32.1001 Policy
Source: FAR 32.1001 on acquisition.gov
Performance-based payments are the Government's preferred contract financing method when practical, but are subject to specific restrictions and must be agreed upon by both parties.
Overview
FAR 32.1001 establishes the policy for using performance-based payments (PBPs) as a preferred method of Government contract financing, provided they are practical and both the contracting officer and contractor agree. PBPs are not payments for accepted deliverables but are instead financing payments based on the achievement of specific performance milestones. These payments are fully recoverable by the Government if the contractor defaults, similar to progress payments. PBPs are not subject to prompt payment interest penalties and must comply with agency-specific policies. However, PBPs are prohibited for cost-reimbursement line items, certain construction and architect-engineer contracts, shipbuilding contracts with progress payments, and contracts awarded via sealed bidding.
Key Rules
- Preference for Performance-Based Payments
- PBPs are the preferred financing method when practical and mutually agreed upon.
- Nature of PBPs
- PBPs are not payments for accepted items but are based on performance milestones.
- Recoverability
- PBPs are fully recoverable if the contractor defaults.
- Interest Penalties
- PBPs are not subject to prompt payment interest penalties.
- Restrictions on Use
- PBPs cannot be used for cost-reimbursement line items, certain construction/architect-engineer/shipbuilding contracts, or sealed bid contracts.
Responsibilities
- Contracting Officers: Assess practicality, obtain contractor agreement, ensure compliance with restrictions, and follow agency policy.
- Contractors: Agree to PBPs, meet performance milestones, and understand recoverability in case of default.
- Agencies: Establish and enforce policies for PBPs and ensure proper application.
Practical Implications
- PBPs offer a flexible, milestone-driven financing option but are not universally applicable.
- Contractors and contracting officers must carefully assess contract type and agency policy before selecting PBPs.
- Misapplication can result in noncompliance or financial risk if default occurs.
(a) Performance-based payments are the preferred Government financing method when the contracting officer finds them practical, and the contractor agrees to their use.
(b) Performance-based payments are contract financing payments that are not payment for accepted items.
(c) Performance-based payments are fully recoverable, in the same manner as progress payments, in the event of default.
(d) Performance-based payments are contract financing payments and, therefore, are not subject to the interest-penalty provisions of prompt payment (see subpart 32.9). These payments shall be made in accordance with agency policy.
(e) Performance-based payments shall not be used for-
(1) Payments under cost-reimbursement line items;
(2) Contracts for architect-engineer services or construction, or for shipbuilding or ship conversion, alteration, or repair, when the contracts provide for progress payments based upon a percentage or stage of completion; or
(3) Contracts awarded through sealed bid procedures.