84 FR 18221 - Performance-Based Payments (DFARS Case 2019-D002)

DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to implement a section of the National Defense Authorization Act for Fiscal Year 2017, which amends 10 U.S.C. 2307 to address the use of performance-based payments.

[Federal Register Volume 84, Number 83 (Tuesday, April 30, 2019)]
[Proposed Rules]
[Pages 18221-18225]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2019-08487]



[[Page 18221]]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 204, 232, and 252

[Docket DARS-2019-0019]
RIN 0750-AK37


Performance-Based Payments (DFARS Case 2019-D002)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Proposed rule.

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SUMMARY: DoD is proposing to amend the Defense Federal Acquisition 
Regulation Supplement (DFARS) to implement a section of the National 
Defense Authorization Act for Fiscal Year 2017, which amends 10 U.S.C. 
2307 to address the use of performance-based payments.

DATES: Comment Date: Comments on the proposed rule should be submitted 
in writing to the address shown below on or before July 1, 2019, to be 
considered in the formation of a final rule.

ADDRESSES: Submission of Comments: Submit comments identified by DFARS 
Case 2019-D002, using any of the following methods:
    [cir] Federal eRulemaking Portal: http://www.regulations.gov. 
Search for ``DFARS Case 2019-D002.'' Select ``Comment Now'' and follow 
the instructions provided to submit a comment. Please include ``DFARS 
Case 2019-D002'' on any attached documents.
    [cir] Email: [email protected]. Include DFARS Case 2019-D002 in 
the subject line of the message.
    [cir] Fax: 571-372-6094.
    [cir] Mail: Defense Acquisition Regulations System, Attn: Ms. Amy 
G. Williams, OUSD(A&S)DPC/DARS, Room 3B941, 3060 Defense Pentagon, 
Washington, DC 20301-3060.
    Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To 
confirm receipt of your comment(s), please check www.regulations.gov, 
approximately two to three days after submission to verify posting 
(except allow 30 days for posting of comments submitted by mail).

FOR FURTHER INFORMATION CONTACT: Ms. Amy Williams, DPC/DARS, at 571-
372-6106.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD is proposing to amend DFARS subpart 232.10, Performance-Based 
Payments; amend the clauses at DFARS 252.232-7012, Performance-Based 
Payments--Whole Contract Basis, and DFARS 252.232-7013, Performance-
Based Payments--Deliverable Item Basis; and add a new provision at 
252.232-70XX, Performance-Based Payments--Representation, to implement 
section 831 the National Defense Authorization Act (NDAA) for Fiscal 
Year (FY) 2017, which amends 10 U.S.C. 2307 to address the use of 
performance-based payments.
    A proposed rule was published in the Federal Register on August 23, 
2018 (83 FR 42831), under DFARS Case 2017-D019, Performance-Based 
Payments and Progress Payments. That rule proposed to implement section 
831 and also revise progress payments and performance-based payments 
policies and procedures for DoD contracts. That proposed rule was 
withdrawn by a notice published in the Federal Register on October 4, 
2018 (83 FR 47867). This rule addresses only the amendments to the 
DFARS required by section 831.

II. Discussion and Analysis

A. Preference for Performance-Based Payments

    Performance-based payments are a method of contract financing that 
may be available under fixed-price contracts, except for contracts 
awarded using Sealed Bidding procedures. Performance-based payments 
differ from the more traditional progress payments based on costs 
because these contract financing payments are made on the basis of the 
contractor's achievement of objective, quantifiably measurable events, 
results, or accomplishments that are defined and valued in the contract 
prior to performance. It is a preferred method of contracting as it may 
reduce oversight and compliance costs to the Government. It also has 
benefits for contractors as it should help cash flow, reduce the cost 
of oversight and compliance, and allows the management team to focus on 
technical and schedule progress.
    Section 831 amends 10 U.S.C. 2307(b)(1) by requiring, whenever 
practicable, that payment under the authority of 10 U.S.C. 2307(a) 
shall be made using performance-based payments. Federal Acquisition 
Regulation (FAR) 32.1001(a) already states that performance-based 
payments are the preferred Government financing method when the 
contracting officer finds them practical, and the contractor agrees to 
their use.

B. Relationship of Performance-Based Payments to Costs Incurred

    DFARS case 2011-D045, published in the Federal Register on March 
31, 2014 (77 FR 4638), mandated that cumulative performance-based 
payments shall not exceed the cumulative cost incurred on the contract 
or delivery item, whichever is applicable, at any point during contract 
performance. That requirement was supported by the statement at FAR 
32.1004(b)(2)(i) that contract financing should only be provided to the 
extent actually needed for contract performance and the statement at 
FAR 32.1004(b)(3)(ii) that the contracting officer must ensure that 
performance-based payments ``are not expected to result in an 
unreasonably low or negative level of contractor investment in the 
contract.''
    Section 831 amended 10 U.S.C. 2307 by adding paragraph (b)(2), 
which provides that performance-based payments shall not be conditioned 
upon costs incurred in contract performance but only on the achievement 
of negotiated performance outcomes. Therefore, this rule proposes to 
remove the restrictions at DFARS 232.1001(a) and paragraph (b)(i) of 
the clauses at DFARS 252.232-7012 and 252.232-7013 that limit 
performance-based payments to amounts not greater than costs incurred 
up to the time of payment. However, the requirement for contractors to 
report costs incurred when requesting performance-based payments is 
retained, in order to have the data necessary for negotiation of 
performance-based payments on future contracts.
    Section 831 also added paragraph (b)(3) to 10 U.S.C. 2307, which 
addresses the eligibility for performance-based payments of 
nontraditional defense contractors and other private sector companies. 
This has been added to the policy at DFARS 232.1001.
    10 U.S.C. 2307(b)(4), as added by section 831, requires contractors 
to be in compliance with Generally Accepted Accounting Principles in 
order to receive performance-based payments, with no requirement for a 
Government-unique accounting systems or practices as a prerequisite to 
receive performance-based payments. This requirement has been 
incorporated at DFARS 232.1003-70 and the clauses at DFARS 252.232-7012 
and 252.232-7013. This rule also proposes a new representation by each 
offeror, if performance-based payments are anticipated, as to whether 
the output of its accounting system is in compliance with Generally 
Accepted

[[Page 18222]]

Accounting Principles, as evidenced by audited financial statements.

III. Applicability to Contracts at or Below the Simplified Acquisition 
Threshold and for Commercial Items, Including Commercially Available 
Off-the-Shelf Items

    This rule proposes to amend the clauses at DFARS 252.232-7012 and 
252.232-7013. These clauses do not apply to contracts at or below the 
simplified acquisition threshold or for the acquisition of commercial 
items. In accordance with 10 U.S.C. 2307(f) and 41 U.S.C. 4505, FAR 
32.201 provides that payment for commercial items may be made under 
such terms and conditions as the agency head determines are appropriate 
or customary in the commercial marketplace and are in the best interest 
of the United States. Furthermore, FAR 32.202-1 states that Government 
financing of commercial purchases is expected to be different from that 
used for noncommercial purchases. While the contracting officer may 
adapt techniques and procedures from the noncommercial subparts for use 
in implementing commercial contract financing arrangements, the 
contracting officer must have a full understanding of effects of the 
differing contract environments and of what is needed to protect the 
interests of the Government in commercial contract financing.

IV. Expected Cost Impact

    This rule proposes to amend the DFARS to implement changes to 
performance-based payment policies for DoD contracts by amending the 
policy on performance-based payments at DFARS 232.1001 and amending the 
clauses at DFARS 252.232-7012, Performance-Based Payments--Whole 
Contract Basis, and 252.232-7013, Performance-Based Payments--
Deliverable Item Basis.
    This rule may benefit contractors who receive contract financing 
from the Government in the form of performance-based payments. 
Performance-based payments do not apply to--
     Payments under cost-reimbursement line-items;
     Contracts awarded under the authority of FAR part 12 or 
part 13;
     Contracts for architect-engineer services or construction, 
or for shipbuilding or ship repair, when the contract provides for 
progress payments based upon a percentage or stage of completion.
    Performance-based payments are tied to the achievement of specific, 
measurable events or accomplishments that are defined and valued in 
advance by the parties to the contract. Total performance-based 
payments cannot exceed 90 percent of the contract price.
    This rulemaking proposes to remove the DFARS restrictions that 
limit performance-based payments to amounts not greater than costs 
incurred up to the time of payment.
    If performance-based payments to the contractor based on the 
negotiated value of completed milestone events are allowed to exceed 
the total costs incurred up to the time of payment, the cost to the 
contractor of short-term borrowing will decrease and the cost to the 
Government of borrowing will increase.
    In addition, there is a minimal cost to offerors and the Government 
related to a new provision at DFARS 252.232-70XX, Performance-Based 
Payments--Representation, that requires each offeror responding to a 
solicitation that may result in a contract providing performance-based 
financing to represent whether the output of the offeror's accounting 
system is in compliance with Generally Accepted Accounting Principles, 
as evidenced by audited financial statements.
    DoD has performed a regulatory cost analysis on this rule. The 
following is a summary of the estimated public cost savings and 
Government costs in millions calculated in perpetuity in 2016 dollars 
at a 7-percent discount rate:

----------------------------------------------------------------------------------------------------------------
                             Summary                                  Public        Government         Total
----------------------------------------------------------------------------------------------------------------
Present Value...................................................        -$53.971         $27.338        -$26.633
Annualized Costs................................................          -3.778           1.914          -1.864
Annualized Value Costs (as of 2016 if Year 1 is 2019)...........          -3.084           1.562          -1.522
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    To access the complete Regulatory Cost Analysis, go to the Federal 
eRulmaking Portal at www.regulations.gov, search for ``DFARS Case 2019-
D002,'' click ``Open Docket,'' and view ``Supporting Documents.''

V. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is a significant regulatory action and, therefore, was subject to 
review under section 6(b) of E.O. 12866, Regulatory Planning and 
Review, dated September 30, 1993. This rule is not a major rule under 5 
U.S.C. 804.

VI. Executive Order 13771

    This rule is expected to be an E.O. 13771, Reducing Regulation and 
Controlling Regulatory Costs, deregulatory action. The total annualized 
value of the cost savings is $1,521,836. Details on the estimated cost 
savings can be found in section IV. of this preamble.

VII. Regulatory Flexibility Act

    DoD expects that this proposed rule may have a significant economic 
impact on a substantial number of small entities within the meaning of 
the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. Therefore, an 
initial regulatory flexibility analysis has been prepared and is 
summarized as follows:
    This rule proposes to implement section 831 the National Defense 
Authorization Act (NDAA) for Fiscal Year (FY) 2017, which amends 10 
U.S.C. 2307 to address the use of performance-based payments.
    The primary objective of this rule is to remove the restrictions at 
DFARS 232.1001(a) and the clauses at 252.232-7012(b)(i) and 252.232-
7013(b)(i) that limit performance-based payments to amounts not greater 
than costs incurred up to the time of payment, as required 10 U.S.C. 
2307.
    This rule will apply to approximately 50 small entities per year 
that submit offers and are awarded contracts that provide performance-
based contract payments from DoD, as well as an additional 5 offerors 
that submit offers in response to solicitations that may result in 
contracts that provide performance-based payments but do not receive an 
award.

[[Page 18223]]

    This rule adds a reporting requirement that will require an entry 
in the annual representations and certifications with regard to whether 
the output of the offeror's accounting system is in compliance with 
Generally Accepted Accounting Principles, as evidenced by audited 
financial statements. DoD estimates that the skill necessary for this 
requirement is at the journeyman level and that each entry will require 
an average of 6 minutes.
    The rule does not duplicate, overlap, or conflict with any other 
Federal rules.
    This rule will not have a significant economic impact on small 
entities. The burden imposed by the new representation is minimal. The 
net impact is likely to benefit small entities, to the extent that the 
entity may receive an increase in cash flow if the negotiated value of 
performance-based payment events exceeds the actual costs incurred at 
the time of event completion. There are no significant alternatives 
consistent with the stated objectives of the statute.
    DoD invites comments from small business concerns and other 
interested parties on the expected impact of this rule on small 
entities.
    DoD will also consider comments from small entities concerning the 
existing regulations in subparts affected by this rule in accordance 
with 5 U.S.C. 610. Interested parties must submit such comments 
separately and should cite 5 U.S.C. 610 (DFARS Case 2018-D043), in 
correspondence.

XIII. Paperwork Reduction Act

    This rule affects the information collection requirements at DFARS 
subpart 232.10 (and associated clauses at DFARS 252.232-7012 and 
252.232-7013, currently approved under OMB Control Number 0704-0359, 
DFARS Part 232, Contract Financing. The impact, however, is negligible, 
because only the last three lines of the table are deleted, which do 
not impose the predominance of the burden. This rule also adds a new 
information collection requirement that requires the approval of the 
Office of Management and Budget under the Paperwork Reduction Act (44 
U.S.C. chapter 35). Accordingly, DoD has submitted a request for 
approval of a new information collection requirement concerning the 
provision at 252.232-70XX, Performance-Based Payments--Representation 
to the Office of Management and Budget.
    A. Public reporting burden for this collection of information is 
estimated to average 0.1 hours per response, including the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information.
    The annual reporting burden estimated as follows:
    Respondents: 144.
    Responses per respondent: 1.
    Total annual responses: 144.
    Preparation hours per response: 0.1 hours.
    Total response Burden Hours: 14.4.
    B. Request for Comments Regarding Paperwork Burden.
    Written comments and recommendations on the proposed information 
collection, including suggestions for reducing this burden, should be 
sent to Ms. Jasmeet Seehra at the Office of Management and Budget, Desk 
Officer for DoD, Room 10236, New Executive Office Building, Washington, 
DC 20503, or email [email protected], with a copy to the 
Defense Acquisition Regulations System, Attn: Ms. Amy G. Williams, 
OUSD(A&S)DPC/DARS, Room 3B941, 3060 Defense Pentagon, Washington, DC 
20301-3060. Comments can be received from 30 to 60 days after the date 
of this notice, but comments to OMB will be most useful if received by 
OMB within 30 days after the date of this notice.
    Public comments are particularly invited on: Whether this 
collection of information is necessary for the proper performance of 
functions of the DFARS, and will have practical utility; whether our 
estimate of the public burden of this collection of information is 
accurate, and based on valid assumptions and methodology; ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and ways in which we can minimize the burden of the 
collection of information on those who are to respond, through the use 
of appropriate technological collection techniques or other forms of 
information technology.
    To request more information on this proposed information collection 
or to obtain a copy of the proposal and associated collection 
instruments, please write to the Defense Acquisition Regulations 
System, Attn: Ms. Amy G. Williams, OUSD(A&S)DPC/DARS, Room 3B941, 3060 
Defense Pentagon, Washington, DC 20301-3060, or email 
[email protected]. Include DFARS Case 2019-D002 in the subject line of 
the message.

List of Subjects in 48 CFR Parts 204, 232, and 252

    Government procurement.

Jennifer Lee Hawes,
Regulatory Control Officer, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 204, 232, and 252 are proposed to be 
amended as follows:

0
1. The authority citation for 48 CFR parts 204, 232, and 252 continues 
to read as follows:

    Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

PART 204--ADMINISTRATIVE MATTERS

0
2. Amend section 204.1202 by--
0
a. Revising the section heading;
0
b. Redesignating paragraph (2)(xiii) as (2)(xiv); and
0
c. Adding a new paragraph (2)(xiii)
    The revision and addition read as follows:


204.1202  Solicitation provision and contract clause.

* * * * *
    (2) * * *
    (xiii) 252.232-70XX, Performance-Based Payments--Representation.
* * * * *

PART 232--CONTRACT FINANCING

0
3. In section 232.1001, revise paragraph (a) to read as follows:


232.1001  Policy.

    (a) In accordance with 10 U.S.C. 2307(b)(2), performance-based 
payments shall not be conditioned upon costs incurred in contract 
performance, but on the achievement of performance outcomes. Private 
sector companies, including nontraditional defense contractors, are 
eligible for performance-based payments, consistent with best 
commercial practices.
* * * * *
0
4. Revise section 232.1003-70 to read as follows:


232.1003-70  Criteria for use.

    In accordance with 10 U.S.C. 2307(b), the output of a contractor's 
accounting system shall be in compliance with Generally Accepted 
Accounting Principles, as evidenced by audited financial statements, in 
order to receive performance-based payments. 10 U.S.C. 2307 does not 
grant the Defense Contract Audit Agency the authority to audit 
compliance with Generally Accepted Accounting Principles.
0
5. Amend section 232.1005-70 by--
0
a. Designating the introductory text as paragraph (a);

[[Page 18224]]

0
b. Redesignating paragraphs (a) and (b) as paragraphs (a)(1) and (2), 
respectively; and
0
c. Adding a new paragraph (b).
    The addition reads as follows:


232.1003-70  Criteria for use.

* * * * *
    (b) Use the provision at 252.232-70XX, Performance-Based Payments--
Representation, in solicitations where the resulting contract may 
include performance-based payments.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
6. Amend section 252.204-7007 by--
0
a. Removing the provision date of ``(APR 2018)'' and adding ``(DATE)'' 
in its place; and
0
b. Adding paragraph (d)(2)(vi) to read as follows:


252.204-7007  Alternate A, Annual Representations and Certifications.

* * * * *
    (d) * * *
    (2) * * *
    _(vi) 252.232-70XX, Performance-Based Payments--Representation.
* * * * *
0
7. Amend section 252.232-7012 by--
0
a. In the clause introductory text, removing ``232.1005-70(a)'' and 
adding ``232.1005-70(a)(1)'' in its place;
0
b. Removing the clause date of ``(MAR 2014)'' and adding ``(DATE)'' in 
its place;
0
c. Redesignating paragraphs (b)(i) through (iii) as (c)(1) through (3), 
respectively;
0
d. Adding a new paragraph (b); and
0
e. Revising paragraph (c)(1).
    The addition and revision reads as follows:


252.232-7012  Performance-Based Payments-Whole-Contract Basis.

* * * * *
    (b) In accordance with 10 U.S.C. 2307(b), the output of the 
Contractor's accounting system shall be in compliance with Generally 
Accepted Accounting Principles, as evidenced by audited financial 
statements, in order to receive performance-based payments.
    (c)(1) The Contractor shall, in addition to providing the 
information required by FAR 52.232-32, submit supporting information 
for all payment requests using the following format:
[GRAPHIC] [TIFF OMITTED] TP30AP19.000

* * * * *
0
8. Amend section 252.232-7013 by--
0
a. In the clause introductory text, removing ``232.1005-70(b)'' and 
adding ``232.1005-70(a)(2)'' in its place;
0
b. Removing the clause date of (APR 2014)'' and adding ``(DATE)'' in 
its place;
0
c. Redesignating paragraphs (b)(i) through (iii) as (c)(1) through (3), 
respectively;
0
d. Adding a new paragraph (b); and

[[Page 18225]]

0
e. Revising newly redesignated paragraph (c)(1).
    The addition and revision read as follows:


252.232-7013  Performance-Based Payments--Deliverable-Item Basis.

* * * * *
    (b) In accordance with 10 U.S.C. 2307(b), the output of the 
Contractor's accounting system shall be in compliance with Generally 
Accepted Accounting Principles, as evidenced by audited financial 
statements, in order to receive performance-based payments.
    (c)(1) The Contractor shall, in addition to providing the 
information required by FAR 52.232-32, submit supporting information 
for all payment requests using the following format:
[GRAPHIC] [TIFF OMITTED] TP30AP19.001

* * * * *
0
9. Add section 252.232-70XX to read as follows:


252.232-70XX  Performance-Based Payments--Representation

    As prescribed in 232.1005-70(b), use the following provision:

Performance-Based Payments-Representation (DATE)

    (a) In accordance with 10 U.S.C. 2307(b), the output of a 
contractor's accounting system shall be in compliance with Generally 
Accepted Accounting Principles in order to receive performance-based 
payments.
    (b) The Offeror represents that the output of its accounting 
system is [ ] is not [ ] in compliance with Generally Accepted 
Accounting Principles, as evidenced by audited financial statements.

(End of Provision)

[FR Doc. 2019-08487 Filed 4-29-19; 8:45 am]
 BILLING CODE 5001-06-P