Performance Based Payments - Proposal to Remove Limitation to Cost Incurred

The Defense Department is proposing changes to its rules on Performance-Based Payments. These changes are required to implement provisions in prior NDAAs (National Defense Authorization Act).

Performance-based payments are a method of contract financing that are based on the achievement of objective, quantifiably measurable events, results, or accomplishments that are defined and valued in the contract prior to performance. It is the preferred method of contracting as many believe that it reduces oversight and compliance costs to the Government. It also has benefits for contractors as it should help cash flow, reduce the cost of oversight and compliance, and allow management to focus on technical and schedule progress.

One of the inherent problems with performance based payments however has been that performance based payments are limited to amounts not greater than costs incurred up to the time of payments. This restriction then requires contractors to accumulate costs in such a way that such comparisons can be made. It kind of defeats some of the attractions of performance-based payments.

Under the proposed rule, those restrictions will be lifted. Contractors will no longer be limited by their costs incurred. Contractors will be able to bill based on the milestones stipulated in the contract.

The requirement for contractors to report costs incurred when requesting performance-based payments is retained, not for purposes of capping payment requests, but in order to have the data necessary for negotiation of performance-based payments on future contracts. So, contractors will still require a cost accounting system hat accumulates costs by contract.

You can access the full text of the proposed change, including instructions on where to send comments here.