FAR 32.1004—Procedures.
Plain-English Summary
FAR 32.1004 explains how contracting officers establish and administer performance-based payments as a form of contract financing. It covers whether payments are made on a whole-contract basis or a deliverable-item basis, how to define the performance basis using milestones or measurable criteria, and how to distinguish severable events from cumulative events. It also addresses how to set and document payment amounts, including the requirement to keep total financing within the 90 percent cap, ensure the amounts are commensurate with the value of the work, and maintain a fair and reasonable overall contract price. The section further explains how to adjust the payment schedule when contract modifications change the work and how to provide payment office instructions when multiple appropriations fund the contract. In practice, this section is about structuring financing so the Government pays only for meaningful progress, can verify completion, and avoids overfinancing or paying for administrative events that do not represent real contract performance.
Key Rules
Whole vs. item basis
Performance-based payments may be structured on a whole-contract basis or on a deliverable-item basis unless agency regulations say otherwise. Whole-contract financing applies to the contract as a whole, while deliverable-item financing applies only to a specific item with a distinct unit price.
Use real performance events
Payment triggers must be meaningful events or measurable performance criteria that are integral and necessary to contract performance. Administrative actions like signing a contract, issuing a modification, exercising an option, or the mere passage of time cannot be used as payment triggers.
Verify completion readily
Each event or criterion must be described in the contract along with what counts as successful performance. The Government must be able to readily verify that the event or criterion has been met before payment is made.
Separate severable and cumulative events
The contract must identify which events are severable and which are cumulative, and for cumulative events it must identify the prerequisite events that must be completed first. Payment for a cumulative event cannot be made until the dependent event is successfully completed.
No overpayment for extra effort
Performance-based payments are contract financing, not a bonus system. The events or criteria cannot be used to reward performance beyond what is required for successful contract completion.
Set payment amounts carefully
The contracting officer must establish a complete schedule of events, criteria, and payment amounts, and adjust it when modifications materially affect price or performance. Total performance-based payments may not exceed 90 percent of the contract price on a whole-contract basis or 90 percent of the deliverable-item price on an item basis.
Tie amounts to value and investment
Each payment amount must be stated as a dollar amount or a percentage of a specifically identified price. The amounts must be commensurate with the value of the event or criterion and should not leave the contractor with an unreasonably low or negative investment in the contract.
Use rational pricing methods
Unless agency procedures prescribe a method, the contracting officer may use any rational basis to set payment amounts, such as engineering estimates of completion stages, estimated hours or effort, or projected cost of the event.
Adjust for modifications
When later contract modifications change the work, the contracting officer must revise the performance-based payment schedule as needed to match the modified requirements.
Allocate payments across funds
If more than one appropriation or subaccount funds the contract, the contracting officer must give the payment office instructions for distributing financing payments among the proper funding accounts in a way that is consistent with funding rules.
Responsibilities
Contracting Officer
Decide whether performance-based payments will be on a whole-contract or deliverable-item basis, unless agency rules prescribe otherwise. Define the performance events or criteria, ensure they are meaningful and verifiable, distinguish severable from cumulative events, set and document payment amounts, keep total financing within the 90 percent limit, ensure the contract price remains fair and reasonable, adjust the schedule after modifications, and provide funding distribution instructions when multiple appropriations are used.
Contractor
Perform the contract work so that each required event or criterion can be successfully completed and documented. Provide information needed to support negotiation of payment amounts or contractor investment when requested, and comply with the contract’s performance-based payment schedule and any revised schedule after modifications.
Agency
Prescribe any agency-specific procedures or limitations governing the use of performance-based payments, including any required bases for establishing payment amounts or any restrictions on whole-contract versus deliverable-item financing.
Payment Office
Distribute financing payments among the correct appropriation accounts or subaccounts according to the contracting officer’s instructions and applicable funding rules.
Practical Implications
This section is mainly about disciplined contract financing: the Government should pay for verified progress, not for paperwork or the mere passage of time.
A common pitfall is using weak milestones that are too easy to claim or too hard for the Government to verify; each trigger should be objective and tied to real performance.
Another frequent issue is failing to update the payment schedule after a modification changes scope, price, or delivery structure, which can lead to overfinancing or misaligned payments.
Contracting officers should watch the 90 percent cap closely and make sure payment amounts do not leave the contractor with too little skin in the game.
When multiple appropriations fund a contract, poor payment-office instructions can cause funding mischarges, so the funding distribution should be clear and consistent from the start.
Official Regulatory Text
Performance-based payments may be made either on a whole contract or on a deliverable item basis, unless otherwise prescribed by agency regulations. Financing payments to be made on a whole contract basis are applicable to the entire contract, and not to specific deliverable items. Financing payments to be made on a deliverable item basis are applicable to a specific individual deliverable item. (A deliverable item for these purposes is a separate item with a distinct unit price. Thus, a line item for 10 airplanes, with a unit price of $1,000,000 each, has 10 deliverable items-the separate planes. A line item for 1 lot of 10 airplanes, with a lot price of $10,000,000, has only one deliverable item-the lot.) (a) Establishing performance bases. (1) The basis for performance-based payments may be either specifically described events ( e.g. , milestones) or some measurable criterion of performance. Each event or performance criterion that will trigger a finance payment shall be an integral and necessary part of contract performance and shall be identified in the contract, along with a description of what constitutes successful performance of the event or attainment of the performance criterion. The signing of contracts or modifications, the exercise of options, the passage of time, or other such occurrences do not represent meaningful efforts or actions and shall not be identified as events or criteria for performance-based payments. An event need not be a critical event in order to trigger a payment, but the Government must be able to readily verify successful performance of each such event or performance criterion. (2) Events or criteria may be either severable or cumulative. The successful completion of a severable event or criterion is independent of the accomplishment of any other event or criterion. Conversely, the successful accomplishment of a cumulative event or criterion is dependent upon the previous accomplishment of another event. A contract may provide for more than one series of severable and/or cumulative performance events or criteria performed in parallel. The contracting officer shall include the following in the contract: (i) The contract shall not permit payment for a cumulative event or criterion until the dependent event or criterion has been successfully completed. (ii) The contract shall specifically identify severable events or criteria. (iii) The contract shall specifically identify cumulative events or criteria and identify which events or criteria are preconditions for the successful achievement of each event or criterion. (iv) Because performance-based payments are contract financing, events or criteria shall not serve as a vehicle to reward the contractor for completion of performance levels over and above what is required for successful completion of the contract. (v) If payment of performance-based finance amounts is on a deliverable item basis, each event or performance criterion shall be part of the performance necessary for that deliverable item and shall be identified to a specific line item or subline item. (b) Establishing performance-based finance payment amounts. (1) The contracting officer shall establish a complete, fully defined schedule of events or performance criteria and payment amounts when negotiating contract terms. If a contract action significantly affects the price, or event or performance criterion, the contracting officer responsible for pricing the contract modification shall adjust the performance-based payment schedule appropriately. (2) Total performance-based payments shall- (i) Reflect prudent contract financing provided only to the extent needed for contract performance (see 32.104 (a)); and (ii) Not exceed 90 percent of the contract price if on a whole contract basis, or 90 percent of the delivery item price if on a delivery item basis. (3) The contract shall specifically state the amount of each performance-based payment either as a dollar amount or as a percentage of a specifically identified price ( e.g. , contract price or unit price of the deliverable item). The payment of contract financing has a cost to the Government in terms of interest paid by the Treasury to borrow funds to make the payment. Because the contracting officer has wide discretion as to the timing and amount of the performance-based payments, the contracting officer shall ensure that- (i) The total contract price is fair and reasonable, all factors considered; and (ii) Performance-based payment amounts are commensurate with the value of the performance event or performance criterion and are not expected to result in an unreasonably low or negative level of contractor investment in the contract. To confirm sufficient investment, the contracting officer may request expenditure profile information from offerors, but only if other information in the proposal, or information otherwise available to the contracting officer, is expected to be insufficient. (4) Unless agency procedures prescribe the bases for establishing performance-based payment amounts, contracting officers may establish them on any rational basis, including (but not limited to)- (i) Engineering estimates of stages of completion; (ii) Engineering estimates of hours or other measures of effort to be expended in performance of an event or achievement of a performance criterion; or (iii) The estimated projected cost of performance of particular events. (5) When subsequent contract modifications are issued, the contracting officer shall adjust the performance-based payment schedule as necessary to reflect the actions required by those contract modifications. (c) Instructions for multiple appropriations . If there is more than one appropriation account (or subaccount) funding payments on the contract, the contracting officer shall provide instructions to the Government payment office for distribution of financing payments to the respective funds accounts. Distribution instructions shall be consistent with the contract’s liquidation provisions. (d) Liquidating performance-based finance payments . Performance-based amounts shall be liquidated by deducting a percentage or a designated dollar amount from the delivery payments. The contracting officer shall specify the liquidation rate or designated dollar amount in the contract. The method of liquidation shall ensure complete liquidation no later than final payment. (1) If the contracting officer establishes the performance-based payments on a delivery item basis, the liquidation amount for each line item is the percent of that delivery item price that was previously paid under performance-based finance payments or the designated dollar amount. (2) If the performance-based finance payments are on a whole contract basis, liquidation is by predesignated liquidation amounts or liquidation percentages. (e) Competitive negotiated solicitations. (1) If a solicitation requests offerors to propose performance-based payments, the solicitation shall specify- (i) What, if any, terms shall be included in all offers; and (ii) The extent to which and how offeror-proposed performance-based payment terms will be evaluated. Unless agencies prescribe other evaluation procedures, if the contracting officer anticipates that the cost of providing performance-based payments would have a significant impact on determining the best value offer, the solicitation should state that the evaluation of the offeror’s proposed prices will include an adjustment to reflect the estimated cost to the Government of providing each offeror’s proposed performance-based payments (see Alternate I to the provision at 52.232-28 ). (2) The contracting officer shall- (i) Review the proposed terms to ensure they comply with this section; and (ii) Use the adjustment method at 32.205 (c) if the price is to be adjusted for evaluation purposes in accordance with paragraph (e)(1)(ii) of this section.