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Progress Payments or Performance Based Payments for FFP Production Contract


Atlas STS

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Our company has been negotiating a FFP production contract and are nearing agreement on price.  We proposed PBP as we are a small business without an accounting system that supports PP.  The contracting officer said our contract doesn't qualify for PBP because it's not a service contract, despite both 52.232-16 Progress Payments and 52.232-32 Performance-Based Payments being included in the solicitation.  We are prepared to update our accounting system and accept PP, if required.

Our contract has significant material and subcontracting costs at the start of the contract with lead times between 4 and 6 months.  We anticipate ~$2.5M of COTS material that must be paid upfront at time of purchase order and ~$2.2M of COTS material with NET30 terms.  Further, our first delivery is not expected until approximately 9 months after award.

I don't think there is an issue with requesting PP for the NET30 material upon delivery and invoice by supplier, but I am unsure whether I can submit a PP for those items that will be invoiced before delivery.  Specifically, I am concerned about the language on computation of amounts in 52.232-16(a).  (4) The Contractor shall not include the following in total costs for progress payment purposes in paragraph (a)(1) of this clause: (iv) Payments made or amounts payable to subcontractors or suppliers, except for- (A) Completed work, including partial deliveries, to which the Contractor has acquired title.

Does this mean that purchase of COTS material where payment is required at time of order are not allowable costs for PP, until those items have been completed, delivered, and/or acquired title?  If so, I think this means that we would have to convince the contracting officer that PBP are the better choice in this instance.  However, perhaps I just don't understand the sections on contract financing to subcontracts and I merely need to call that upfront payment something else?

Or perhaps asked another way, what are the most common methods of contract financing to small businesses with FFP production contracts that require a significant amount of COTS material to be ordered up front?

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First, PBPs are the "preferred" form of contract financing payments. Seems to me that your PCO just doesn't want to put in the work to establish event values.

PBPs are superior in all respects to Progress Payments based on (adjusted) costs incurred. You should fight for them, especially if you don't have a DCAA-audited and DCMA-approved accounting system.

To your other question, if you are paying suppliers at the time of PO placement, as opposed to the time of receipt of materials or finished goods, then those are "advance payments" and are not eligible for inclusion in progress payment requests. I would advise -- if possible -- avoiding advance payments to your suppliers.

Those are my thoughts.

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14 hours ago, Atlas STS said:

Our company

I could be miss reading so disregard if so.  It sounds like cash flow is part of the issue.  Here 2 has offered sound advice.  Another avenue that might help is accelerated payments to small businesses.  There is coverage in the FAR.  You might want explore with the CO.

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@here_2_help I think you answered my question exactly, so thank you very much!  Unfortunately, we haven't been able to negotiate payment upon receipt with all of our suppliers so it sounds like PBP is our only option if the CO wants to stick to customary contract financing.

I suppose I could provide the alternative of PP with an upfront advance payment to us that we would flow down to our payment at order suppliers.  Or a PBP to start with PP thereafter, but both of those sounds less appealing the straight PBP to me.

I don't know how familiar our CO is with PP or PBP as initially suggested partial delivery invoice payments (e.g. no contract financing), but I explained there's no way I can capitalize a $10M order as a small business with a period of performance of 2 years.

Do you know of any good, modern resources for developing PBP events and event values?  I've read the 2014 DOD PBP Guide and as much FAR/DFARS on them as I can find.  I did find a 2001 User's Guide to PBP which has a very similar example, but I can tell some of the info is incorrect/outdated.

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18 hours ago, Atlas STS said:

@here_2_help I think you answered my question exactly, so thank you very much!  Unfortunately, we haven't been able to negotiate payment upon receipt with all of our suppliers so it sounds like PBP is our only option if the CO wants to stick to customary contract financing.

I suppose I could provide the alternative of PP with an upfront advance payment to us that we would flow down to our payment at order suppliers.  Or a PBP to start with PP thereafter, but both of those sounds less appealing the straight PBP to me.

I don't know how familiar our CO is with PP or PBP as initially suggested partial delivery invoice payments (e.g. no contract financing), but I explained there's no way I can capitalize a $10M order as a small business with a period of performance of 2 years.

Do you know of any good, modern resources for developing PBP events and event values?  I've read the 2014 DOD PBP Guide and as much FAR/DFARS on them as I can find.  I did find a 2001 User's Guide to PBP which has a very similar example, but I can tell some of the info is incorrect/outdated.

The DoD has several tools/aides available to contracting officers. I don't know how much access a contractor has to them. Start with the Defense Acquisition University (DAU) site and go from there.

Ultimately -- and this is why some parties are reluctant to use PBPs -- it is a matter of negotiation. Here are my thoughts but please do your own research.

1. Develop a spend plan (time-phased budget). Layer proposed profit on top of the spend plan. Note that you need to reach 90% of the estimated contract price but not more.

2. Identify key programmatic milestones. Ideally, at least one per month but you can have more than that. Some events may be stand-alone; others may be dependent on others (i.e., cumulative events).

3. Value the milestones/events based on your spend plan.

4. Present to contracting officer. Show your work. Show how you are not front-loading cash to the extent you are actually asking the government for advance payments yourself.

5. Negotiate.

6. Incorporate the final, negotiated, events into the contract.

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