Performance Based Payments - Final Rule Published

DoD published a final rule in its FAR Supplement (DFARS) today that provides detailed guidance and instructions on the use of the performance-based payments analysis tool. Performance-based payments have been around for a long time but this new "tool" is a cash-flow analysis model for evaluating alternative financing arrangements. It is also required to be used by all contracting officers contemplating the use of performance-based payments on new fixed-price type contracts.

We're going to take a few days to look at this new rule in depth. Contractors who rely on contract financing through performance-based payments need to understand these new rules and to be able to position themselves to maximize their performance-based progress payment entitlements.

The very first thing to note is that an adequate accounting system is a paramont for obtaining performance-based payments. Contractors that do not have an adequate accounting system will not qualify. An inadequate accounting system is a show-stopper. DoD explains it this way:

FAR 32.1007(c) requires the contracting officer to determine the adequacy of controls established by the contractor for the administration of performance-based payments. Since the contractor will be required to report total cost incurred to date based on its existing accounting system, the contracting officer must consider the adequacy of the contractor's accounting system for providing reliable cost data. DFARS 232.1003-70, Criteria for use, is added to require contracting officers to consider the adequacy of an offeror's or contractor's accounting system prior to agreeing to use performance-based payments.

Contracting officers, before agreeing to any performance-based payments, will need to assure themselves that the contractor's (or offeror's) accounting system is adequate for providing reliable cost-data. They may use someone from their organization to do this or they might ask for assistance from DCMA (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency). Where possible, the Government will rely on information already in their files to make that assessment. But where no recent relevant oversight has been performed, contractors (offerors) can expect some level of inquiry and analysis of their accounting system.

To view the attributes that make up an adequate accounting system, see this posting.