Federal Register / Vol. 79, No. 61 / Monday, March 31, 2014 / Rules and Regulations 17931 

prerecorded programming completed 

well in advance of its distribution on 

television. 

(xi) For better coordination for 

ensuring high quality captions and for 

addressing problems as they arise, 

understand the roles and 

responsibilities of other stakeholders in 

the closed-captioning process, including 

video program distributors, video 

programmers, producers, equipment 

manufacturers, regulators, and viewers, 

and keep abreast of issues and 

developments in those sectors. 

[FR Doc. 2014–06754 Filed 3–28–14; 8:45 am] 

BILLING CODE 6712–01–P 

DEPARTMENT OF DEFENSE 

Defense Acquisition Regulations 

System 

48 CFR Part 219 

Small Business Programs 

CFR Correction 

■ In Title 48 of the Code of Federal 

Regulations, Chapter 2 (Parts 201 to 

299), revised as of October 1, 2013, on 

page 136, before subpart 219.12, subpart 

219.11 is reinstated to read as follows: 

Subpart 219.11—Price Evaluation 

Adjustment for Small Disadvantaged 

Business Concerns 

219.1101 General. 

The determination to use or suspend 

the price evaluation adjustment for DoD 

acquisitions can be found at http://

www.acq.osd.mil/dpap/dars/classdev/

index.htm. 

[72 FR 20763, Apr. 26, 2007] 

219.1102 Applicability. 

(b) The price evaluation adjustment 

also shall not be used in acquisitions 

that are for commissary or exchange 

resale. 

(c) Also, do not use the price 

evaluation adjustment in acquisitions 

that use tiered evaluation of offers, until 

a tier is reached that considers offers 

from other than small business 

concerns. 

[63 FR 41974, Aug. 6, 1998, as amended 

at 71 FR 53043, Sept. 8, 2006] 

[FR Doc. 2014–07201 Filed 3–28–14; 8:45 am] 

BILLING CODE 1505–01–P 

DEPARTMENT OF DEFENSE 

Defense Acquisition Regulations 

System 

48 CFR Parts 232 and 252 

RIN 0750–AH54 

Defense Federal Acquisition 

Regulation Supplement; PerformanceBased Payments (DFARS Case 2011– 

D045) 

AGENCY: Defense Acquisition 

Regulations System, Department of 

Defense (DoD). 

ACTION: Final rule. 

SUMMARY: DoD is issuing a final rule 

amending the Defense Federal 

Acquisition Regulation Supplement 

(DFARS) to provide detailed guidance 

and instructions on the use of the 

performance-based payments analysis 

tool. 

DATES: Effective March 31, 2014. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Mark Gomersall, 571–372–6099. 

SUPPLEMENTARY INFORMATION: 

I. Background 

DoD published a proposed rule at 77 

FR 4638 on January 30, 2012, to provide 

requirements for the use of the 

performance-based payments (PBP) 

analysis tool. The PBP analysis tool is 

a cash-flow model for evaluating 

alternative financing arrangements, and 

is required to be used by all contracting 

officers contemplating the use of 

performance-based payments on new 

fixed-price type contract awards. 

II. Discussion and Analysis 

DoD reviewed the public comments in 

the development of the final rule. A 

discussion of the comments and the 

changes made to the rule as a result of 

those comments is provided as follows: 

A. Adequate Accounting System 

Comment: One respondent requested 

clarification on whether the proposed 

rule requires an accounting system 

deemed adequate by the Government. 

DoD Response: FAR 32.1007(c) 

requires the contracting officer to 

determine the adequacy of controls 

established by the contractor for the 

administration of performance-based 

payments. Since the contractor will be 

required to report total cost incurred to 

date based on its existing accounting 

system, the contracting officer must 

consider the adequacy of the 

contractor’s accounting system for 

providing reliable cost data. DFARS 

232.1003–70, Criteria for use, is added 

to require contracting officers to 

consider the adequacy of an offeror’s or 

contractor’s accounting system prior to 

agreeing to use performance-based 

payments. 

B. Administratively Burdensome and 

Costly 

Comment: One respondent stated that 

the proposed rule is administratively 

burdensome, and that implementation 

will surpass the one hour average 

burden per response. 

DoD Response: Performance-based 

payments will be paid for completed 

events, but not more frequently than 

monthly. Each request for a PBP will 

require the contractor to provide two 

dollar values: Cumulative value of PBP 

events completed to date and total cost 

incurred to date. The rule is, therefore, 

not administratively burdensome since 

it requires the contractor to provide 

information that should be readily 

available in the contractor’s accounting 

system in the ordinary course of 

business. Accordingly, DoD estimates, 

on average, it will not take more than 

one hour per response. 

Comment: One respondent requested 

clarification regarding in what manner 

contractors will be required to verify, or 

otherwise state, total costs incurred. 

DoD Response: Each request for a PBP 

will require the contractor to provide 

two dollar values: Cumulative value of 

PBPs completed to date and total cost 

incurred to date. For DoD verification 

purposes, the final rule includes the 

requirement for the contractor to 

provide access, upon request of the 

contracting officer, to the contractor’s 

books and records, as necessary, for the 

administration of the clause. 

Comment: One respondent expressed 

concern that since the proposed rule 

forces contractors to disclose extensive 

cost information and report incurred 

costs per milestone, the costs associated 

with this reporting obligation will 

increase the cost to the Government. 

DoD Response: The cost information 

to be provided by the contractor takes 

two forms: A projected expenditure 

profile of total cost per month which is 

required once when PBPs are initially 

proposed (i.e., as part of the contractor’s 

proposed performance-based payments 

schedule that includes all performancebased payments events, completion 

criteria, event values, etc.) and 

cumulative value of PBPs completed to 

date and total cost incurred to date, 

which are required during the 

performance of the contract. The 

expenditure profile is a key element in 

determining the expected financing 

needs over time and is needed by both 

parties in order to establish appropriate 


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PBP event values. Based on DoD 

experience, information without an 

expenditure profile is expected to be 

insufficient. On fixed-price contracts, it 

is in the contractor’s best interest to 

closely track and manage cost during 

contract performance. The entering of a 

total cost incurred-to-date value on the 

PBP form should not result in increased 

cost to the contractor or the Government 

as it merely reports the sum total of the 

accumulation of costs recorded in the 

contractor’s accounting system. 

Comment: One respondent stated that 

the proposed rule adds to administrative 

costs by requiring two price 

negotiations, and by requiring systems 

to support progress payment financing 

to be reinstituted. By imposing the 

expense of establishing progress 

payment capabilities, this rule may 

drive some businesses out of the 

Government contracting market. 

DoD Response: Every price 

negotiation involves a discussion of 

contract cost and profit. The 

negotiations will be the same regardless 

of the financing method used (progress 

payments or PBPs). Although there will 

be two negotiations of price, there is no 

need to conduct two negotiations on 

cost. With regard to requiring systems to 

support financing payments, FAR 

32.1007(c) requires contracting officers 

to determine the adequacy of controls 

established by the contractor for the 

administration of performance-based 

payments. Therefore, contracting 

officers must consider the adequacy of 

the contractor’s accounting system for 

providing reliable cost data to support 

the performance-based payments. 

Similarly, FAR 32.503–3(b)2) requires 

contracting officers to determine the 

adequacy of the contractor’s accounting 

system and controls for the proper 

administration of progress payments. 

However, contractors are not obligated 

to accept contract financing payments, 

whether performance-based payments, 

progress payments, or any other type of 

contract financing. If the contractor 

decides not to seek Governmentprovided contract financing and the 

associated expense of establishing and 

maintaining an adequate accounting 

system to substantiate the costs incurred 

to support the contract financing 

payments and to protect the 

Government’s interests, the contractor 

will not incur the additional costs of 

those requirements. 

Comment: One respondent stated a 

concern that the proposed rule will 

result in increased costs for small 

businesses and prevent them from 

competing due to the adequate business 

system requirement. 

DoD Response: Small business will 

not be at a competitive disadvantage 

whether or not they decide that a 

performance-based payment funding 

arrangement is in their best interest. 

Contractors are not obligated to 

negotiate or accept a performance-based 

payment financing arrangement. 

However, just as with any other form of 

Government-provided contract 

financing, there will be some form of 

requirement for contractor business 

systems to substantiate the incurrence of 

the costs to support the contract 

financing payments and to protect the 

Government’s interests. A decision not 

to pursue performance-based payments 

will not be held against any offeror in 

a competitive source selection. 

C. Conversion to Cost-Type Contracts 

Comment: One respondent claimed 

that the rule effectively converts fixedprice contracts into cost-type contracts 

by focusing on incurred cost as opposed 

to completion of a subset of fixed price 

tasks. 

DoD Response: This rule does not 

convert fixed-price contracts with PBPs 

into cost-type contracts. The rule merely 

provides a tool for determining a 

mutually beneficial financial 

arrangement using performance-based 

payments. The focus on incurred costs 

simply provides a check to prevent the 

contract from being in an advance 

payment scenario. 

D. Commercial Items 

Comment: One respondent expressed 

concern that the proposed rule may be 

misapplied to commercial items. The 

respondent recommended an explicit 

statement stating that PBPs do not apply 

to commercial items. 

DoD Response: FAR 32.1000 already 

states that FAR subpart 32.10, 

Performance-Based Payments, applies to 

performance-based payments under 

noncommercial purchases pursuant to 

FAR 32.1. 

E. Competition 

Comment: One respondent stated that 

the economic consequences of the rule 

will add another barrier for nontraditional contractors/businesses from 

entering the marketplace, stifling 

competition. 

DoD Response: When a contractor 

accepts Government-provided financing 

payments, it must accept some form of 

requirement for the oversight of 

business systems that substantiate the 

incurrence of the costs to support the 

financing payments and to protect the 

Government’s interests. No contractor is 

under obligation to accept performancebased payments or any other type of 

contract financing, and thus, avoid any 

additional economic consequence of the 

rule for an adequate accounting system. 

Thus, the rule is not another barrier to 

keep a non-traditional contractor from 

entering the Government marketplace if 

it utilizes its normal private financing, 

and does not accept Governmentprovided contract financing, i.e., the 

rule does not stifle competition. 

F. Conflict With DoD’s User’s Guide to 

PBPs 

Comment: One respondent stated that 

the proposed rule conflicts with DoD’s 

‘‘User’s Guide to PBP’’ which states that 

payment requests are event driven and 

contain no financial information that 

must be prepared according to financial 

regulations and practices dictated by the 

Government. 

DoD Response: A new PBP User’s 

Guide has been created which is 

consistent with this rule, and is 

available on the DPAP Web site. 

G. Contractor Risk 

Comment: One respondent asserted 

that the proposed rule’s attempt to begin 

negotiations with the benchmark of a 

negotiated fixed-price contract based on 

customary progress payments is 

misplaced due to higher risk to 

contractors and additional 

administrative burden of PBPs. 

DoD Response: The use of a 

negotiated price using customary 

progress payments as the benchmark for 

determining a mutually beneficial 

financial arrangement using PBPs is 

appropriate. Customary progress 

payments will be the likely financing 

method utilized if agreement on a PBP 

arrangement cannot be reached. In 

determining the amount of 

consideration due the Government as a 

result of the improved cash flow to the 

contractor provided by PBPs, the parties 

will use the DoD PBP analysis tool, 

which is designed to allow users to 

objectively measure both the benefits 

and risks of the PBP arrangement. 

H. Weighted Guidelines and Profit 

Comment: One respondent asserted 

that an alternative to the rule exists in 

the weighted guidelines method, which 

provides a far simpler and fairer profit 

adjustment for the value of the PBPs, as 

well as recognizing the added risk to 

contractors of event-based financing. 

The weighted guidelines reasonably 

method recognizes that performancebased payments impose added risk on 

the contractor by tying financing to 

performance. Consequently, the DFARS 

provides that such payments should 

lead to an increase in the negotiated 

profit rate. 


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DoD Response: The weighted 

guidelines method is not designed to 

accurately measure the financial 

benefits and risks associated with a 

particular PBP arrangement. The DoD 

PBP analysis tool is a cash flow model 

that was specifically designed to allow 

users to objectively measure both the 

benefits and risks of each PBP 

arrangement. DoD is therefore amending 

the DFARS to improve the process of 

negotiating PBP financing arrangements. 

Contractors are not obligated to 

negotiate or accept a PBP financing 

arrangement. If a contractor determines 

that the risk of tying financing to 

performance is too great, the contractor 

may always choose traditional progress 

payments and forego the financial 

benefits of a PBP financing arrangement. 

Comment: One respondent expressed 

concern that the rule further provides 

unnecessary visibility into the 

contractor’s proprietary profit. 

DoD Response: The rule will provide 

no more insight into a contractor’s 

profitability than is already provided in 

customary progress payments. 

Comment: One respondent stated that 

the proposed rule establishes the 

Government’s cash outlay under 

traditional progress payments as the cap 

for PBPs and does not allow any 

payment of profit or fee for PBPs until 

performance is completed. 

DoD Response: As previously stated, 

the use of a negotiated price using 

customary progress payments as the 

benchmark for determining a mutually 

beneficial financial arrangement using 

PBPs is appropriate. Customary progress 

payments will be the likely financing 

method utilized if agreement on a PBP 

arrangement cannot be reached. In 

determining the amount of 

consideration due the Government as a 

result of the improved financing 

provided by PBPs, the parties will use 

the DoD PBP analysis tool which is 

designed to allow users to objectively 

measure both the benefits and risks of 

the PBP financing arrangement. The rule 

does not establish the Government’s 

cash outlay under customary progress 

payments as the cap for PBPs. The FAR 

limitation is that PBPs cannot exceed 

90% of the contract price. This 

limitation does not change under this 

rule. Further, the rule requires that 

cumulative PBPs will not exceed the 

contractor’s cumulative cost incurred, in 

accordance with FAR 32.104(a), which 

states that PBPs are to be provided only 

to the extent actually needed for prompt 

and efficient performance. Therefore, 

the payment of profit as part of PBPs 

will not occur. 

I. Cost Risk 

Comment: One respondent expressed 

concern that the proposed rule focused 

on cost risk, which is a disincentive on 

contracts that carry a greater than 

average technical performance and 

schedule risk. 

DoD Response: PBPs are a method of 

contract financing and do not add or 

detract from the underlying cost, 

performance or schedule risk on a 

contract. The purpose of all contract 

financing is to assist the contractor in 

paying the contract cost incurred during 

contract performance. Per FAR 

32.104(a), contract financing is intended 

to be provided ‘‘only to the extent 

actually needed for prompt and efficient 

performance.’’ Therefore, the rule 

appropriately links PBPs with cost 

incurred to ensure that financing is not 

provided to a greater extent than 

intended by FAR. 

J. Early Performance Disincentive 

Comment: One respondent stated that 

the rule effectively eliminates contractor 

incentives to perform early and below 

anticipated costs, and in essence treats 

PBPs as a form of cost-type, not-toexceed interim payment because it 

implements a policy that states: ‘‘At no 

time will cumulative performance-based 

payments exceed cumulative cost 

incurred on this contract.’’ 

DoD Response: PBPs are a form of 

contract financing and not incentive 

payments. FAR 32.1004(a)(2)(iv) 

specifically states: ‘‘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.’’ PBP financing that 

provides the contractor the opportunity 

to receive payments up to 100% of cost 

incurred, so long as they are less than 

90% of the contract price, can be 

considerably more advantageous than 

customary progress payments, which 

cannot exceed 80% of costs incurred (or 

85% of costs incurred for small 

businesses). The DoD PBP analysis tool 

will enable both sides to determine the 

financial value of the improved cash 

flow provided by PBPs on a given 

contract. 

K. Executive Orders 12866 and 13563 

Comment: One respondent asserted 

that the proposed rule has not 

undergone a comprehensive review of 

the 5 U.S.C. 804 classification as a 

‘‘Major Rule’’ as required by Executive 

Order (E.O.) 12866 and 13563, and as 

such, should be subject to a thorough 

assessment of the economic impact, 

regulatory inconsistencies, and costbenefit evaluation of other options. 

DoD Response: This rule was 

submitted to the Office of Information 

and Regulatory Affairs (OIRA). OIRA 

determined that this rule is not a major 

rule under 5 U.S.C. 804, but that this is 

a significant regulatory action and, 

therefore, the rule was subject to review 

under section 6(b) of E.O. 12866, 

Regulatory Planning and Review, dated 

September 30, 1993. This rule is not a 

major rule under 5 U.S.C. 804. 

L. FAR Preference for PBP Financing 

Comment: A number of respondents 

indicated that the proposed rule is 

inconsistent with the FAR preference 

for performance-based payments. One 

respondent recommended that a 

statement be added to DFARS 232.1001 

that private financing without 

Government guarantee is preferred. 

DoD Response: This rule does not 

change the FAR stated preference for 

PBPs when Government financing is 

determined to be appropriate. The first 

preference in FAR 32.106(a) is that the 

contractor should obtain private 

financing without Government 

guarantee. Customary contract financing 

is secondary in preference. As stated in 

FAR 32.1001(a), PBPs ‘‘are the preferred 

method of Government contract 

financing when the contracting officer 

finds them to be practical and the 

contractor agrees to their use’’. 

M. Limitation to PBP Financing Ceiling 

Comment: One respondent expressed 

concern that the proposed rule imposes 

further constraints to FAR 

32.1004(b)(2)(ii) limitation of 90% of 

price. The respondent questioned why 

DoD contracts should have less 

favorable financing terms than other 

Federal contracts. 

DoD Response: This rule is consistent 

with the existing FAR requirements 

regarding financing in general and PBPs 

in particular. It is important to 

remember that the fundamental purpose 

of all contract financing is to assist the 

contractor in paying cost incurred 

during the performance of the contract. 

Per FAR 32.1004(b)(2)(i), financing is to 

be provided ‘‘only to the extent actually 

needed for prompt and efficient 

performance’’. In other words, the 

contractor should not be reimbursed 

more than its actual cost incurred at any 

point in time. FAR 32.1004(b)(3)(ii) 

further states that the contracting officer 

must ensure that PBPs ‘‘are not expected 

to result in an unreasonably low or 

negative level of contractor investment 

in the contract.’’ Therefore, the 

proposed rule appropriately links PBPs 


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17934 Federal Register / Vol. 79, No. 61 / Monday, March 31, 2014 / Rules and Regulations 

with cost incurred to ensure that 

financing is not provided to a greater 

extent than intended by FAR. 

N. Foreign Military Sales 

Comment: One respondent stated that 

the application of the proposed rule on 

FMS contracts has the potential to 

reduce Federal income tax revenue. 

Since there is no existing regulatory or 

statutory requirement to do so, the 

respondent recommends exempting 

FMS contracts from performance-based 

payments. 

DoD Response: In accordance with 

DFARS 225.7303(a) the general rule for 

the pricing of FMS contracts is that they 

should be priced using the same 

principles used in pricing other defense 

contracts. Therefore, there would be no 

reason to exempt FMS contracts from 

the proposed rule. Additionally, the 

potential for federal income tax 

revenues is not a factor in contract 

pricing. 

O. Government Benefits for Using PBPs 

Comment: One respondent stated that 

the proposed rule does not account for 

the benefits that the performance-based 

financing approach provides for the 

Government. 

DoD Response: PBPs, when properly 

structured, can provide benefits to both 

the Government and the contractor. The 

key benefit to the contractor is improved 

cash flow. However, there is a cost to 

the Government of providing improved 

contract financing to the contractor. 

Therefore, the PBP analysis tool 

appropriately calculates a lower profit 

to ensure that the use of PBPs provides 

a mutually beneficial financial 

arrangement for both parties. 

P. Incurred Cost Accounting 

Comment: One respondent requests 

clarification on how the Government 

will treat commitments to 

subcontractors and/or vendors who 

have not been paid in determining total 

cost incurred. 

DoD Response: The definition of what 

constitutes an ‘‘incurred cost’’ is not 

affected by the proposed rule. 

Q. Incurred Cost Limitation 

Comment: A number of respondents 

expressed concern with limitation of 

performance-based payments to only 

costs incurred. The respondents believe 

that this limitation reduces or 

eliminates the incentive to use 

performance-based payment financing 

arrangement and therefore shifts favor to 

progress payments. The incurred cost 

limitation eliminates the certainty that a 

contractor has in obtaining an agreed-to 

PBP milestone price, and concentrates 

on a contractor’s incurred cost profile 

which shifts focus from performance 

and delivery to cost incurred in 

association to a milestone. 

DoD Response: PBPs are a form of 

contract financing and not incentive 

payments. FAR 32.1004(a)(2)(iv) 

specifically states: ‘‘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.’’ Furthermore, FAR 

32.1004(b)(3) states that the contracting 

officer shall ensure that ‘‘Performancebased 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.’’ These requirements limit the 

PBP payments to only costs incurred. 

However, PBP financing that provides 

the contractor the opportunity to receive 

payments up to 100% of cost incurred 

(so long as they are less than 90% of the 

contract price) can be considerably more 

advantageous than customary progress 

payments, (which cannot exceed 80% of 

costs incurred or 85% of costs incurred 

for small businesses). The DoD PBP 

analysis tool will enable both sides to 

determine the financial value of the 

improved cash flow provided by PBPs 

on a given contract. PBPs require the 

contractor to successfully complete a 

PBP event in accordance with the 

completion criteria specified in the 

contract before being paid. Therefore, 

the contractor’s focus will be on 

successfully performing those events in 

a prompt and efficient manner. Since 

the purpose of all contract financing is 

to assist the contractor in paying the 

contract cost incurred during contract 

performance, and given that in 

accordance with FAR 32.104(a), contract 

financing is intended to be provided 

‘‘only to the extent actually needed for 

prompt and efficient performance,’’ the 

proposed rule appropriately links PBPs 

with cost incurred to ensure that 

financing is not provided to a greater 

extent than intended by the FAR. 

R. Invoice Delay 

Comment: One respondent expressed 

concern that the proposed rule will 

delay invoice payments. 

DoD Response: The rule will have no 

impact on the timing of invoice 

payments. 

S. Better Buying Power Initiative 

Comment: One respondent claimed 

that the PBP Analysis Tool fails to 

address the ‘‘Better Buying Power’’ 

direction of flexibility to propose an 

alternative payment arrangement and 

innovative financing methods. 

DoD Response: The rule does not 

impede the flexibility to propose an 

alternative payment arrangement. In 

many cases, performance-based 

payment financing arrangements will be 

the alternative payment arrangement. 

Therefore, the rule addresses how a PBP 

arrangement will be analyzed from a 

cash flow perspective. A similar cash 

flow analysis would be required in any 

arrangement that provided improved 

cash flow to the contractor. 

T. PBP Analysis Tool Assessment 

Accuracy 

Comment: One respondent asserted 

that the PBP Analysis Tool does not 

provide an accurate methodology for 

assessing improved cash flow. The 

respondent stated that the PBP Analysis 

Tool discounts the reduction in cash 

flows using an after-tax discount rate, 

but fails to account for the reduction in 

cash associated with applied taxes to 

earned income. 

DoD Response: The DoD PBP analysis 

tool compares the series of financing 

cash flows that would be generated 

under customary progress payments and 

PBPs. Taxes are only applicable to 

profit, not financing cash flows. Since 

the model already produces a mutually 

beneficial financing arrangement in 

which the profit is lower using PBPs 

than with customary progress payments, 

accounting for taxes within the model 

would only result in an even lower 

profit position. Although the model 

could be revised to include the reduced 

taxes paid by the contractor as a result 

of reduced profit in the PBP scenario, 

the net impact would be negligible and 

does not warrant the added complexity. 

Comment: One respondent 

recommended that DoD revise the cash 

flow model and its instructions to 

reflect the discount/interest rates 

recognized in the FAR for all other 

financing and cash flow valuations as 

the sole basis for consideration required 

(OMB A–94 or Prompt Payment Act 

Interest Rate). 

DoD Response: The cost of raising 

money is not the same for industry and 

the Government and therefore the timevalue of money is not the same for each. 

The model will be revised as follows: 

The discount rate for contractor cash 

flows will be reflective of the short term 

borrowing rate as represented by the 

published Prime Rate adjusted for the 

corporate income tax rate of 35%. At the 

current Prime Rate of 3.25%, the 

discount rate for contractor cash flows 

would be 2.11% [3.25% × (1 ¥.35)]. 


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The discount rate for Government 

cash flows will continue to be the rates 

published in OMB Circular A–94 

Appendix C which are specified for use 

by the Government in cash flow analysis 

as they are reflective of the cost of 

borrowing to the Treasury. For contract 

periods of performance that fall between 

the rate periods identified in the 

circular, the model instructions will be 

revised to instruct the user on how to 

extrapolate to derive the appropriate 

rate for their contract action. 

U. Overly Complex PBP Analysis Tool 

Comment: One respondent 

recommended that DoD redesign the 

cash flow model to make it more 

intuitive and correct errors that have the 

potential to overstate the consideration 

requirement by $200 million a year. 

DoD Response: The cash flow model 

will be used by trained contracting 

officers who will be able to walk the 

contractor through the process, if 

required. DoD has found no 

inconsistencies between the PBP cashflow model and the FAR, nor has DoD 

found errors in the model that have the 

potential to overstate the consideration 

requirement by $200 million a year. 

Comment: One respondent asserted 

that if a DoD contracting officer is 

unable to develop a fair and reasonable 

PBP schedule, why would DoD believe 

that there would be a better outcome 

from this new and complicated process. 

DoD Response: There are a number of 

important aspects to establishing an 

effective and equitable PBP 

arrangement. The DoD PBP analysis tool 

addresses the cash flow consideration 

aspect of PBPs. The other aspects are 

addressed in the new PBP Users Guide. 

V. Previously Implemented PBP 

Analysis Tool 

Comment: One respondent indicated 

displeasure that the proposed rule fails 

to note that the PBP analysis tool has 

been in effect since the issuance of 

DPAP memo mandating a cash-flow 

analysis for alternative financing 

arrangements for fixed price contracts. 

The respondent requested DoD provide 

a historical background and explanation 

for the new PBP policy. 

DoD Response: This rule provides 

requirements for the use of the 

performance-based payments (PBP) 

analysis tool. The PBP analysis tool is 

a cash-flow model for evaluating 

alternative financing arrangements, and 

is required to be used by all contracting 

officers contemplating the use of 

performance-based payments on new 

fixed-price type contract awards. The 

DoD PBP analysis tool has been 

available since the issuance of the DPAP 

memo and a cash flow analysis is 

mandatory when providing improved 

cash flow to the contractor. 

W. Prompt Payment Act 

Comment: A respondent 

recommended that DoD request a 

statutory change to the Prompt Payment 

Act to provide interest payments to 

contractors on late or delayed 

performance-based payment financing. 

DoD Response: The Prompt Payment 

Act is not applicable to contract 

financing payments (see 31 U.S.C. 

3902(a) and 5 CFR 1315.1(b)(1)). As 

PBPs are a form of contract financing, 

they are not subject to the Prompt 

Payment Act. DoD does not intend to 

seek a statutory change to, or a 

regulatory change to the implementation 

of, the Prompt Payment Act at this time 

to make contract financing payments 

subject to the Act. 

X. Protracted Negotiations 

Comment: One respondent expressed 

concern that the proposed rule 

constrains the normal constructive 

evaluation and negotiation of all aspects 

of the business being put under 

contract. 

DoD Response: The proposed rule 

does not constrain the normal 

evaluation and negotiation of any other 

elements of the business deal. The 

proposed rule pertains to the analysis 

and negotiation of the consideration due 

the Government as a result of the 

improved cash flow provided by PBP 

financing. 

Y. Timing of PBP Negotiations 

Comment: One respondent expressed 

concern that the proposed rule language 

at DFARS 232.1004(b)(iii) requires the 

Government to negotiate the 

consideration to be received by the 

Government if using a PBP financing 

arrangement will be more favorable to 

the contractor than customary progress 

payments. The respondent claimed that 

such negotiations are inappropriate 

since, in accordance with FAR 

32.005(a), contract financing 

consideration is required after award. 

DoD Response: FAR 32.005(a) 

assumes that appropriate consideration 

for the contract financing included in a 

contract is already reflected in the 

contract price or other contract terms 

and conditions. The proposed rule 

simply defines the process by which 

contracting officers will determine the 

appropriate consideration when a 

contract will be awarded with PBP 

financing. 

Z. Term Clarification 

Comment: One respondent took 

exception to the proposed language at 

DFARS 232.1004(b)(ii)(A), which states 

in part ‘‘. . . If performance-based 

payments are deemed practical, the 

Government will evaluate and negotiate 

the details of the performance-based 

payments schedule.’’ The respondent 

believes that this introduces a nebulous 

new term (i.e., ‘‘practical’’) that does not 

appear to be defined, and appears to be 

in conflict with basic FAR requirements. 

The respondent recommends that this 

statement be replaced with the 

following: ‘‘If the FAR Part 32 

provisions for making contract financing 

payments are met, the Government will 

evaluate and may negotiate the details 

of the proposed performance-based 

payments schedule.’’ 

DoD Response: The use of PBPs is not 

practical for all fixed price contracts. 

The FAR already states that PBPs ‘‘are 

the preferred method of contract 

financing when the contracting officer 

finds them to be practical and the 

contractor agrees to their use.’’ 

Therefore, it is important that the 

contracting officer determine if PBPs are 

practical for use on the contract before 

proceeding further with the evaluation 

and negotiation of a PBP arrangement. 

III. Executive Orders 12866 and 13563 

Executive Orders (E.O.s) 12866 and 

13563 direct agencies to assess all costs 

and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). E.O. 13563 emphasizes the 

importance of quantifying both costs 

and benefits, of reducing costs, of 

harmonizing rules, and of promoting 

flexibility. This is a significant 

regulatory action and, therefore, was 

subject to review under section 6(b) of 

E.O. 12866, Regulatory Planning and 

Review, dated September 30, 1993. This 

rule is not a major rule under 5 U.S.C. 

804. 

IV. Regulatory Flexibility Act 

DoD has prepared a final regulatory 

flexibility analysis consistent with 5 

U.S.C. 603. A copy of the analysis may 

be obtained from the point of contact 

specified herein. The analysis is 

summarized as follows: 

This rule provides detailed guidance 

and instructions on the use of the 

performance–based payments (PBP) 

analysis tool. The objective of the rule 

is to amend the DFARS to provide 


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requirements for the use of the PBP 

analysis tool. The PBP analysis tool is 

a cash-flow model for evaluating 

alternative financing arrangements and 

is required to be used by all contracting 

officers contemplating the use of 

performance-based payments on new 

fixed-price type contract awards. 

No comments were submitted by the 

Chief Counsel for Advocacy of the Small 

Business Administration in response to 

the initial regulatory flexibility analysis 

published with the proposed rule. 

However, one respondent stated a 

concern that the proposed rule will 

result in increased costs for small 

businesses and prevent them from 

competing due to the adequate business 

system requirement. Small business 

contractors are not obligated to negotiate 

or accept a performance-based payment 

financing arrangement, and a decision 

not to pursue performance-based 

payments will not be held against any 

offeror in a competitive source 

selection. Performance-based payment 

negotiations will commence only after 

the contracting officer and offeror have 

agreed on price using customary 

progress payments. Therefore, small 

business will not be at a competitive 

disadvantage whether or not they decide 

that a performance-based payment 

funding arrangement is in their best 

interest. 

DoD does not expect this rule to have 

a significant economic impact on a 

substantial number of small entities 

within the meaning of the Regulatory 

Flexibility Act, 5 U.S.C. 601, et seq., 

because requiring the use of the PBP 

analysis tool by all contracting officers 

contemplating the use of PBPs on new 

fixed-price type contract awards does 

not require contractors to expend 

significant effort or cost. No known 

alternatives to the rule have been 

identified. 

V. Paperwork Reduction Act 

The rule contains new information 

collection requirements that require the 

approval of the Office of Management 

and Budget under the Paperwork 

Reduction Act (44 U.S.C. chapter 35). 

This information collection is necessary 

in order to use the PBP analysis tool, 

required by all contracting officers 

contemplating the use of PBPs on new 

fixed-price type contract awards. OMB 

has cleared this information collection 

requirement under OMB Control 

Numbers 0704–0485, PerformanceBased Payments (PBP) Analysis Tool, 

DFARS Part 232-Contract Financing. 

List of Subjects in 48 CFR Parts 232 and 

252 

Government procurement. 

Manuel Quinones, 

Editor, Defense Acquisition Regulations 

System. 

Therefore, 48 CFR parts 232 and 252 

are amended as follows: 

■ 1. The authority citation for 48 CFR 

parts 232 and 252 continues to read as 

follows: 

Authority: 41 U.S.C. 1303 and 48 CFR 

chapter 1. 

PART 232—CONTRACT FINANCING 

■ 2. Amend section 232.1001 by— 

■ a. Adding a new paragraph (a); and 

■ b. Amending paragraph (d) by 

removing ‘‘standard prompt payment 

terms’’ and adding in its place 

‘‘standard payment terms’’. 

The addition reads as follows: 

232.1001 Policy. 

(a) As with all contract financing, the 

purpose of performance-based payments 

is to assist the contractor in the payment 

of costs incurred during the 

performance of the contract. Therefore, 

performance-based payments should 

never exceed total cost incurred at any 

point during the contract. See PGI 

232.1001(a) for additional information 

on use of performance-based payments. 

* * * * * 

■ 3. Add section 232.1003–70 to read as 

follows: 

232.1003–70 Criteria for use. 

The contracting officer will consider 

the adequacy of an offeror’s or 

contractor’s accounting system prior to 

agreeing to use performance-based 

payments. 

■ 4. In section 232.1004, revise the 

section heading and add paragraph (b) 

to read as follows: 

232.1004 Procedures. 

(b) Prior to using performance-based 

payments, the contracting officer shall— 

(i) Agree with the offeror on price 

using customary progress payments 

before negotiation begins on the use of 

performance-based payments, except for 

modifications to contracts that already 

use performance-based payments; 

(ii) Analyze the performance-based 

payment schedule using the 

performance-based payments (PBP) 

analysis tool. The PBP analysis tool is 

on the DPAP Web site in the Cost, 

Pricing & Finance section, Performance 

Based Payments—Guide Book & 

Analysis Tool tab, at http://

www.acq.osd.mil/dpap/cpic/cp/

Performance_based_payments.html. 

(A) When considering performancebased payments, obtain from the offeror/ 

contractor a proposed performancebased payments schedule that includes 

all performance-based payments events, 

completion criteria and event values 

along with the projected expenditure 

profile in order to negotiate the value of 

the performance events. If performancebased payments are deemed practical, 

the Government will evaluate and 

negotiate the details of the performancebased payments schedule. 

(B) For modifications to contracts that 

already use performance-based 

payments financing, the basis for 

negotiation must include performancebased payments. The PBP analysis tool 

will be used in the same manner to help 

determine the price for the 

modification. The only difference is that 

the baseline assuming customary 

progress payments will reflect an 

objective profit rate instead of a 

negotiated profit rate; 

(iii) Negotiate the consideration to be 

received by the Government if the 

performance-based payments payment 

schedule will be more favorable to the 

contractor than customary progress 

payments; 

(iv) Obtain the approval of the 

business clearance approving official, or 

one level above the contracting officer, 

whichever is higher, for the negotiated 

consideration; and 

(v) Document in the contract file that 

the performance-based payment 

schedule provides a mutually beneficial 

settlement position that reflects 

adequate consideration to the 

Government for the improved contractor 

cash flow. 

* * * * * 

■ 5. Add section 232.1005–70 to read as 

follows: 

232.1005–70 Contract clauses. 

The contracting officer shall include 

the following clauses with appropriate 

fill-ins in solicitations and contracts that 

include performance-based payments: 

(a) For performance-based payments 

made on a whole-contract basis, use the 

clause at 252.232–7012, PerformanceBased Payments—Whole-Contract Basis. 

(b) For performance-based payments 

made on a deliverable-item basis, use 

the clause at 252.232–7013, 

Performance-Based Payments— 

Deliverable-Item Basis. 

PART 252—SOLICITATION 

PROVISIONS AND CONTRACT 

CLAUSES 

■ 6. Add sections 252.232–7012 and 

252.232–7013 to read as follows: 


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252.232–7012 Performance-Based 

Payments—Whole-Contract Basis. 

As prescribed in 232.1005–70(a), use 

the following clause: PERFORMANCE– 

BASED PAYMENTS—WHOLE– 

CONTRACT BASIS (MAR 2014) 

(a) Performance-based payments shall form 

the basis for the contract financing payments 

provided under this contract, and shall apply 

to the whole contract. The performancebased payments schedule (Contract 

Attachment lll) describes the basis for 

payment, to include identification of the 

individual payment events, evidence of 

completion, and amount of payment due 

upon completion of each event. 

(b)(i) At no time shall cumulative 

performance-based payments exceed 

cumulative contract cost incurred under this 

contract. To ensure compliance with this 

requirement, the Contractor shall, in addition 

to providing the information required by FAR 

52.232–32, submit supporting information for 

all payment requests using the following 

format: 

BILLING CODE: 5001–06–P 


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(ii) The Contractor shall not submit 

payment requests more frequently than 

monthly. 

(iii) Incurred cost is determined by the 

Contractor’s accounting books and records, 

which the contractor shall provide access to 

upon request of the Contracting Officer for 

the administration of this clause. 

(End of clause) 

252.232–7013 Performance-Based 

Payments—Deliverable-Item Basis. 

As prescribed in 232.1005–70(b), use 

the following clause: PERFORMANCEBASED PAYMENTS—DELIVERABLEITEM BASIS (MAR 2014) 

(a) Performance-based payments shall form 

the basis for the contract financing payments 

provided under this contract and shall apply 

to Contract Line Items (CLINs) ll, ll, 

and ll. The performance-based payments 

schedule (Contract Attachment ll) 

describes the basis for payment, to include 

identification of the individual payment 

events, CLINs to which each event applies, 

evidence of completion, and amount of 

payment due upon completion of each event. 

(b)(i) At no time shall cumulative 

performance-based payments exceed 

cumulative contract cost incurred under 

CLINs ll, ll, and ll. To ensure 

compliance with this requirement, the 

Contractor shall, in addition to providing the 

information required by FAR 52.232–32, 

submit supporting information for all 

payment requests using the following format: 


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(ii) The Contractor shall not submit 

payment requests more frequently than 

monthly. 

(iii) Incurred cost is determined by the 

Contractor’s accounting books and records, 

which the contractor shall provide access to 

upon request of the Contracting Officer for 

the administration of this clause. 

(End of clause) 

[FR Doc. 2014–07069 Filed 3–28–14; 8:45 am] 

BILLING CODE 5001–06–C 


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