Defense office to emphasize performance-based payments

A Defense office advocated a more aggressive use of performance-based payments in response to public criticisms Thursday.

In the Federal Register, the Defense Procurement and Acquisition Policy office said contracting officers should be given leeway in determining how to manage performance-based payments and suggested that the Federal Acquisition Regulation may need to be more explicit in advocating the use of those types of payments, which finance contracts based on work accomplished.

"The FAR may need to provide a more assertive requirement for the use of performance-based payments," such as calling for contracting officers to explain their decision when performance-based payments are not used, DPAP stated. Deirdre Lee, who also serves on the Services Acquisition Reform Act Advisory Committee, is DPAP's director.

DPAP responded directly to comments submitted to the office. One contracting and grants officer criticized the method because "milestones for performance-based payments are highly influenced by the contractor and are skewed in their favor." While DPAP did not respond directly to that comment, it reiterated its support for the payments.

In response to a comment that the payments require a "tremendous amount of extra work," DPAP said, "performance-based payments generally require more upfront work than progress payments. However, this is offset by the reduced administrative effort that results from the elimination of cost verifications."

DPAP also shied away from a "command and control" approach, where the Pentagon would mandate use of performance-based payments in contracts. It emphasized the need for contracting officers to have the freedom to shape contracts as they see fit.

When contractor Rockwell Collins Inc. said that contracting officers have too much discretion to avoid performance-based payments, DPAP responded, "It is not advisable to mandate a particular form of contract financing."

DPAP was receptive, however, to suggestions that they take a more active approach in encouraging the use of the payments. Kevin Cox, who works for the Defense Contract Management Agency, suggested a "Performance-Based Payment Roadshow" to educate contractors and acquisition personnel about using that type of contracting device.

"Contractors and DOD buying commands are truly unaware of the benefits of performance-based payments and especially how to structure a performance-based payment contract to achieve the mutual benefits performance-based payments provide," said Cox.

DPAP said it will review the current training that contracting personnel receive on performance-based payments by August 2006 and that it is also working on updating its user guide for acquisitions.

DPAP said it completed an internal review of the Pentagon's performance-based payments, which resulted in almost 50 suggested changes to the FAR. It said it will issue a final rule with those revisions in July 2006.