Milestone Payments and Adequate Accounting Systems

Progress payments for construction projects are typically based on a percentage of work complete. FAR (Federal Acquisition Regulations) 52.232-5 provides for progress payments monthly as the work proceeds ... on estimates of work accomplished which meets the standards of quality established under the contract, as approved by the contracting officer. The FAR clause also requires

• an itemization of the amounts requested, related to the various elements of work required by the contract covered by the payment requested
• a listing of the amount included for work performed by each subcontractor under the contract
• a listing of the total amount of each subcontract
• a listing of the amounts previously paid to each subcontractor
• additional supporting data in a form and detail required by the contracting officer

The form and content of the progress payment requests and the substantiation accompanying it vary from Agency to Agency but common among them is a signature block where the contractor and the Government agree with the percentage complete for specific tasks. For example, mobilization might be one of the progress payment line items. When mobilization is completed, the contractor and Government will agree and the contractor can bill for 100 percent of that line item.

The question often arises concerning the importance of an adequate accounting system when progress payments based on performance (as opposed to progress payments based on costs) are part of the contract. Since progress payments are based on a percentage of work complete and have nothing to do with actual costs incurred, why the focus and importance on an accounting system that can record costs by job?

The Government has an answer for this. The Government position is that the two should correlate, i.e. percentage complete should correlate to actual costs incurred. The contractor when doing their scheduling should also be allocating the associated costs with each activity. It is the job of the contracting officer to approve the schedule and the associated costs with each activity. The contractor should then be tracking and reporting their actual cost incurred as well as progress. If cost exceed its anticipated percentage complete, that is a warning sign that the contractor could be in trouble and the contracting officer will (or should) begin asking questions.

It is not difficult to establish an accounting system that is acceptable for Government contracting purposes. If you need help, give us a call.