rule amends the Federal Acquisition Regulation to 
increase the use of performance-based payments as the method of 
contract financing on Federal Government contracts and improve the 
efficiency of performance-based payments when used on these contracts. 
These changes originated from recommendations submitted by the 
Department of Defense Performance-Based Payments Working Group in their 
March 8, 2005, report.
    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 71 FR 75186 on December 14, 2006. Comments were received 
from three respondents in response to the proposed rule. The Councils 
considered all of the comments and recommendations in developing the 
final rule. A discussion of the comments is provided below.
    1. Comment: Two commenters addressed the issue of establishing 
performance-based payments at other than 90 percent of the contract 
price. One commenter recommended revising the rule to require 
contracting officers to document the rationale for soliciting or 
awarding contracts that limit performance-based payments to less than 
90 percent of the contract price instead of when the performance-based 
payments effectively result in financing payments that are less than 
the payments that would be made with progress payments. The ability to 
receive contract financing payments at 90 percent of the contract price 
balances the risk associated with performance-based payments. If the 
performance-based payments are less than 90 percent of the contract 
costs, contractors will not agree to their use, which is problematic 
since performance-based payments are the preferred financing method. 
Another commenter said the requirement to document the rationale for 
establishing performance-based payments when the performance-based 
payments are less than 90 percent of the contract price, or delivered-
item price, will likely result in contracting officers artificially 
inflating the value of the events to avoid having to document the 
    Response: Providing performance-based payments at or below the 
effective rate for progress payments does not facilitate the use of 
performance-based payments. However, performance-based payments must 
reflect prudent contract financing and are authorized only to the 
extent needed for contract performance. In addition, performance-based 
payment amounts must be commensurate with the value of the performance 
event or performance criterion. Therefore, the Councils see no reason 
to require contracting officers to document the rationale for 
establishing performance-based payments that are less than 90 percent 
of the contract price. In addition, the Councils believe the FAR 
requirements are sufficient to ensure performance-based payments are 
not artificially inflated simply to avoid having to document the 
rationale for establishing performance-based payments that are less 
than 90 percent of the contract price or delivered-item price.
    2. Comment: Two commenters recommended eliminating the provision in 
the proposed rule that precluded limiting performance-based payments to 
the contractor's actual incurred costs because there can never be a 
need for contract financing payments in excess of the incurred costs.
    Response: Such a prohibition could inhibit the contracting 
officer's flexibility in structuring and administering performance-
based payments. Therefore, this provision has been omitted from the 
final rule.
    3. Comment: One commenter recommended making performance-based 
payments the mandatory type of financing payments whenever a contractor 
requests this type of financing because some buying commands never 
authorize performance-based payments.
    Response: Performance-based payments are the preferred Government 
financing method when the contracting officer finds them practical and 
the contractor agrees to their use. However, performance-based payments 
are not always practical. Therefore, the Government must retain the 
right to determine the proper financing method.
    4. Comment: One commenter recommended revising the rule to permit 
contractors to submit contract financing payment requests on either a 
fiscal or calendar month basis as long as no more than 12 payment 
requests are made annually. The commenter said the lack of clear 
definition in the FAR clause at 52.232-32(b) as to what constitutes 
``monthly'' payment requests has resulted in inconsistencies and 
confusion in enforcement. Contractors that use fiscal months accounting 
to bill contract financing payments should be allowed to submit two 
payment requests in the same calendar month to avoid negative 
fluctuations in working capital.
    Response: Nothing in the FAR precludes payment on a fiscal month 
basis. The Councils are not aware of any payment issues relating to the 
use of the term ``monthly'' and note that the provision is unchanged by 
this rule. Therefore, the Councils believe the existing terminology is 
    5. Comment: One commenter recommended deleting all reference to 
``milestones'' from the FAR coverage on performance-based payments to 
eliminate confusion between performance-based financing and commercial 
financing. Instead of using the term ``milestones,'' the commenter 
recommended using the terms ``event'' or ``performance-based event.''
    Response: The Councils are not aware of any issues related to the 
meaning of ``milestones'' and note that the terminology is unchanged by 
this rule. Therefore, the Councils believe the existing terminology is 

[[Page 73220]]

    6. Comment: One commenter recommended revising the performance-
based payment provisions to specify that payment offices will pay 
approved payment requests in the number of days specified in an 
agency's regulation if the contracting officer fails to prescribe the 
number of days the payment office will pay approved requests. The 
default 30th day could cause some DoD contracting officers to refuse to 
include the 14th day as prescribed in DoD regulations.
    Response: Concerns over compliance with individual agency 
regulations are beyond the scope of this case. However, the Councils 
are not aware of any instances where contracting officers have failed 
to include the number of days prescribed by their agency regulations.
    7. Comment: One commenter recommended DoD partner with industry 
when it develops the training materials and guidance referenced in 
DoD's June 2, 2005, response to public input on performance-based 
payments (70 FR 32306) because dissemination of this information to 
both Government and industry personnel would facilitate a better 
understanding of the process.
    Response: DoD training materials are beyond the scope of this case. 
DoD will consider whether input from industry is needed to develop the 
appropriate training.
    8. Comment: One commenter recommended requiring the FAR or agency 
policy to require agency head approval when performance-based payments 
are less than 90 percent of the contract price on foreign military 
sales. Application of DoD's weighted guidelines generally results in 
FMS contracts having lower profit margins and FAR limitations typically 
provide less favorable financing than contracts negotiated on a direct 
basis with the foreign country.
    Response: Foreign military sales and the DoD weighted guidelines 
are not addressed in the FAR because they are unique to DoD. DoD 
regulations are beyond the scope of this case.
    9. Comment: One commenter recommended DoD consider revising DoD 
policy to permit direct billing for performance-based payments.
    Response: DoD policy is beyond the scope of this case. However, DoD 
notes that direct billing is only authorized for payments that require 
Defense Contract Audit Agency (DCAA) provisional approval. Performance-
based payments require the approval of the contracting officer and not 
DCAA. Contracting officer approval is a reasonable management control 
as it may be difficult to reconstruct when a milestone was completed.
    This is not a significant regulatory action and, therefore, was not 
subject to 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 certify that this 
final rule will not 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 this rule should reduce 
administrative costs for contractors and the Government, thus further 
encouraging the use of performance-based payments.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the rule does 
not impose any additional information collection requirements that 
require the approval of the Office of Management and Budget under 44 
U.S.C. 3501, et seq.

List of Subjects in 48 CFR Parts 32 and 52

    Government procurement.

    Dated: December 19, 2007.
Al Matera,
Director, Office of Acquisition Policy.

Therefore, DoD, GSA, and NASA amend 48 CFR parts 32 and 52 as set forth 
1. The authority citation for 48 CFR parts 32 and 52 continues to read 
as follows:

    Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).


2. Revise section 32.1000 to read as follows:

32.1000  Scope of subpart.

    This subpart provides policy and procedures for performance-based 
payments under noncommercial purchases pursuant to Subpart 32.1.

3. Amend section 32.1001 by--
a. Removing the second sentence in paragraph (c);
b. Removing paragraph (d);
c. Redesignating paragraph (e) as (d);
d. Revising newly redesignated paragraph (d); and
e. Adding new paragraph (e) to read as follows:

32.1001  Policy.

* * * * *
    (d) Performance-based payments are contract financing payments and, 
therefore, are not subject to the interest-penalty provisions of prompt 
payment (see Subpart 32.9). These payments shall be made in accordance 
with agency policy.
    (e) Performance-based payments shall not be used for--
    (1) Payments under cost-reimbursement line items;
    (2) Contracts for architect-engineer services or construction, or 
for shipbuilding or ship conversion, alteration, or repair, when the 
contracts provide for progress payments based upon a percentage or 
stage of completion; or
    (3) Contracts awarded through sealed bid procedures.

4. Revise section 32.1002 to read as follows:

32.1002  Bases for performance-based payments.

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

5. Revise section 32.1003 to read as follows:

32.1003  Criteria for use.

    The contracting officer may use performance-based payments for 
individual orders and contracts provided--
    (a) The contracting officer and offeror agree on the performance-
based payment terms;
    (b) The contract, individual order, or line item is a fixed-price 
    (c) For indefinite delivery contracts, the individual order does 
not provide for progress payments; and
    (d) For other than indefinite delivery contracts, the contract does 
not provide for progress payments.

6. Revise section 32.1004 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.

[[Page 73221]]

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 shall be an 
integral and necessary part of contract performance and shall be 
identified in the contract, along with a description of what 
constitutes successful performance of the event or attainment of the 
performance criterion. The signing of contracts or modifications, the 
exercise of options, the passage of time, or other such occurrences do 
not represent meaningful efforts or actions and shall not be identified 
as 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 shall include the following in the contract:
    (i) The contract shall not permit payment for a cumulative event or 
criterion until the dependent event or criterion has been successfully 
    (ii) The contract shall specifically identify severable events or 
    (iii) The contract shall specifically identify cumulative events or 
criteria and identify which events or criteria are preconditions for 
the successful achievement of each event or criterion.
    (iv) Because performance-based payments are contract financing, 
events or criteria shall not serve as a vehicle to reward the 
contractor for completion of performance levels over and above what is 
required for successful completion of the contract.
    (v) If payment of performance-based finance amounts is on a 
deliverable item basis, each event or performance criterion shall be 
part of the performance necessary for that deliverable item and shall 
be identified to a specific contract line item or subline item.
    (b) Establishing performance-based finance payment amounts.
    (1) The contracting officer shall establish a complete, fully 
defined schedule of events or performance criteria and payment amounts 
when negotiating contract terms. If a contract action significantly 
affects the price, or event or performance criterion, the contracting 
officer responsible for pricing the contract modification shall adjust 
the performance-based payment schedule appropriately.
    (2) Total performance-based payments shall--
    (i) Reflect prudent contract financing provided only to the extent 
needed for contract performance (see 32.104(a)); and
    (ii) Not exceed 90 percent of the contract price if on a whole 
contract basis, or 90 percent of the delivery item price if on a 
delivery item basis.
    (3) The contract shall 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 shall 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 
    (5) When subsequent contract modifications are issued, the 
contracting officer shall adjust the performance-based payment schedule 
as necessary to reflect the actions required by those contract 
    (c) Instructions for multiple appropriations. If there is more than 
one appropriation account (or subaccount) funding payments on the 
contract, the contracting officer shall provide instructions to the 
Government payment office for distribution of financing payments to the 
respective funds accounts. Distribution instructions shall be 
consistent with the contract's liquidation provisions.
    (d) Liquidating performance-based finance payments. Performance-
based amounts shall be liquidated by deducting a percentage or a 
designated dollar amount from the delivery payments. The contracting 
officer shall specify the liquidation rate or designated dollar amount 
in the contract. The method of liquidation shall ensure complete 
liquidation no later than final payment.
    (1) If the 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 
    (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 shall specify--
    (i) What, if any, terms shall 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 
state that the evaluation of the offeror's proposed prices will include 
an adjustment 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).

[[Page 73222]]

    (2) The contracting officer shall--
    (i) Review the proposed terms to ensure they comply with this 
section; and
    (ii) Use the adjustment method at 32.205(c) if the price is to be 
adjusted for evaluation purposes in accordance with paragraph 
(e)(1)(ii) of this section.

7. Revise section 32.1005 to read as follows:

32.1005  Solicitation provision and contract clause.

    (a) Insert the clause at 52.232-32, Performance-Based Payments, 
    (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)).

8. Revise section 32.1007 to read as follows:

32.1007  Administration and payment of performance-based payments.

    (a) Responsibility. The contracting officer responsible for 
administering performance-based payments (see 42.302(a)(12)) for the 
contract shall review and approve all performance-based payments for 
that contract.
    (b) Approval of financing requests. Unless otherwise provided in 
agency regulations, or by agreement with the appropriate payment 
    (1) The contracting officer shall be responsible for receiving, 
approving, and transmitting all performance-based payment requests to 
the appropriate payment office; and
    (2) Each approval shall specify the amount to be paid, necessary 
contractual information, and the appropriation account(s) (see 
32.1004(c)) to be charged for the payment.
    (c) Reviews. The contracting officer is responsible for determining 
what reviews are required for protection of the Government's interests. 
The contracting officer should consider the contractor's experience, 
performance record, reliability, financial strength, and the adequacy 
of controls established by the contractor for the administration of 
performance-based payments. Based upon the risk to the Government, 
post-payment reviews and verifications should normally be arranged as 
considered appropriate by the contracting officer. If considered 
necessary by the contracting officer, pre-payment reviews may be 
    (d) Incomplete performance. The contracting officer shall not 
approve a performance-based payment until the specified event or 
performance criterion has been successfully accomplished in accordance 
with the contract. If an event is cumulative, the contracting officer 
shall not approve the performance-based payment unless all identified 
preceding events or criteria are accomplished.
    (e) Government-caused delay. Entitlement to a performance-based 
payment is solely on the basis of successful performance of the 
specified events or performance criteria. However, if there is a 
Government-caused delay, the contracting officer may renegotiate the 
performance-based payment schedule to facilitate contractor billings 
for any successfully accomplished portions of the delayed event or 

32.1009  [Amended]

9. Amend section 32.1009 by removing from the first sentence in 
paragraph (a) the word ``must'' and adding ``shall'' in its place.


10. Amend section 52.232-32 by--
a. Revising the clause date;
b. Revising the second sentence of paragraph (c)(2); and
c. Removing from the first sentence of paragraph (f)(5) the word 
``must'' and adding ``shall'' in its place.

52.232-32  Performance-based payments.

* * * * *


    (c) * * *
    (2) * * * The designated payment office will pay approved 
requests on the ---------- [Contracting Officer insert day as 
prescribed by agency head; if not prescribed, insert ``30th''] day 
after receipt of the request for performance-based payment by the 
designated payment office. * * *
* * * * *
[FR Doc. E7-24939 Filed 12-21-07; 8:45 am]