FAR 32.1003—Criteria for use.
Plain-English Summary
FAR 32.1003 explains when a contracting officer may use performance-based payments on a federal contract, individual order, or line item. It covers four core eligibility conditions: the contracting officer and offeror must agree to the performance-based payment terms, the instrument must be a fixed-price type, indefinite delivery orders using performance-based payments cannot also provide for progress payments, and non-indefinite-delivery contracts using performance-based payments cannot also provide for progress payments. In practice, this section sets the threshold gate for using performance-based payments at all; it does not itself establish the payment schedule or the detailed administration rules, but it determines whether the arrangement is permissible. The rule matters because performance-based payments are a financing method tied to measurable performance rather than incurred costs, so the government must ensure the contract structure supports that approach and does not duplicate other financing methods. For contractors, this section signals that performance-based payments are not automatic and must be negotiated into the deal. For contracting officers, it is a checklist item before including performance-based payment terms in an award or order.
Key Rules
Mutual agreement required
The contracting officer may use performance-based payments only if the contracting officer and the offeror agree on the performance-based payment terms. This means the payment structure must be negotiated, not imposed unilaterally.
Fixed-price only
Performance-based payments may be used only for a fixed-price contract, individual order, or line item. They are not available under cost-reimbursement arrangements under this section.
No progress payments on IDIQ orders
For indefinite delivery contracts, the individual order may use performance-based payments only if that order does not provide for progress payments. The order must be structured to avoid combining the two financing methods.
No progress payments on other contracts
For contracts that are not indefinite delivery contracts, performance-based payments may be used only if the contract does not provide for progress payments. The overall contract cannot include both financing approaches.
Responsibilities
Contracting Officer
Determine whether the proposed contract, order, or line item meets the eligibility criteria for performance-based payments; negotiate and document the performance-based payment terms with the offeror; and ensure the instrument is fixed-price and does not also provide for prohibited progress payments.
Offeror/Contractor
Agree to the performance-based payment terms before award or order placement; ensure the proposed pricing and financing structure is consistent with a fixed-price arrangement; and avoid requesting or accepting progress payments where they are incompatible with performance-based payments under the applicable contract structure.
Agency
Use performance-based payments only within the regulatory limits of this section and ensure acquisition planning, solicitation language, and award documentation support the chosen financing method.
Practical Implications
This section is a gatekeeper: if any one of the four conditions is missing, performance-based payments should not be used.
A common pitfall is mixing financing methods, especially trying to pair performance-based payments with progress payments on the same contract or order when the rule forbids it.
Contracting officers should confirm the contract type at the line-item or order level, because the rule applies to individual orders and line items as well as whole contracts.
Because the terms must be agreed to, the solicitation and negotiations should clearly address milestones, payment triggers, and documentation expectations early in the acquisition process.
Contractors should review financing terms carefully before award, since accepting performance-based payments can affect cash flow, compliance obligations, and how performance is measured for payment purposes.
Official Regulatory Text
The contracting officer may use performance-based payments for individual orders and contracts provided- (a) The contracting officer and offeror agree on the performance-based payment terms; (b) The contract, individual order, or line item is a fixed-price type; (c) For indefinite delivery contracts, the individual order does not provide for progress payments; and (d) For other than indefinite delivery contracts, the contract does not provide for progress payments.