Breakout Session # 1106 Jim Kirlin Contracts Manager Raytheon Company Date 26 Apr 05

2. Performance Based Payments Breakout Session #1106 Jim Kirlin Contracts Manager Raytheon Company Date 26 Apr 05 Time 2:45 – 3:45 p.m. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

3. Purpose • Primer on Using Performance Based Payments • The viewpoint: Contract Manager in Industry • Learning Objectives • When to use PBPs • Advantages of using PBPs • How to structure a contract using PBPs NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

4. Outline • Disclaimer • Introduction • When to use PBPs • Advantages of using PBPs • How to structure a contract using PBPs • Resources for further learning • Summary • Contact Information • Questions and Answers NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

5. Disclaimer • The views in this presentation and accompanying paper are those of Jim Kirlin only and are not to be construed as the views of the Raytheon Company • Non-attribution NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

6. When to Use PBPs NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

7. PBP is not Performance-Based Contracting • Performance Based Contracting (FAR 37.6) • Ensures achievement of required quality levels • Total payment is related to the degree that services performed meet contract standards • Describe the requirements in terms of results required rather than the methods of work • Use measurable performance standards and quality assurance surveillance plans • Can reduce fee for non-performance NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

8. FAR on PBP • FAR 32.10 – Performance Based Payments • When PBPs do and do not apply • Bases and criteria for use • Procedures • Solicitation provisions and contract clauses • Administration and payment • Special Topics: Reduction; Title; Risk of Loss NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

9. When PBPs Do Not Apply • FAR 12 – Acquisition of Commercial Items • Part 14 - Sealed bid procedures • Payments under cost-reimbursement • Architect-engineer services or construction or for shipbuilding, ship conversion, alteration or repair, when the contracts provide for progress payments based upon percentage or stage of completion NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

10. When to Use PBPs • Use only when all these conditions are met: • Fixed price contract • Contract does not provide other methods of financing, except that advance payments IAW 32.4, or guaranteed loans IAW 32.3 • Contracting officer and offeror agree on the PBP terms NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

11. When to Use PBPs • Can be undefinitized • Competitive and sole-source • Can use on fixed price subcontract under a cost-reimbursable prime contract NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

12. When to Use PBPs • Large Contractor: • Will not be able bill for first delivery within 6 month and significant impact to working capital or demonstrates actual financial need • Contract price over $2M or aggregate of orders over the simplified acquisition threshold expected to be over $2M • Simplified acquisition threshold • See FAR 2.101 Definitions • $100K / $250K / $1M NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

13. When to Use PBPs • Small Business Concern: • Will not be able bill for first delivery within 4 month and significant impact to working capital or demonstrates actual financial need • Contract price exceeds the simplified acquisition threshold or aggregate of orders expected to be over the simplified acquisition threshold NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

14. PBP Policy • PBPs are the preferred Government financing method when: • The contracting officer finds them practical, • And, the contractor agrees to their use • PBPs are contract financing payments that are not payment for accepted items • PBPs are fully recoverable in event of default • Cannot use with other forms of financing except as provided in 31.1003(c) NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

15. PBP Policy • PBPs are contract financing payments and, therefore, are not subject to interest-penalty provisions of prompt payment • For Government accounting purposes, the Government should treat PBPs like progress payments based on costs under 32.5 NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

16. Advantages of Using PBPs NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

17. Advantages of Using PBPs • For the Government • Enhanced Technical and Schedule Focus • Traditional Progress Payments are based on incurred costs • PBPs focus on accomplishing meaningful and measurable technical progress and schedule commitments • Parties agree on expectations up-front and the impact to cash flow NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

18. Advantages of Using PBPs • For the Government • Reinforced Role of Program Managers and IPTs • PBP is a management tool that allows programs teams to linking financing to actual documented performance • PBP plans jointly developed • PBP execution jointly administered • Reduced cost of oversight because contractor’s accounting system is not relied upon NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

19. Advantages of Using PBPs • For the Government • Broadened Contractor Participation • Traditional cost-based progress payments can be used only with those contractors who have government-approved accounting systems • This reduces number of contractors • PBPs eliminate that barrier • Fits with the move to focus on outcomes and results and less on costs based techniques NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

20. Advantages of Using PBPs • For the Contractor • Potentially Improved Cash Flow • Structuring effective events can provide significant cash-flow advantages for a successfully performing contractor • PBPs can be made up to 90% of the contract price or line item price • Versus 80% for DoD progress payments • DoD policy – pay with 14 days NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

21. Advantages of Using PBPs • For the Contractor • Reduced Costs of Oversight and Compliance • Because contractor’s accounting and related systems are not relied on when making PBPs, contractor does not expend resources to comply with many of the Government’s cost-based oversight and compliance programs • Allows non-traditional contractors to enter market NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

22. Advantages of Using PBPs • For the Contractor • Total Management Team Focus on Technical and Schedule Progress • Entire contractor management team stays focused on program execution and progress • Not achieving a milestone impacts cash flow plans and this gets lots of attention NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

23. How to Structure a Contract Using PBPs NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

24. Payment Structures • PBPs may be made either on a: • Deliverable item basis, or • Whole contract basis, • Unless otherwise prescribed by agency regulations NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

25. Deliverable Item Basis • Financing payments made on a deliverable item basis are applicable to a specific individual deliverable item • A deliverable item for these purposes is a separate item with a distinct unit price • Example: • A contract has only one contract line item for 10 airplanes, with a unit price of $1M each, has 10 deliverable items – the separate airplanes. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

26. Whole Contract Basis • Financing payments are applicable to the entire contract and not to specific deliverable items • Example • Contract has only one contract line item for 1 lot of 10 airplanes with a lot price of $10M has only deliverable item – the lot NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

27. Bases for PBPs • PBPs may be made on any of the following bases: • Performance measured by objective, quantifiable methods • Accomplishment of defined events (milestones) • Other quantifiable measures of results NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

28. Events (Milestones) and Criteria • Must be an integral and necessary part of the contract performance • Must be identified in the contract • Must have a description of what constitutes successful performance of the events or attainment of the performance criterion • Government must be able to verify successful performance of the event or criterion • Need not be a critical event • Cannot be signing of contract, mod, exercise of option, etc. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

29. Severable or Cumulative • Events or Criteria may be Severable or Cumulative • Severable • The successful completion of a severable event or criterion is independent of the accomplishment of any other event or criterion • Cumulative • The successful completion of a cumulative event or criterion is dependent upon the previous accomplishment of another event NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

30. Establishing Payment Amounts • Complete Schedule Needed • Fully defined events • Criteria • Payment Amounts • Schedule is modified when contract action significantly affects schedule NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

31. Establishing Payment Amounts • Payments must reflect prudent contract financing only to the extent needed for contract performance (FAR 32.104(a)) • Payments cannot exceed 90% of contract value if on whole contract basis or 90% of the delivery item price if on a delivery item basis NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

32. Establishing Payment Amounts • Contract financing has a cost to Government in terms of interest • Contracting officer must ensure PBPs are commensurate with the value of the performance event or performance criterion, and are not expected to result in an unreasonably low or negative level of contractor investment in the contract • Contracting officer may request expenditure profile if information is otherwise insufficient NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

33. Establishing Payment Amounts • Contracting may establish amounts based using but not limited to – • Engineering estimates of stages of completion • Engineering estimates of hours or other measures of effort • The estimated projected cost of performance of particular events NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

34. Request for Payment • Only once a month • Multiple events/milestones can be on one invoice • Certification • True and correct • All subs paid • No encumbrances against property • No material change in financial condition • Won’t exceed any limitation in contract NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

35. Resources for Further Learning NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

36. Topics for Further Learning • Multiple Appropriations – FAR 32.1004(c) • Liquidating PBPs – FAR 32.2004(d) • Competitive Negotiated Solicitations – FAR 32.1004(e) • Suspension and Reduction of PBPs – FAR 32.1008 • Title – FAR 32.1009 • Risk of Loss – FAR 32.1010 • Solicitation Provision and Contract Clause • DOD IG Report NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

37. Resources for Further Learning • 10 U.S.C. 2307(b): Authorizing statute • FAR Subpart 32.10 PBPs • FAR 2.101: Definition of Simplified Acquisition Authority • DoD’s “User’s Guide to Performance Based Payments”, Revision 1, 30 Nov 2001 • DFARS 232.10 PBPs: 14 days and FMS • DOD IG Report - Administration of PBPs to Defense Contractors (D-2003-106) 25 Jun 03 NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

38. Summary • Primer on Using Performance Based Payments • The viewpoint: Contract Manager in Industry • Learning Objectives • When to use PBPs • Advantages of using PBPs • How to structure a contract using PBPs • Thank You! NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

39. Contact Information Jim Kirlin, CPCM, CFCM Contracts Manager Network Centric Systems Raytheon Company 1010 Production Road M/S C2-09 Fort Wayne, IN 46808-4106 (260) 429-6259 office fax: -5194 Jim_W_Kirlin@raytheon.com NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

40. Questions and Answers • You have comments – please share • You have questions • We have answers • Audience help in answering is welcome! • Share the time with others • Must conclude formal part on time • Be glad to discuss further outside the room NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”