[Federal Register: December 26, 2007 (Volume 72, Number 246)]
[Rules and Regulations]
[Page 73219-73222]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26de07-23]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 32 and 52
[FAC 2005-23; FAR Case 2005-016; Item III; Docket 2007-0001; Sequence
13]
RIN 9000-AK64
Federal Acquisition Regulation; FAR Case 2005-016, Performance-
Based Payments
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on a final rule
amending the Federal Acquisition Regulation (FAR) to implement
recommendations to change the regulations related to performance-based
payments.
DATES: Effective Date: January 25, 2008.
FOR FURTHER INFORMATION CONTACT: Ms. Meredith Murphy, Procurement
Analyst, at (202) 208-6925 for clarification of content. For
information pertaining to status or publication schedules, contact the
FAR Secretariat at (202) 501-4755. Please cite FAC 2005-23, FAR case
2005-016.
SUPPLEMENTARY INFORMATION:
A. Background
This final rule amends the Federal Acquisition Regulation to
increase the use of performance-based payments as the method of
contract financing on Federal Government contracts and improve the
efficiency of performance-based payments when used on these contracts.
These changes originated from recommendations submitted by the
Department of Defense Performance-Based Payments Working Group in their
March 8, 2005, report.
DoD, GSA, and NASA published a proposed rule in the Federal
Register at 71 FR 75186 on December 14, 2006. Comments were received
from three respondents in response to the proposed rule. The Councils
considered all of the comments and recommendations in developing the
final rule. A discussion of the comments is provided below.
1. Comment: Two commenters addressed the issue of establishing
performance-based payments at other than 90 percent of the contract
price. One commenter recommended revising the rule to require
contracting officers to document the rationale for soliciting or
awarding contracts that limit performance-based payments to less than
90 percent of the contract price instead of when the performance-based
payments effectively result in financing payments that are less than
the payments that would be made with progress payments. The ability to
receive contract financing payments at 90 percent of the contract price
balances the risk associated with performance-based payments. If the
performance-based payments are less than 90 percent of the contract
costs, contractors will not agree to their use, which is problematic
since performance-based payments are the preferred financing method.
Another commenter said the requirement to document the rationale for
establishing performance-based payments when the performance-based
payments are less than 90 percent of the contract price, or delivered-
item price, will likely result in contracting officers artificially
inflating the value of the events to avoid having to document the
rationale.
Response: Providing performance-based payments at or below the
effective rate for progress payments does not facilitate the use of
performance-based payments. However, performance-based payments must
reflect prudent contract financing and are authorized only to the
extent needed for contract performance. In addition, performance-based
payment amounts must be commensurate with the value of the performance
event or performance criterion. Therefore, the Councils see no reason
to require contracting officers to document the rationale for
establishing performance-based payments that are less than 90 percent
of the contract price. In addition, the Councils believe the FAR
requirements are sufficient to ensure performance-based payments are
not artificially inflated simply to avoid having to document the
rationale for establishing performance-based payments that are less
than 90 percent of the contract price or delivered-item price.
2. Comment: Two commenters recommended eliminating the provision in
the proposed rule that precluded limiting performance-based payments to
the contractor's actual incurred costs because there can never be a
need for contract financing payments in excess of the incurred costs.
Response: Such a prohibition could inhibit the contracting
officer's flexibility in structuring and administering performance-
based payments. Therefore, this provision has been omitted from the
final rule.
3. Comment: One commenter recommended making performance-based
payments the mandatory type of financing payments whenever a contractor
requests this type of financing because some buying commands never
authorize performance-based payments.
Response: Performance-based payments are the preferred Government
financing method when the contracting officer finds them practical and
the contractor agrees to their use. However, performance-based payments
are not always practical. Therefore, the Government must retain the
right to determine the proper financing method.
4. Comment: One commenter recommended revising the rule to permit
contractors to submit contract financing payment requests on either a
fiscal or calendar month basis as long as no more than 12 payment
requests are made annually. The commenter said the lack of clear
definition in the FAR clause at 52.232-32(b) as to what constitutes
``monthly'' payment requests has resulted in inconsistencies and
confusion in enforcement. Contractors that use fiscal months accounting
to bill contract financing payments should be allowed to submit two
payment requests in the same calendar month to avoid negative
fluctuations in working capital.
Response: Nothing in the FAR precludes payment on a fiscal month
basis. The Councils are not aware of any payment issues relating to the
use of the term ``monthly'' and note that the provision is unchanged by
this rule. Therefore, the Councils believe the existing terminology is
sufficient.
5. Comment: One commenter recommended deleting all reference to
``milestones'' from the FAR coverage on performance-based payments to
eliminate confusion between performance-based financing and commercial
financing. Instead of using the term ``milestones,'' the commenter
recommended using the terms ``event'' or ``performance-based event.''
Response: The Councils are not aware of any issues related to the
meaning of ``milestones'' and note that the terminology is unchanged by
this rule. Therefore, the Councils believe the existing terminology is
sufficient.
[[Page 73220]]
6. Comment: One commenter recommended revising the performance-
based payment provisions to specify that payment offices will pay
approved payment requests in the number of days specified in an
agency's regulation if the contracting officer fails to prescribe the
number of days the payment office will pay approved requests. The
default 30th day could cause some DoD contracting officers to refuse to
include the 14th day as prescribed in DoD regulations.
Response: Concerns over compliance with individual agency
regulations are beyond the scope of this case. However, the Councils
are not aware of any instances where contracting officers have failed
to include the number of days prescribed by their agency regulations.
7. Comment: One commenter recommended DoD partner with industry
when it develops the training materials and guidance referenced in
DoD's June 2, 2005, response to public input on performance-based
payments (70 FR 32306) because dissemination of this information to
both Government and industry personnel would facilitate a better
understanding of the process.
Response: DoD training materials are beyond the scope of this case.
DoD will consider whether input from industry is needed to develop the
appropriate training.
8. Comment: One commenter recommended requiring the FAR or agency
policy to require agency head approval when performance-based payments
are less than 90 percent of the contract price on foreign military
sales. Application of DoD's weighted guidelines generally results in
FMS contracts having lower profit margins and FAR limitations typically
provide less favorable financing than contracts negotiated on a direct
basis with the foreign country.
Response: Foreign military sales and the DoD weighted guidelines
are not addressed in the FAR because they are unique to DoD. DoD
regulations are beyond the scope of this case.
9. Comment: One commenter recommended DoD consider revising DoD
policy to permit direct billing for performance-based payments.
Response: DoD policy is beyond the scope of this case. However, DoD
notes that direct billing is only authorized for payments that require
Defense Contract Audit Agency (DCAA) provisional approval. Performance-
based payments require the approval of the contracting officer and not
DCAA. Contracting officer approval is a reasonable management control
as it may be difficult to reconstruct when a milestone was completed.
This is not a significant regulatory action and, therefore, was not
subject to review under Section 6(b) of Executive Order 12866,
Regulatory Planning and Review, dated September 30, 1993. This rule is
not a major rule under 5 U.S.C. 804.
B. Regulatory Flexibility Act
The Department of Defense, the General Services Administration, and
the National Aeronautics and Space Administration certify that this
final rule will not 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 this rule should reduce
administrative costs for contractors and the Government, thus further
encouraging the use of performance-based payments.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the rule does
not impose any additional information collection requirements that
require the approval of the Office of Management and Budget under 44
U.S.C. 3501, et seq.
List of Subjects in 48 CFR Parts 32 and 52
Government procurement.
Dated: December 19, 2007.
Al Matera,
Director, Office of Acquisition Policy.
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Therefore, DoD, GSA, and NASA amend 48 CFR parts 32 and 52 as set forth
below:
0
1. The authority citation for 48 CFR parts 32 and 52 continues to read
as follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
PART 32--CONTRACT FINANCING
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2. Revise section 32.1000 to read as follows:
32.1000 Scope of subpart.
This subpart provides policy and procedures for performance-based
payments under noncommercial purchases pursuant to Subpart 32.1.
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3. Amend section 32.1001 by--
0
a. Removing the second sentence in paragraph (c);
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b. Removing paragraph (d);
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c. Redesignating paragraph (e) as (d);
0
d. Revising newly redesignated paragraph (d); and
0
e. Adding new paragraph (e) to read as follows:
32.1001 Policy.
* * * * *
(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.
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4. Revise section 32.1002 to read as follows:
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.
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5. Revise section 32.1003 to read as follows:
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.
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6. Revise section 32.1004 to read as follows:
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.
[[Page 73221]]
Thus, a contract line item for 10 airplanes, with a unit price of
$1,000,000 each, has 10 deliverable items-the separate planes. A
contract 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 contract 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).
[[Page 73222]]
(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.
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7. Revise section 32.1005 to read as follows:
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)).
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8. Revise section 32.1007 to read as follows:
32.1007 Administration and payment of performance-based payments.
(a) Responsibility. The contracting officer responsible for
administering performance-based payments (see 42.302(a)(12)) 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.
32.1009 [Amended]
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9. Amend section 32.1009 by removing from the first sentence in
paragraph (a) the word ``must'' and adding ``shall'' in its place.
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
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10. Amend section 52.232-32 by--
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a. Revising the clause date;
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b. Revising the second sentence of paragraph (c)(2); and
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c. Removing from the first sentence of paragraph (f)(5) the word
``must'' and adding ``shall'' in its place.
52.232-32 Performance-based payments.
* * * * *
PERFORMANCE-BASED PAYMENTS (JAN 2008)
(c) * * *
(2) * * * The designated payment office will pay approved
requests on the ---------- [Contracting Officer insert day as
prescribed by agency head; if not prescribed, insert ``30th''] day
after receipt of the request for performance-based payment by the
designated payment office. * * *
* * * * *
[FR Doc. E7-24939 Filed 12-21-07; 8:45 am]
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