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    Can the ACO reduce a PBP payment request based on the contractor being delinquent on contractual deliveries.


    A final rule entitled, Performance-Based Payments (DFARS Case 2019-D002), published in the Federal Register on April 8, 2020, made changes to DoD’s policy as it relates to performance based payments (PBPs) which I think sheds some light on the answer to your question.  The National Defense Authorization Act for Fiscal Year 2017, Section 831 amended 10 U.S.C. 2307 by adding paragraph (b)(2), which provides that performance-based payments SHALL NOT be conditioned upon costs incurred in contract performance but only on the achievement of negotiated performance outcomes.  As a result of the final rule, the restrictions were removed at DFARS 232.1001(a) and paragraph (b)(i) of the clauses at DFARS 252.232-7012 and 252.232-7013 that limited PBPs to amounts not greater than costs incurred up to the time of payment.  Due to the statute and consequently the DFARS policy change, I think that withholding a performance based payment for cost incurred (or lack thereof) would violate the new policy.  The final rule makes clear that the PBPs should be tied to the achievement of specific, measurable events or accomplishments that are defined and valued in advance by the parties to the contract.  In other words, a PBP should only be withheld when (and only when) a milestone event is not successfully completed by the contractor (the payment, however, can be made as soon as the contractor successfully completes the event).  On the other hand, payments should not be withheld because the contractor is incurring costs at a faster(or slower) than expected rate.  The FAR limitation that that total PBPs cannot exceed 90 percent of the contract price does still apply though. 

    Furthermore, I don’t advise making a reduction to a PBP because of a late delivery by the contractor.  Once again, PBP are supposed to be based solely on meeting or not meeting the completion criteria of a milestone event.  PBPs are NOT delivery payments (in fact, they are payments in advance of deliveries).  Performance-based events, therefore, should NOT be tied to deliveries on the contract.  Additionally, a contractor is normally paid the entire amount of the PBP or nothing at all.  For instance, if the contractor fails to meet the completion criteria for an event, the contractor does not get paid anything for that event until they do successfully complete it at which time they would get paid the entire PBP value in accordance the PBP schedule in the contract.  Making a partial (or reduced) performance-based payment, I think would require a restructure/re-negotiation of the payment schedule in the contract. 

    In reading the final rule, I found one industry comment which I thought was interesting.  The comment and response read as follows:

    Comment: One respondent recommended guidance to contracting officers that a slightly positive cash flow is acceptable and encouraged, since it further incentivizes performance. Another respondent when addressing training also noted that limiting reasonable cash flow to contractors may result in deferring expenditures, which could result in late delivery.

    Response: FAR 32.1004(b)(2)(i) states that performance-based payments shall reflect prudent contract financing provided only to the extent needed for contract performance, and FAR 32.1004(b)(3)(ii) states that the contracting officer shall ensure that 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. DoD is not trying to limit reasonable cash flow with this rule as it does not differ from FAR 32.1004 (b)(2)(ii) which limits contract financing to 90% of price. Any training provided will be done so in accordance with the rules in the FAR and DFARS.

    As pointed out in the response, DoD does not want to limit reasonable cash flow to the extent it causes a contractor to defer expenditures which could result in late delivery.  

    Bottom line: I would not advise reducing or deducting the contractor’s PBP based on cost incurred or because the contractor was late on one or more deliveries (assuming of course they earned the payment based on meeting the completion criteria for the event).  Taking such an action, in my opinion, would be inconsistent with  10 U.S.C. 2307 (b)(2) and DFARS 232.1001(a) and could expose the government to unintended risks.  Moreover, a decision to make a performance-based payment or not to the contractor is normally a binary action – it’s all or nothing.  Either they earned the entire PBP value, or they didn’t.  The most feasible remedy available to the Government is termination for default (FAR 49.402 ).  FAR 49.402-1 -- The Government’s Right, states the following: “Under contracts containing the Default clause at 52.249-8, the Government has the right … to terminate the contract completely or partially for default if the contractor fails to--

    (a) Make delivery of the supplies or perform the services within the time specified in the contract.”

    On the other hand, the Government could choose to accept the items that were delivered late, but, in doing so, should expect to get some type of consideration due to the contractor being late (e.g. a deduction to delivery payment(s) or additional quantities or services). 

    For additional information on the subject, I recommend reviewing the DAU Continuing Learning Course (CLC 026), Performance Based Payment Overview, the DoD Performance Based Payment Guide, and Guide for Performance Based Service Acquisitions.  The PBP analysis tool is also on the DPC website in the Cost, Pricing & Finance section, Performance Based Payments—Guide Book & Analysis Tool tab, at​dpap/​cpic/​cp/​Performance_​based_​payments.html.  I would also take a look at DFARS 232.1004 with regard to establishment of  performance-based finance payment amounts  Finally, we always recommend consulting with your local contracting chain of command and legal office before taking action.





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