Q = Question; A = Answer
A. The milestone payments you describe would not be described as "progress payments." If you are comfortable in structuring partial payments for certain deliverable items, such as reports, then you can do that. Keep in mind that when you negotiate a price for the deliverable you are agreeing that the deliverable is worth that price to you. You will not have recourse to get that money back after you accept the report. Your contract clause on inspection and acceptance should say that you will take title on acceptance of the report. Partial payments are discussed in the Best Practices Procurement Manual (BPPM), Section 126.96.36.199 - Payment of the Price. Progress Payments are in Section 188.8.131.52.
Progress payments are actually a means of financing a contractor until delivery of the final product of the contract. They are used on fixed price contracts when the deliverable will take more time and money to produce than the contractor is able to finance with its own money. Progress payments must be based on costs incurred by the contractor. But that is not what you are describing here. For information, please see the FAR progress payment clause at FAR 52.232-16. Paragraph (d) of that clause addresses the title issue - title immediately passes to the government as products are produced under the contract, including technical data and drawings (d)(iv). In your case, title will pass when you pay for the report as a fixed price deliverable item. (Revised: July 2010)
I would like to verify that the situation described above qualifies as a progress payment and not an advance payment and is an allowable practice and can be included as part of a grant application.
A. The practice of financing bus purchases via progress payments is an accepted industry practice and may very well foster increased competition, and thus could be seen as a "best practice" that should be encouraged. The FTA requirements are: (1) that the progress payments be based on costs incurred by the contractor, and (2) that the payments be safeguarded with adequate security. By tying the payments to costs incurred the grantee is avoiding the problem of advance payments. The performance bond should afford adequate security. The Best Practices Procurement Manual (BPPM) discusses progress payments in Section 184.108.40.206. (Reviewed: July 2010)
A. The scenario appears to be closer to an "advance payment" than a progress payment.
These requirements are discussed in the Best Practices Procurement Manual (BPPM), Section 2.4, "Payment of the Price," with more specific guidance on "Advance Payments" in 220.127.116.11 and "Progress Payments" in 18.104.22.168.
FTA allows for progress payments based on costs incurred by the contractor in the performance of the contract. However, 49 CFR Part 18.21(d) allows grantees to use the percentage of completion method to pay their construction contractors, which is consistent with Federal regulations for Federal contracts. Grantees should not use the percentage of completion method for supply contracts such as the one you have inquired about. If you choose to finance the contractor by using progress payments based on costs incurred, the contractor may be authorized to bill monthly or at other approved intervals by providing an invoice detailing its costs incurred for the billing period.
Federal government coverage of progress payments may be found in the Federal Acquisition Regulation (FAR) at Subpart 32.5- Progress Payments Based on Costs, with a contract clause at FAR 52.232-16 which you can design to meet your needs. Your progress payment clause must include a title to work in progress provision which gives you title to property for which progress payments are made.
We would also note that the progress payments are not final payments-they are provisional/interim payments which can only be retained by the contractor if it fully performs the contract and delivers all items in accordance with the contract specifications. The other alternative is to consider "partial payments" if you can structure the contract in terms of incremental stages or deliveries and there are appropriate acceptance criteria for the supplies, services or completed subsystems. In other words, when you can safely inspect, test and accept these units and make a "final" payment for those items delivered, without having to worry about their functioning as part of a larger system still under construction. Since you are buying a large system here that must function properly as a system, and can only be tested successfully when the entire system has been completed, it would appear that partial payments are not a realistic alternative for you to consider. (Reviewed: July 2010)
A. We would suggest that you consider using a "progress payments" clause as a means of financing these electrical lighting materials that will be incorporated into the building at some time several months from now. We agree with you that the city should not incorporate these lighting units as separate deliverable items in the contract (for which you would make a "partial payment") but rather you should use a "progress payments" clause that is in the nature of a financing arrangement in the estimated amount of about $50,000. Using a progress payments clause keeps the responsibility on the contractor for loss or damage to the items and also means the city can recover the progress payments if the contractor fails to complete the electrical work.
The Best Practices Procurement Manual (BPPM) discusses progress payments in Section 22.214.171.124. The discussion gives some guidance on what the progress payments clause must address, such as title to the equipment or materials, risk of loss, how the payments will be liquidated (earned), etc. Note also that the FTA Circular 4220.1F requires your agency to obtain adequate security from the contractor to protect the progress payments, and this may take the form of title to the materials, a letter of credit from the contractor, etc. (Revised: July 2010)
Article 6: Compensation and Payment Schedule
The purchase price for the Work, including all design and installation is a total of Sixty-five thousand and no/100 American Dollars ($65,000.00), which constitutes full and final payment for all services to be performed, material to be furnished, costs to be incurred and all other expenses of the Artist under this Agreement.
Unless modified by the parties in writing, the purchase price shall be paid in the following installments:
- Sixteen thousand two hundred fifty and no/100 American Dollars ($16,250) payable within seven (7) days of the execution of this contract; and
- Sixteen thousand two hundred fifty and no/100 American Dollars ($16,250) payable within seven (7) days of receipt and approval of 1a and 1b listed in Exhibit A; and
- Sixteen thousand two hundred fifty and no/100 American Dollars ($16,250) payable when the Work is fifty percent (50%) complete. The artist shall submit photographs of the work to ITP showing completion of at least 50% of the Work and ITP shall issue a check for $16,250 provided there are no questions on the level of completion. If ITP has questions on the level of completion it shall notify the Artist in writing and ITP shall issue payment within seven (7) days of receipt of adequate documentation. The adequacy of such documentation shall be within the discretion of ITP; and (7) days of receipt; and
- Final payment in the amount of sixteen thousand two hundred fifty and no/100 American Dollars ($16,250) seven (7) days following the receipt of 1 d listed in Exhibit A and the final acceptance of the Work by ITP.
A. These look like progress payments based on a percent of completion, (not on a cost-incurred basis). Progress payments based on a percent of completion are allowed for construction contracts only. All other contracts would have to use percent of incurred costs as the basis for the payments. "Milestone payments" would predefine the milestones, not refer to percentage of completion. Milestones would be more objectively measured and defined in the contract, for example, “submission and agency approval of scale model of end product." The first payment 7 days after award is definitely not a milestone but more like an "advance payment." The FTA advance payments requirements are set forth in the BPPM Section 126.96.36.199. There is an allowance there for "mobilization on construction contracts," but it does not appear that the artwork could be considered construction. (Revised: July 2010)
A. Progress payments may be made to the contractor only for costs incurred in the performance of the contract. The grantee must obtain adequate security for progress payments, which may include taking title, letter of credit or equivalent means to protect the grantee's interest in the progress payment. More discussion on this subject can be found in FTA Circular 4220.1F, Chapter IV 2. b. (5) (c).
The FTA Best Practices Procurement Manual (BPPM) Section 188.8.131.52 discusses progress payments and you should read this Section. (Posted: May, 2010)
"(c) Progress Payments. Progress payments are payments for contract work that has not been completed. The recipient may use FTA assistance to support progress payments provided the recipient obtains adequate security for those payments and has sufficient written documentation to substantiate the work for which payment is requested."
Please clarify what is meant by "... for contract work that has not been completed…."Shouldn't it read "for contract work that has been completed"?
A. The language in FTA Circular 4220.1F is correct and in accord with the FTA Best Practices Procurement Manual. The FTA Best Practices Procurement Manual (BPPM), Section 2.4.4 - Payments, discusses various types of payments to contractors and distinguishes between "Partial Payments" and "Progress Payments" as follows: "Progress payments are to be distinguished from partial payments. Partial payments are payments made, as authorized by the contract, upon delivery and acceptance of one or more complete units (or one or more distinct items of service) in accordance with the contract specifications, even though other quantities remain to be delivered. Note that partial payments are for completed units, whereas progress payments are for uncompleted work-in-progress." The operative word here is "completed." Partial payments are made for completed work where the price of the completed work is stated in the contract. For example, the contract may require the delivery of 10 buses at a unit price of $200,000 each. When the contractor delivers a completed bus he is paid $200,000, which is a "partial payment" because all of the 10 buses have not yet been delivered. A "progress payment," however, is for uncompleted work. In the bus contract illustration, if the contract calls for progress payments, the contractor may be paid for work on uncompleted buses based on the costs incurred to date. Here the bus itself is not yet completed or delivered, but the grantee has agreed to finance the contractor with progress payments, allowing him to bill for costs incurred before final delivery as a means to reduce the contractor's financing requirements. When progress payments are used, FTA requires adequate security to protect the grantees interests in the progress payments, so that if the contractor fails to deliver the completed units, the grantee is protected by a letter of credit or similar security. The BPPM is available online. (Posted: September, 2010)