Progress Payment Request Under a Fixed-Price Vehicle Contract
A defense contractor holds a $24,000,000 firm-fixed-price contract for 40 vehicles. The contract provides for progress payments at 80% of allowable costs incurred, with liquidation at the same rate. To date, the contractor has incurred $7,400,000 in allowable costs, has received prior progress payments of $4,300,000, and has submitted a request for $1,620,000. The administrative contracting officer's review notes that the contractor's accounting system has a deficiency in tracking indirect costs, and $300,000 of the incurred costs are for unapproved overtime. The contractor is a small business. The payment office has not yet paid the current request. The ACO must approve, reduce, or deny the request and decide whether to recommend performance-based payments for the remaining work. The contracting officer's representative has verified that 18 of the 40 vehicles are in production, but no vehicles have been accepted.
1. Calculate the maximum allowable progress payment the contractor is entitled to receive now. Show your work and identify any amount to be denied.
Read the worked answer
Begin with costs incurred, then remove the unallowable overtime because it is not an allowable cost under the contract:
Costs incurred: $7,400,000 Less unapproved overtime: -$300,000 Allowable costs incurred: $7,100,000 Progress payment rate: 80% Maximum cumulative progress payments: $7,100,000 x 0.80 = $5,680,000 Less prior progress payments: -$4,300,000 Maximum current payment: $1,380,000
The contractor requested $1,620,000, so the ACO should reduce the request by $240,000 and approve no more than $1,380,000, assuming the prior payments were properly computed and no other unallowable costs exist. The contract rate is 80%, so the ACO should not apply a different small-business rate unless the contract has been modified to include it.
The ACO should document the calculation in the contract file and notify the contractor of the specific unallowable cost. If prior payments already included the $300,000 overtime, the ACO would need to recalculate the cumulative position and consider a payment adjustment, not simply approve the current request.
2. What contract-financing controls should the ACO apply before approving the revised amount?
Read the worked answer
The ACO should verify the costs from the contractor's accounting records, not just the payment request. The review should confirm that the $7,100,000 is allowable, allocable, and reasonable under the contract, and that the unapproved overtime has been excluded. The ACO should also confirm that prior progress payments and liquidation were correctly applied so the current payment does not duplicate earlier financing.
Because the accounting system has an indirect-cost tracking deficiency, the ACO should require a corrective action plan and consider whether a withholding or more frequent cost reviews are warranted. The ACO should coordinate with DCAA or the cognizant audit activity, review the contractor's public vouchers and supporting schedules, and ensure the payment office has the correct contract data. The receiving activity should verify production status, but production progress alone does not prove allowable costs.
Before approval, the ACO should also check that funds are available, that the contract is in a payable status, and that the payment will be recorded against the correct contract line. The approval should be in writing and should state the allowed amount, the denied amount, and the basis for any withholding.
3. The contractor proposes converting to performance-based payments. Evaluate whether that is appropriate and what terms you would require.
Read the worked answer
Performance-based payments pay for achieved results rather than costs incurred, so they can be useful when the contractor's cost accounting is weak and the work can be tied to objective, verifiable milestones. For this contract, possible milestones include completion of chassis and integration for a defined lot, completion of testing, and delivery and acceptance of vehicles. That structure would reduce reliance on indirect-cost tracking and could improve the link between payment and progress.
However, conversion is not automatically appropriate. No vehicles have been accepted, and the contractor is still early in production. The ACO should compare the proposed payment schedule with the actual cost curve and ensure the government does not prepay ahead of progress. The ACO should also consider whether the accounting-system deficiency affects the contractor's ability to support milestone completion and whether the contract modification is in the government's interest.
If conversion is approved, the ACO should require measurable, verifiable completion criteria; a payment schedule with defined events and amounts; a cap consistent with the contract price; government verification before each payment; and a clear liquidation or adjustment mechanism. The ACO should not convert merely to avoid the accounting deficiency, because performance-based payments still require evidence that the milestone was achieved.