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    We are converting a contract from progress payments to performance based payments (PBPs). (1) Does the value of the progress payments to date become the first milestone? (EX: $26M progress payments to date; same CLIN for progress payments and PBPs.) (2) How are the performance based payments calculated? FAR Part 32 discusses contract price (to include profit) while DFARS 232 discusses incurred costs. Contractor is seeking 100% of contract price; 100% of incurred costs. We do not have any sub-assemblies built or major end items delivered. First delivery will be July 2017. Do you have examples of performance based payments that show how the 90% limitation applies? Thank you.


    Answer

    Before discussing the move from Progress Payments (PP) to Performance Based Payments (PBP), I want to bring to your attention the change made to DFARS 232.10: Performance-Based Payments in April 2014 where now performance-based payments cannot exceed total cost incurred at any point during the contract.  Meaning if the value associated with a milestone is $100 but the contractor has only incurred $75 in cost; the contractor would only be paid $75 and the contractor would receive the remaining $25 later in the contract when he starts making deliveries.  With this DFARS change, the cash flow available to contractors under PBP is not as attractive.
    Performance-based payments are not practical for use on all fixed price contracts and require considerable effort between the contractor and Government to identify the appropriate performance-based payment events and establish the proper completion criteria for those events. Additional information and instruction on performance-based payments are provided in the DoD Performance-based Payments Guide on the DPAP website located http://www.acq.osd.mil/dpap/cpic/cp/Performance_based_payments.html

    FAR 52.232-28: Invitation to Propose PBPs states the total value of all the milestones must not exceed 90% of the contract price if on a whole contract basis or 90% of the delivery item price if on a delivery item basis.  The milestones may represent a physical change in the product.   Appropriate payment events include receipt of material, product leaving fabrication, completion of first article testing or completion of a sub assembly.  Milestone should demonstrate the contractor is making progress ie completing tasks.  Inappropriate payment events include typical administrative actions such as signing of contract or modification, attendance at management system review or a passage of time or incurring of costs. 


    The conversion modification must provide instructions on how to liquidate all unliquidated Progress Payments.  The three options for the liquidation are to instruct Contractor to repay unliquidated Progress Payments, re-allocate previous Progress Payments via adjustments or instruct paying office (DFAS) to take offset against first PBP invoice.  Please work with DFAS during the conversion process.
     


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