A Company Fully Implements Performance Life Cycle Logistics In Life Cycle Management Work with Federal Contracts.

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DoD Performance Based Payments Guidance

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What Are PBPs

PBPs are financing payments based upon the achievement of specific, measurable events or accomplishments that are defined and valued in advance by the parties to the contract.

PBPs are: a) A customary method of contract financing.  b) Fully recoverable in the event of default.

Per the FAR, PBPs can be made on the basis of performance measured by objective and quantifiable methods, accomplishment of defined events or other quantifiable measures of results. For ease of understanding, this guide will refer to “events” as the basis for PBPs.

About PBP Limitation

Total PBPs on a contract cannot exceed 90% of the contract price, if on the whole contract or 90% of the line item price if on a line item basis. It is important to note that 90% is the maximum that can be provided and not the default level of PBP financing. In order to establish PBP financing, the parties must identify and agree upfront on what events will be used to indicate true progress, how their accomplishment will be determined and what financing value each will have. The events, completion criteria and financing values must be clearly identified in the contract. Therefore, PBPs require considerable upfront time and effort on both sides. Also, because PBPs require verification of event completion prior to payment, they require administrative effort during contract performance.

DoD Contract Financing Means

Since Performance Based Payments (PBPs) are a form of contract financing it is important to understand the Federal Acquisition Regulations (FAR) requirements and guidance regarding contract financing.

Contract Financing is covered in FAR Part 32 and is defined as the Government authorized payment of funds to the contractor prior to acceptance of supplies or services by the Government. Contract financing does not include invoice payments, payments for partial acceptance or lease or rental payments. Payments of invoices on cost-type contracts are not considered contract financing. Therefore, contract financing only applies to fixed-price contracts.

The purpose of contract financing is to assist the contractor in paying costs incurred during the performance of the contract. FAR 32.104(a)(1) states that when contract financing is provided it should be provided only to the extent actually needed for prompt and efficient performance.

Order of Preference

It should be noted that in the FAR 32.106 order of preference for contract financing, the first preference is that no Government financing be provided and that the contractor obtain private contract financing without Government guarantee. It should also be noted that except for two certain situations involving non-profit educational or research institutions or the management and operation of Government-owned facilities, advance payments are the least preferred method.

Customary Contract Financing

FAR 32.113 describes what can be considered to be customary contract financing methods for various types of goods and services. The financing method most commonly used to date has been customary Progress Payments based on cost which is covered in  FAR Subpart 32.5. Performance-Based Payments (PBPs) are also a customary form of contract financing and are covered in FAR Subpart 32.10.

When PBPs were first introduced a number of potential advantages were cited:

1) Enhanced technical and schedule focus, 2)  Reduced cost of oversight,  3) Broadened contractor participation and; 4) Potentially improved cash flow for the contractor.

Determining When PBPs Are Practical

Customary contract financing to large businesses may be provided on contracts valued at $2.5 million or more where deliveries will not begin until six months after contract award. In determining whether or not PBPs are practical for use on a contract, the contracting officer should first consider whether the benefits associated with PBPs outweigh the time and effort required to establish and administer them.

Production Contracts

The ideal candidate for PBPs is a mature, stable production program where the fabrication, assembly and test processes are well established. Ideally the contractor will have already completed one or more production lots. This should permit events and their timing to be easily identified. Furthermore, the actual cost by month on the prior contracts should make the financing need at each event easier to determine.

Service Contracts

It is less likely that PBPs will be practical on fixed-price contracts for services. Unlike production contracts that normally provide opportunities for numerous objective events such as receipt of materials and completion of subassemblies or stages of manufacturing, service contracts usually involve fewer and less objective milestones.

Development Contracts

When a fixed-price contract (FPIF or FFP) is considered proper for development, there can be a number of significant events that are PBP candidates. For instance, in an Engineering and Manufacturing Development (EMD) contract, the major activities will be toward completion of the design as evidenced by the Preliminary Design Review (PDR), if not already accomplished in the Technology Development phase, and the Critical Design Review (CDR). Clearly, PDR and CDR are important milestones in the EMD process, but the criteria for successful completion of each can be problematic.

Undefinitized Contract Actions (UCAs)

Although PBPs are not prohibited during the UCA phase, it is recommended that the UCA be awarded using progress payments and PBPs be considered during the price definitization process. The same factors that cause both parties to delay the definitization of price, affects the ability to establish PBPs during the UCA period. In addition, the first few months of a contract often do not provide meaningful or objectively measurable PBP events. Providing progress payments during the UCA phase will provide the contractor adequate contract financing during this phase and allow the parties time to appropriately define the PBP arrangement prior to definitization.

Competitive Solicitations

Although PBPs are not prohibited in competitive solicitations, they are likely to require significant discussions between the Government and each offeror in order to reach agreement on the PBP events, completion criteria and valuation. Therefore, it is recommended that the solicitation state that proposal pricing and contract award will be based on customary progress payment financing, but the Government will be willing to modify the contract with the successful offeror to use PBPs if they are determined to be practical by the contracting officer, the contractor agrees to their use and adequate consideration is received by the Government (FAR 32.005(b) and DFARS 232.1004(iii)).

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