Once the candidate events have been selected, it is essential to define them as clearly and precisely as possible, including a specified completion date, so that their accomplishment can be objectively determined. Ideally, the definitions of these events and the measurements or other indicators to be used to determine their achievement should be such that there can be no argument or uncertainty about whether they warrant making a PBP. All completion criteria should specify Government verification before payment can be made.
The use of objective measures is the preferred course of action here. Objectivity and clarity, in both event definition and in how accomplishment will be determined or measured, cannot be overly stressed. Remember, in order for PBPs to be used, the contracting officer must find PBPs to be practical and the contractor must consent to their use. Thus, it is essential that the parties arrive at clear definitions, agree on measurements to be used, and have a consistent bilateral understanding of what is expected in order to qualify for payment.
Generally it is not a good idea to define a PBP event as the start of an effort such as “begin testing”. Events can be initiated prematurely only to be halted due to problems and subsequently re-initiated upon resolution of the problems. A valid “entry event” must have definite “entrance criteria” that requires the successful completion of other events or tasks deemed necessary to begin the event process. If such an event refers to completion of another PBP event or events it must be identified as a cumulative event. However, in addition to the predecessor PBP events, any additional tasks which are required to be successfully performed before beginning an “entry event” must be captured in the entrance criteria which must be satisfied to trigger the payment.
DCMA can be particularly useful in providing unique insight into the contractor’s established work methods and quality processes. To the greatest extent practical you would want to use events and criteria already established in the contractor’s normal business practices.
A. What is “Completion” and Is There Any Flexibility?
Successful completion of a performance-based payment event consists of the contractor meeting the stated objectives established for the event by the specified completion date and verfication by the Government. In producing the proto-type STE example above, the completion criterion for initial testing is defined as when the appropriate level of contractor management approves the initial design before handing it off to the Government. If the appropriate Government official concurs that the initial design is complete, then making payment is acceptable. However, for final testing, payment should not be permitted until the contractor has produced the equipment and the Government has verified that both production and final testing are completed. In addition, when an event is successfully completed, payment is made in conjunction with the scheduled completion date. If an event is not completed by the date anticipated, payment is delayed accordingly. Conversely, if an event is completed earlier than anticipated, the payment is accelerated.
In some cases, while a “good” PBP event may be clearly identified and adequately defined, there may be room for interpretation concerning what constitutes its completion. For example, in an aircraft production contract, one of the PBP events might be the completion of the tail section. A question could arise about whether this event has been successfully accomplished if the tail section has been finished and properly inspected but a few, low-cost rivets are missing from a small section of the skin. (This is sometimes referred to as the case of the “golden rivets.”) Has the tail section been “completed” for purposes of entitlement to payment? There is no absolute answer. If the tail section can be moved on to the final assembly area so that mating it to the main fuselage can begin, and the rivets could be installed without adversely affecting the other on-going mating effort. one could reasonably conclude that, for purposes of entitlement to the event payment for tail-section completion, the event is “essentially” complete. It is not uncommon for there to be some minor level of work that is accomplished out of sequence or “out of station”, particularly in an early production environment, but it should always be the goal to minimize such work due to the adverse impact on efficiency and increased risk to the delivery schedule. The intent should not be to deny payment in instances where the uncompleted work is truly minor and can be accomplished without disrupting or affecting the efficiency of other work.
However, caution must be used not to define the event so broadly that it fails to require timely performance on the part of the contractor. For instance, defining an event as being complete when 90% of the work has been accomplished can be problematic. In fact, 5% of work uncompleted may not be minor. Sometimes completing the last 5% of an effort can require a disproportionate amount of time to complete especially when it must be accomplished out of sequence. Since the financing needs and therefore event value are based on when an event is scheduled to occur, how do you predict when 90% of an event will be accomplished? A program or master schedule will identify event completion dates not completion of 90% or 95% of the work.
B. Be Aware of Unintended Consequences
Although PBPs are not incentive payments, any event that is associated with significant payment of cash to the contractor will be very important to the contractor. In the private sector, the phrase “cash is king” is often used to describe the importance of cash flow. Ideally PBPs should reinforce the contractor’s motivation to perform the effort in an efficient and timely manner in order to receive financing payments. However, inadequate completion criteria cannot only render potentially excellent PBP events meaningless, they can the unintended consequence of encouraging less than efficient performance on the part of the contractor.
The tail section example above is clearly a significant event and could be worth many millions of dollars on a major production program. The tendency might be to simply define the successful completion of the tail section as the arrival of that section in the final assembly area (e.g. “tail section arrives in final assembly area”). However, unless the criteria is established for when it is prudent for a tail section to be moved to the final assembly area, the opportunity to receive the payment as soon as possible can create the motivation for the contractor to move the tail section prematurely resulting in significant “out of station” tail section work to be performed in the final assembly area. Establishing PBP completion criteria requires not only a realistic understanding of the underlying manufacturing process but the financial motivations that can influence contractor behavior as well.
Remember that PBPs are a means of contract financing that ties payments to progress achieved. Approving or allowing an event payment to be made does not constitute government acceptance of an end-item.
Finally, the individual responsible for administering the PBP schedule, e.g. ACO, should be contacted in advance to review the completion criteria and ensure there are no issues from an administrative standpoint.
