Contractors may establish a structure for receiving progress payments under certain federal contracts that involve significant upfront costs. Under such contracts, progress payments can help alleviate this financial burden by allowing partial payments from the government throughout the contract based on factors such as costs incurred by the contractor or the percentage of work completed. The administration of such progress payment structures is governed by the contract at issue and the policies outlined in the Federal Acquisition Regulation (FAR). However, contractors should note that while progress payments may be negotiated on federal contracts, they are generally only available on contracts over a certain dollar threshold requiring a substantial amount of time between the start of contract performance and the time for initial deliveries. Progress payments based on cost, performance, and percentage of performance completion are described below.

Cost-Based Progress Payments

Under cost-based progress payments structure, the government pays a percentage of the costs incurred by the contractor as work progresses. FAR § 32.5 prescribes policies relevant to contract financing through cost-based progress payments, whereby contractors may recover a percentage of their incurred costs. FAR § 32.501 provides for two types of progress payments based on costs – customary progress payments and unusual progress payments. Customary progress payments are made pursuant to FAR § 32.5 utilizing the customary progress payment rate, the cost base, and frequency of payment established in the progress payments clause of the contract. All other payments are considered unusual progress payments only made under exceptional circumstances. The ordinary and alternate liquidation methods for calculating cost-based progress payments are provided in FAR §§ 32.503-8, 32.503-9. Under FAR § 32.501-1(a), the customary progress payment rate is 80% of the contractor’s costs of performing the contract. Small businesses may receive 85% of their costs expended in performing the contract as progress payments. Both small and large contractors are permitted to recover the entire amount of progress payments made to their subcontractors.

Under FAR § 32.501-2, contracting officers may also permit unusual progress payments under certain exceptional circumstances. For instance, to be eligible for unusual progress payments contractors may demonstrate that the contract requires predelivery expenditures that are large in relation to the contract price and the contractor’s working capital and credit. In such circumstances, the contractor must fully document its need to supplement private funding sources, including private financing and any loans guaranteed by the government. Finally, 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 such as objective milestones or deliverables outlined in the contract. The government may utilize performance-based progress payment structures when it is possible to quantify performance objectives or results. Unlike cost-based progress payments that are tied to the costs incurred by the contractor, performance-based progress payments are tied to the contractor’s performance. Under this progress payment mechanism, payment is made when the contractor achieves a quantifiable performance objective, such as the delivery of acceptable items, work measurement, or at the occurrence of specific events in the program management plan. FAR § 32.1003 requires that the following criteria be met before a contracting officer authorizes the use of performance-based progress payments for individual orders and contracts.

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

FAR § 32.1005 instructs contracting officers to include the clause at FAR 52.232-32 in solicitations that may result in contracts providing for performance-based payments. Contractors will also find this clause included on fixed-price contracts providing for performance-based payments. Similarly, 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

Percentage of performance completion-based payment structures are designed to support contractors performing on large or long-term projects by providing them with working capital as they perform the contract. Such progress payment structures are particularly helpful in situations where the contractor might not be able to finance the entire project upfront. For instance, progress payments based on a percentage of completed performance is available to contractors performing large construction projects 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 such contracts, contractors must generally include the following types of documents and materials in support of their invoices requesting progress payments.

• List of amounts requested mapped to specific elements of work that the invoice covers.
• 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 negotiated or required by the contracting officer.

Negotiating progress payments for federal contracts generally requires contractors to carefully consider the specific project and its financial needs. Understanding the different types of progress payment structures available to federal contractors in different situations, along with the relevant FAR regulations, enables contractors to structure requests for progress payments that meet their project’s cash flow requirements. For both small and large contractors, a well-defined progress payment structure ensures financial security during performance and promotes a collaborative contracting environment.

This 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.