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This is the first blog on a three-part series on progress payments and discusses progress payments and the applicable rates.
What Are Progress Payments?
Progress payments are a form of Government financing on fixed price contracts and are covered under the Progress Payment clause in FAR 52.232-16. Progress payments are submitted on a Standard Form (SF)1443, Contractor’s Request for Progress Payments. (FAR 53.232 or Form: SF1443 Contractor's Request for Progress Payment). Progress payments are made to a contractor as work is performed based on the progress payment percentage applied to total allowable costs incurred (adjusted for projected loss) during the period of performance.
Is an Acceptable Accounting System Required?
YES – The DFARS clause 252.242-7006 Accounting System Administration is required in solicitations/contracts where progress payments based on costs are contemplated. Contracting Officers will normally assess a contractor’s financial condition and adequacy of the accounting and billing system, in order to approve progress payments. The government will rely on the adequacy of the accounting and billing system in determining the frequency of progress payment reviews to ensure there are no overpayments or premature payments. The risk to the government is the time value of money and the potential for default.
Will the Government Pay my Progress Payment and then Review it?
There are two types of payment methods under progress payments, a pre-payment or post-payment request. The Administrative Contracting Officer (ACO) decides whether to request a pre-pay or post-pay progress payment review. Pre-payment means the progress payment is reviewed prior to payment being made. If there are any issues found, they must be corrected, and the progress payment resubmitted before payment. Post payment occurs when the government pays the contractor’s progress payment request and then the ACO requests DCMA/DCAA to review the progress payment request after payment. If there is an error in the progress payment, the adjustment is corrected in the next progress payment request, depending on the dollar amount of the error and timing of the next progress payment. While this may not impact the contractor’s cashflow, there is a significant risk that DCAA will issue an accounting system deficiency report.
What is the Difference Between a Customary and Unusual Progress Payment?
There are two types of progress payments, customary and unusual. Customary progress payments are the most common and are paid using the customary progress payment rates. Contracting Officers can authorize a higher rate in unusual circumstances (e.g., higher than the 80% for large business). This is referred to as an unusual progress payment rate.
So, What are the Customary Progress Payment Rates?
These rates represent the amount of your incurred cost adjusted for any potential loss that the Government will finance.
The customary progress payments rates are included in FAR 32.501-1 as follows:
- 80% for large business
- 85% for small business
The customary rates for DoD Contracts are included in DFARS 232.501-1 and are as follows:
- 80% for large business
- 90% for small business
However, on March 20, 2020, the Acting Principal Director, Defense Pricing and Contracting (DPC) issued a Class Deviation 2020-O0010 on Progress Payment Rates. The purpose of the DFARS 232.501-1 deviation was to improve contractor’s cash flow on DoD contracts in response to COVID-19. The progress payment rates in DFARS 232.501-1 were increased to the following rates on new contracts:
- 90% for large business
- 95% for small business.
Line 6b of the SF1443 contains the alternate liquidation rate which is generally the same as the progress payment rate Line 6a of the form.
What do DoD Contractors Need to do to Get the Higher Rate on Contracts in Process Before the Deviation was Issued?
DCMA issued a mass administrative modification to implement the deviation on in-process contracts and also notified the services to modify contracts where DCMA did not have delegation authority. Contractors not receiving the higher progress payment percentages on DoD contracts should contact the Contracting Officer to request a modification.
So, Can Subcontractors Get the New Higher Rates?
Although there is no privity of contract between subcontractors and the government, the DPC notified major prime contractors of DoD’s expectation that increased financing should be flowed down to suppliers. So, if your company is submitting progress payments to a prime contractor on a DoD contract at the lower progress payment rate, we recommend contacting the prime contractor to see about flowing down the higher progress payment rate.
Redstone GCI is available to assist contractors and subcontractors in their preparation of progress payments and/or a progress payment request to ensure the revised progress payment rates are being utilized appropriately. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and requirements related to compliance with Government contracting terms and conditions.
Lynne is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to Commercial Item Determinations and support, Cost Accounting Standards, DFARS Business System Audits, Proposals, and Incurred Cost. Prior to joining Redstone Government Consulting, Lynne served in several capacities with DCAA and DCMA for over 35 years. Professional Experience Lynne began her career working with DCAA in the Honeywell Resident Office, Clearwater, FL in 1984. Lynne’s experience included various positions which involved conducting or reviewing forward proposals or rate audits, financial capability audits, progress payments, accounting and estimating systems, cost accounting standards, claims and disclosure statement reviews. She is an expert in FAR, DFARS, CAS and testified as an expert witness. Lynne assisted in drafting the commercial item guidance for DCAA Headquarters. Lynne was assigned as a Regional Technical Specialist where she provided guidance to 20 field offices on highly complex or technical issues relative to forward pricing, financial capability or progress payment issues. As an Assistant for Quality, she was involved in reviewing and ensuring audit reports were in compliance with policy and GAGAS as well as made NASBA certified presentations to the staff including but not limited to billing reviews, CAS, unallowable cost and progress payments. To enhance her experience in government contracting, Lynne accepted a position with DCMA in 2015 as part of the newly organized DCMA Cadre of Experts in the Commercial Item Group. This included performing reviews of prime contractor’s assertions and/or commercial item determinations as well as performing price analyses. Lynne was a project lead and later became a lead analyst where she engaged with the buying commands on requests and reviewed price analysis reviews performed by a team of 5 analysts. She also assisted the DCMA CPSR team relative to commercial items and co-instructed the Commercial Item Training presented to DCMA. Education Lynne earned a Bachelor of Science Degree in Accounting from the University of Central Florida. Certifications State of Florida Certified Public Accountant State of Alabama Certified Public Accountant Defense Acquisition Workforce Improvement Act (DAWIA) Level III- Auditing DAWIA Level III – Contracting