FAR 32.503-10—Establishing alternate liquidation rates.
Plain-English Summary
FAR 32.503-10 explains how a contracting officer establishes an alternate liquidation rate for progress payments and what documentation must support that decision. It covers the core requirement that the rate be high enough to ensure the Government recoups progress payments through contract billings, the minimum liquidation rate formula, how to compute expected progress payments, and how to handle adjustments for authorized but unpriced work and projected economic adjustments. It also addresses limits on those adjustments, using the Government’s estimate of the price of all authorized work or the funds obligated for the contract as a ceiling. Finally, it gives examples of the calculation and explains how to round minimum liquidation rates to tenths of a percent, rounding up when necessary. In practice, this section is meant to prevent under-recovery of progress payments, keep liquidation terms tied to realistic contract economics, and ensure the file contains enough support for audit and administration review.
Key Rules
Rate must ensure recoupment
The liquidation rate must be high enough so that the Government recovers the applicable progress payments from each billing. A rate that is too low is not acceptable because it would delay or prevent full liquidation of progress payments.
File support is required
The contracting officer must document the basis for the liquidation rate in the administration office contract file. This means the calculation and any assumptions must be retained so the rate can be reviewed and justified later.
Minimum rate formula
The minimum liquidation rate is the expected progress payments divided by the contract price. This establishes the floor for the rate the contracting officer may use.
Expected progress payments calculation
Expected progress payments are computed by multiplying the estimated cost of performing the contract by the progress payment rate. This ties the liquidation rate to the amount of financing the Government expects to advance.
Limited adjustments allowed
For liquidation-rate calculations, the contracting officer may adjust estimated cost and contract price to reflect authorized but unpriced work and projected economic adjustments. However, the adjustment cannot exceed the Government’s estimate of the price of all authorized work or the funds obligated for the contract.
Rounding rule
Minimum liquidation rates are generally stated to tenths of a percent. Any fraction between tenths must be rounded up to the next highest tenth, not merely to the nearest tenth, to avoid setting a rate below the calculated minimum.
Responsibilities
Contracting Officer
Compute the minimum liquidation rate, ensure the selected rate is high enough to recoup progress payments on each billing, apply any permitted adjustments within the stated limits, round the rate correctly, and document the basis in the administration office contract file.
Administration Office
Maintain the contract file supporting the liquidation-rate determination and preserve the calculation, assumptions, and supporting documentation for administration and audit purposes.
Contractor
Use the established liquidation rate in billing and progress payment administration, and understand that the rate may be based on estimated costs, contract price, and limited adjustments for authorized but unpriced work or economic changes.
Practical Implications
This section matters whenever a contract uses progress payments and an alternate liquidation rate is needed; the rate directly affects how quickly the Government recovers financing advances from invoices.
A common pitfall is using an unsupported or overly optimistic estimate of costs or price adjustments, which can produce a liquidation rate that is too low and vulnerable to challenge.
Another frequent mistake is rounding down or to the nearest tenth instead of rounding up, which can drop the rate below the required minimum.
Contracting officers should make sure any authorized but unpriced work or economic adjustment included in the calculation is actually supportable and does not exceed the allowed ceiling.
Contractors should expect the liquidation rate to be tied to the financing structure of the contract, so changes in estimated cost, price, or authorized work can affect billing and cash flow.
Official Regulatory Text
(a) The contracting officer must ensure that the liquidation rate is- (1) High enough to result in Government recoupment of the applicable progress payments on each billing; and (2) Supported by documentation included in the administration office contract file. (b) The minimum liquidation rate is the expected progress payments divided by the contract price.Each of these factors is discussed below: (1) The contracting officer must compute the expected progress payments by multiplying the estimated cost of performing the contract by the progress payment rate. (2) For purposes of computing the liquidation rate, the contracting officer may adjust the estimated cost and the contract price to include the estimated value of any work authorized but not yet priced and any projected economic adjustments; however, the contracting officer’s adjustment must not exceed the Government’s estimate of the price of all authorized work or the funds obligated for the contract. (3) The following are examples of the computation. Assuming an estimated price of $2,200,000 and total estimated costs eligible for progress payments of $2,000,000: (i) If the progress payment rate is 80 percent, the minimum liquidation rate should be 72.7 percent, computed as follows: (ii) If the progress payment rate is 85 percent, the minimum liquidation rate should be 77.3 percent, computed as follows: (4) Minimum liquidation rates will generally be expressed to tenths of apercent. Decimals between tenths will be rounded up to the next highest tenth (not necessarily the nearest tenth), since rounding down would produce a rate below the minimum rate calculated.