Government Contracts DFARS Rule Lifts Restrictions on Performance-Based Payments
Wednesday, May 6, 2020

DFARS Rule Lifts Restrictions on Performance-Based Payments

By Government Contracts Editorial Staff

The Department of Defense has finalized the rule in DFARS Case 2019-D002. The rule amends the Defense Federal Acquisition Regulation Supplement to implement section 831 the National Defense Authorization Act for Fiscal Year 2017 (PL 114-328), which addresses the use of performance-based payments. Performance-based payments differ from traditional progress payments based on costs because they consider the contractor’s achievement of objective, quantifiably measurable events, results, or accomplishments that are defined and valued in the contract prior to performance. Under FAR 32.1001(a), performance-based payments are a preferred method of government contracting. Section 831 amended 10 USC 2307 to provide that performance-based payments may be conditioned only on the achievement of negotiated performance outcomes, and not on costs incurred in contract performance.

Restrictions Removed. Accordingly, the rule removes restrictions in DFARS 232.1001(a), DFARS 252.232-7012(b)(i), and DFARS 252.232-7013(b)(i) that limited performance-based payments to amounts not greater than costs incurred up to the time of payment. The rule does not alter the requirement for contractors to report costs incurred when requesting performance-based payments. The final rule makes a number of changes to the proposed rule (¶70,020.430), including permitting alternate forms of security for performance-based payments and clarifying that an acceptable accounting system is not required for incurred costs under the performance-based payments clause. Specifically, the final rule modifies the requirement at DFARS 232.1003-70 for compliance with Generally Accepted Accounting Principles and the representation at DFARS 252.232-7015 to apply to the contractor’s financial statements, rather than the “output” of the contractor’s accounting system. The rule removes the requirement for GAAP compliance to be evidenced by audited financial statements. The rule modifies the procedures at DFARS 232.1004 to eliminate the requirement to first agree on price using customary progress payments and then require consideration if performance-based payments are subsequently negotiated.

Clauses and Provisions. Also, the rule revises the contract clauses at DFARS 252.232-7012, Performance-Based Payments—Whole-Contract Basis, and DFARS 252.232-7013, Performance-Based Payments—Deliverable Items, to state that it is not necessary to have a government-unique cost accounting system to report incurred cost. In addition, the rule adds a new provision at DFARS 252.232-7016, Notice of Progress Payments or Performance-Based Payments, to be used instead of FAR 52.232-13, Notice of Progress Payments, when the solicitation contains clauses for progress payments and performance-based payments, to explain that only one type of financing will be included in the resultant contract. For the text of the rule, which has an April 8, 2020, effective date, see ¶70,017.32.

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