Progress payments made hereunder shall be liquidated in the following manner, unless previously liquidated pursuant to paragraph (b):

(1) If this letter contract shall be superseded by a fixed-price type of contract, unliquidated progress payments made hereunder shall be liquidated by deducting the amount thereof from the first progress or other payments which shall be made under such contract.

(2) If this letter contract shall be superseded by a cost-reimbursement type contract, progress payments made hereunder shall be liquidated by deducting the unliquidated amount thereof from the first payments which shall be made under such costreimbursement contract.

(3) If this letter contract shall not be superseded by a contract calling for the furnishing of all or part of the articles or services covered hereby, unliquidated progress payments made hereunder shall be liquidated by deducting the amount thereof from the amount payable under the provisions of the Termination clause for this letter contract.

(4) If this letter contract shall in part be terminated and shall in part be superseded by a contract, the unliquidated progress payments made hereunder shall be allocated by the Government for the purpose of liquidation to the terminated portion of the letter contract and to the superseding contract in such proportions as the Government shall deem to be equitable, and the part of such progress payments allocated to each shall be liquidated in accordance with the applicable provisions of subdivisions (1), (2), and (3) of this paragraph.

(5) If the method of liquidating progress payments provided above shall not result in the full liquidation thereof, the Contractor shall forthwith pay the unliquidated balance to the Government upon demand.

(c) Any superseding definitive contract will contain appropriate provisions, carried forward from the letter contract, for liquidation of progress payments made under the preliminary instrument. When the superseding contract provides for progress payments, the Progress Payments clause will be supplemented by further provision as follows:

The costs, previous progress payments, aggregate progress payments, and unliquidated progress payments, mentioned in paragraph (a) of this Progress Payments clause, include the costs incurred and progress payments made under the letter contract which has been superseded by this contract.

[29 FR 10356, July 24, 1964, as amended at 40 FR 43732, Sept. 23, 1975]

§ 1-30.516 [Reserved]

§ 1-30.517 Contract financing office clear

ance.

The following types of provisions for progress payments shall in accordance with agency procedures, receive the prior approval by the agency's contract financing office. (See § 1-30.212.)

(a) Those involving progress payments at rates exceeding the applicable uniform standard percentages authorized by §§ 1-30.503 and 1-30.504.

(b) Those involving deviations, as defined in § 1-1.009-1;

(c) Those exceptional cases involving unusual risks, described in § 1-30.212;

(d) Those involving contractors as to whom it is known that within the preceding 12 months, (1) request for advance payments has been denied for financial reasons, or (2) application for guarantee of a loan to the contractor or for increase or extension of maturity of a guaranteed loan has been disapproved for financial reasons, or (3) an approved application for guarantee of a loan or for advance payment to the contractor has lapsed or has been withdrawn; and

40-104 0-79--63

counting system and controls (§ 130.506) and on the reliability of the contractor's certificates. To conserve administrative effort, hold down expense, and promote prompt payment

of proper progress billings, audit before the making of progress payments should be kept to the minimum necessary for the protection of the interest of the Government. Preaudit, that is, audit before the making of a progress payment, should be limited to those situations in which there is reason to question the reliability or accuracy of the contractor's certificate, or reason to believe that the contract will involve a loss. Postreview or postaudit will be made when considered desirable by the contracting officer to determine the validity of any progress payment made on the contractor's certifications.

§ 1-30.521

Administration-general.

Progress Payments clauses cannot be self-executing, and require careful administration to insure against overpayments and losses. In all cases the physical progress of the work should be evaluated periodically to assure that the progress payments are fairly supported by the value of the work actually accomplished on the undelivered portion of the contract in conformity with the contract requirements. Also, the unliquidated progress payments should not be permitted to exceed the percentage specified in the contract, of the costs forming the base for progress payments, applicable only to the partially finished undelivered portion of the contract. It is necessary for adequate supervision of progress payments that the administering office keep itself informed concerning the contractor's overall operations and financial condition, since difficulties encountered and losses suffered in operations outside the particular progress payments contract may affect adversely the performance of that contract and the liquidation of the progress payments. For contracts with those contractors whose financial condition is doubtful or not strong in relation to progress payments outstanding or to be outstanding, or whose management is of doubtful capacity or whose accounting controls are found by experi

ence to be weak, or who are encountering substantial difficulties in performance, full information concerning both the progress under the contracts involved (including the status of subcontract), and concerning the contractor's other operations and financial condition, should be obtained and analyzed at frequent intervals, with a view to the better protection of the interest of the Government and the taking of such action as may be proper to make contract performance more certain. If there is reason to doubt only minor elements of the costs involved in a progress billing, only the doubtful amounts should be withheld, subject to later adjustment, and the amount clearly due should be paid without awaiting resolution of the differences. So far as practicable in each case, all cost problems, particularly those involving indirect costs, of a kind likely to create disagreements in future administration of the contract, should be identified and resolved at the inception of the contract.

§ 1-30.521-1 Extent of supervision.

The extent of supervision required, whether for loss prevention or for avoidance of overpayments, should vary inversely with the experience, performance record, reliability, quality of management, and financial strength of contractors, and with the adequacy of their accounting system and controls. Review should be of a kind and degree that will be sufficient, consistent with the circumstances of individual cases, to provide timely knowledge of circumstances that would adversely affect contract performance and the liquidation of progress payments, and timely opportunity for any action that may be appropriate for the protection of the Government. Particular care must be taken to assure that the unpaid balance of the contract price will be adequate to cover the anticipated cost of completion, or that the contractor has adequate resources to complete the contract if the unpaid balance of the contract price is inadequate to cover costs of completion.

§1-30.521-2 Use of progress payments by

contractors.

It is expected that the contractor will use the progress payments made by the Government, or equivalent amounts of money, to pay the costs incurred in the performance of the contract under which progress payments are made.

§ 1-30.522 Adjustments-retroactive price

reduction-refunds.

When a retroactive price reduction has been made effective, i.e., by supplemental agreement or by unilateral determination pursuant to the price redetermination provision of the contract, the last sentence of paragraph (b) of the clause prescribed in either § 1-30.510-1(a) or § 1-30.510-2(a) requires adjustments so that the amount of unliquidated progress payments and the amounts paid or payable for supplies or services accepted will give effect to the price reduction. In this situation, the retroactive price reduction means that too much has been paid or billed for deliveries, and that from those delivery billings too much has been applied as a reduction of the unliquidated progress payment balance. The necessary adjustments would be (a) recomputation of total cash delivery payments on the basis of the reduced billing price resulting from the retroactive price reduction, and repayment by the contractor of the difference between the total recomputed payments and the total cash delivery payments that had been made, and (b) increase of the unliquidated progress payment balance by the excess of the total amounts previously applied to reduce the unliquidated progress payment balance over the amounts that would have been applied to reduce the unliquidated progress payment balance if the reduced delivery prices had been in effect from the date from which the redtermination is applicable. This same principle of upward adjustment of the unliquidated progress payment balance is also applicable in connection with interim refunds made by contractors pursuant to the provisions of incentive and price redetermination contracts, and in connection with voluntary refunds on such contracts.

§ 1-30.523 Maximum unliquidated amount. In all cases where the contract price is sufficient to cover all costs of complete performance, and liquidation of progress payments is effected in accordance with paragraph (b) of the clause provided in § 1-30.510-1(a) or § 1-30.510-2 the amount of unliquidated progress payments will never exceed the maximum limit provided by paragraph (a)(3)(i) of the clause, unless liquidation percentages have been based on cost estimates that are less than actual costs. In such cases, if the contract involves a profit to the contractor, the actual unliquidated progress payment amount will always be less than the maximum limit stated in paragraph (a)(3)(i) after the first delivery payment, unless liquidation percentages have been based on cost estimates that are less than actual costs. So long as performance is satisfactory and there is no reason to believe that the contract will involve a loss to the contractor or that a liquidation rate fixed by paragraph (b) of the clause or pursuant to § 1-30.512-2, is too low, there will be no need or reason to verify the relationship of the amount of unliquidated progress payments to the maximum limit prescribed by paragraph (a)(3)(i) of the clause. However, when the rate or quality of performance is unsatisfactory, or the rate of rejections is unduly high, or there is excessive wastage or spoilage, or it appears that unduly low costs have been attributed by the contractor to delivered items, or a loss to the contractor is otherwise indicated, or that the liquidation rate is too low, careful examination should be made to determine whether or not the unliquidated progress payments exceed the maximum amount permitted by paragraph (a)(3)(i) of the Progress Payment clause. The services of the agency audit organization should be utilized to the fullest extent, together with the services of qualified cost analysis and engineering personnel as required. (See § 1-30.519; Section III of Instructions of the format for Contractor's Request for Progress Payments set forth in § 1-30.529(b); and § 1-30.524-6.)

§ 1-30.524 Suspension or reduction of pay

ments-general.

In the process of reviewing individual progress payments already existing or hereafter established, action to reduce or slow down progress payments or to increase liquidation rates (unless justified on other grounds, such as overpayments or unsatisfactory performance) should be consistent with contract provisions, and never taken precipitately or arbitrarily. Any such reduction of progress payments on active contracts (other than normal liquidation pursuant to the contract) should be effected only after notice to and discussion with the contractor, and after full exploration of the contractor's financial condition, existing or available credit arrangements, projected cash requirements, effect of progress payment reduction on the contractor's operations, and generally on the equities of the particular situation. Where contract performance is satisfactory, and there is neither overpayment nor anticipated loss, proper progress payments, adequately verified should be paid promptly when earned and billed in accordance with contract provisions, even though the terms of the particular contract may make the payment discretionary rather than mandatory, and such proper payments should not be held up or denied because of the contractor's lack of need for the payment. Paragraph (c) of each clause prescribed in § 1-30.510 provides the Government the right to reduce, suspend, or increase the rate of liquidation of progress payments, whenever any of the circumstances there described are found to exist. The rights reserved to the Government by these paragraphs are for the purpose of protecting the interests of the Government, fostering satisfactory contract performance, and guarding against overpayments and losses. The paragraphs should be administered with these purposes in mind. Action taken pursuant to these paragraphs should be fair and reasonable under the circumstances of particular cases, and supported by substantial evidence. Findings made under the paragraphs should be in writing.

§ 1-30.524-1 Failure to comply with contract.

Except for the purpose of correcting overpayments or obtaining amounts due from the contractor, action will not be taken pursuant to paragraph (c)(i) of the clause provided in § 130.510-1(a) or § 1-30.510-2(a) for failure to comply with a requirement of the contract, if such failure has resulted solely from causes beyond the control and without the fault or negligence of the contractor. For examples of such causes, see paragraph (c) of the Default clause in § 1-8.707. Compliance with the material requirements of the contract, within the meaning of paragraph (c)(i) includes compliance with all provisions of the Progress Payment clause.

§ 1-30.524-2 Unsatisfactory financial condition.

If unsatisfactory financial condition, or failure to make progress, endangering contract performance, as described in paragraph (c)(ii) of the clause prescribed in §§ 1-30.510-1(a) or 1-30.5102(a), is found to exist, arrangements reasonably assuring contract completion without loss to the Government will be requried in connection with the making of further progress payments and the making of other payments so long as progress payments are unliquidated. Within the meaning of this paragraph (c)(ii), performance of the contract includes full liquidation of progress payments. Further payments should be withheld so long as any progress payments remain unliquidated, only upon full consideration of all pertinent facts, and upon concluding that further payments will serve to increase the probable loss to the Government.

§ 1-30.524-3 Excessive inventory.

When inventory allocated to the contract is found substantially to exceed reasonable requirements (see paragraph (c)(iii) of clauses prescribed in §§ 1-30.510-1(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 contrac

tor'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 the clause prescribed in § 1-30.510-1(a) and paragraph (c)(v) of the clause prescribed in § 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.) The standards set forth in paragraph (a)(1) of the clauses set forth in § 130.510-1(a) and (b) for the exclusion of pension contribution costs from progress payment computations will govern a determination of delinquency in the ordinary course of business with respect to these pension contribution costs, without regard to other provisions in § 1-30.524. Amounts claimed by subcontractors, suppliers, and others, but disputed in good faith by the contractor, should not be consid

ered 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. The standards in paragraph (a) of the clauses set forth in § 1-30.5101(a) and (b) for the exclusion of pension contribution costs from progress payment computations will govern a determination of delinquency in the ordinary course of business with respect to these pension contribution costs, without regard to other provisions of § 1-30.524.

[40 FR 14917, Apr. 3, 1975, as amended at 40 FR 43732, Sept. 23, 1975]

§ 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 and 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