32.1004 Procedures.

Performance-based payments may be made either on a whole contract or on a deliverable item basis,

unless otherwise prescribed by agency regulations. Financing payments to be made on a whole

contract basis are applicable to the entire contract, and not to specific deliverable items. Financing

payments to be made on a deliverable item basis are applicable to a specific individual deliverable

item. (A deliverable item for these purposes is a separate item with a distinct unit price. Thus, a line

item for 10 airplanes, with a unit price of $1,000,000 each, has 10 deliverable items-the separate

planes. A line item for 1 lot of 10 airplanes, with a lot price of $10,000,000, has only one deliverable

item-the lot.)

(a) Establishing performance bases.

(1) The basis for performance-based payments may be either specifically described events (e.g.,

milestones) or some measurable criterion of performance. Each event or performance criterion that

will trigger a finance payment shall be an integral and necessary part of contract performance and

shall be identified in the contract, along with a description of what constitutes successful

performance of the event or attainment of the performance criterion. The signing of contracts or

modifications, the exercise of options, the passage of time, or other such occurrences do not

represent meaningful efforts or actions and shall not be identified as events or criteria for

performance-based payments. An event need not be a critical event in order to trigger a payment,

but the Government must be able to readily verify successful performance of each such event or

performance criterion.

(2) Events or criteria may be either severable or cumulative. The successful completion of a

severable event or criterion is independent of the accomplishment of any other event or criterion.

Conversely, the successful accomplishment of a cumulative event or criterion is dependent upon the

previous accomplishment of another event. A contract may provide for more than one series of

severable and/or cumulative performance events or criteria performed in parallel. The contracting

officer shall include the following in the contract:

(i) The contract shall not permit payment for a cumulative event or criterion until the dependent

event or criterion has been successfully completed.

(ii) The contract shall specifically identify severable events or criteria.

(iii) The contract shall specifically identify cumulative events or criteria and identify which events or

criteria are preconditions for the successful achievement of each event or criterion.

(iv) Because performance-based payments are contract financing, events or criteria shall not serve

as a vehicle to reward the contractor for completion of performance levels over and above what is

required for successful completion of the contract.

(v) If payment of performance-based finance amounts is on a deliverable item basis, each event or

performance criterion shall be part of the performance necessary for that deliverable item and shall

be identified to a specific line item or subline item.

(b) Establishing performance-based finance payment amounts.
(1) The contracting officer shall establish a complete, fully defined schedule of events or

performance criteria and payment amounts when negotiating contract terms. If a contract action

significantly affects the price, or event or performance criterion, the contracting officer responsible

for pricing the contract modification shall adjust the performance-based payment schedule

appropriately.

(2) Total performance-based payments shall-

(i) Reflect prudent contract financing provided only to the extent needed for contract performance

(see 32.104(a)); and

(ii) Not exceed 90 percent of the contract price if on a whole contract basis, or 90 percent of the

delivery item price if on a delivery item basis.

(3) The contract shall specifically state the amount of each performance-based payment either as a

dollar amount or as a percentage of a specifically identified price (e.g., contract price or unit price of

the deliverable item). The payment of contract financing has a cost to the Government in terms of

interest paid by the Treasury to borrow funds to make the payment. Because the contracting officer

has wide discretion as to the timing and amount of the performance-based payments, the contracting

officer shall ensure that-

(i) The total contract price is fair and reasonable, all factors considered; and

(ii) Performance-based payment amounts are commensurate with the value of the performance event

or performance criterion and are not expected to result in an unreasonably low or negative level of

contractor investment in the contract. To confirm sufficient investment, the contracting officer may

request expenditure profile information from offerors, but only if other information in the proposal,

or information otherwise available to the contracting officer, is expected to be insufficient.

(4) Unless agency procedures prescribe the bases for establishing performance-based payment

amounts, contracting officers may establish them on any rational basis, including (but not limited

to)-

(i) Engineering estimates of stages of completion;

(ii) Engineering estimates of hours or other measures of effort to be expended in performance of an

event or achievement of a performance criterion; or

(iii) The estimated projected cost of performance of particular events.

(5) When subsequent contract modifications are issued, the contracting officer shall adjust the

performance-based payment schedule as necessary to reflect the actions required by those contract

modifications.

(c) Instructions for multiple appropriations. If there is more than one appropriation account (or

subaccount) funding payments on the contract, the contracting officer shall provide instructions to

the Government payment office for distribution of financing payments to the respective funds

accounts. Distribution instructions shall be consistent with the contract’s liquidation provisions.

(d) Liquidating performance-based finance payments. Performance-based amounts shall be

liquidated by deducting a percentage or a designated dollar amount from the delivery payments. The

contracting officer shall specify the liquidation rate or designated dollar amount in the contract. The

method of liquidation shall ensure complete liquidation no later than final payment.
(1) If the contracting officer establishes the performance-based payments on a delivery item basis,

the liquidation amount for each line item is the percent of that delivery item price that was

previously paid under performance-based finance payments or the designated dollar amount.

(2) If the performance-based finance payments are on a whole contract basis, liquidation is by

predesignated liquidation amounts or liquidation percentages.

(e) Competitive negotiated solicitations.

(1) If a solicitation requests offerors to propose performance-based payments, the solicitation shall

specify-

(i) What, if any, terms shall be included in all offers; and

(ii) The extent to which and how offeror-proposed performance-based payment terms will be

evaluated. Unless agencies prescribe other evaluation procedures, if the contracting officer

anticipates that the cost of providing performance-based payments would have a significant impact

on determining the best value offer, the solicitation should state that the evaluation of the offeror’s

proposed prices will include an adjustment to reflect the estimated cost to the Government of

providing each offeror’s proposed performance-based payments (see Alternate I to the provision at

52.232-28).

(2) The contracting officer shall-

(i) Review the proposed terms to ensure they comply with this section; and

(ii) Use the adjustment method at 32.205(c) if the price is to be adjusted for evaluation purposes in

accordance with paragraph (e)(1)(ii) of this section.

Parent topic: Subpart 32.10 - Performance-Based Payments