U.S. Federal Procurement Insights – Progress Payments Under U.S. Federal Contracts

By February 24, 2024 No Comments
TILLIT LAW PLLC

Contractors may establish a progress payment structure under certain federal contracts, requiring the government to make payments based on costs the contractor incurs or on the percentage of work completion. Such payment structures are known as progress payments, and their administration is governed by government policies outlined in the Federal Acquisition Regulations (FAR). Progress payments are generally only available on contracts over a certain dollar threshold, requiring a substantial amount of time between the beginning of the performance and the time for the start of deliveries.

  • Cost-Based Progress Payments

FAR Subpart 32.5 prescribes policies relevant to contract financing through cost-based progress payments. The FAR contemplates two types of progress payments – customary progress payments and unusual progress payments. Contractors may recover a percentage of their costs under progress payments. Under FAR 32.501-1(a), the customary progress payment rate is 80% of the contractor’s costs of performing the contract. Calculating progress payment amounts under contracts involving both advance payments and progress payments is more challenging as the contracting officer may not permit a progress payment rate higher than the customary rate. Small businesses may receive 85% of their costs expended in performing the contract as progress payments. The ordinary and alternate liquidation methods for calculating progress payments are provided in FAR 32.503-8 and 32.503-9, respectively. Both small and large contractors may recover the entire amount of progress payments made to subcontractors. 

Under FAR 32.501-2, contracting officers may also permit unusual progress payments under certain circumstances. To receive unusual progress payments, contractors must demonstrate that the contract requires predelivery expenditures that are large in relation to the contract price and the contractor’s working capital and credit. To receive unusual progress payments, the contractor must fully document its need to supplement private funding sources, including private financing and any loans guaranteed by the government. The head of the contracting activity at the applicable government agency must also approve contractor requests for unusual progress payments.

  • Performance-Based Progress Payments

Performance-based progress payments refer to payment structures based on the completion of work segments. The government utilizes such payment structures whenever it is practicable to quantify performance objectives or results. In other words, performance-based progress payments are possible whenever contractor performance can be measured by objective, quantifiable methods such as the delivery of acceptable items, work measurement, or the occurrence of events specified in the program management plan. FAR 32.1003 details the criteria that must be met before a contracting officer may use performance-based payments.

  • The government and the contractor agree on payment terms.
  • The contract, order, or line item at issue is fixed-price.
  • The individual order under an indefinite delivery contract does not provide for progress payments.
  • For contracts other than indefinite-delivery contracts, the contract does not provide for progress payments.

FAR 32.1005 instructs contracting officers to include the clause at FAR 52.232-32 in solicitations that could result in contracts permitting performance-based payments. Contractors may also find this clause on fixed-price contracts allowing performance-based payments. Finally, the FAR clause 52.232-28 is included in negotiated procurements that invite prospective contractors to propose appropriate performance-based payments.

  • Percentage of Performance Completion-Based Progress Payments

Progress payments based on a percentage of completed performance are considered a method of contract financing generally available to contractors performing construction or shipbuilding and repair contracts. Such progress payments may be at most 80% of the eligible costs of work performed under undefinitized contract actions but may include an appropriate percentage of profits earned by the contractor. The fixed price construction contracts clause in the FAR allows construction contractors to receive progress payments monthly or more frequently if the contracting officer deems it appropriate. Under the FAR clause at 52.232-5(b)(1), the contractor must include the following documents and materials supporting its invoices requesting progress payments under such contracts.

  • A list of amounts requested mapped to specific elements of work that the invoice covers.
  • A list of amounts for the work performed by any subcontractors, the total amount of each subcontract, and all amounts previously paid to subcontractors.
  • Any additional supporting documents, materials, or data as required by the contracting officer.

Finally, the contracting officer may allow the consideration of construction materials delivered to the construction site in the preparation of estimates. Any preparatory construction work may also be considered. For construction materials provided to the contractor at other locations, the contracting officer may authorize consideration in estimates if the contract specifically allows it or if the contractor produces evidence that it has acquired title to the construction materials. These construction materials must ultimately be used in performing the contract.

This U.S. Federal Procurement Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.