DOD Clarifies Progress Payments Deviation

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Morrison & Foerster LLP - Government Contracts Insights

In one of its earliest moves to shore up cash flow for contractors that may be affected by the COVID-19, the DOD issued a deviation on March 20, 2020, allowed for an increase in progress‑payment rates under DOD contracts from 80 percent to 90 percent for large business concerns and from 90% to 95% for small business concerns.  In a press release from the DCMA discussing the deviation, the DCMA described the change as an “an important avenue where industry cash flow can be improved.”

A number of questions about the deviation remained.  Among them:  did the deviation apply only to new contracts or to existing contracts, and would the percentages apply only to future billing or to a cumulative to date amount of the contract?

On April 3, 2020, the DOD issued a memorandum providing guidance on the implementation of the deviation in the form of a Frequently Asked Questions document.  The guidance clarified that the deviation applied to both new and existing contracts but that contractors “must wait until their contracts are modified or contact the Administrative Contracting Officer before submitting requests for payments at the higher rate.”  In addition, the guidance noted that the DCMA had issued a mass administrative modification for contracts administered by the DCMA.  For contracts not administered by the DCMA, such as shipbuilding contracts issued by Naval Sea Systems Command, contractors must seek to modify the contracts individually before seeking payment of the higher amounts.

In addition, the implementation memo stated that the deviation applied only to future Progress Payment Requests and not to prior requests.  However, as the guidance noted, the deviation explicitly stated that each progress payment will be computed at 90 (or 95) percent “of the Contractor’s total costs incurred under this contract whether or not actually paid,” plus financing payments for subcontractors, and less the sum of all previous progress payments.  This means that the first progress payment request under the modified contract will be larger because it will allow for recovery of the higher progress payment rate against all qualified costs, including those incurred prior to the deviation.

Given the deviation and guidance, contractors should do the following:

  • Ensure that any contracts on which the contractor is receiving progress payments have been modified either as a result of the DCMA mass modification or by the contracting officer; and
  • Ensure that future progress‑payment requests reflect a request for the higher progress payment rate.

In addition, although not covered by guidance, any subcontractors who have a progress‑payments clause in their subcontract may also want to seek modification of the clause with their prime contractors. Although nothing in the deviation or guidance requires the prime contractor to alter the terms of the subcontract, the increased progress payments allowed for prime contractors by the deviation, and the fact that financing payments for subcontractors are passed directly on to the government pursuant to FAR 52.232-16(a) and (j), may persuade prime contractors to increase payments to subcontractors as well.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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