DoD Performance Based
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
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.
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.
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.
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.
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)).