On larger contracts an Integrated Master Plan (IMP) and Integrated Master Schedule (IMS) may be required by the contract. An IMP is an event-based plan that can be the first source for potential PBP events. The IMS provides a more detailed calendar-based schedule for the tasks needed to be accomplished for each IMP event. The IMS will identify the expected timing of PBP events selected. Being more detailed than the IMP, the IMS is also a source of potential PBP events. Although an IMS is continually updated over the life of performance, the IMS as it exists at the time of PBP event selection is still the best source for event timing. IMP and IMS are very important in the earlier phases of a program. As a program matures into full production, a formal IMP and IMS may not be as important as the manufacturing processes and material need dates become established. Even if a formal IMP or IMS is not required by the contract, a contractor must have a plan of what tasks need to be accomplished and the optimal sequence of performing those tasks. It is recommended that DCMA be contacted to help identify appropriate PBP events.
Virtually every significant program (whether it entails producing an item, providing a service, or conducting research) has a plan identifying the steps that will have to occur in order for the overall effort to be successfully completed. Thus, the initial set of candidate events that can be used for PBP purposes should not require the creation of steps not already set forth in the program’s planning documents. In exceptional circumstances, some unique PBP events may have to be identified, but this should be a rare situation because every PBP event must represent work already required under the contract.
Selecting the payment events requires serious discussion between the parties. While all events to be used for PBPs need not be on the “critical path” of the overall program plan, each event should be or represent a meaningful and essential step in successfully executing the work called for by the contract or the line item to which it relates.
PBP events can be of two kinds: severable (i.e., stand-alone) or cumulative (i.e., dependent):
- Severable events do not require the accomplishment of any other events.
- Cumulative events require the prior or concurrent completion of other events in order to be successfully accomplished.
A typical set of PBP events will usually contain both kinds, like producing a proto-type of special test equipment (STE). Initial design of the STE, which is not dependent upon other events for completion, qualifies as severable events. However, final testing of the proto-type would be a cumulative event because it must follow the production of the equipment. The performance-based payment schedule in the contract shall identify each event either as severable or cumulative. For cumulative events, the payment schedule should also identify which events or criteria must be completed prior to the successful achievement of each cumulative event.
In determining event frequency and valuation, the contractor’s expected cash flow needs, should be the determining factor. Another benefit of the PBP Analysis Tool is the ability to assess the financial impact of including or excluding any event. Keep in mind that the greater the number of events, the greater the administrative effort that will be required on both sides.
It will not be uncommon for the program schedule to reveal that some months have no acceptable PBP events while other months may have more than one acceptable PBP event scheduled. Although the contractor cannot be paid more frequently than once per month with PBPs, the PBP payment in a month can be for the completion of multiple events.
In no case, however, should the parties select PBP events that do not require meaningful effort or action. PBP events should not be established solely to provide monthly cash flow opportunity. In those situations where there are few valid PBP event candidates and the time between events is lengthy, the use of PBPs is not advisable. FAR 32.1004(a)(1) states that the signing of contracts (inlcuding issuing purchase orders) or modifications, the exercise of options, the passage of time, or other such occurrences (e.g., kickoff meetings, postaward conferences, entry events, etc.) do not represent meaningful efforts or actions and shall not be identified as events or criteria for performance-based payments. Also, PBPs are not to be provided as payment for accepted items, although it may be appropriate for a subcontract delivery to result in a prime PBP payment.
It is not uncommon for a contract to contain ample PBP events but few or none in the first few months of the contract. Fortunately, when significant accomplishments are not present in the first few months, the contractor’s expenditures also tend to be relatively low. If needed to provide some cash flow to the contractor, a less significant event may be used as long as the value of the event is commensurate with its programmatic significance. For example, early effort in a production contract will often be associated with the ordering of material and parts from suppliers. While the ordering of parts does not indicate nearly as much progress as the receipt of or kitting of parts for assembly, it may be used as an early PBP event if there are no other meaningful events in that time period. This assumes there is a genuine cash flow need at that time as determined by the evaluation of the contractor’s expenditure profile and as validated by the PBP Analysis Tool. Establishing the amount assigned to PBP events is covered in Chapter 9.
