Contract financing payments are authorized Government disbursement of monies to a contractor prior to acceptance of supplies or services by the Government. They are based upon Firm Fixed Price (FFP) contracts. The specific methods of Government contract financing payment liquidation include:

1. Commercial advance and interim payments
2. Progress Payments
3. Performance-Based Payments

1) Commercial Advance and Interim Payment (Subpart 32.2)

A commercial interim payment is given to the contractor after some work has been done. These payments are contract financing payments. Commercial interim payments and commercial advance payments may be made under the following circumstances:

1. The contract item financed is a commercial supply or service;
2. The contract price exceeds the simplified acquisition threshold;
3. The contracting officer determines that it is appropriate or customary in the commercial marketplace to make financing payments for the item;
4. Authorizing this form of contract financing is in the best interest of the Government (see paragraph (e) of this subsection);
5. Adequate security is obtained (see 32.202-4);
6. Prior to any performance of work under the contract, the aggregate of commercial advance payments shall not exceed 15 percent of the contract price;
7. The contract is awarded on the basis of competitive procedures or, if only one offer is solicited, adequate consideration is obtained (based on the time value of the additional financing to be provided) if the financing is expected to be substantially more advantageous to the offeror than the offeror’s normal method of customer financing; and
8. The contracting officer obtains concurrence from the payment office concerning liquidation provisions when required by 32.206(e).

2) Progress Payments (Subpart 32.5)

Progress payments may be customary or unusual. Customary progress payments are those made under the general guidance using the customary progress payment rate (80%), the cost base, and frequency of payment established in the Progress Payments clause, and either the ordinary liquidation method or the alternate method as provided in subsections FAR 32.503-8 and FAR 32.503-9. Unusual payments are authorized in accordance with subsection 32.501-2.

3) Performance-Based Payments (Subpart 32.10)

Performance-based payments are contract financing payments that are not payment for accepted items. They are liquidated by deducting a percentage or a designated dollar amount from the delivery payments. The Contracting Officer must specify the liquidation rate or designated dollar amount in the contract. The method of liquidation must ensure complete liquidation no later than final payment.

• If the contracting officer establishes the performance-based payments on a delivery item basis, the liquidation amount for each line item is the percent of that delivery item price that was previously paid under performance-based finance payments or the designated dollar amount.
• If the performance-based finance payments are on a whole contract basis, liquidation is by pre-designated liquidation amounts or liquidation percentages.

Performance-based payments shall not be used for:

• Payments under cost-reimbursement line items;
• Contracts for architect-engineer services or construction, or for shipbuilding or ship conversion, alteration, or repair, when the contracts provide for progress payments based upon a percentage or stage of completion; or
• Contracts awarded through sealed bid procedures.

Definitions

• Delivery Payment: means a payment for accepted supplies or services, including payments for accepted partial deliveries. Financing payments are liquidated by deductions from these payments.
• Invoice Payment: means a Government disbursement of monies to a contractor under a contract or other authorization for supplies or services accepted by the Government.
• Liquidate: means to decrease a [delivery or invoice] payment for an accepted supply item or service under a contract for the purpose of recouping financing payments previously paid to the contractor.

AcqLinks and References:

• Guide: Performance-Based Payment (PBP) Guide – 2014
• White Paper: DAU Liquidating “Progress Payments Based on Cost”
• Website: FAR Subpart 32.10 – Performance-Based Payments
• Website: FAR Subpart 32.5 – Progress Payments Based on Costs
• Website: FAR Subpart 32.2 – Commercial Item Purchase Financing

Updated: 7/14/2021

Rank: G1