Should the Contracting Officer be considering stopping, suspending or removing Progress Payments? If so, under what FAR/DFAR authority should be utilizing to make this determination?
Based on your question, you should refer to FAR part 32 and DFARS part 232 (for DoD). Below is an excerpt for your convenience.
32.503-6 -- Suspension or Reduction of Payments.
Payments clause provides a Government right to reduce or suspend progress
payments, or to increase the liquidation rate, under specified conditions. These conditions and actions are discussed in paragraphs (b) through (g) of this subsection.
(1) The contracting officer shall take these actions only in accordance with the contract terms and never precipitately or arbitrarily. These actions should be taken only after—
(i) Notifying the contractor of the intended action and providing an opportunity for discussion;(2) The contracting officer shall take immediate unilateral action only if warranted by circumstances such as overpayments or unsatisfactory contract performance.
(ii) Evaluating the effect of the action on the contractor’s operations, based on the contractor’s financial condition, projected cash requirements, and the existing or available credit arrangements; and
(iii) Considering the general equities of the particular situation.
(3) In all cases, the contracting officer shall—
(i) Act fairly and reasonably;
(ii) Base decisions on substantial evidence; and
(iii) Document the contract file. Findings made under paragraph (c) of the Progress Payments clause shall be in writing.
(b) Contractor noncompliance.
(1) The contractor must comply with all material requirements of the contract. This includes the requirement to maintain an efficient and reliable accounting system and controls, adequate for the proper administration of progress payments. If the system or controls are deemed inadequate, progress payments shall be suspended (or the portion of progress payments associated with the unacceptable portion of the contractor’s accounting system shall be suspended) until the necessary changes have been made.
(2) If the contractor fails to comply with the contract without fault or negligence, the contracting officer will not take action permitted by paragraph (c)(1) of the Progress Payments clause, other than to correct overpayments and collect amounts due from the contractor.
(c) Unsatisfactory financial condition.
(1) If the contracting officer finds that contract performance (including full liquidation of progress payments) is endangered by the contractor’s financial condition, or by a failure to make progress, the contracting officer shall require the contractor to make additional operating or financial arrangements adequate for completing the contract without loss to the Government.
(2) If the contracting officer concludes that further progress payments would increase the probable loss to the Government, the contracting officer shall suspend progress payments and all other payments until the unliquidated balance of progress payments is eliminated.
(d) Excessive inventory.
If the inventory allocated to the contract exceeds reasonable requirements (including a reasonable accumulation of inventory for continuity of operations), the contracting officer should, in addition to requiring the transfer of excessive inventory from the contract, take one or more of the following actions, as necessary, to avoid or correct overpayment:
(1) Eliminate the costs of the excessive inventory from the costs eligible for progress payments, with appropriate reduction in progress payments outstanding.
(2) Apply additional deductions to billings for deliveries (increase liquidation).
(e) Delinquency in payment of costs of performance.
(1) If the contractor is delinquent in paying the costs of contract performance in the ordinary course of business, the contracting officer shall evaluate whether the delinquency is caused by an unsatisfactory financial condition and, if so, shall apply the guidance in paragraph (c) of this section. If the contractor’s financial condition is satisfactory, the contracting officer shall not deny progress payments if the contractor agrees to—
(i) Cure the payment delinquencies;(2) If the contractor has, in good faith, disputed amounts claimed by subcontractors, suppliers, or others, the contracting officer shall not consider the payments delinquent until the amounts due are established by the parties through litigation or arbitration. However, the amounts shall be excluded from costs eligible for progress payments so long as they are disputed.
(ii) Avoid further delinquencies; and
(iii) Make additional arrangements adequate for completing the contract without loss to the Government.
(3) Determinations of delinquency in making contributions under employee pension, profit sharing, or stock ownership plans, and exclusion of costs for such contributions from progresspayment requests, shall be in accordance with paragraph (a)(3) of the clause at 52.232-16, Progress Payments, without regard to the provisions of 32.503-6.
(f) Fair value of undelivered work. Progress
payments must be commensurate with the fair value of work accomplished in accordance with contract requirements. The contracting officer must adjust progress
payments when necessary to ensure that the fair value of undelivered work equals or exceeds the amount of unliquidated progress
payments. On loss contracts, the application of a loss ratio as provided at paragraph (g) of this subsection constitutes this adjustment.
(g) Loss contracts.
(1) If the sum of the total costs incurred under a contract plus the estimated costs to complete the performance are likely to exceed the contract price, the contracting officer shall compute a loss ratio factor and adjust future progress payments to exclude the element of loss. The loss ratio factor is computed as follows:
(i) Revise the current contract price used in progress payment computations (the current ceiling price under fixed-price incentive contracts) to include the not-to-exceed amount for any pending change orders and unpriced orders.(2) If the contracting officer believes a loss is probable, future progress payment requests shall be modified as follows:
(ii) Divide the revised contract price by the sum of the total costs incurred to date plus the estimated additional costs of completing the contract performance.
(i) The contract price shall be the revised amount computed under subparagraph (g)(1)(i) of this section.(3) The contracting officer may use audit assistance, technical services, management reports, and other sources of pertinent data to evaluate progress payment requests. If the contracting officer concludes that the contractor’s figures in the contractor’s progress payment request are not correct, the contracting officer shall—
(ii) The total costs eligible for progress payments shall be the product of
(A) the sum of paid costs eligible for progress payments times(iii) The costs applicable to items delivered, invoiced, and accepted shall not include costs in excess of the contract price of the items.
(B) the loss ratio factor computed under subparagraph (g)(1)(ii) of this section.
(i) In the manner prescribed in paragraph (g)(4) of this section, prepare a supplementary analysis to be attached to the contractor’s request;(4) The following is an example of the supplementary analysis required in paragraph (g)(3) of this section:
(ii) Advise the contractor in writing of the differences; and
(iii) Adjust all further progress payments in accordance with paragraph (g)(1) of this section, using the contracting officer’s figures, until the difference is resolved.
Contract price $2,850,000
Change orders and unpriced orders (to extent
funds have been obligated) 150,000
Revised contract price $3,000,000
Total costs incurred to date $2,700,000
Estimated additional costs to complete 900,000
Total costs to complete $3,600,000
Loss ratio factor $3,000,000/$3,600,000 = 83.3%
Total costs eligible for progress
Loss ratio factor x 83.3%
Recognized costs for progress
rate x 80.0%
Alternate amount to be used $1,799,280
Factored costs of items delivered* $750,000
Recognized costs applicable to undelivered items
*This amount must be the same as the contract price of the items delivered.
32.503-7 – [Reserved]
32.503-8 -- Liquidation Rates -- Ordinary Method.
The Government recoups progress
payments through the deduction of liquidations from payments that would otherwise be due to the contractor for completed contract items. To determine the amount of the liquidation, the contracting officer applies a liquidation rate to the contract price of contract items delivered and accepted. The ordinary method is that the liquidation rate is the same as the progress payment
rate. At the beginning of a contract, the contracting officer must use this method.
32.503-9 -- Liquidation Rates -- Alternate Method.
(a) The liquidation rate determined under 32.503-8
shall apply throughout the period of contract performance unless the contracting officer adjusts the liquidation rate under the alternate method in this 32.503-9. The objective of the alternate liquidation rate method is to permit the contractor to retain the earned profit element of the contract prices for completed items in the liquidation process. The contracting officer may reduce the liquidation rate if --
(1) The contractor requests a reduction in the rate;
(2) The rate has not been reduced in the preceding 12 months;
(3) The contract delivery schedule extends at least 18 months from the contract award date;
(4) Data on actual costs are available --
(i) For the products delivered, or(5) The reduced liquidation rate would result in the Government recouping under each invoice the full extent of the progress payments applicable to the costs allocable to that invoice;
(ii) If no deliveries have been made, for a performance period of at least 12 months;
(6) The contractor would not be paid for more than the costs of items delivered and accepted (less allocable progress payments) and the earned profit on those items;
(7) The unliquidated progress payments would not exceed the limit prescribed in paragraph (a)(5) of the Progress Payments clause;
(8) The parties agree on an appropriate rate; and
(9) The contractor agrees to certify annually, or more often if requested by the contracting officer, that the alternate rate continues to meet the conditions of subsections 5, 6, and 7 of this section. The certificate must be accompanied by adequate supporting information.
(b) The contracting officer shall change the liquidation rate in the following circumstances:
(1) The rate shall be increased for both previous and subsequent transactions, if the contractor experiences a lower profit rate than the rate anticipated at the time the liquidation rate was associated with contract items already delivered, as well as subsequent progress payments.
(2) The rate shall be increased or decreased in keeping with the successive changes to the contract price or target profit when --
(i) The target profit is changed under a fixed-price incentive contract with successive targets; or
(ii) A redetermined price involves a change in the profit element under a contract with prospective price redetermination at stated intervals.
(c) Whenever the liquidation rate is changed, the contracting officer shall issue a contract modification to specify the new rate in the Progress
Payments clause. Adequate consideration for these contract modifications is provided by the consideration included in the initial contract. The parties shall promptly make the payment
or liquidation required in the circumstances.
32.503-10 -- Establishing Alternate Liquidation Rates.
(a) The contracting officer must ensure that the liquidation rate is --
(1) High enough to result in Government recoupment of the applicable progress payments on each billing; and
(2) Supported by documentation included in the administration office contract file.
(b) The minimum liquidation rate is the expected progress
payments divided by the contract price. Each of these factors is discussed below:
(1) The contracting officer must compute the expected progress payments by multiplying the estimated cost of performing the contract by the progress payment rate.
(2) For purposes of computing the liquidation rate, the contracting officer may adjust the estimated cost and the contract price to include the estimated value of any work authorized but not yet priced and any projected economic adjustments; however, the contracting officer’s adjustment must not exceed the Government’s estimate of the price of all authorized work or the funds obligated for the contract.
(3) The following are examples of the computation. Assuming an estimated price of $2,200,000 and total estimated costs eligible for progress payments of $2,000,000:
(i) If the progress payment rate is 80 percent, the minimum liquidation rate should be 72.7 percent, computed as follows:(4) Minimum liquidation rates will generally be expressed to tenths of a percent. Decimals between tenths will be rounded up to the next highest tenth (not necessarily the nearest tenth), since rounding down would produce a rate below the minimum rate calculated.
(ii) If the progress payment rate is 85 percent, the minimum liquidation rate should be 77.3 percent, computed as follows:
$2,000,000 x 80% = 72.7%
$2,000,000 x 85% = 77.3%