Liquidating Progress Payments

Introduction

A fixed-price contract or subcontract containing the “Progress Payments” clause at FAR 52.232-16 permits the contractor to submit a Standard Form (SF) 1443, Contractor's Request for Progress Payment, on a monthly basis to collect contract financing payments before the Government accepts deliverable products or services. These financing payments do not include any amounts for profit. The contractor can only submit invoices for the payment of certain eligible costs.

Subcontract Payments

Except for progress payments made to subcontractors, a percentage of these eligible costs are paid to the contractor at a rate specified in the Progress Payments clause. This rate is known as the progress payment rate. Progress payments that the contractor makes to subcontractors are paid at a rate of 100 percent, provided that

(1) such payments cover only the subcontractor's eligible costs and

(2) the payment rate to subcontractors is not more favorable than the progress payment rate contained in the prime contract.

Liquidation Rate

FAR 52.232-16 specifies an 80 percent progress payment rate. The FAR Progress Payment clauses also specify a rate known as the liquidation rate. It is important to note that the liquidation rate is different from the progress payment rate. Even though the numerical values of both rates are set equal to each other at the time of contract award, each rate has a different purpose, and each rate will affect contractor cash flow in different ways.

The Liquidation Process

Liquidation is a procedure where previous progress payments made to the contractor are subtracted from the contract price of a product or service in order to determine the final amount the customer pays to the contractor when it accepts that product or service. This final payment includes eligible costs not previously reimbursed and any earned profit.

Liquidation Process Illustration

A contractor has a contract for one widget. The price of the system is $5,000,000, and progress payments made to the contractor before the customer accepted the widget $2,000,000 (80 percent of costs incurred). Then the normal progress payment liquidation procedure would be as follows:

$5,000,000 - Contract Price

- 2,000,000 - Less Progress Payments (Liquidated)

$ 3,000,000 - Amount Paid Upon Acceptance (Unliquidated)

References

FAR 32.5