Performance-Based Payments No Longer Capped by the Amount of Incurred Costs

The Defense Department just issued a class deviation concerning performance-based payments and it marks a significant change from the existing DFARS (DoD FAR Supplement) regulations.

The current DFARS clause (DFARS 252.232-7012) states that "at no time shall cumulative performance-based payments exceed cumulative contract cost incurred under this contract. To ensure compliance with this requirement, the Contractor shall, in addition to providing the information required by FAR 52.232-32, submit supporting information for all payment requests using the following format:" The specified format is a schedule that, once you go through the calculations, limits performance-based payments to the cost incurred under the contract. 

The new clause removes that restriction. It does not limit performance-based payments to cost incurred although it still requires contractors to produce actual cost records upon request by the contracting officer. But it goes further:

An acceptable job order cost accounting system is not required for reporting of incurred costs under this clause. If the contractor's accounting system is not capable of tracking costs on a job order basis, the contractor shall provide a realistic approximation of the allocation of incurred costs attributable to this contract in accordance with Generally Accepted Accounting Principles (GAAP) and the contractor's accounting system. Contractors are not required to "certify" incurred costs.

The Government still needs some form of security for performance-based payments. Title to the property is the preferred security but the new clause also allows for (i) a paramount lien on assets, (ii) an irrevocable letter of credit from a federally insured financial institution, (iii) a performance bond, (iv) a guarantee of repayment from a person or corporation of demonstrated liquid net worth, connected by significant ownership interest to the contractor, or (v) title to identified contractor assets of adequate worth.

If the contractor fails to provide adequate security, no financing payment will be made. If the contracting officer determines that the security provided by the contractor is insufficient, the contractor must provide additional security. If the contractor fails to do that, the contracting officer may collect or liquidate such security that has been provided and suspend further payments.

In summary, performance-based payments on DoD contracts are no longer capped at the amount of incurred costs but contractors will need to provide some form of security in exchange for contract financing.

DoD's 'class deviation' letter and accompanying clauses can be accessed here.