Subpart 32.10 - Performance-Based

Payments

Parent topic: Part 32 - Contract Financing

32.1000 Scope of subpart.

This subpart provides policy and procedures for performance-based payments under noncommercial

purchases pursuant to subpart 32.1.

32.1001 Policy.

(a) Performance-based payments are the preferred Government financing method when the

contracting officer finds them practical, and the contractor agrees to their use.

(b) Performance-based payments are contract financing payments that are not payment for accepted

items.

(c) Performance-based payments are fully recoverable, in the same manner as progress payments, in

the event of default.

(d) Performance-based payments are contract financing payments and, therefore, are not subject to

the interest-penalty provisions of prompt payment (see subpart 32.9). These payments shall be

made in accordance with agency policy.

(e) Performance-based payments shall not be used for-

(1) Payments under cost-reimbursement line items;

(2) Contracts for architect-engineer services or construction, or for shipbuilding or ship conversion,

alteration, or repair, when the contracts provide for progress payments based upon a percentage or

stage of completion; or

(3) Contracts awarded through sealed bid procedures.

32.1002 Bases for performance-based payments.

Performance-based payments may be made on any of the following bases:

(a) Performance measured by objective, quantifiable methods.

(b) Accomplishment of defined events.

(c) Other quantifiable measures of results.
32.1003 Criteria for use.

The contracting officer may use performance-based payments for individual orders and contracts

provided-

(a) The contracting officer and offeror agree on the performance-based payment terms;

(b) The contract, individual order, or line item is a fixed-price type;

(c) For indefinite delivery contracts, the individual order does not provide for progress payments;

and

(d) For other than indefinite delivery contracts, the contract does not provide for progress payments.

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.

32.1005 Solicitation provision and contract clause.

(a) Insert the clause at 52.232-32, Performance-Based Payments, in-

(1) Solicitations that may result in contracts providing for performance-based payments; and
(2) Fixed-price contracts under which the Government will provide performance-based payments.

(b)

(1) Insert the solicitation provision at 52.232-28, invitation to Propose Performance-Based Payments,

in negotiated solicitations that invite offerors to propose performance-based payments.

(2) Use the provision with its Alternate I in competitive negotiated solicitations if the Government

intends to adjust proposed prices for proposal evaluation purposes (see 32.1004(e)).

32.1006 [Reserved]

32.1007 Administration and payment of performance-based

payments.

(a) Responsibility. The contracting officer responsible for administering performance-based

payments (see 42.302(a)(13)) for the contract shall review and approve all performance-based

payments for that contract.

(b) Approval of financing requests. Unless otherwise provided in agency regulations, or by

agreement with the appropriate payment official-

(1) The contracting officer shall be responsible for receiving, approving, and transmitting all

performance-based payment requests to the appropriate payment office; and

(2) Each approval shall specify the amount to be paid, necessary contractual information, and the

appropriation account(s) (see 32.1004(c)) to be charged for the payment.

(c) Reviews. The contracting officer is responsible for determining what reviews are required for

protection of the Government’s interests. The contracting officer should consider the contractor’s

experience, performance record, reliability, financial strength, and the adequacy of controls

established by the contractor for the administration of performance-based payments. Based upon the

risk to the Government, post-payment reviews and verifications should normally be arranged as

considered appropriate by the contracting officer. If considered necessary by the contracting officer,

pre-payment reviews may be required.

(d) Incomplete performance. The contracting officer shall not approve a performance-based payment

until the specified event or performance criterion has been successfully accomplished in accordance

with the contract. If an event is cumulative, the contracting officer shall not approve the

performance-based payment unless all identified preceding events or criteria are accomplished.

(e) Government-caused delay. Entitlement to a performance-based payment is solely on the basis of

successful performance of the specified events or performance criteria. However, if there is a

Government-caused delay, the contracting officer may renegotiate the performance-based payment

schedule to facilitate contractor billings for any successfully accomplished portions of the delayed

event or criterion.
32.1008 Suspension or reduction of performance-based

payments.

The contracting officer shall apply the policy and procedures in paragraphs (a), (b), (c), and (e) of

32.503-6, Suspension or reduction of payments, whenever exercising the Government’s rights to

suspend or reduce performance-based payments in accordance with paragraph (e) of the clause at

52.232-32, Performance-Based Payments.

32.1009 Title.

(a) Since the clause at 52.232-32, Performance-Based Payments, gives the Government title to the

property described in paragraph (f) of the clause, the contracting officer shall ensure that the

Government title is not compromised by other encumbrances. Ordinarily, the contracting officer, in

the absence of reason to believe otherwise, may rely upon the contractor’s certification contained in

the payment request.

(b) If the contracting officer becomes aware of any arrangement or condition that would impair the

Government’s title to the property affected by the Performance-Based Payments clause, the

contracting officer shall require additional protective provisions.

(c) The existence of any such encumbrance is a violation of the contractor’s obligations under the

contract, and the contracting officer may, if necessary, suspend or reduce payments under the terms

of the Performance-Based Payments clause covering failure to comply with a material requirement

of the contract. In addition, if the contractor fails to disclose an existing encumbrance in the

certification, the contracting officer should consult with legal counsel concerning possible violation

of 31 U.S.C.3729, the False Claims Act.

32.1010 Risk of loss.

(a) Under the clause at 52.232-32, Performance-Based Payments, and except for normal spoilage,

the contractor bears the risk of loss for Government property, even though title is vested in the

Government, unless the Government has expressly assumed this risk. The clauses prescribed in this

regulation related to performance-based payments, default, and terminations do not constitute a

Government assumption of risk.

(b) If a loss occurs in connection with property for which the contractor bears the risk, and the

property is needed for performance, the contractor is obligated to repay the Government the

performance-based payments related to the property.

(c) The contractor is not obligated to pay for the loss of property for which the Government has

assumed the risk of loss. However, a serious loss may impede the satisfactory progress of contract

performance, so that the contracting officer may need to act under paragraph (e)(2) of the

Performance-Based Payments clause. In addition, while the contractor is not required to repay

previous performance-based payments in the event of a loss for which the Government has assumed

the risk, such a loss may prevent the contractor from making the certification required by the

Performance-Based Payments clause.