Progress Payments Under Federal Contracts

February 24, 2024 Sareesh Rawat, Esq.

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.

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Responsibility Considerations for Prospective Contractors

January 11, 2024 Sareesh Rawat, Esq.

The Federal Acquisition Regulation (FAR) requires prospective contractors to be deemed responsible before they are awarded federal contracts. FAR subpart 9.1 prescribes policies, standards, and procedures for determining whether prospective contractors and subcontractors are responsible. FAR 9.103 requires contracting officers to make an affirmative determination of responsibility before award. This affirmative determination must be reasonable and factually supported. Prime contractors may also be required to demonstrate the responsibility of their proposed subcontractors when necessary. FAR 9.104 states general and special standards that prospective contractors must meet to demonstrate responsibility to receive contracts.

General Standards

The general standards listed in FAR 9.104 require prospective contractors to:

Either have adequate financial resources to perform the contract at issue or have the ability to obtain them.
Have the ability to comply with the required or proposed performance or delivery schedule, taking into consideration all existing commercial and governmental commitments.
Have a satisfactory past performance record. Notably, the responsibility determination of prospective contractors cannot solely be made based on a lack of relevant performance history, subject to exceptions of FAR 9.104–2.
Have a satisfactory record of integrity and business ethics.
Possess or have the ability to obtain the necessary organization, experience, accounting and operational controls, and technical skills.
Be otherwise qualified and eligible to receive an award under applicable laws and regulations.

Emergency Acquisition Flexibilities Impacting Federal Contract Administration

January 23, 2024 Sareesh Rawat, Esq.

Federal government contracting operates under a well-defined and highly regulated framework of rules and procedures. However, unforeseen circumstances like natural disasters or national emergencies often disrupt the typical procurement process. Recognizing this, the Federal Acquisition Regulation (FAR) contemplates the need for emergency acquisition flexibilities for contracting officers under special circumstances such as disasters, contingencies, or presidential declarations so that critical work continues. Notably, FAR 18.001 defines emergency acquisition flexibilities as flexibilities provided with respect to any acquisition that is used to facilitate:

A contingency operation.
The defense against or recovery from cyber, nuclear, biological, chemical, or radiological attacks.
The provision of international disaster assistance.
A presidential emergency declaration or a major disaster declaration.

FAR 18.1 lists several flexibilities available to contracting officers in emergency acquisitions, provided certain conditions are met. Emergency acquisition flexibilities that are most relevant to the administration of federal government contracts include:

Contracting Under the Sole Source Exception to Full & Open Competition

January 31, 2024 Sareesh Rawat, Esq.

The Competition in Contracting Act (CICA) governs competition in federal contracting and is designed to guarantee full and open competition amongst competing offerors. Although the federal government generally prefers full and open competition, certain contracts are awarded on a sole-source basis without going through the standard competitive process. Such sole-source contracts may be of particular interest to specialized or small business contractors. The Federal Acquisition Regulation (FAR) provides seven limited exceptions to full and open competition listed in FAR subsections 6.302-1 through 6.302-7. Even if one of these exceptions is applicable, the FAR requires contracting officers to solicit offers from as many potential sources as practicable under the circumstances.

The sole-source exception to full and open competition is provided in FAR 6.302-1 and applies in situations where only one responsible source exists to satisfy agency requirements. Sole-source decisions must be supported with written justifications and approvals. Notably, the government may not issue sole-source awards due to a lack of advance planning or concerns relating to the expiration of appropriated funds. Pursuant to FAR 5.201, contracting officers are also required to publish notifications of sole-source solicitations, giving prospective contractors interested in such procurements an opportunity to respond. FAR 6.302-1 outlines three specific scenarios in which contracting officers are permitted to conduct procurements on a sole-source basis.

Validity of Electronic Signatures in Federal Contracts

March 7, 2024 Sareesh Rawat, Esq.

The use of electronic signatures in federal contracting is generally consistent with the Electronic Signatures in Global and National Commerce (E-SIGN) Act. Enacted in 2000, the E-SIGN Act promotes the use of e-signatures in domestic and international commerce by establishing the legal equivalency of electronic records, signatures, and contracts with their paper counterparts. The E-SIGN Act is applicable to most commercial transactions with a few notable exceptions, including required notices that directly impact consumer rights. Consistent with the E-SIGN Act, the Federal Acquisition Regulation (FAR) permits the use of electronic signatures in federal government contracting. Specifically, FAR § 4.502(d) allows federal agencies to accept electronic signatures and records in connection with government contracts. Additionally, FAR § 2.101 defines a signature as the discrete, verifiable symbol of an individual that, when affixed to a writing with the knowledge and consent of the individual, indicates a present intention to authenticate the writing. The FAR definition expressly states that it encompasses electronic symbols.

An electronic signature may take many forms, such as a typed name, a digitally scanned image of a wet-ink signature, or a signature affixed using an e-signature technology solution. Consequently, an electronic signature can comprise of an electronic sound, symbol, or process attached to or logically associated with a contract or other record and executed or adopted by a person with an intent to sign the record. Therefore, contracts may not be denied legal effect solely because they are in an electronic form or they are executed in an electronic form. The parties' intent to be bound is the primary consideration in determining the enforceability of an electronic signature. Therefore, scanned signatures are legally binding electronic signatures as long as the parties intend to be bound by them. The FAR also requires an electronic signature to be discrete and verifiable as belonging to the signing individual. That is, the signature must be a separate, distinct, and true representation of the signing individual’s present intent to authenticate the document or record. Finally, to have a legal effect, the electronic signature, which can be a symbol, sound, or process, should be knowingly attached to the contract, document, or record at issue.

Progress Payments Under Federal Contracts

TILLIT LAW Federal Procurement Insights