Customary contract financing to large businesses may be provided on contracts valued at $2.5 million or more where deliveries will not begin until six months after contract award. In determining whether or not PBPs are practical for use on a contract, the contracting officer should first consider whether the benefits associated with PBPs outweigh the time and effort required to establish and administer them. Therefore smaller contracts are generally not good PBP candidates as the administrative effort can easily exceed any financial benefits attained.
Since PBPs require agreement by both parties on all aspects of the arrangement, if difficulties arise in selecting events, defining measures or means of confirming their accomplishment, or deciding on the valuations, this should raise concern about whether PBPs are practical for use on the contract. Obviously, the inability to come to agreement on any of these makes the use of PBPs impossible on that contract.
The following are some of the things to consider in deciding whether PBPs are practical for a particular acquisition situation.
The ideal candidate for PBPs is a mature, stable production program where the fabrication, assembly and test processes are well established. Ideally the contractor will have already completed one or more production lots. This should permit events and their timing to be easily identified. Furthermore, the actual cost by month on the prior contracts should make the financing need at each event easier to determine.
Initial production contracts will not provide the same level of confidence in the timing of events or the cash flows needs driven by those events. Therefore more effort will be required to identify events, establish completion criteria and value events but PBPs can still be practical for most initial production contracts.
It is less likely that PBPs will be practical on fixed price contracts for services. Unlike production contracts that normally provide opportunities for numerous objective events such as receipt of materials and completion of subassemblies or stages of manufacturing, service contracts usually involve fewer and less objective milestones.
When a fixed price contract (FPIF or FFP) is considered proper for development, there can be a number of significant events that are PBP candidates. For instance, in an Engineering and Manufacturing Development (EMD) contract, the major activities will be toward completion of the design as evidenced by the Preliminary Design Review (PDR), if not already accomplished in the Technology Development phase, and the Critical Design Review (CDR). Clearly PDR and CDR are important milestones in the EMD process but the criteria for successful completion of each can be problematic. A PBP event or milestone should always be associated with the completion, not the initiation of the event or milestone. In the case of PDR and CDR, the resolution of each action item that originates during the review process is critical to the ultimate success of the review. For this reason, the initiation of a PDR or CDR should not be used as the event criteria. However, from a contractor’s perspective, resolution of action items is not always a simple process of objective verification and always involves some level of further review by, and coordination with, Government personnel which makes the timing of the successful completion of the event more difficult to predict. Prior to a PDR the most common event candidates are associated with the submission of various plans which may also be CDRL deliveries on the contract. The significance, timing and relationship of these events to cash flow needs are not always easy to assess. As noted earlier, the linking of cash payments to specific events will inherently focus the contractor’s attention to the earliest completion of those events. Therefore, especially in contracts for development , care must be taken in the identification of events and the associated completion criteria that the contractor is not unintentionally being motivated to sacrifice quality so as to receive financing payments sooner. Another complicating factor in the use of PBPs on a development contract is the difficulty in determining the reliability of the expenditure profile since there will not be a history of expenditures on a prior contract for the same effort.
E. Undefinitized Contract Actions (UCAs)
Although PBPs are not prohibited during the UCA phase it is recommended that the UCA be awarded using progress payments and PBPs be considered during the price definitization process. The same factors that cause both parties to delay the definitization of price, affects the ability to establish PBPs during the UCA period. In addition, the first few months of a contract often do not provide meaningful or objectively measurable PBP events. Providing progress payments during the UCA phase will provide the contractor adequate contract financing during this phase and allow the parties time to appropriately define the PBP arrangement prior to definitzation.
F. Competitive Solicitations
Although PBPs are not prohibited in competitive solicitations they are likely to requiresignificant discussions between the Government and each offeror in order to reach agreement on the PBP events, completion criteria and valuation. Therefore it is recommended that the solicitation state that proposal pricing and contract award will bebased on customary progress payment financing but the Government will be willing to modify the contract with the successful offeror to use PBPs if they are determined to be practical by the contracting officer, the contractor agrees to their use and adequate consideration is received by the Government (FAR 32.005(b) and DFARS 232.1004(iii)).
