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I have a contractor who has met various PBP (Performance-Based Payment) milestones but cannot request payment for the full value because they have not incurred the costs.  They are now attempting to submit additional PBP requests as they incur additional costs in an attempt to get the full value of the milestones.  I believe they get one bite at the apple.  Either request it all when all conditions have been met or request the milestone less the costs, not chew on it each time they incur additional costs. DFARs 252.232-7012, PBP - Whole Contract Basis is in the contract.

On a side note, I believe the milestone values were extremely high and the contractor front loaded their costs from the beginning, but I was met with resistance by the contracting officer to address this.

Am I wrong for not allowing the contractor to keep billing as they incur costs?

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252.232-7012

  “ ...(b)(i)  At no time shall cumulative performance-based payments exceed cumulative contract cost incurred under this contract.” 

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. Therefore, performance-based payments should never exceed total cost incurred at any point during the contract. See PGI 232.1001(a) (DFARS/PGI view) for additional information on use of performance-based payments.”

Are you asking if the contractor can obtain additional payments as the costs catch up? 

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Yes, that is exactly what I am asking.  I believe they should get one request for the milestone payment, not multiple.  I can't find anything that says they can or can't keep requesting payment until they have obtained the total value of the milestone.

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Michele G: Is the following along the lines of what you're explaining:

Payment milestones for a Four-Legged Dinner Table (total price $1000):

1. $600 upon ordering screws

2. $200 upon ordering wood

3. $100 upon assembly

4. $100--final delivery

And the contractor can't invoice for the first payment event because they've only incurred $5 in costs. So instead, they're basically submitting monthly cost reimbursable invoices on whatever other work they do up until they hit $600?

 

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Pretty close

Cumulative Milestone value is $46M

Costs incurred to date is $14.5M

Cumulative amt of payments previously requested $12M

Can only request $2.3M of the $46M due to not enough costs incurred.  They want to keep billing as they incur costs until they receive the entire $46M.

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3 hours ago, Michele G said:

I have a contractor who has met various PBP (Performance-Based Payment) milestones but cannot request payment for the full value because they have not incurred the costs. 

Am I wrong for not allowing the contractor to keep billing as they incur costs?

The purpose of performance-based payments is to tie contract financing payments to measurable technical performance. Period. There should be zero tie to incurred costs, at least with respect to payment request approval. (You can always have DCAA review costs after the fact.) If you are going to insist that contract financing payments must have a relation to incurred costs, then please use cost-based progress payments. Then you can reimburse the contractor for spending money instead of making technical progress. (Hello, any A-12 folks in the room?)

In this case, for some reason, the government contracting officer accepted event values that were not commensurate with actual value. Okay, that was wrong, but the damage is done and the values are in the contract. Either you continue to pay the contractor for accomplishment of contractually agreed-upon milestones or you suspend PBPs and try to reform the contract.

The other option, in my view, is to get ready for a contractor claim that you breached the contract by failing to make payments when agreed-upon events were completed.

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We are making payments when they are requested, the full payments however cannot be paid because it would put the contractor in an advanced payment situation.  We would be providing a financial payment in excess of the costs that have been incurred.

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4 minutes ago, here_2_help said:

The purpose of performance-based payments is to tie contract financing payments to measurable technical performance. Period. There should be zero tie to incurred costs, at least with respect to payment request approval. (You can always have DCAA review costs after the fact.) If you are going to insist that contract financing payments must have a relation to incurred costs, then please use cost-based progress payments. Then you can reimburse the contractor for spending money instead of making technical progress. (Hello, any A-12 folks in the room?)

In this case, for some reason, the government contracting officer accepted event values that were not commensurate with actual value. Okay, that was wrong, but the damage is done and the values are in the contract. Either you continue to pay the contractor for accomplishment of contractually agreed-upon milestones or you suspend PBPs and try to reform the contract.

The other option, in my view, is to get ready for a contractor claim that you breached the contract by failing to make payments when agreed-upon events were completed.

That was my gut reaction when I started reading the OP's post. But how do you reconcile that with the DFARS clause 252.232-7012 that Joel quoted? Payments cannot exceed cost incurred (in this DOD contract, at least).

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43 minutes ago, Michele G said:

We are making payments when they are requested, the full payments however cannot be paid because it would put the contractor in an advanced payment situation.  We would be providing a financial payment in excess of the costs that have been incurred.

Is that an official finding from the IG? Or is that somebody's opinion?

42 minutes ago, kevlar51 said:

That was my gut reaction when I started reading the OP's post. But how do you reconcile that with the DFARS clause 252.232-7012 that Joel quoted? Payments cannot exceed cost incurred (in this DOD contract, at least).

The DFARS clause is illegal and cannot be enforced, as it conflicts with Section 831 of the 2017 NDAA.

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1 hour ago, here_2_help said:

The DFARS clause is illegal and cannot be enforced, as it conflicts with Section 831 of the 2017 NDAA.

It does indeed. Thanks

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1 hour ago, here_2_help said:

The DFARS clause is illegal and cannot be enforced, as it conflicts with Section 831 of the 2017 NDAA.

What if the contract was awarded prior to the passage of the 2017 NDAA?

In case this turns into a law vs. regulation discussion, here's a previous topic on that issue:

 

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3 hours ago, Matthew Fleharty said:

What if the contract was awarded prior to the passage of the 2017 NDAA?

In case this turns into a law vs. regulation discussion, here's a previous topic on that issue:

 

The NDAA did not create new law, it simply clarified the existing law that the DAR Council had ignored when promulgating its illegal rule.

*Shrug* We can do this forever.

I'm not a lawyer and it would take a couple of them, plus a trier of fact, to determine whether or not, in this particular scenario, the contractor should be paid for accomplishment of its contractually agreed-upon PBP events. How about we let our comments here stand for contractor and contracting officer to consider as they try to resolve without resorting to litigation?

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9 hours ago, Michele G said:

On a side note, I believe the milestone values were extremely high and the contractor front loaded their costs from the beginning, but I was met with resistance by the contracting officer to address this.

Stating "the contractor front loaded their costs" is a misnomer - you probably meant to say "the contractor front loaded their payments" (because if the contractor front loaded their costs, they likely wouldn't be trying to invoice for payments in excess of costs incurred) As such, it may be worth noting that the contractor does not unilaterally determine the PBP schedule - those milestones and their amounts are agreed to by the contractor and the government's contracting officer.

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33 minutes ago, here_2_help said:

How about we let our comments here stand for contractor and contracting officer to consider as they try to resolve without resorting to litigation?

I don't think the OP is the government's contracting officer.

See the following (emphasis added):

9 hours ago, Michele G said:

On a side note, I believe the milestone values were extremely high and the contractor front loaded their costs from the beginning, but I was met with resistance by the contracting officer to address this.

Am I wrong for not allowing the contractor to keep billing as they incur costs?

 

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Is this a fixed price contract that provides for full payment for an item or items upon full delivery and acceptance but provides for performance-based financing payment(s) upon completion of a milestone event(s)?

Is FAR Clause 52.232-32 Performance-Based Payments also in this contract or order?

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Yes to both of your questions.

I believe I have answered my own question though.  Because the contract contains 252.232-7012 and the contractor is required to submit their requests using the format identified under this clause, the form itself identifies cumulative events completed, total costs incurred to date and cumulative amount of payments previously requested, the calculations allow them to bill for any value of the milestones they were not able to obtain due to lack of incurred costs.  So they can continue requesting payments.

Quote
16 hours ago, Matthew Fleharty said:

I don't think the OP is the government's contracting officer.

See the following (emphasis added):

 

I am the ACO on this contract and the contracting officer I was referring to was the PCO.  And, the contractor wasn't trying to invoice for payments in excess of their incurred costs. 

16 hours ago, Matthew Fleharty said:

Stating "the contractor front loaded their costs" is a misnomer - you probably meant to say "the contractor front loaded their payments" (because if the contractor front loaded their costs, they likely wouldn't be trying to invoice for payments in excess of costs incurred) As such, it may be worth noting that the contractor does not unilaterally determine the PBP schedule - those milestones and their amounts are agreed to by the contractor and the government's contracting officer.

The contractor wasn't trying to invoice for payments in excess of their incurred costs.  They were submitting invoices for payments they had not yet received because they had not yet incurred enough costs to receive the entire milestone payment.

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10 minutes ago, Michele G said:

I believe I have answered my own question though.  Because the contract contains 252.232-7012 and the contractor is required to submit their requests using the format identified under this clause, the form itself identifies cumulative events completed, total costs incurred to date and cumulative amount of payments previously requested, the calculations allow them to bill for any value of the milestones they were not able to obtain due to lack of incurred costs.  So they can continue requesting payments.

I’m not an expert on this. However, a plain reading of both clauses would appear to me to support additional payment requests not to exceed incurred costs up to the negotiated value of the milestone or activity and no more frequently than monthly.  

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PBPs don't serve as a cap that a contractor bills against gradually as they incur costs.  They're binary - when the contractor completes the event, they receive payment equal to the amount in the payment schedule for that milestone; until then, they don't.  See paragraph (a) of the clause you reference 252.232-7012 (emphasis added below):

Quote

(a) Performance-based payments shall form the basis for the contract financing payments provided under this contract, and shall apply to the whole contract. The performance-based payments schedule (Contract Attachment ____) describes the basis for payment, to include identification of the individual payment events, evidence of completion, and amount of payment due upon completion of each event

Assuming the following clause is also in your contract, see FAR 52.232-32( c )(1) (emphasis added below):

Quote

(1) The Contractor shall not be entitled to payment of a request for performance-based payment prior to successful accomplishment of the event or performance criterion for which payment is requested. The Contracting Officer shall determine whether the event or performance criterion for which payment is requested has been successfully accomplished in accordance with the terms of the contract. The Contracting Officer may, at any time, require the Contractor to substantiate the successful performance of any event or performance criterion which has been or is represented as being payable

 

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37 minutes ago, Matthew Fleharty said:

PBPs don't serve as a cap that a contractor bills against gradually as they incur costs.  They're binary - when the contractor completes the event, they receive payment equal to the amount in the payment schedule for that milestone; until then, they don't.  See paragraph (a) of the clause you reference 252.232-7012 (emphasis added below):

 

Thank you. I hope DPAP is reading this.

The intent of PBPs was to DIVORCE contract financing from incurred costs and focus on accomplishment of programmatic technical milestones. PBPs were to be the province of CORs and PMs, not auditors. Evidence in support of these assertions can be found in the original DoD PBP Users Guide.

DPAP, aided and abetted by the DAR Council, has perverted Congressional intent (and statutory language).

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I think here_2_help has a valid point. The statute, 10 USC 2307(b)(2) clearly states:

Quote

(2) Performance-based payments shall not be conditioned upon costs incurred in contract performance but on the achievement of performance outcomes listed in paragraph (1).

However, DOD has clearly limited payments to costs incurred. See DFARS 232.1001(a):

Quote

 (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. Therefore, performance-based payments should never exceed total cost incurred at any point during the contract.

I don't know how they get away with it. The final rule that promulagated the policy, 79 Fed. Reg. 17936, March 31, 2014, included this comment and response:

Quote

Comment: One respondent claimed that the rule effectively converts fixedprice contracts into cost-type contracts by focusing on incurred cost as opposed to completion of a subset of fixed price tasks.

DoD Response: This rule does not convert fixed-price contracts with PBPs into cost-type contracts. The rule merely provides a tool for determining a mutually beneficial financial arrangement using performance-based payments. The focus on incurred costs simply provides a check to prevent the contract from being in an advance payment scenario.

It also included this:

Quote

Comment: One respondent stated that the proposed rule conflicts with DoD’s ‘‘User’s Guide to PBP’’ which states that payment requests are event driven and contain no financial information that must be prepared according to financial regulations and practices dictated by the Government.

DoD Response: A new PBP User’s Guide has been created which is consistent with this rule, and is available on the DPAP Web site.

And this:

Quote

Comment: One respondent stated that the rule effectively eliminates contractor incentives to perform early and below anticipated costs, and in essence treats PBPs as a form of cost-type, not-toexceed interim payment because it implements a policy that states: ‘‘At no time will cumulative performance-based payments exceed cumulative cost incurred on this contract.’’

DoD Response: PBPs are a form of contract financing and not incentive payments. FAR 32.1004(a)(2)(iv) specifically states: ‘‘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.’’ PBP financing that provides the contractor the opportunity to receive payments up to 100% of cost incurred, so long as they are less than 90% of the contract price, can be considerably more advantageous than customary progress payments, which cannot exceed 80% of costs incurred (or 85% of costs incurred for small businesses). The DoD PBP analysis tool will enable both sides to determine the financial value of the improved cash flow provided by PBPs on a given contract.

And this:

Quote

Comment: A number of respondents expressed concern with limitation of performance-based payments to only costs incurred. The respondents believe that this limitation reduces or eliminates the incentive to use performance-based payment financing arrangement and therefore shifts favor to progress payments. The incurred cost limitation eliminates the certainty that a contractor has in obtaining an agreed-to PBP milestone price, and concentrates on a contractor’s incurred cost profile which shifts focus from performance and delivery to cost incurred in association to a milestone.

DoD Response: PBPs are a form of contract financing and not incentive payments. FAR 32.1004(a)(2)(iv) specifically states: ‘‘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.’’ Furthermore, FAR 32.1004(b)(3) states that the contracting officer shall ensure that ‘‘Performancebased 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.’’ These requirements limit the PBP payments to only costs incurred. However, PBP financing that provides the contractor the opportunity to receive payments up to 100% of cost incurred (so long as they are less than 90% of the contract price) can be considerably more advantageous than customary progress payments, (which cannot exceed 80% of costs incurred or 85% of costs incurred for small businesses). The DoD PBP analysis tool will enable both sides to determine the financial value of the improved cash flow provided by PBPs on a given contract. PBPs require the contractor to successfully complete a PBP event in accordance with the completion criteria specified in the contract before being paid. Therefore, the contractor’s focus will be on successfully performing those events in a prompt and efficient manner. Since the purpose of all contract financing is to assist the contractor in paying the contract cost incurred during contract performance, and given that in accordance with FAR 32.104(a), contract financing is intended to be provided ‘‘only to the extent actually needed for prompt and efficient performance,’’ the proposed rule appropriately links PBPs with cost incurred to ensure that financing is not provided to a greater extent than intended by the FAR.

I didn't find a single comment that mentioned the statute. I'm disappointed that no one dragged DOD off to federal court on grounds that its policy is contrary to statute. I can only assume that no one knew enough to do so or that no one cared enough. The rule appears to have prompted little if any comment in the acquisition press.

Interesting.

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Vern,

The rule that you are quoting preceded, and probably prompted, the change made to 10 USC 2307. There is an open DFARS case (2017-D019; Performance-Based Payments) to implement the changes to the statute. 

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I find it interesting (and antiquated) that there is this separation between any type of contract financing and the word "incentive."  Since cash flow is a vital part of a company's return on investment and cash flow is impacted by financing arrangements the two seem inseparable (to me).  This incongruity is probably what drove policies like we saw here with PBPs.

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1 hour ago, Don Mansfield said:

The rule that you are quoting preceded, and probably prompted, the change made to 10 USC 2307. There is an open DFARS case (2017-D019; Performance-Based Payments) to implement the changes to the statute. 

So the statute was changed to block the rule, and DOD is taking its sweet time to make the change. Is that what you're saying?
 

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