Availability. The Progress Payments clause (FAR 52.232-16) is sanctioned where the contractor cannot bill "for the first delivery of products for a substantial time after work begins" and must make substantial expenditures. "Substantial time" for large businesses is considered six months or more while for small businesses it means four months or more. The clause may also be sanctioned where the contractor demonstrates actual financial need or unavailability of private financing. The contract threshold for availability of progress payments to small businesses is the simplified acquisition threshold of $100,000 (for ID/IQ contracts the expected value must exceed that amount) while for other businesses the threshold is $2 million. A final requirement for progress payments is that the contractor has "an accounting system and controls adequate for the proper administration of the clause" where the ACO is to monitor the adequacy of these controls and suspend progress payments if government auditors deem them inadequate.

Award Evaluation. If a solicitation contains the Progress Payments clause then a bid indicating that progress payments will be sought cannot affect the validity of the bid. However, if it does not contain the clause or does not invite offerors to request progress payments, a bid that is conditioned on the receipt of progress payments will be considered nonresponsive. Contractors should review solicitations carefully to see whether they provide for financing payments and remember that the time to address the failure of the solicitation to provide for financing is before you submit your offer. Remember, if the solicitation does not provide for progress payments do not condition your bid on its availability for to do so makes your bid nonresponsive.

Billable Costs. The clause does not entirely describe the costs that may be billed but it accomplishes this purpose by setting forth the costs that may not be included in "total costs incurred" for purposes of calculating progress payments. These prohibited costs include (1) those not "reasonably allocable" to the contract – those concepts of allowable and allocable costs set forth in the FAR Part 31 and the Cost Accounting Standards (2) costs that are ordinarily capitalized or subject to depreciation except for the properly amortized or depreciated costs (3) those incurred by subcontractors or suppliers where the contractor has not acquired title (4) incurred costs for pensions until they are actually paid (unless it is the routine practice not to pay for them until 30 days after the end of the quarter). In order to avoid problems with indirect costs that the government may have reason to believe would not sustain an audit, you may want to add a decrement factor to your indirect rate that would, for example, take into account prior years proposed versus approved amounts.

"Paid Cost" Rule. Contractors should be reminded of the elimination of the "paid cost" rule – large contractors (small contractors were exempt) could not recognize incurred costs for purposes of progress billing unless they were actually paid. This had the effect of "fronting" (paying) subcontractors before they could submit a progress payment. Though this paid cost rule has recently been eliminated – the "incurred cost" can now be submitted for progress payment as long as the incurrence is consistent with the contractor’s procedures for recognizing costs – the Standard Form (SF) 1443 used to present progress payment requests has not been amended to reflect this new rule change.

Liquidation. Progress payments, in effect, represent "loans" or "debt" owed by the contractor to the government and rather than being paid back, they are "liquidated" by contract performance. Liquidation can occur in a number of ways. Progress payments are liquidated by deducting them, up to a point, from payments due for completed contract preformance. The amount of unliquidated progress payments cannot exceed either (1) the progress payments made against incomplete work or (2) the value of the incomplete work. Normally the liquidation rate is the same as the progress payment rate but the CO can adjust the liquidation rate under certain circumstance e.g. the contractor requests a reduction and the rate has not been reduced in the preceding 12 months, data on actual costs are available, etc. (see FAR32.503-9(a)). Liquidation can occur in other ways as well. For example, if the amount of unliquidated progress payments exceed the limits, then the CO may require immediate liquidation and repayment by the contractor. The government may also liquidate at an "increased" rate or even "call" for the repayment of progress payments if the CO determines on substantial evidence the contractor is in danger of non-performance, failed to comply with material contract requirements or is delinquent in paying vendors or subcontractors.

Financing Subcontractors. If you are a prime contractor receiving progress payments, the FAR requires you to flow down the Progress Payments clause to all of your subcontracts, enabling your subcontractors to also receive progress payments or some other type of financing. The prime contractor must pay its suppliers and subcontractors in a timely manner and if delinquent, the government may suspend progress payments. However, if there is a good faith dispute in the amount owed to a supplier, the CO should not consider the prime delinquent. While there was, historically no absolute requirement to make timely payments, changes made in the mid-1990s provided greater recourse for suppliers and subcontractors. If a contractor is delinquent in its payments to its suppliers or subcontractors, the supplier may ask the CO if progress payments have been made to the contractor. If yes and the supplier has not received payment, the supplier may inform the CO of the delinquency whereupon the CO may investigate the matter to see whether the contractor’s certifications for progress payments indicated payment to the supplier. If the CO determines the subcontractor is correct and that payments have not been made the CO may encourage the contractor to make payments to the supplier or reduce and even suspend progress payments to the contractor. If the certification was inaccurate, the CO may initiate remedial action including assertions of violations of the False Claims Act.

Title and Risk of Loss. As security for progress payments, the government obtains title to all property chargeable to the contract. With the exception of selling scrap, the contractor may not dispose of any property to which title has vested to the government and there cannot be any compromises to the property by other encumbrances. Nonetheless, the FAR is clear that risk of loss to the property remains with the contractor before delivery to and acceptance by the government. If the property is lost, stolen or destroyed, the CO will require you to repay the government an amount equal to the unliquidated progress payments allocable to that property.