Performance Based Payments And Progress Payments Bryant, Wilson, Wheeler, Lyons October 29, 2015 Overall Classification Unclassified // None

Contract Financing What is Contract Financing? Interim payments on contracts Disbursement prior to delivery/performance Most common form is Progress Payments Newest form is Performance Based Payments Progress Payments and Performance Based Payments are only offered on fixed-priced type contracts under certain conditions. Unclassified // None2

Progress Payments What are Progress Payments? A no interest “loan” or line of credit, from the Government to a Contractor to finance a specific contract The “loan” (progress payment) is paid to the Contractor after contract specific costs have been incurred. The collateral for the “loan" is the work in progress associated with the production of individual contract items. Liquidation is accomplished by DFAS withhold a percentage of each contractor invoice, for that specific contract until the “loan” is paid in full. The PCO may limit progress payments to a stated amount or percentage until the First Article is approved (FAR (e) (Reference (u)) Unclassified // None

Progress Payments Progress Payments Steps: Ensure the following for Progress Payments 1. Ensure the payment clause Progress Payments is in the contract 2. Ensure contractor has an approved Accounting System 3. Determine if contract includes Foreign Military Sales (FMS) 4. Confirm contractor is registered in Invoicing, Receipt, Acceptance, and Property Transfer (iRAPT) and System for Award Management (SAM) Unclassified // None

Progress Payments FMS Progress Payments Contract contains both US and FMS progress payments Use separate numbering systems If the contract is a mixed (firm fixed price and cost type contract) submission must be for the fixed portion only. Supplier must identify ACRN(s) on submission if contract contains FMS or is mixed type contract DFARS , Progress Payments for Foreign Military Sales Acquisitions The contractor is not required to identify the ACRN on a US firm fixed price only contracts. Unclassified // None

Progress Payments Progress Payments Computation Progress payments are limited to the contract price multiplied by the applicable progress payment rate. Progress payment rate depend on business size and clause used. Contract price is generally the same as the obligated amount. Contractor submits payment request using iRAPT. Contracting Officer may limit the maximum amount of Progress Payments based on anticipated costs Unclassified // None

Excluded Costs The Contractor shall not include the following in total costs for progress payment purposes in paragraph (a)(1) of this clause: (i) Costs that are not reasonable, allocable to this contract, and consistent with sound and generally accepted accounting principles and practices. (ii) Costs incurred by subcontractors or suppliers. (iii) Costs ordinarily capitalized and subject to depreciation or amortization except for the properly depreciated or amortized portion of such costs. (iv) Payments made or amounts payable to the subcontractors or suppliers, except for-- (A) completed work, including partial deliveries, to which the Contractor has acquired title; and (B) Work under cost-reimbursement or time-and-material subcontracts to which the Contractor has acquired title. Unclassified // None

Progress Payments Progress Payments Rates Large Business 80% (FAR ) Small Business 90% (DFARS ) Note: Small Disadvantage Businesses are not financed at a different rate (DFARS ) Unclassified // None

Progress Payments Contractor’s Evaluation Before Authorizing the First Payment DCMA Performs a Risk Assessment and a Technical Baseline. The assessment includes: Adequate experience or capability in producing contracted item Satisfactory performance record Sufficient financial strength Company management and exercise of sound business judgment Adequate accounting systems and controls FAR Unclassified // None

Progress Payments Eligible vs. Ineligible Contracts Method of financing Not authorized for cost type fixed-price contracts contracts or cost type line or fixed-price items portion of a mixed type contract Can’t be used with Performance-Based Payments Unclassified // None

Performance Based Payments What PBPs ARE: Method of providing financing to contractors performing under fixed-price, non-commercial contracts, or fixed price items on a mixed type contract Payments are based upon contractor performance of definitive criteria uniquely established in each contract Payment amounts should represent expenses that contractor could reasonably be expected to incur in order to achieve completion of each defined criteria or event Unclassified // None

Performance Based Payments PBP Steps: 1. Ensure clause Performance Based Payments is in contract, as well as , PBP-Whole Contract Basis or , PBP—Deliverable-Item Basis 2. Ensure adequacy of Contractor’s Accounting System and controls 3. DCMA involvement with the PCO and contractor in the PBP event planning stage is strongly encouraged. However, at both stages the plan will be reviewed for: 4. PBP events – meaningful, 5. Completion Criteria, definite and objective for each event 6. Event Values - need expenditure profile to establish. Unclassified // None

Performance Based Payments PBPs cannot exceed 90% of the contract price When are they used? When regulatory conditions are met Fixed-price, non-commercial contract, including R&D Not for architect-engineer services of construction Not for ship building or ship conversion, alteration, or repair Not awarded through sealed bid procedures Contract is valued at >$2.5M large business Contractor is not expected to be able to bill for delivery of products for substantial time after work begins Contracting Officer and contractor agree upon terms Unclassified // None

Performance Based Payments Two kinds of payment events FAR (a)(2) Severable or cumulative Contracts may include more than one series of severable and/or cumulative event criteria General characteristics of good payment events Clear accomplishments May represent a physical change in the product Indicate added value Not surrogates for incurred costs Unclassified // None

Performance Based Payments Payment Administration: Request ACRN identification is required in order to process One of eleven Payment Instructions must be included in the contract The contractor’s certification required by FAR must be signed by an individual previously identified by separate documentation as authorized to bind the contractor Validate Payment PBP disbursements are recorded as a Progress Payment Unliquidated Obligation, and are a contingent liability Credit PBP requests cannot be processed, any overpayments must be returned Unclassified // None

Comparison Chart Progress PaymentsPerformance-Based Payments Order of PreferenceCustomary Contract Financing Historically Preferred over other forms Approval LevelKO Criteria for Use >$2.5 M contract, large business >$150K contract small business (SAT) >$2.5 M contract, large business >$150K contract small business (SAT) FAR (d)(2)&(3) Basis for Payment Based on actual, incurred costs (eligible, allowable & allocable) Based on lesser of predetermined amounts, or actual costs Entitlement to Payment Submission of allowable costs which is commensurate with progress made Successful and verifiable completion of performance event ProfitExcluded from paymentSome profit may be included Combining FinancingCannot be combined with PBPsCannot be combined with PPs Contract Type Fixed Price/FPIF/Fixed Price portion of a mixed contract Accounting SystemMust be approved Policy change requires consideration or approval Frequency of PaymentNot more than monthly Not more than monthly, but invoice can have multiple events Recoverable in Case of DefaultYes Alternate Liquidation Rate ApplicableYes, with circumstancesNo Unclassified // None

The End…for now ANY QUESTIONS?