FAR 32.504—Subcontracts under prime contracts providing progress payments.
Plain-English Summary
FAR 32.504 explains how subcontract financing works when the prime contract provides progress payments. It covers what kinds of financing a subcontract may use—performance-based payments, customary progress payments, or commercial product/commercial service purchase financing—and makes clear that a subcontract may use one type, but not both performance-based payments and progress payments. The section also explains how a prime contractor may include subcontract financing amounts in its own progress payment requests to the Government, including amounts that have been paid or are still unpaid, and the timing limits for unpaid amounts. It addresses unusual progress payments to subcontractors, when the contracting officer must modify the prime contract to reflect a new progress payment rate, and how that modification affects the contractor’s cost basis for Government progress payments. The section further assigns responsibility to the contractor to ensure subcontract financing complies with the standards in the prime contract’s Progress Payments clause, while limiting the need for routine contracting officer consent or special review. Finally, it prescribes how the subcontract must be written when financing is provided through progress payments, performance-based payments, or commercial financing, including required clause substance, title vesting, records access, default terms, and the use of a financing clause structured under FAR 32.206. In practice, this section is about aligning subcontract financing terms with the prime contract so the contractor can lawfully recover financing costs and the Government can maintain proper control over risk, title, and administration.
Key Rules
Choose one financing method
A subcontract may use either performance-based payments or customary progress payments, if the applicable criteria are met, but not both. Commercial purchases may instead use commercial product or commercial service purchase financing terms if those criteria are met.
Include subcontract financing in requests
A contractor’s progress payment request to the Government may include the full amount of subcontract financing payments, whether already paid or still unpaid, as long as unpaid amounts are limited to amounts determined due and the contractor will pay them under the subcontract or invoice terms, ordinarily within 30 days after submitting the progress payment request.
Unusual progress payments need approval
If the contractor is considering unusual progress payments to a subcontractor, the parties must follow the policies in FAR 32.501-2. If the Government approves them, the contracting officer must modify the prime contract to state the new rate in paragraph (j)(6) of the Progress Payments clause at 52.232-16.
Prime contract modification is not a deviation
The contract modification needed to reflect approved unusual subcontract progress payments is not treated as a deviation and does not require the clearance process in FAR 32.502-2(b).
Contractor controls subcontract compliance
The contractor must ensure that subcontract financing payments comply with the standards and principles in paragraph (j) of the prime contract’s Progress Payments clause. The contracting officer generally does not need special review or consent just because financing payments are included, except for unusual progress payments.
Management controls must exist
The contracting officer must ensure the contractor has adequate management control systems, including internal audit procedures, to administer subcontract financing properly.
Progress-payment subcontracts must mirror clause substance
When subcontract financing is in the form of progress payments, the subcontract must include the substance of the prime contract’s Progress Payments clause, adapted to show that the contractor—not the Government—awards and administers the subcontract.
Title and records terms need specific edits
For progress-payment subcontracts, title to property must vest in the Government, not the contractor, and the records-access language must preserve references to the Contracting Officer and the Government, with limited substitutions allowed for 'Contracting Officer or Prime Contractor' and 'the Government or Prime Contractor.'
Default terms must be carried through
The subcontract’s special default terms must include paragraph (h) of the prime contract’s Progress Payments clause through subdivision (i); the remainder of paragraph (h) is optional.
Performance-based payment subcontracts must mirror clause substance
When subcontract financing uses performance-based payments, the subcontract must include the substance of the Performance-Based Payments clause at 52.232-32, modified to reflect that the contractor administers the subcontract and with similar wording adjustments as needed.
Commercial financing needs a proper clause
When subcontract financing is commercial product or commercial service purchase financing, the subcontract must include a contract financing clause structured in accordance with FAR 32.206.
Responsibilities
Contractor
Select a permissible subcontract financing method, ensure the subcontract uses the required clause substance and wording, administer subcontract financing correctly, include allowable subcontract financing amounts in progress payment requests, pay subcontractors in accordance with subcontract or invoice terms, and maintain management controls and internal audit procedures.
Subcontractor
Comply with the financing terms negotiated in the subcontract and perform in accordance with the payment, title, records, and default provisions incorporated into the subcontract.
Contracting Officer
Review subcontract financing only as appropriate in overall progress payment administration, approve unusual progress payments when warranted, modify the prime contract to reflect an approved new progress payment rate, and ensure the contractor has adequate management control systems.
Government
Provide progress payments under the prime contract consistent with the allowable cost basis, including properly supported subcontract financing amounts, and rely on the contractor to administer subcontract financing except where the FAR requires Government action.
Practical Implications
Contractors can usually pass subcontract financing through to their own progress payment requests, but only if the amounts are due or will be paid promptly under the subcontract terms. Poor timing or unsupported unpaid amounts can create payment disputes or overbilling risk.
The clause-drafting requirements matter. If the subcontract does not properly incorporate the required substance of the applicable financing clause, the contractor may lose protection on title, records access, or default remedies, and the financing arrangement may not be compliant.
Unusual progress payments are a special case and require Government approval plus a prime contract modification. Contractors should not assume they can simply agree to a higher subcontract progress payment rate and then bill it through without formal action.
The contracting officer is not expected to approve every financing subcontract, but must be satisfied that the contractor has strong internal controls. Weak audit trails, poor subcontract administration, or missing management systems can become a major issue during progress payment oversight.
A common pitfall is mixing financing methods or using commercial financing terms without confirming the criteria in FAR 32.202-1 or 32.1003. Another frequent mistake is failing to preserve the required Government title and records-access language when adapting the clause for a subcontract.
Official Regulatory Text
(a) Subcontracts may include either performance-based payments, provided they meet the criteria in 32.1003 , or progress payments, provided they meet the criteria in subpart 32.5 for customary progress payments, but not both. Subcontracts for commercial purchases may include commercial product or commercial service purchase financing terms, provided they meet the criteria in 32.202-1 . (b) The contractor’s requests for progress payments may include the full amount of commercial product or commercial service purchase financing payments, performance-based payments, or progress payments to a subcontractor, whether paid or unpaid, provided that unpaid amounts are limited to amounts determined due and that the contractor will pay- (1) In accordance with the terms and conditions of a subcontract or invoice; and (2) Ordinarily within 30 days of the submission of the contractor’s progress payment request to the Government. (c) If the contractor is considering making unusual progress payments to a subcontractor, the parties will be guided by the policies in 32.501-2 . If the Government approves unusual progress payments for the subcontract, the contracting officer must issue a contract modification to specify the new rate in paragraph (j)(6) of the clause at 52.232-16 , Progress Payments, in the prime contract. This will allow the contractor to include the progress payments to the subcontractor in the cost basis for progress payments by the Government. This modification is not a deviation and does not require the clearance prescribed in 32.502-2 (b). (d) The contractor has a duty to ensure that financing payments to subcontractors conform to the standards and principles prescribed in paragraph (j) of the Progress Payments clause in the prime contract. Although the contracting officer should, to the extent appropriate, review the subcontract as part of the overall administration of progress payments in the prime contract, there is no special requirement for contracting officer review or consent merely because the subcontract includes financing payments, except as provided in paragraph (c) of this section. However, the contracting officer must ensure that the contractor has installed the necessary management control systems, including internal audit procedures. (e) When financing payments are in the form of progress payments, the Progress Payments clause at 52.232-16 requires that the subcontract include the substance of the Progress Payments clause in the prime contract, modified to indicate that the contractor, not the Government, awards the subcontract and administers the progress payments. The following exceptions apply to wording modifications: (1) The subcontract terms on title to property under progress payments shall provide for vesting of title in the Government, not the contractor, as in paragraph (d) of the Progress Payments clause in the prime contract. A reference to the contractor may, however, be substituted for "Government" in paragraph (d)(2)(iv) of the clause. (2) In the subcontract terms on reports and access to records, the contractor shall not delete the references to "Contracting Officer" and "Government" in adapting paragraph (g) of the Progress Payments clause in the contract, but may expand the terms as follows: (i) The term "Contracting Officer" may be changed to "Contracting Officer or Prime Contractor." (ii) The term "the Government" may be changed to "the Government or Prime Contractor." (3) The subcontract special terms regarding default shall include paragraph (h) of the Progress Payments clause in the contract through its subdivision (i). The rest of paragraph (h) is optional. (f) When financing payments are in the form of performance-based payments, the Performance-Based Payments clause at 52.232-32 requires that the subcontract terms include the substance of the Performance-Based Payments clause, modified to indicate that the contractor, not the Government, awards the subcontract and administers the performance-based payments, and include appropriately worded modifications similar to those noted in paragraph (e) of this section. (g) When financing payments are in the form of commercial product or commercial service purchase financing, the subcontract must include a contract financing clause structured in accordance with 32.206 .