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  • Question

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


    Answer

    FAR 52.232-32 Performance-Based Payments, paragraph (e) permits reduction or suspension of performance-based payments as follows:

               (1) The Contractor failed to comply with any material requirement of this contract (which includes paragraphs (h) and (i) of this clause).

               (2) Performance of this contract is endangered by the Contractor’s-

                    (i) Failure to make progress; or

                    (ii) Unsatisfactory financial condition.

               (3) The Contractor is delinquent in payment of any subcontractor or supplier under this contract in the ordinary course of business.

    However, in your situation based on the AAP background information, I’m not sure that a suspension or reduction of payment pursuant to FAR 52.232-32 is appropriate.  DFARS Case 2019-D002 Performance-Based Payments, April 8, 2020, drove a recent change to DFARS policy which helps shed light on the issue.  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 (PBPs) SHALL NOT be conditioned upon costs incurred in contract performance but only on the achievement of negotiated performance outcomes.  As a result of this change, 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.  Therefore, reduction or suspension of PBPs for cost incurred (or lack thereof) would violate the new policy in addition to not fitting any of the criteria in 52.232-32(e).  Additionally, the final rule reiterated the well-known precept that 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, payment or nonpayment of a PBP should be based on completion or non-completion of the milestone event.  Also, when the contractor finally completes the event, they should still get paid the full value of the event despite being late.  Unless endangering contract performance (or delinquent paying subs), the rate at which the contractor is incurring costs (regardless of whether it’s faster or slower than expected) should have no bearing on the payment for a PBP event.  The determining factor should be whether or not the contractor meets all of the completion criteria for the PBP event.  The FAR limitation that total PBPs cannot exceed 90 percent of the contract price still applies however. 

    On the other hand, the contractor being late for one or more deliveries is considered grounds for termination for default, which means it should also be grounds for invoking FAR 52.232-32(e), in which case a reduction or suspension would be an appropriate action to take.  However, from the background information provided, I get the impression the Government is willing to accept or has already accepted late deliveries which makes it difficult to then tell the contractor they are endangering performance.  Therefore, I would be hesitant to make a reduction or suspension to a PBP on this basis (late deliveries).  Once again, PBP are supposed to be based solely on meeting or not meeting the completion criteria of a milestone event.  Also, PBPs are NOT delivery payments (in fact, they are payments in advance of deliveries) and  are NOT normally tied to deliveries on the contract.  Additionally, a contractor is normally paid the entire amount of the PBP or nothing at all.  And, finally, I think it would be a high bar to make the case for invoking FAR 52.232-32(e) if the Government has accepted late deliveries from the contractor unless perhaps a cure notice and/or  show cause notice has been issued at the same time.

    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 wants to avoid limiting reasonable cash flow particularly to the extent it could cause a contractor to defer expenditures or could result in late delivery.  

    Bottom line: I would not advise reducing or suspending the contractor’s PBP based on cost incurred or because the contractor was late on one or more deliveries unless the Government has already begun the termination process by issuing a cure notice and/or show cause notice.  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 such as causing the contractor to defer expenditures making them even more late.  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.”

    Furthermore, if the Government decides to accept late deliveries, you should get consideration such as a reduction to delivery payment(s) or additional quantities or services or something else of value to the Government. 

    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 http://www.acq.osd.mil/​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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