DATE: November 22, 2000

FROM: Barry McVay, CPCM

SUBJECT: Department of Defense; Use of Performance-Based Payments

SOURCE: Department of Defense Acquisition Reform Website: http://www.acq.osd.mil/ar/doc/pbp.pdf

AGENCIES: Department of Defense (DOD)

ACTION: Notice

SYNOPSIS: On November 13, 2000, Under Secretary of Defense Jacques Gansler issued a memorandum to the secretaries of the military departments in which he states that DOD "must take maximum advantage of the benefits of performance-based payments as the preferred means of providing contract financing under fixed-price contracts by making this form of payment the primary and most commonly used form of contract financing."

EDITOR'S NOTE: Performance-based payments are contract financing payments made after achievement of predetermined goals, such as performance objectives or defined events. Federal Acquisition Circular (FAC) 97-16 amended Federal Acquisition Regulation (FAR) Subpart 32.10, Performance-Based Payments, to make performance-based payments "the preferred government financing method when the contracting officer finds them practical, and the contractor agrees to their use." For more on Federal Acquisition Circular (FAC) 97-16, see the March 27, 2000, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Circular (FAC) 97-16, Small Business Competitiveness Demonstration Program and Progress Payments and Related Financing Policies."

SUPPLEMENTAL INFORMATION: In his memorandum, Under Secretary Gansler points out that DOD has had the authority to make performance-based payments to contractors under sole source fixed-price contracts for several years, but that this authority has not been widely used. Now that FAC 97-16 has removed from FAR 32.1000, Scope of Subpart, the prohibitions on using performance-based payments on research and development and competitively negotiated acquisitions, and permits prime contractors with cost-type contracts to use performance-based payments on fixed-price subcontracts (see FAR 32.110, Payment of Subcontractors Under Cost-Reimbursement Prime Contracts), Gansler directs that performance-based payments be "the primary form of contract in at least 25% of contracts valued at $2 million or more. By fiscal year 2005, this method of financing should be the most prevalent form used in fixed-price contracts, such as those for complex services or for production efforts...Exceptions to the use of this contract financing technique should only be agreed to by the contracting officer when supported by a sound business case justification."

In addition, the under secretary has attached to the memorandum "The Case for Performance-Based Payments (PBP)". It lists the following as "advantages of using PBP":

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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