Government Contract — Payment Types

Progress payments are interim payments made to contractors during contract performance based on costs incurred, percentage of completion, or a particular stage of completion. They provide working capital financing to contractors before delivery, typically at 80% of costs incurred for large businesses and 90% for small businesses. Progress payments are the most common form of government contract financing for fixed-price contracts.

Performance-based payments (PBPs) are the preferred government financing method, made on the basis of objective, measurable performance events or criteria. Unlike progress payments tied to costs incurred, PBPs are tied to accomplishment of defined milestones or metrics. They incentivize efficient performance rather than cost accumulation and can be structured to provide better cash flow than traditional progress payments.

Milestone payments are a specific form of performance-based financing where payment is made upon completion of predefined contract milestones representing significant achievements or deliverables. Common in construction, systems development, and phased service delivery, milestones create clear payment triggers tied to verifiable accomplishments rather than cost accrual or time passage.

Cost reimbursement payment provides for payment of allowable incurred costs to the extent prescribed in the contract. The government reimburses the contractor for all allowable, allocable, and reasonable costs as they are incurred, plus any applicable fee. This method is inherent to cost-type contracts (CPFF, CPIF, CPAF) and provides the most complete financing since the contractor bears minimal financial risk.

Commercial item financing provides government contract financing for purchases of commercial products and services under FAR Part 12. Since commercial items use firm-fixed-price contracts, traditional progress payments are not available. Instead, the government may provide financing payments that do not exceed the lesser of the contractor's costs or the contract price, subject to commercial market research and risk assessment.

The Prompt Payment Act requires federal agencies to pay contractors within 30 days of receiving a proper invoice (Net 30). If the government fails to pay on time, it must pay interest penalties at the rate set by the Treasury Department. This statutory framework ensures timely payment and provides contractors a legal remedy for late payments, forming the backbone of standard government payment practices.

Standard invoice payment is the default government payment process where the contractor submits an invoice after delivering goods or completing services, and the government pays after inspection, acceptance, and invoice review. This is the most straightforward payment method, requiring no special financing arrangements. Payment timelines are governed by the Prompt Payment Act.

Advance payments are payments made to a contractor before performance begins or costs are incurred. They are the least preferred form of government contract financing due to the risk of loss, and are only authorized when other financing methods are inadequate. Advance payments require special approval authority and typically involve protective measures like letters of credit or special bank accounts.

The fast payment procedure allows agencies to pay contractors based on submission of an invoice and contractor certification of delivery, before the government actually verifies receipt of goods. Designed for small purchases and situations where inspection delays would be impractical, this method accelerates payment by eliminating the traditional receipt-before-payment requirement.

Assignment of claims allows a contractor to assign its right to receive payment under a government contract to a bank, trust company, or other financing institution. This enables contractors to use their government contracts as collateral for loans or lines of credit. The Assignment of Claims Act provides the legal framework, and FAR 32.8 implements the procedures for recognizing valid assignments.