FAR 32.102—Description of contract financing methods.
Plain-English Summary
FAR 32.102 describes the main contract financing and payment methods available in federal contracting and explains how they differ from one another. It covers advance payments, progress payments based on costs, loan guarantees, partial delivery payments, progress payments based on percentage or stage of completion, and performance-based payments. The section matters because these methods affect contractor cash flow, risk allocation, and how the Government protects itself while helping contractors perform. In practice, the key distinction is whether a payment is tied to performance, costs incurred, accepted partial deliveries, or a financing arrangement made before performance is complete. The section also points readers to statutory and regulatory limits, including when agencies may use a method, when they must pay for partial deliveries, and when progress payments must remain commensurate with work accomplished. For contracting officers and contractors, this section is a roadmap for choosing the right payment structure and avoiding improper financing arrangements or payment timing errors.
Key Rules
Advance payments are pre-performance funds
Advance payments are money the Government gives a prime contractor before performance, in anticipation of contract completion. They are not based on work done and must be liquidated from later amounts due under the contract; they may also be used to fund advances to subcontractors.
Cost-based progress payments track incurred costs
Progress payments based on costs are made as work progresses and are tied to costs incurred by the contractor. They are not the same as percentage-of-completion payments, payments for accepted partial deliveries, termination proposal payments, or performance-based payments.
Loan guarantees support defense contracting finance
Loan guarantees are provided through Federal Reserve banks on behalf of designated guaranteeing agencies to help contractors obtain private financing for supplies or services needed for national defense contracts. This is a financing support mechanism, not a direct Government payment for work performed.
Partial deliveries must generally be paid when accepted
Payments for accepted partial deliveries or partial performance are authorized by statute and generally must be made unless the contract specifically prohibits them. Agencies should structure statements of work and pricing so discrete portions of work can be accepted and paid as soon as they are accepted.
Percentage-of-completion progress payments are agency-authorized
Progress payments based on a percentage or stage of completion are authorized by statute and may be used under agency procedures. Those procedures must ensure payments are commensurate with work accomplished and meet the contract’s quality standards, and they may not exceed 80 percent of eligible costs of work accomplished on undefinitized contract actions.
Performance-based payments depend on measurable results
Performance-based payments are contract financing payments made when objective, quantifiable performance measures, defined events, or other measurable results are achieved. They are not based on costs incurred and require clear, measurable milestones or outcomes.
Responsibilities
Contracting Officer
Select and structure the appropriate financing or payment method, ensure the contract terms and pricing arrangement support the chosen method, and verify that partial deliveries can be accepted and paid when appropriate. The contracting officer must also ensure agency procedures and contract terms comply with statutory and regulatory limits, including the 80 percent cap for percentage-of-completion progress payments on undefinitized contract actions.
Agency
Establish procedures for any use of percentage-or-stage-of-completion progress payments and ensure those procedures require payments to be commensurate with work accomplished and quality standards met. The agency must also follow statutory payment rules for partial deliveries and administer any loan guarantee or financing program consistent with applicable authority.
Contractor
Use advance payments, progress payments, or performance-based payments only in accordance with the contract and applicable procedures, and ensure that any advances are properly liquidated or supported by eligible costs, work accomplished, or measurable performance. The contractor must also structure performance and invoicing to support acceptance of partial deliveries when the contract allows it.
Subcontractor
Receive advances only if the prime contractor uses authorized advance-payment funds for that purpose and only under the terms arranged by the prime contractor and contract requirements. Subcontractors must support any financing or payment claims with the required performance, cost, or delivery documentation.
Federal Reserve Bank / Guaranteeing Agency
Administer loan guarantees that enable contractors to obtain private financing for national defense supply or service contracts, consistent with the designated agency’s authority and program rules.
Practical Implications
This section is mainly about choosing the right payment mechanism, because each method shifts cash-flow timing and risk differently. Contractors should know whether they are being paid for costs incurred, accepted partial deliveries, or measurable milestones, since the documentation needed for each is different.
A common pitfall is confusing progress payments based on costs with percentage-of-completion payments or performance-based payments. Those methods are not interchangeable, and using the wrong terminology or billing basis can create payment disputes or compliance problems.
Partial delivery payment rights are important in practice because they can reduce the need for contract financing. If the work can be broken into discrete, accepted portions, the contract should say so clearly in the statement of work and pricing structure.
For undefinitized contract actions, the 80 percent limit on eligible costs is a key control point. Contractors and contracting officers should watch this closely because exceeding it can create funding and compliance issues.
Advance payments and loan guarantees are financing tools, not substitutes for earned payment. They require careful administration because the Government is fronting or supporting money before full performance, which increases the need for controls, liquidation terms, and oversight.
Official Regulatory Text
(a) Advance payments are advances of money by the Government to a prime contractor before, in anticipation of, and for the purpose of complete performance under one or more contracts. They are expected to be liquidated from payments due to the contractor incident to performance of the contracts. Since they are not measured by performance, they differ from partial, progress, or other payments based on the performance or partial performance of a contract. Advance payments may be made to prime contractors for the purpose of making advances to subcontractors. (b) Progress payments based on costs are made on the basis of costs incurred by the contractor as work progresses under the contract. This form of contract financing does not include- (1) Payments based on the percentage or stage of completion accomplished; (2) Payments for partial deliveries accepted by the Government; (3) Partial payments for a contract termination proposal; or (4) Performance-based payments. (c) Loan guarantees are made by Federal Reserve banks, on behalf of designated guaranteeing agencies, to enable contractors to obtain financing from private sources under contracts for the acquisition of supplies or services for the national defense. (d) Payments for accepted supplies and services that are only a part of the contract requirements ( i.e., partial deliveries) are authorized under 41 U.S.C. chapter 45 and 10 U.S.C. chapter 277 . In accordance with 5 CFR 1315.4(k), agencies must pay for partial delivery of supplies or partial performance of services unless specifically prohibited by the contract. Although payments for partial deliveries generally are treated as a method of payment and not as a method of contract financing, using partial delivery payments can assist contractors to participate in contracts without, or with minimal, contract financing. When appropriate, contract statements of work and pricing arrangements must permit acceptance and payment for discrete portions of the work, as soon as accepted (see 32.906 (c)). (e) (1) Progress payments based on a percentage or stage of completion are authorized by the statutes cited in 32.101 . (2) This type of progress payment may be used as a payment method under agency procedures. Agency procedures must ensure that payments are commensurate with work accomplished, which meets the quality standards established under the contract. Furthermore, progress payments may not exceed 80 percent of the eligible costs of work accomplished on undefinitized contract actions. (f) Performance-based payments are contract financing payments made on the basis of- (1) Performance measured by objective, quantifiable methods; (2) Accomplishment of defined events; or (3) Other quantifiable measures of results.