Performance-base payments are addressed in FAR 32.1003. Instead of basing payments on costs and a pre-set payment rate, a performance-based payment schedule identifies mutually agreed-to payment amounts based on meeting contract events or criteria. Events must represent integral and meaningful aspects of contract performance and should signify true progress in completing the contract effort. Events or criteria may be either "severable or cumulative." The successful completion of a severable event or criterion is independent of accomplishment of any other event while if cumulative, the successful accomplishment of an event or criterion is dependent on the previous accomplishment of another event.

The Defense Department has issued, which is frequently revised, the "Users Guide to Performance Based Payments." It states that events to be selected must be clearly and precisely defined so their accomplishment can be factually determined. The guide offers several examples but stresses the parties themselves must arrive at clear definitions of events. Though performance-based payments may "feel" like payment for work completed, performance-based payments are contract financing payment and hence are not subject to interest penalties under the Prompt Payment Act.

The performance based clause mirrors the Progress Payments clause in many respects.

Availability of performance-based payments depends on contract price.

If the clause is included in the solicitation then a bid indicating payments will be sought does not affect the validity of the bid; unlike the progress payments clause, the regulations are unclear about whether a bid conditioned on receipt of performance based payments when the clause is not included makes the bid nonresponsive..

Unlike required use of SF 1443 for progress payments, there is no official governmentwide form that must be used though DOD has a standard form in Appendix E attached to its "Users Guide" that it "strongly encourages" contractors to use (see Appendix E). (Editor’s Note. Performance based payments are based on predetermined events, not costs. Hence though you are not required to explain your incurred costs, in practice, many agencies still ask for incurred cost information because it is sometimes difficult to depart from familiar requirements.)

COs may reduce or suspend performance based payments under certain circumstances (e.g. failure to comply with significant contract requirements, performance is endangered, delinquent payments to subcontractors).

Same flow down requirements if the prime contractor is receiving performance-based payments.

Government maintains title to property allocable to the contract and the same risk of loss aspects exist.

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