The Defense Department has made a priority the use of performance-based payments (PBPs) as a financing method, establishing various goals such 25 percent of all contracts valued at $2 million or more in 2002 and 50 of all service contracts by 2005 and issuing a PBP guide to the contracting community at “http://www.acq.osd.mil/ar/doc/pbpguide-012201.pdf .  PBPs are made on the basis of predetermined objectives, measurable events and schedule commitments (commonly called milestones) whereas the traditional cost-based payments are made at regular intervals regardless of how much progress is being made on the contract.  The policy statements issued by DOD have called for input by the Defense Contract Audit Agency into how PBP events and values are established, proper documentation to back up payments,  how post-payment verification should be conducted and evaluations of contractor’s financial strength.  The following guidance is DCAA’s first input.

DCAA should be available to conduct both pre-payment and post-payment reviews when asked by contracting officers.  Prepayment assistance may be sought in structuring the agreement and negotiating terms.  The PBP event should be structured to ensure contractors receive a reasonably consistent cash flow during performance to avoid long periods of insufficient cash flow when their rate of expenditure is significant.  Once the parties agree on events to trigger payments and measure accomplishments DCAA will have a role to make sure (1) PBPs do not exceed 90 percent of the price of a contract or  delivery item (2) PBPs should not be structured to provide advanced payment (e.g. front-loading) (3) event values should have some "reasonable relationship” to working capital expended and (4) final payments should occur only after the government has accepted the contractor’s performance.

Once agreement is reached on events and values, DCAA recommends proper documentation for payment to include: the PBP event number, contract line item or sub-line item to which the event applies, whether the event is separate or cumulative, funding information related to the event, the event’s value and the estimated date the event is to occur.  Post payment review may include verification of the accomplishment or incurred cost associated with the completion of a performance-based event.  DCAA may also include a review of a contractor’s financial condition and whether the contractor is delinquent in paying its subcontractors (MRD 01-PPD-056(R).

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