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Per FAR 46.407(e), “The contracting officer must discourage the repeated tender of nonconforming supplies or services, including those with only minor nonconformances, by appropriate action, such as rejection and documenting the contractor’s performance record.”  In addition, per FAR 46.407(f), “When supplies or services are accepted with critical or major nonconformances as authorized in paragraph (c) of this section, the contracting officer must modify the contract to provide for an equitable price reduction or other consideration. In the case of conditional acceptance, amounts withheld from payments generally should be at least sufficient to cover the estimated cost and related profit to correct deficiencies and complete unfinished work. The contracting officer must document in the contract file the basis for the amounts withheld. For services, the contracting officer can consider identifying the value of the individual work requirements or tasks (subdivisions) that may be subject to price or fee reduction. This value may be used to determine an equitable adjustment for nonconforming services. However, when supplies or services involving minor nonconformances are accepted, the contract need not be modified unless it appears that the savings to the contractor in fabricating the nonconforming supplies or performing the nonconforming services will exceed the cost to the Government of processing the modification.”

In our specific case, there is a large business under a Firm Fixed Price supply contract that provides progress payments (at 80%) to the Contractor on a contract line item number (CLIN) that has been previously conditionally accepted via a DD250.  At the time the CLIN was conditionally accepted the withhold amount was negotiated and established based on the remaining outstanding requirements not being met on contract (also known as deficiencies) and commensurate consideration was received from the Contractor to the Government for not meeting the outstanding contractual requirements.  In addition, a new delivery date was negotiated and the contract was modified to extend the date of the CLIN so the Contractor could complete the outstanding requirements and deliver a conforming supply item.  The Contractor has asked the Contracting Officer to establish a new withhold amount so partial payment can be made based on completion of some of  the outstanding requirements since they have delivered that capability to date to the Government and partially resolved part or most of the outstanding requirements for the CLIN.  There are still some outstanding requirements left to fulfill on the CLIN.

QUESTION: Is it appropriate for a Contracting Officer to establish another withhold amount based on the remaining outstanding requirements and partially pay the Contractor for the requirements that have been delivered to the Government to date, even though there are some outstanding requirements the Contractor still needs to meet? If so, can the PCO establish and authorize multiple withholds and then release payments against the withheld amounts for a single CLIN?

Or, once we establish a withhold for a conditional acceptance, does the Contractor only get paid the full withheld amount upon satisfying all of the remaining contractual requirements whether they are delivered to the Government incrementally or not? Thus, only one withhold would be established for the CLIN, with the full withhold amount paid upon completion, regardless of whether or not some of the outstanding

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Not a government contracting officer so take my opinion for what it's worth.

The withhold should be commensurate with the government's risk. If the CO believes that the risk has been reduced, a reduction in withhold would seem to be appropriate.

When dealing the progress payments the CO has wide latitude to manage the progress payments to protect the government's interests; any decisions made should be grounded in that concept.

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7 hours ago, CMoore said:

In our specific case, there is a large business under a Firm Fixed Price supply contract that provides progress payments (at 80%) to the Contractor...

Is the clause at FAR 52.232-16, Progress Payments, being relied on?

7 hours ago, CMoore said:

At the time the CLIN was conditionally accepted the withhold amount was negotiated and established based on the remaining outstanding requirements not being met on contract (also known as deficiencies) and commensurate consideration was received from the Contractor to the Government for not meeting the outstanding contractual requirements. 

What is a withhold amount?  The clause says nothing about withholdings.

7 hours ago, CMoore said:

Is it appropriate for a Contracting Officer to establish another withhold amount based on the remaining outstanding requirements and partially pay the Contractor for the requirements that have been delivered to the Government to date, even though there are some outstanding requirements the Contractor still needs to meet?

Para. (c) of the clause suggests the contacting officer should reduce or suspend progress payments, and/or increase the liquidation rate. Maybe there should be zero further payments until the contractor earns them by successful delivery?

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CMoore, what contract clause are you relying on to conditionally accept something?  What do you mean by conditional acceptance?  In this regard, I doubt a CLIN is a deliverable under the contract.  What is it that the contractor was required to deliver?  Why are you doing a withhold instead of a price reduction?

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Too bad the parties didn't agree to use performance-based payments. For PBPs, the DoD recognizes a concept called "substantial completion."

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So as this thread goes I am reading two different contract clause applications am I not?   

One is whether an item meets the contract requirements - so quality assurance and the governments rights under say clause 52.246-2 or 52.212-4(a) and the other is whether it is appropriate to continue to make the financing progress payments based on costs based on the contractors compliance with the material requirements of the contract.  Just noting as when the dust settles as to what the "contract" provides then a response as to appropriate action can be woven together.  

Clearly an action can be taken for failure of meeting requirements but my head spins as to what might be appropriate when you are talking progress payments based on cost, with the costs not fully addressed by the OP in his/her posts.  By example what costs have been paid to date, what costs are still outstanding, what about subcontractors if any....etc. etc.

For me too much missing to make an affirmative statement to the OP but I will watch responses with interest as usual.

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5 hours ago, Retreadfed said:

CMoore, what contract clause are you relying on to conditionally accept something?  What do you mean by conditional acceptance?  In this regard, I doubt a CLIN is a deliverable under the contract.  What is it that the contractor was required to deliver?  Why are you doing a withhold instead of a price reduction?

Let's assume the contractor was to deliver a technically complex widget under CLIN 0001 at a specified date in accordance with the terms and conditions of the contract. The date came and the contractor informed the Government they could not make delivery in accordance with the contractual date. Due to the needs of the customer (urgency), the PCO took the advice of our technical team and accepted a non-conforming widget in order for the customer to at least received some benefit. As PER FAR 49.607(e) the PCO calculated the amount of work remaining to fix any deficiencies or non-completed work and withheld that amount. The decision to withhold verse reduce the price was because we are in a sole source environment and the customer needs the widget in order to meet operational needs. A price reduction would mean that certain capabilities for the widget would have been removed from the requirement and the widget would never be fully conforming. I hope that helps. If not please feel free to ask more questions.      

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20 hours ago, ji20874 said:

Is the clause at FAR 52.232-16, Progress Payments, being relied on?

What is a withhold amount?  The clause says nothing about withholdings.

Para. (c) of the clause suggests the contacting officer should reduce or suspend progress payments, and/or increase the liquidation rate. Maybe there should be zero further payments until the contractor earns them by successful delivery?

It is my understanding that progress payments occur under the normal execution of the contract. If progress are not being made then the PCO can work with DCMA in order to suspend progress payments or reduce the liquidation amount, that is true. Theoretically, if the liquidation rate is 80% of incurred cost then roughly 20%  of the CLIN value should be remaining when delivery is made. If the contractor delivers a fully conforming widget on time they can liquidate the remining amount. However, in our case they did not, so technically the PCO stopped the progress payments when they decided to withhold X dollars for a non-conforming widget because that amount can't be paid out until the device is fully conforming...or unless the contractor make progress and the PCO approves payment to be made. That's the question we are trying to answer. Do they only get paid if they fully conform, or do they get paid if the PCO determines sufficient progress has been made to release some of the withheld amount. Also, I'm not a professional on progress payments so if I'm way off base I'd be open to feedback.

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1 hour ago, CMoore said:

FAR 49.607(e)

That is not a contract clause, it is a FAR section.  What clause in the contract are you relying on for the actions you have taken?  Also, what do you mean by "conditional acceptance"?

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CMoore,

Para. (h)(1) of the clause at FAR 52.246-2, Inspection of Supplies—Fixed-Price,  says that if the Contractor fails to promptly remove, replace, or correct rejected supplies that are required to be removed or to be replaced or corrected, the Government may remove, replace, or correct the supplies and charge the cost to the Contractor.  Is this what happened, and what you are calling a withhold?

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On 3/12/2020 at 5:29 PM, Retreadfed said:

That is not a contract clause, it is a FAR section.  What clause in the contract are you relying on for the actions you have taken?  Also, what do you mean by "conditional acceptance"?

 

On 3/12/2020 at 5:29 PM, Retreadfed said:

That is not a contract clause, it is a FAR section.  What clause in the contract are you relying on for the actions you have taken?  Also, what do you mean by "conditional acceptance"?

FAR 46.101 “Conditional acceptance” means acceptance of supplies or services that do not conform to contract quality requirements, or are otherwise incomplete, that the contractor is required to correct or otherwise complete by a specified date.

The contractor did not deliver a device that conformed to the Government's requirement. However, the Government still accepted the device with the condition that the contractor fix the deficiencies and finish all completed work. As such, the PCO withheld a sufficient amount of money to incentivize the contractor to complete the work as allowed in FAR 46.407(f). At some point, if the contract just cannot meet the requirement then to Ji20874's point, we would remove the cost of the outstanding deficiencies or work to be performed. 

I think the PCO is well with in their right to take this kind of action. The question I'm trying to answer is if once the amount is withheld does the contract need to fix it all to get full payment, or should the PCO pay out as progress is made. Mind you, this is large company that has been in business with the Government for years.

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13 minutes ago, CMoore said:

The question I'm trying to answer is if once the amount is withheld does the contract need to fix it all to get full payment, or should the PCO pay out as progress is made.

No one can definitively answer your question until we know what the contract says.  FAR 46.407 is merely guidance to the contracting officer.  However,  the contracting officer still must act in a way that is consistent with the terms of the contract. 

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Is the clause at FAR 52.232-16, Progress Payments, being relied on?

If YES, I think the contractor gets zero additional payment until it fixes all the deficiencies.  The Government has already paid progress payments based on cost, and the contractor delivered a nonconforming product.  So, it is fair to suspend progress payments -- the contracting officer is probably on safe ground to make no further payments until a conforming product is delivered.  And that's what I would call it, progress payments suspended -- I wouldn't call it a withhold, as the clause at FAR 52.232-16, Progress Payments, makes no mention of withholding.  But retreadfed is right -- we don't know if your contract contains these this clause.  We also don't know if your contract contains the clause at FAR 52.246-2, Inspection of Supplies -- Fixed-Price.  I'm not exactly sure if your question is a progress payments question or an inspection/acceptance question.

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21 hours ago, ji20874 said:

Is the clause at FAR 52.232-16, Progress Payments, being relied on?

If YES, I think the contractor gets zero additional payment until it fixes all the deficiencies.  The Government has already paid progress payments based on cost, and the contractor delivered a nonconforming product.  So, it is fair to suspend progress payments -- the contracting officer is probably on safe ground to make no further payments until a conforming product is delivered.  And that's what I would call it, progress payments suspended -- I wouldn't call it a withhold, as the clause at FAR 52.232-16, Progress Payments, makes no mention of withholding.  But retreadfed is right -- we don't know if your contract contains these this clause.  We also don't know if your contract contains the clause at FAR 52.246-2, Inspection of Supplies -- Fixed-Price.  I'm not exactly sure if your question is a progress payments question or an inspection/acceptance question.

Ji20874, we do have clause 52.232-16 in our contract. I think between your responses and Retreadfed, along with some additional research (https://media.defense.gov/2007/Dec/21/2001712587/-1/-1/1/08-038.pdf),  I think I have my answer. From the perspective of the 52.232-16 the contractor gets 80% of cost incurred with the remaining 20% being paid upon final inspection/acceptance in accordance with the terms and conditions of the contract. In our case, the contractor did not meet the inspection crtieria for the Government to fully accept the device. Therefore, a decision was made to conditionally accept the device and withhold the reaming 20% until the contractor corrects the known deficiencies or uncompleted work. To linked articles point, I think the PCO has latitude to allow the contractor to invoice even after conditional acceptance as long a work progress. For example, if the contractor fixes 15 out of 30 deficiencies (assuming the are all of equal monetary value) then I think the PCO could allow them invoice for half of the remaining un-liquidated, or withheld amount. However,  it may be in the Government's best interest to not allow the contractor to invoice until all the deficiencies or uncompleted work is completed to meet all the inspection criteria for final acceptance.

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17 minutes ago, ji20874 said:

Is the contractor pushing the contracting officer to make payment?  Or is the contracting officer desperately wanting to make payment on his or her own?

The contractor is trying to argue that they should be able to invoice as progress is made and that they have done it in the past, which is true. That doesn't mean it's necessarily correct and PCO, fairly new to the contract, was looking for something more black and white to support telling the contractor no. This is an ongoing issue and I know that we would prefer to withhold the full amount until the contractor brings the device to full conformance. However, if the contractor can argue it's PCO's discretion then they most likely will put pressure other members of our team to put pressure on the PCO to release funds, which effectively reduces our leverage over the contractor. Our PCO is not a pushover, and is fair, so if it makes sense then they will certainly allow payment to be made on a case by case basis. However, part of our challenge is juggling whats appropriate with politics so that is why we were hoping to find a direct answer to our question, or at best a common understanding from other contract professionals.

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42 minutes ago, CMoore said:

Ji20874, we do have clause 52.232-16 in our contract.... From the perspective of the 52.232-16 the contractor gets 80% of cost incurred with the remaining 20% being paid upon final inspection/acceptance in accordance with the terms and conditions of the contract. In our case, the contractor did not meet the inspection crtieria for the Government to fully accept the device. Therefore, a decision was made to conditionally accept the device and withhold the reaming 20% until the contractor corrects the known deficiencies or uncompleted work. To linked articles point, I think the PCO has latitude to allow the contractor to invoice even after conditional acceptance as long a work progress. For example, if the contractor fixes 15 out of 30 deficiencies (assuming the are all of equal monetary value) then I think the PCO could allow them invoice for half of the remaining un-liquidated, or withheld amount. However,  it may be in the Government's best interest to not allow the contractor to invoice until all the deficiencies or uncompleted work is completed to meet all the inspection criteria for final acceptance.

I like your approach (as I bolded). It seems to tie payments to risk, though of course we don't know how much taxpayer dollars are at risk here. One question I have is whether the PCO agrees that the inspection failures were legitimate -- that the government inspector was reasonable when they found inspection failures. If the inspector wasn't reasonable that could be a problem.

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The contracting officer is wholly within her is her rights to suspend (cancel) progress payments, all the way down to zero -- after all, the contractor failed by delivering nonconforming products -- the contracting officer doesn't need any more support than the text of the progress payments clause.  It would be better for the contractor to focus its efforts on making the corrections rather than squeezing more money out of the Government.

Does the contract use the clause at FAR 52.232-1, Payments?  That clause authorizes payment for partial deliveries in certain circumstances.  But are we talking about partial deliveries? 

  • Does 15 out of 30 mean 15 conforming products and 15 still uncorrected products?  If YES, then maybe you make full payment for the 15 conforming items (but the invoice payments have to be offset by the progress payments liquidation).
  • Or, does 15 pout of 30 mean the single product has 30 deficiencies, of which only 15 have been corrected?  If YES, then the contractor should get nothing -- zero -- nada -- zilch -- unless and until it delivers a conforming product with zero deficiencies.  I say this as a general proposition -- I do not have the benefit of knowing what the product is, and might take a different approach under some circumstances.

You will enter the contractor's failure in CPARS, right?  Even if the contractor corrects everything, you will still record the actual facts, right?  Please say YES.

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22 minutes ago, here_2_help said:

I like your approach (as I bolded). It seems to tie payments to risk, though of course we don't know how much taxpayer dollars are at risk here. One question I have is whether the PCO agrees that the inspection failures were legitimate -- that the government inspector was reasonable when they found inspection failures. If the inspector wasn't reasonable that could be a problem.

I would agree if this situation were a one off instance, but it is not. It a consistent problem where the contractor will fix the issues with the highest priory and never get around the rest because it is not in their best interest to do so. So, I know that our position is to maintain as much leverage as we can in order to have something to hold the contractor accountable for to  incentive them to resolve the remaining issues. I know sometimes it can get adversarial, but we are not trying to be inflexible or unreasonable by withholding final payments to the contractor. It's not a punishment, but history suggest making payments as the contractor progressed rarely gets us the results we need.  

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11 minutes ago, ji20874 said:

The contracting officer is wholly within her is her rights to suspend (cancel) progress payments, all the way down to zero -- after all, the contractor failed by delivering nonconforming products -- the contracting officer doesn't need any more support than the text of the progress payments clause.  It would be better for the contractor to focus its efforts on making the corrections rather than squeezing more money out of the Government.

Does the contract use the clause at FAR 52.232-1, Payments?  That clause authorizes payment for partial deliveries in certain circumstances.  But are we talking about partial deliveries? 

  • Does 15 out of 30 mean 15 conforming products and 15 still uncorrected products?  If YES, then maybe you make full payment for the 15 conforming items (but the invoice payments have to be offset by the progress payments liquidation).
  • Or, does 15 pout of 30 mean the single product has 30 deficiencies, of which only 15 have been corrected?  If YES, then the contractor should get nothing -- zero -- nada -- zilch -- unless and until it delivers a conforming product with zero deficiencies.  I say this as a general proposition -- I do not have the benefit of knowing what the product is, and might take a different approach under some circumstances.

You will enter the contractor's failure in CPARS, right?  Even if the contractor corrects everything, you will still record the actual facts, right?  Please say YES.

Ji20874,

It is to your second bullet: Or, does 15 pout of 30 mean the single product has 30 deficiencies, of which only 15 have been corrected?  If YES, then the contractor should get nothing -- zero -- nada -- zilch -- unless and until it delivers a conforming product with zero deficiencies.  I say this as a general proposition -- I do not have the benefit of knowing what the product is, and might take a different approach under some circumstances.

This is the position we are also leaning toward. Of course, due to the technical complexity of what we are working with we do try to take this on a case by case basis because not every situation is so cut and dry. However, generally we think releasing withheld payments should be an exception not the rule since we know at some point the monetary benefit (the incentive) to the contractor is lessened and the remaining issues may be deemed to be not worth their while to fix.

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You do not have to explain yourself to the contractor -- and you do not need to apologize to the contractor for your position.  Your position is wholly appropriate under the circumstances and the terms of the contract.  If the contractor is unhappy, it has recourse under the contract clause at FAR 52.233-1, Disputes.  Or, it can simply make the corrections.

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3 hours ago, CMoore said:

I would agree if this situation were a one off instance, but it is not. It a consistent problem where the contractor will fix the issues with the highest priory and never get around the rest because it is not in their best interest to do so.

That seems to be new information I didn't see in the OP. Okay, then. Is this consistent problem associated solely with the contract in hand, or does it pertain to other contracts with the same contractor?

Also, in rereading the OP I see you are dealing with a large business. It makes me wonder how the PCO documented compliance with FAR 32.104? In my experience, everybody wants contract financing payments, but not everybody can actually demonstrate they are qualified to receive them.

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4 hours ago, CMoore said:

if this situation were a one off instance, but it is not. It a consistent problem where the contractor will fix the issues with the highest priory and never get around the rest because it is not in their best interest to do so.

With this background, how is the contractor being found responsible?

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18 hours ago, Retreadfed said:

if this situation were a one off instance, but it is not. It a consistent problem where the contractor will fix the issues with the highest priory and never get around the rest because it is not in their best interest to do so.

 

1 hour ago, CMoore said:

On paper they more than meet all the responsibility standards of FAR Part 9

These statements are inconsistent.  There are at least three responsibility factors that could be used to determine that they are not responsible.  Remember, the government does not have to show that a contractor is not responsible.  Instead, it is up to the contractor to demonstrate its responsibility.

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