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Using Performance-Based Payments Linking Contract Financing to Performance and Schedule Advanced Program Management Cour

Using Performance-Based Payments Linking Contract Financing to Performance and Schedule Advanced Program Management Course Elective 486A Presented By: Timothy Frank Defense Contract Management Agency. Performance-Based Payments. About the Defense Contract Management Agency. What We Do.

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Using Performance-Based Payments Linking Contract Financing to Performance and Schedule Advanced Program Management Cour

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  1. Using Performance-Based Payments Linking Contract Financing to Performance and Schedule Advanced Program Management Course Elective 486A Presented By: Timothy Frank Defense Contract Management Agency

  2. Performance-Based Payments About the Defense Contract Management Agency

  3. What We Do Achieve Customer Outcomes! • Provide Customer Focused Contract Management Services • Right Item = Quality • Right Time = On-Time Delivery • Right Price = Value for Money • Combat Support Agency • Military Operations • Readiness of Fielded Systems • Modernization of Military Equipment • Industrial Surge – During Conflict Teaming with Military Services and Defense Contractors to ensure that tax dollars achieve mission requirements

  4. PRE-AWARD 81 Functions Pricing / Negotiation Core Contract Admin Program Technical Support Quality Assurance Engineering Surveillance Production Surveillance Property Management Small Business COMPLETION AWARD PERFORMANCE CAS Life Cycle Involvement What We Do!!! • FAR 42.302(a) Standard Functions • DFARS 242.302(a) • FAR 42.302(b) Additional Functions • DFARS 242.302(b)

  5. Full Service Acquisition Impact • Scope of work • All major weapons system programs • $850B in Contract “Face Value” • $95B Unliquidated Obligations • 360,000 Contracts • 25,000 Contractors • Flight Operations (1200 Aircraft/yr) • Span of Control • 12,500 Professionals • 1,000 Locations Worldwide • 65 Major Field Commands • $100M Reimbursable Foreign • Military Sales • DoD Standard Procurement • System • Combat Support Agency

  6. About Performance-Based Payments

  7. What Are Performance-Based Payments? PBPs are… • Part of the acquisition reforms of FASA • Contract financing relying on performance measured by: • Objective, quantifiable methods • Accomplishment of defined events • Other quantifiable measures or results • Focus on performance rather than incurred costs • The preferred method of contract financing

  8. What is OSD Policy? “Increase the Use of Performance-Based Payments” Under Secretary of Defense for AT&L memorandum, November 13, 2000… Established goals for expanding use of PBPs in contracts with contract financing 25% of contracts in 2002 50% of contracts by 2005 Services and Agencies are working hard to meet these goals!

  9. Contract Financing Changes from FY00 to FY01 1st Qtr FY001st Qtr FY01 PBP #s 43% 199 285 PBP $s 94% $1,820M $3,503M Progress Pay #s 28% 4,420 3,190 Progress Pay #s 25% $2,179M $1,632M What are the Trends? Use of Performance-Based Payments is Growing

  10. Why increase use of PBPs? Enhanced technical and schedule focus PBPs require contractor performance before payment is made This is the “performance” aspect – Good for the Government Enhanced cash flow to contractors PBPs can be up to 90% of the contract or line item price This is the “payment” aspect – Good for the contractor

  11. When Can PBPs Be Used? Federal Acquisition Regulation (FAR) requires the contract to be Fixed Price 6 months duration or longer 4 months for small businesses Minimum of $2 million Minimum of Simplified Acquisition Threshold (currently $100,000) for small businesses PBPs are particularly well suited for major programs

  12. What Other Conditions Apply? • Can Be Used • With definitized contracts • When the Contracting Officer finds them practical • When the contractor agrees to their use • And, as of March 2000, with competitive procurements and R&D • Can’t Be Used • In conjunction with most other financing types • Such as progress payments • On undefinitized or cost-reimbursement contract • When contractor and Government cannot agree on terms • For architect-engineer services or construction • For ship building or ship conversion, alteration, or repair

  13. Why would you want to use them? • Government • Payment contingent on performance encourages performance, not costs • Can be structured to motivate improvement • Potentially easier to administer – low level of monitoring/audit • Contractor • Higher payment ceiling (90% of price vs. 80% of costs • (90%-95% for Small Business or SDB) • Better cash flow when initial costs are low, or contract is ahead of schedule (in both an over-run and under-run) • Somewhat less system oversight required

  14. What About Negotiation of PBPs? • Payments must be clearly defined amounts • Dollar value or percentage of known amount such as unit price • Payments may be based on • Accomplishment of defined events • Other quantifiable measures of results • “Financing shall be provided only to the extent actually needed for prompt and efficient performance” • Amounts may be established on any rational basis including • Engineering estimates of stages of completion • Engineering estimates of hours or other measure of effort • Projected costs of performance PBP terms are part of the total negotiation of a fair and reasonable contract price

  15. How Are Events Selected? • Events may be severable or cumulative • If cumulative, no steps can be skipped • Events must be “integral and necessary part of contract performance” • No administrative or perfunctory events • No reliance on costs rather than accomplishment • Schedule and amounts must take into account value of completed work, and Government financial security needs • Need to motivate continued performance • If contract ends at this event, what do we have?

  16. How is a payment processed? • Contractor presents request for payment to ACO, no more than monthly, for all performance events completed in the period • The request contains all required supporting documentation and will be certified by the contractor. • ACO verifies completion of performance events, approves request for payment, and forwards request to payment office. • Payment office processes payment

  17. What happens if…? • There is Government-caused delay? • Contracting officer may renegotiate the PBP terms • There is a modification to the contract? • PBP terms may have to be changed by the contracting officer negotiating the change • Contractor fails to make progress, financial condition deteriorates, or doesn’t pay it’s vendors? • PBPs can be reduced or suspended

  18. How is Surveillance performed? • ACO determines what reviews are required based on assessment of Government risk • Reviews may include: • Verification of performance events • Assessment of financial condition • Evaluation of progress on the contract • Surveillance performed by technical specialists

  19. Performance-Based Payments A Performance-Based Payments Success Story The C-17 Globemaster Note: C-17 information provided courtesy of The Boeing Company

  20. C-17 Program: 2 PBP Applications • C-17 Production Contract - $14.2 Billion • Established On The 80 Aircraft Multi-Year Production Program • Groundbreaking Implementation - Highly Successful • Affordability Improvement Projects - $300 Million • One Time Only Engineering and Manufacturing Development (EMD) Efforts • Struggled To Success

  21. C-17’s Application of Production PBP Part I • Contractor, SPO, DCMA, & DFAS Early Partners In PBP Process • Process Designed To Meet Needs Of All Parties • Deliverable Item (Aircraft) Rather Than Whole Contract • Event Definition -- Each PBP Event Has Two Parts: • The Action: An Easily Observable Physical Move • -- And -- • The Criteria:A Quantifiable Measure Of Completeness • Contractually Defined Description, Criteria, & Required Verification

  22. C-17’s Application of Production PBP Part II • Manufacturing Variability Recognized - Success > 95% Of Event’s Work • Chosen Events Are Central To The Build Of The Aircraft • Both Severable (Stand-Alone) And Cumulative (Dependant) Events • Predetermine Estimated Schedule Dates Payments Replicate Net Present Value Of 100% Progress Payments

  23. Severable Events Cumulative Events Aircraft Delivery PBP Events For Each Aircraft 1 Rough Machining Of MLG Bulkhead Frames 2 Receipt Of Aft Pressure Bulkhead Details Completion Of Wing Spars 3 4 Completion Of Wing Halves Cumulative Assembly Series 5 Completion Of The Four Major Sub-Assemblies 6 Completion Of Final Assembly Aircraft Delivery

  24. Notional Aircraft Cost Profile Performance Events With PBP Billing Percentages Aircraft Delivery 110% 100% Event Billing Percentages 100% Events 90% Major Sub-Assemblies Normative Cost Curve 90% 80% Lot IX ATP Milestone 80% Completion Of Wing Halves 70% 70% 60% Percentage Of Cost Completion Of Wing Spars 60% Percent Of Price 50% 50% Recv Aft Press Bulkhead Details 40% MLG Bulkhead Frames Machined A/C Assembly Complete 40% 30% 30% 20% 20% 10% 10% 0% 0% Feb-96 May-96 Aug-96 Nov-96 Feb-97 May-97 Aug-97 Nov-97 Feb-98 May-98 Aug-98 Nov-98 Quarter Mid-Points

  25. C-17 Production PBP Status • C-17 Program Implemented PBP On September 1996 • First Successful Implementation Of PBP On A Major Program • Process Stable And Functioning Extremely Well • DFAS sees the C-17 Program is an Example To Emulate • Increased Cash Flow For Contractor - Lower Unit Cost For Gov't. • Improved Relationship Between Contractor and Gov’t WIN - WIN For Government And Contractor

  26. Production PBP Lessons Learned • Communication Between Gov’t & Contractor Is Essential • Early Attention To Detail and Risk Mitigation Pay Dividends • Exhaustive Contractual Definition Absolutely Required: • Events • Methodologies • Responsibilities • Resets • Changes • Electronic Billing system Needed for PBPs • (Help is on the way! Ed.) • Subcontractors Reluctant To Use PBP • Need Assistance from Primes Note: These charts represent Boeing’s current approach to the C-17 program, but the company continues to explore methods that would improve on the process.

  27. Affordability Improvement Projects PBP • Affordability Improvement Effort Adapted to PBPs • 270 Affordability Improvement Projects -- $300M in Funding • Manufacturing Processes Improvements • Engineering Redesign For Producibility • Software Systems and Others Types • 23 Events Pulled From Eight Representative “Golden” Projects • Available Plans Conceptual -- Event Definition Problematic • Each Event Unique • High Level Schedules • ROM Expenditure Forecast Observation: Not Easy To Implement PBPs On R&D / EMD Type Projects

  28. Affordability Improvement PBP Lessons Learned Situation: • Plans For First Time Efforts Always Subject To Change • Schedule, Work Flow, Expenditures, Event Definitions • At Odds With PBPs Need For Contractually Precise Definitions • Risk To Event Completions, Cashflow, and Program’s Health Response: • Early Risk Mitigation And Adaptability Planning Essential • Contractual Language Defining Change Process Recommended • Establish and Maintain Partnering Relationship • Use PBPs As A Financing Methodology - Not As A Cudgel PBP Can Be Made To Work On First Time Efforts

  29. The Wrap Up • PBPs Are An Excellent Means Of Program Financing • Many Advantages To Customer and Contractor • Attention To Contractual Definition Pays Long Term Benefits • Customer & Contractor’s Joint Ownership Helps Success The Key: Ongoing and Open Communication - Teamwork

  30. Resources & References • DCMA Onebook chapter 9.3, “Performance-Based Payments”http://home.dcma.mil/onebook/9.0/9.3/PerfBasedPay.htm •   Director, Defense Procurement memorandum, “Performance-Based Payments,” Nov. 9, 1998: http://www.acq.osd.mil/dp/oldmemos/perform.pdf •   DCMA Draft “Contract Financing Application Guide”: http://www.dcma.mil/onebook/9.0/9.2/spot-workingdraftAug30_1.htm • DCAA Audit guidance on PBP’s at: http://www.dcaa.mil/mmr/m98pfc105.pdf

  31. Performance Based Payments Contact: Timothy Frank tfrank@hq.dcma.mil 703-428-1005 Process Owner Performance-Based Payments Defense Contracts Management Agency http://www.dcma.mil/

  32. Performance-Based Payments Some Additional Information

  33. Contract Financing Trends

  34. What are some pitfalls? • Security provisions are unclear in regulations • If defined events do not include “deliverable” work of sufficient value, PBPs become advance payments. In this case the CO must comply with FAR 32.4 requirements for advances • All contract financing requires security. FAR PBP clause gives Government title to materials (similar to PP clause), but this may not be adequate security if “events” are too generously defined. • PBPs paid must be “commensurate with the value of the performance event” & not cause “unreasonably low or negative level of contractor investment” • “To avoid undue risk of loss, contracting officers should negotiate PBPs that establish payment amounts not expected to exceed the projected tangible value of [the titled] property.” (Director, Defense Procurement Memo, Nov, 9, 1998)

  35. Performance Based Payments Some Lessons Learned: Performance Events Examples of bad events: • “Definitization of Contract F12345-99-C-0002: This event is successfully completed upon contractor signature” FAR 32.1004 prohibits using signing of contracts or modifications as performance events; raises fiscal concerns. • “Initiate testing of avionics software” Meaning of “initiate” not clear; no criteria for accomplishment. • “Fabrication complete for forward fuselage; 100,000 hours charged to work order as verified by DCMC.” Charging time not the same as accomplishing work. Is the verification test that fabrication is complete, or hours charged? • “Six months prior to delivery” Not a performance milestone. • “Attendance at Management System Review” Does not show true progress. • “Contractor places orders for all materials for main body assembly.” Since contractor has not acquired title, this raises security concerns.

  36. Performance Based Payments Some Lessons Learned: Payment Amounts Examples of bad PBP amounts: • “90% of actual costs incurred since prior payment.” Must be specific dollar amounts known in advance, not cost reimbursement • “40% of projected costs of next event” [a known amount]. Must be commensurate with value of performed work. This is an advance payment. • “An amount to be determined by contracting officer, taking into account . . . ” Amount must be predetermined and objective. • “Unit price of end items completed at this event.” Must be limited to 90% of price. • “Unit price of end items delivered at this event.” PBPs are not installment payments and not associated with acceptance.

  37. Performance Based Payments A Successful PBP Contract NAVAIR Contract N00019-97-C-0114, for 118 Aircraft Engines • It works because… • Product and processes were well understood by all the parties • Performance events are limited to 7 events per engine • Performance events are clear and understandable, and integral and necessary part of contract performance • e.g. “Receipt of Vane Casting for LPT Nozzle Segment” • Performance verification is clear: • e.g. “Casting received by GE and documented in IMPACT System”

  38. Performance Based Payments Early CAS and Contract Review Checklist • FAR 52.232-32 used if applicable, or other clear clause? (52.232-29 also used if commercial contract?) • Performance events clearly defined? • Are events verifiable by unambiguous standards? • Do events reflect actual work which is integral to performance? • Payment amounts clearly stated? • Do payments appear (a) commensurate with value of undelivered work and (b) adequately secured by title to goods? • If not, what is the security for payment? • Is it clear how payments will be requested? • What surveillance is needed?

  39. Using Performance-Based Payments Linking Contract Financing to Performance and Schedule Advanced Program Management Course Elective 486A Presented By: Timothy Frank Defense Contract Management Agency

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