When inventory allocated to the contract is found substantially to exceed reasonable requirements (see paragraph (c) (iii) of clauses prescribed in §§ 130.510-1(a) and 1-30.510-2(a)) the simplest form of adjustment to correct or avoid overpayment will be to eliminate the costs of such excess inventory from the costs shown in item 7 of the format for the contractor's request (§ 1-30.529). If that is not regarded as sufficient in a particular case, additional deductions, to the extent necessary for the correction, should be made, to liquidate progress payments, incident to billings for payments other than progress payments. Transfer of such excess inventory from the contract should also be required. The expression "reasonable requirements" includes a reasonable accumulation of inventory for future use to assure continuity of operations.

§ 1-30.524-4 Delinquency in payment of costs of performance.

The contractor's delinquency in payment of costs of contract performance in the ordinary course of business (see paragraph (c) (iv) of clauses prescribed in §§ 1-30.510-1(a) and 1-30.510-2(a)) may be an indication of unsatisfactory financial condition or other circumstances endangering contract performance and involving probability of loss to the Government. If such delinquency is not connected with poor financial condition that is so unsatisfactory as to endanger contract performance or to involve reasonably foreseeable loss to the Government, further progress payments and other payments should not necessarily be denied to protect the unliquidated progress payments and minimize risks of additional losses, and payments may be continued at the contract rate, or in reduced amounts, in connection with appropriate arrangements to (a) cure the contractor's delinquencies in payment of his costs of contract performance, (b) avoid further delinquencies, and (c) reasonably assure completion of the contract without loss to the

Government. (See also, § 1-30.524-3.) Amounts claimed by subcontractors, suppliers and others, but disputed in good faith by the contractor, should not be considered delinquent until determined due by a court (or by arbitration if applicable). However, any such disputed amounts shall be excluded from costs of performance so long as they are disputed.

§ 1-30.524-5 Fair value of undelivered work.

In connection with determining the relation of the amount of unliquidated progress payments to the fair value of the work accomplished on the undelivered portion of the contract (see paragraph (c)(v) of clauses prescribed in §§ 1-30.510-1(a) and 1-30.510-2(a)) the principles stated in § 1-30.523 are applicable. In determining action, if any, to be taken, the contracting officer (utilizing available audit, engineering, inspection, and cost analysis services) will give full consideration to the degree of completion of contract performance, the quality and amount of work performed on the undelivered portion of the contract, the amount of work remaining to be done and the estimated costs of completion of performance, and the amount remaining unpaid under the contract. If the contracting officer finds that the fair value of the work done under the undelivered portion of the contract, in relation to the contract price, is less than the unliquidated progress payments, his actions will be governed by the principles stated in §§ 1-30.524-2 1-30.524-4. This fair value could not exceed the contract price of undelivered work under the contract, less the estimated total future costs of completion of the contract. When this fair value is found to be less than the amount of the unliquidated progress payments, all further payments on the contract will be controlled in such a manner as to hold the unliquidated progress payments within the fair value of the work done on the undelivered portion of the contract. (See also § 1-30.525-1.)

and

§ 1-30.524-6 Erroneous cost estimates.

When liquidation percentages lower than those called for by § 1-30.512-1 are established pursuant to § 1-30.510-2, it

may occur that actual costs and future cost of performance are higher than the estimated costs used to establish liquidation rates. In such cases (see paragraph (c) (vi) of the clause presented in § 1-30.510-1 (a) and paragraph (c) (iv) of the clause prescribed in § 1-30.5102(a)) appropriate increase of the liquidation percentage will be necessary to adjust for any under-liquidation that may have occurred, to bring the amount of unliquidated progress payments within the limits of paragraph (a) (3) of these clauses, and to assure the adequacy of future liquidations. Increase of the liquidation percentage will also become necessary even though the provisions of § 1-30.512-2 have not been applied in fixing the liquidation percentage, when progress payments are based on costs of direct labor and material only (§ 1-30.510-2) or any limited cost base (§ 1-30.511-5), and actual costs forming the base for progress payments are higher than the estimated eligible costs used in establishing the liquidation centage.

§ 1-30.525 Government title.

per

Since the clauses in § 1-30.510 give the Government title to all of the materials, work in process, and finished goods under contracts after the making of progress payments thereon, care should be taken to assure, to the extent reasonably necessary, that the title to the Government will be free of all encumbrances. The procedure in this respect will necessarily vary with the particular circumstances of individual cases. Ordinarily, in the absence of reason to believe that the Government title may be subject to encumbrance, the contractor's certificate will be relied on. If any arrangements or conditions are found that would impair the contractor's right of disposition of the property affected by the progress payments, appropriate arrangements should be made to establish and protect the Government title. The existence of any such encumbrance is a violation of the contractor's obligations under the contract.

§ 1-30.525-1 Loss, theft, destruction, or damage.

Paragraph (e) of the clauses presented in §§ 1-30.510-1 (a) are not intended to

apply to normal spoilage. The risk of loss as to property affected by the Progress Payments clause is on the contractor, except to the extent that by some special provision of the contract (such as that relating to aircraft in the open) the Government shall have expressly assumed the risk of loss. Such express assumption of risk by the Government is not made in the Progress Payments clause, the Default clause, or the Termination clause. Because of problems of administering the contract, especially those connected with property responsibility and inventory control, the risk of loss on property to which the Government holds title because of progress payments must be on the contractor to the same extent that it would be if the contractor held title to the property. This risk of loss carries with it the accompanying duty to repay to the Government the amount of unliquidated progress payments based on cost allocable to lost, stolen, or destroyed property or to the damaged portion of the property. If the Government has expressly assumed particular risks of loss, then, to the extent of such express assumption of risk by the Government, the contractor would not be obligated to repay to the Government the amount of unliquidated progress payments based on costs allocable to such lost, stolen, destroyed, or damaged property. (See, however, paragraphs (c) (v) and (c) (vi) of the clauses prescribed in §§ 1-30.510-1(a) and 1– 30.510-2(a), respectively, as to future payments on the contract after such loss, damage, theft, or destruction.) § 1-30.525-2

property.

Government-furnished

Contract provisions referring to or defining liability for Government-furnished property do not apply to property to which the Government shall have acquired title solely pursuant to the provisions of paragraph (d) of the Progress Payments clauses prescribed in § 1-30.510.

§ 1-30.525-3 Special tooling.

When the contractor furnishes special tooling, pursuant to a special tooling clause in the contract, and such special

tooling is not to be delivered to the Government as an end item under the contract, the handling and disposition of such special tooling should be governed by the Special Tooling clause of the contract, even though title to such special tooling is held by the Government pursuant to the Progress Payment clause of the contract.

§ 1-30.525-4 Termination for convenience of the Government.

After the giving of notice of termination under contract provision for Termination for Convenience of the Government, the property to which the Government has title pursuant to the Progress Payments clause and which is a part of termination inventory should be acquired or disposed of in accordance with the provisions of the Termination clause of the contract and of applicable laws and regulations. The acquisition or disposition of such termination inventory shall be governed by the Termination clause, even though title to all or a portion of such inventory is in the Government pursuant to the Progress Payments clause of the contract. § 1-30.525-5

Scrap-excess property.

(a) In the course of proper performance of contracts, contractors are permitted to sell or otherwise dispose of current production scrap in the ordinary course of business, notwithstanding the Government's title under the Progress Payments clause. Permission of the contracting officer for such disposal of scrap is not required. With the permission of the contracting officer and on terms approved by him, contractors may also acquire or dispose of materials, inventories, or work in process to which the Government has acquired title pursuant to the Progress Payments clause of the contract, including transfer of such property to other work of the contractor. Proceeds of scrap disposal will be credited against the costs of contract performance. Costs allocable to property, other than scrap, so transferred from the contract will be eliminated from the costs of contract performance, and the contractor shall be required to repay to the

Government an amount equal to the unliquidated progress payments allocable to the property so transferred from the contract.

(b) When (1) the contractor has completed all work called for by the contract, and (2) such work has been delivered to and accepted by the Government, and (3) progress payments made under the contract have been fully liquidated, and (4) the contractor has fully performed all his obligations under the contract (including the making of any payments to which the Government may be entitled under the contract, and including compliance with any other provisions of the contract, such as the Termination clause or the Government-furnished property clause), any excess property remaining is to be regarded as having not been allocated or properly chargeable to the contract under sound and generally accepted accounting principles and practices, and this outside the scope of the Progress Payments clause which would have vested title in the Government. Accordingly, the contractor holds title to such excess property and may deal with it as he desires.

§ 1-30.526 Consideration for progress

payments-awards.

When a Progress Payments clause is included at the inception of a contract, no separate consideration is charged for the Progress Payments clause, and there shall be no provision for interest or other specific charge for progress payments, or for a reduction in payments (other than any agreed discount for prompt payment) by reason of the making of progress payments. The worth of the Progress Payments clause to the contractor is expected to be reflected in one or both of (a) a bid or negotiated price that will be lower than such price would have been if provision had not been made for progress payments, or (b) contract terms and conditions, other than price, that are more beneficial to the Government than they would have been if provision had not been made for progress payments.

ress payments unless there has been material change from the circumstances contemplated by the parties when invitations for bids were issued or the contract was entered into without progress payment provision. However, cases do occur (a) in which the actual lead time or preparatory period between the beginning of work and the first delivery substantially exceeds the estimated lead time and in fact runs or will run over 6 months (§ 1-30.503), or (b) in which unusual circumstances bring about unexpected substantial accumulation of predelivery costs having material impact on the contractor's working funds (§ 130.505). These cases may arise from occurrences such as (a) uncertainties or errors in specifications, (b) contract change notices, (c) Government delays in testing, inspection, furnishing of material or equipment, furnishing of stock numbers, packaging or shipping instructions or shipping documents, or completion of contract supplements, (d) stretchouts or stop-work orders, (e) performance difficulties of subcontractors suppliers, and (f) causes beyond the control and without the fault or negligence of the contractor of the kinds mentioned in paragraph (c) of the Default clause provided in § 1-8.707. In these kinds of cases, requests of contractors for amendments to provide progress payments should be considered promptly, in the light of the circumstances then existing. If the circumstances then existing approximate conditions under which progress payments would have been properly provided in conformity with these regulations at contract inception, if the new circumstances had been foreseen, progress payments should be provided by amendment. In this connection see particularly §§ 1-30.202, 1-30.204, 1-30.205, 1-30.206, 1-30.207, 1-30.210, 1-30.210-1, and 1-30.528. § 1-30.528

Consideration for amendments providing for progress pay

ments.

Contracts may not be modified except in the interest of the Government. Contracts which do not provide for progress payments may be amended to provide for progress payments only when the

amendment provides now and valuable consideration moving to the Government. Appropriate price reduction may provide this consideration. In the varying circumstances of individual cases, the consideration for progress payments need not necessarily be monetary. Agreements by the contractor, incorporated in such an amendment, for the benefit of and substantially advantageous to the Government, may constitute sufficient consideration for an amendment providing for progress payments. When estimated financing costs have been inIcluded as an element (whether or not identified) in the contract price of a contract not providing for progress payments, it is fair to expect elimination of the applicable portion of that element of the price when progress payments are provided by amendment. The fair and reasonable consideration for the progress payment amendment should approximate in value as nearly as practically ascertainable the amount by which the contract price would have been smaller if a Progress Payments clause had been contained in the contract in the first instance. In the absence of definite information on this point, pertinent factors for estimating the fair and reasonable amount of consideration would include (a) the amounts of progress payments expected to be outstanding for an estimated period of time, (b) the cost of equivalent working funds to the contractor, and (c) the estimated profit rate expected to be earned by contract performance. If not accomplished by a contract price reduction, other concessions or agreement by the contractor, advantageous to the Government and incorporated in the amendment, may be fairly evaluated and accepted as being of value reasonably equivalent to a price reduction. This consideration should be such as is fair, equitable and reasonable in the light of the circumstances of each case. (See § 1-30.527.) This consideration should be for the progress payment amendment, and there shall be no provision for interest or other specific charge for progress payments, or for a reduction in payments after the progress payment amendment (other than any agreed discount for prompt payment) by reason of the making of progress payments.