Version 3.

0 reflects the following changes:

1. Accomodates situations in which the contractor received progress payments or other financing prior to
conversion to PBPs. See the Instructions - Basic tab and the Instructions - Conversion tab for more information.
2 Accomodates contract lengths up to 25 years in length.
3. Automatically formats column widths to ensure all values are visible.

DOD Performance Based Payments Analysis Tool (Version 3.0 - Demo) - Conversion

Important Notes:
Macros nust be enabled in order for the model to work.

1. On the Tools menu, click Add-Ins.

2. In the Add-Ins available box, select the check box next to Analysis Toolpak, and then click OK.
Tip

If Analysis Toolpak is not listed, click Browse to locate it.

DOD Performance Based Payments Analysis Tool (Version 3.0 - Demo) - Conversion
This a demonstration version of the DOD PBP Tool for a conversion to PBPs from some other financing
method. In Version 3.0 users can select the contract situation that applies : "New Awards" where no
financing has been provided yet or "Conversion" where the contract is already underway and the
contractor has been provided some financing to date. This demo version already has data in the Contract
Summary and Data Input sheets. For PBP actions, users should use the actual DOD PBP Tool (Version
3.0) to enter the applicable data for their specific contract action. The DOD PBP Tool can be found under
the Cost, Price and Finance section of the DPAP website. This demonstration version operates exactly
On the actual DOD PBP Tool, this sheet will contain the steps required to enter the necessary data and use
Users should read the information on "Using the Model" and "Assumption Explanations" sheets in order
to understand the purpose of the model and how it operates.
Important Notes:
Macros nust be enabled in order for the model to work.

This tool uses the XIRR and XNPV functions which are standard functions in Excel 2007 and later verisons.
If you are using an earlier version of Excel, Microsoft's Analysis Toolpak must be installed as follows:
Do not 'Cut and Paste' cells on the "Data Input" sheet as this will cause errors in protected cells which
cannot be reversed by the 'Undo' feature. 'Copy' and 'Paste' is allowed but the 'Right-Click' method for
doing so is disabled. Copy and Paste can be accomplished by using the menu toolbar or Ctrl-C and Ctrl-V
1. On the Tools menu, click Add-Ins.
2. In the Add-Ins available box, select the check box next to Analysis Toolpak, and then click OK.
Tip

If Analysis Toolpak is not listed, click Browse to locate it.

3. If you see a message that tells you the Analysis Toolpak is not currently installed on your computer,
click Yes to install it.
4. Click Tools on the menu bar. When you load the Analysis Toolpak, the Data Analysis command is added to the

Conversion

Conversion to PBPs - Special Instructions

Keep in mind that the awarding of the definitized contract cannot be a PBP event.

Conversion to PBPs - Special Instructions

If this action involves converting from progress payments or any other type of financing to PBPs there are
several important issues to consider:
Per FAR, PBPs cannot exceed 90% of the contract price. When the contract converts to PBPs, prior
financing payments must be added to the amounts that will be paid using PBPs to ensure that total
financing payments do not exceed 90% of the contract price. Whenever total financing would exceed the
90% limit, the model will adjust PBP values downward to ensure compliance with the 90% limit. When
that happens, you must make sure the contract reflects the adjusted event values. The Data Input sheet
contains the adjusted PBP values in Column N. The model will remind you when this situation occurs.
The most common conversion situation is likely to be the definitiizatuion of an Undefinitized Contract
Action (UCA). There will also be contracts awarded with customary progress payments where the
contractor requests to convert to PBPs. In both cases the contractor will probably have been receiving
progress payments prior to the conversion to PBPs.
In establishing PBP values in those situations, the most common approach is for the initial PBP event to
be valued at the forecasted total cost (using the evaluated expenditure profile) at the time the event is
scheduled for completion. When this approach is used, the contract must make it clear that the amount
to be paid upon completion of the initial event will be the event value less financing already provided
(usually progress payments) through that date.
For example: assume that a UCA has been in place for six months and the contractor has incurred $20
million in cost and been paid $16 million in customary progress payments to date. The definitization price
has just been negotiated, including the PBP schedule. Based on contract clearance reviews, the contract
is expected to be issued 45 days from now and the first PBP event is scheduled to be completed 60 days
from now. The contractor will continue to recieve progress payments under the UCA until the definitized
contract is issued. The contractor expects to incur $10 million over the next two months, therefore the
initial PBP event is valued at $30 million ($20 million incurred to date plus the $10 million forecasted).
Although the event will have a value of $30 million, the contract will state that upon completion of the
Keep in mind that the awarding of the definitized contract cannot be a PBP event.
The model is also capable of handling those situations where the contractor has not received progress
payments against all allowable costs incurred or has been paid some other form of financing prior to
conversion to PBPs. The model will reflect the default progress payment rate in Column L on the Win-Win
Analysis sheet for each month prior to conversion. These cells will be yellow-shaded like all other userchangeable cells. Users can modify the percentages in those cells to reflect the actual financing provided
to date.

Program Name / Contract Action Description

Position
Using Progress Payments

Position
Using PBP

Profit Bearing Cost

64,000,000

64,000,000

Cost of Money(1)

250,000

250,000

Total Cost

64,250,000

64,250,000

Profit

7,680,000

6,909,518

Total Price

71,930,000

71,159,518

(1)

(2)

(2)
12.00% Profit Rate
0.119533

10.80% Profit Rate

0.107541

Facilities Capital Cost of Money plus any other non profit-bearing costs such as interdivisional transfers at price.

Enter the objective profit dollars produced by the weighted guidelines analysis assuming progress payments, not performance based
payments for this contract action. The profit rate will be calculated using this profit amount.

Discounted Cash Flow /

Internal Rate of Return (IRR) Analysis
Assumptions :
Progress Payment Rate

Progress Payment Lag Days

30

Govt Cost of Money Rate (%)

3.13%

80%

PBP / DD 250 Lag Days

30

Contractor Hurdle Rate (%)

8.27%

PBP Cost Limitation

With Progress Payments

Total Price
Profit Rate

With PBP
$71,930,000
12.00%

IRR (Internal Rate of Return)

Total Price
Profit Rate

30.98%

Final Cost to Govt

IRR (Internal Rate of Return)

$73,984,969

KTR NPV @ Hurdle Rate

KTR Cash
Expenditure

Prog Pay

May-11

(1,000,000)

Jun-11

(1,215,000)

Final Cost to Govt

$4,715,803

DD 250

KTR NPV @ Hurdle Rate

PBP % of Price

Prog Pay

Prog Pay

Cash
Flow

Cum Cash
Flow

(1,000,000)

(1,000,000)

800,000

(415,000)

(1,415,000)

PBP
800,000

Jul-11

(1,400,000)

972,000

(428,000)

(1,843,000)

972,000

Aug-11

(1,600,000)

1,120,000

(480,000)

(2,323,000)

1,120,000

Sep-11

(1,752,000)

1,280,000

(472,000)

(2,795,000)

1,280,000

Oct-11

(1,957,800)

1,401,600

(556,200)

(3,351,200)

1,401,600

Nov-11

(2,000,100)

1,566,240

(433,860)

(3,785,060)

2,961,749

Dec-11

(2,100,000)

1,600,080

(499,920)

(4,284,980)

Jan-12

(2,200,000)

1,680,000

(520,000)

(4,804,980)

Feb-12

(2,550,000)

1,760,000

(790,000)

(5,594,980)

Mar-12

(2,600,000)

2,040,000

(560,000)

(6,154,980)

Apr-12

(2,750,000)

2,080,000

(670,000)

(6,824,980)

May-12

(2,800,000)

2,200,000

(600,000)

(7,424,980)

Jun-12

(2,900,000)

2,240,000

(660,000)

(8,084,980)

Jul-12

(3,000,000)

2,320,000

(680,000)

(8,764,980)

5,627,324

Aug-12

(2,900,000)

2,400,000

(500,000)

(9,264,980)

2,961,749

Sep-12

(2,700,000)

2,320,000

(380,000)

(9,644,980)

2,863,024

Oct-12

(2,600,000)

2,160,000

(440,000)

(10,084,980)

2,665,574

Nov-12

(2,500,000)

2,080,000

(420,000)

(10,504,980)

Dec-12

(2,425,000)

2,000,000

(425,000)

(10,929,980)

3,948,999
4,689,436
5,281,786
-

5,034,974

Jan-13

(2,175,000)

1,940,000

(235,000)

(11,164,980)

Feb-13

(2,000,100)

1,740,000

(260,100)

(11,425,080)

5,528,599

Mar-13

(1,900,000)

1,600,080

(299,920)

(11,725,000)

1,974,598

Apr-13

(1,800,000)

1,520,000

(280,000)

(12,005,000)

1,875,775

May-13

(1,700,000)

1,440,000

(260,000)

(12,265,000)

1,777,050

Jun-13

(1,500,000)

1,360,000

(140,000)

(12,405,000)

(100,000)

(12,505,000)

Jul-13

(1,300,000)

1,200,000

Aug-13

(1,250,000)

1,040,000

2,053,000

1,843,000

(10,662,000)

Sep-13

(1,100,000)

1,000,000

2,053,000

1,953,000

(8,709,000)

3,159,199
2,517,487

Oct-13

(900,000)

880,000

2,053,000

2,033,000

(6,676,000)

Nov-13

(875,000)

720,000

2,053,000

1,898,000

(4,778,000)

Dec-13

(850,000)

700,000

2,053,000

1,903,000

(2,875,000)

1,974,500

Jan-14

(650,000)

680,000

2,053,000

2,083,000

(792,000)

Feb-14

(500,000)

520,000

2,053,000

2,073,000

1,281,000

Mar-14

(500,000)

400,000

2,053,000

1,953,000

3,234,000

1,135,337

Apr-14

(300,000)

400,000

2,053,000

2,153,000

5,387,000

493,625

240,000

2,053,000

2,293,000

7,680,000

296,175

1,703,006
-

May-14

Jun-14

7,680,000

Jul-14

7,680,000

Aug-14

7,680,000

7,680,000

Sep-14
Total

(64,250,000)

51,400,000

20,530,000

7,680,000

64,043,566

Govt Break Even

KTR Break Even
Approximate
Win/Win Solution

RESET PBPs
With PBP
$71,159,518
10.80%

R (Internal Rate of Return)

56.10%

nal Cost to Govt

$73,636,787

TR NPV @ Hurdle Rate

$5,013,131
90.00%

DD 250

PBP

PBP

Cash
Flow

Cum Cash
Flow

Progress Payment Rate

(1,000,000)

(1,000,000)

80%

May-11

(415,000)

(1,415,000)

80%

Jun-11

(428,000)

(1,843,000)

80%

Jul-11

(480,000)

(2,323,000)

80%

Aug-11

(472,000)

(2,795,000)

80%

Sep-11

(556,200)

(3,351,200)

80%

Oct-11

961,649

(2,389,551)

80%

Nov-11
Dec-11

(2,100,000)

(4,489,551)

80%

1,748,999

(2,740,552)

80%

Jan-12

(2,550,000)

(5,290,552)

80%

Feb-12

2,089,436

(3,201,115)

80%

Mar-12

(2,750,000)

(5,951,115)

80%

Apr-12

2,481,786

(3,469,329)

80%

May-12

(2,900,000)

(6,369,329)

80%

Jun-12

2,627,324

(3,742,005)

80%

Jul-12

61,749

(3,680,256)

80%

Aug-12

163,024

(3,517,232)

80%

Sep-12

65,574

(3,451,657)

80%

Oct-12

(2,500,000)

(5,951,657)

80%

Nov-12

2,609,974

(3,341,683)

80%

Dec-12

(2,175,000)

(5,516,683)

80%

Jan-13

3,528,499

(1,988,185)

80%

Feb-13

74,598

(1,913,586)

80%

Mar-13

75,775

(1,837,812)

80%

Apr-13

77,050

(1,760,762)

80%

May-13

(1,500,000)

(3,260,762)

80%

Jun-13

1,859,199

(1,401,563)

80%

Jul-13

(1,939,968)

80%

Aug-13

80%

Sep-13

711,595
711,595

(538,405)
2,129,082

189,114

711,595

709

80%

1,811,804

80%

Nov-13

1,673,399

80%

Dec-13

1,764,601

3,438,000

80%

Jan-14

711,595

211,595

3,649,595

80%

Feb-14

711,595

1,346,932

4,996,528

80%

Mar-14

711,595

905,220

5,901,748

80%

Apr-14

711,595

1,007,770

6,909,518

80%

May-14
Jun-14

711,595
711,595
711,595

(188,405)
1,811,095
(138,405)

Oct-13

6,909,518

80%

6,909,518

80%

Jul-14

6,909,518

80%

Aug-14

6,909,518

80%

Sep-14

7,115,952

6,909,518

Cum
Cost
1,000,000

Cum
Progress Pay
-

Cum
PBP
-

Unliquidated
Progress Pay

Liquidated
Progress Pay

2,215,000

800,000

800,000

800,000

3,615,000

1,772,000

1,772,000

1,772,000

5,215,000

2,892,000

2,892,000

2,892,000

6,967,000

4,172,000

4,172,000

4,172,000

8,924,800

5,573,600

5,573,600

5,573,600

10,924,900

7,139,840

8,535,349

7,139,840

13,024,900

8,739,920

8,535,349

8,739,920

15,224,900

10,419,920

12,484,348

10,419,920

17,774,900

12,179,920

12,484,348

12,179,920

20,374,900

14,219,920

17,173,785

14,219,920

23,124,900

16,299,920

17,173,785

16,299,920

25,924,900

18,499,920

22,455,571

18,499,920

28,824,900

20,739,920

22,455,571

20,739,920

31,824,900

23,059,920

28,082,895

23,059,920

34,724,900

25,459,920

31,044,644

25,459,920

37,424,900

27,779,920

33,907,668

27,779,920

40,024,900

29,939,920

36,573,243

29,939,920

42,524,900

32,019,920

36,573,243

32,019,920

44,949,900

34,019,920

41,608,217

34,019,920

47,124,900

35,959,920

41,608,217

35,959,920

49,125,000

37,699,920

47,136,815

37,699,920

51,025,000

39,300,000

49,111,414

39,300,000

52,825,000

40,820,000

50,987,188

40,820,000

54,525,000

42,260,000

52,764,238

42,260,000

56,025,000

43,620,000

52,764,238

43,620,000

57,325,000

44,820,000

55,923,437

44,820,000

58,575,000

45,860,000

55,923,437

40,720,000

5,140,000

59,675,000

46,860,000

58,440,924

36,580,000

5,140,000

60,575,000

47,740,000

58,440,924

32,320,000

5,140,000

61,450,000

48,460,000

60,415,423

27,900,000

5,140,000

62,300,000

49,160,000

60,415,423

23,460,000

5,140,000

62,950,000

49,840,000

62,118,429

19,000,000

5,140,000

63,450,000

50,360,000

62,118,429

14,380,000

5,140,000

63,950,000

50,760,000

63,253,766

9,640,000

5,140,000

64,250,000

51,160,000

63,747,391

4,900,000

5,140,000

64,250,000

51,400,000

64,043,566

64,250,000

51,400,000

64,043,566

64,250,000

51,400,000

64,043,566

64,250,000

51,400,000

64,043,566

64,250,000

51,400,000

64,043,566

(0)

5,140,000

51,400,000

Ca

Unliquidated
PBP

Liquidated
PBP

Cost To Government
Prog Pay
PBP

Lag Time

Prog Pay Lag

800,000

2,083

2,083

1,772,000

4,615

4,615

2,892,000

7,531

7,531

4,172,000

10,865

10,865

5,573,600

14,515

14,515

8,535,349

18,593

22,227

8,535,349

22,760

22,227

12,484,348

27,135

32,511

12,484,348

31,719

32,511

17,173,785

37,031

44,723

17,173,785

42,448

44,723

22,455,571

48,177

58,478

22,455,571

54,010

58,478

28,082,895

60,052

73,133

31,044,644

66,302

80,845

33,907,668

72,344

88,301

36,573,243

77,969

95,243

36,573,243

83,385

95,243

41,608,217

88,594

108,355

41,608,217

93,646

108,355

47,136,815

98,177

122,752

49,111,414

102,344

127,894

50,987,188

106,302

132,779

52,764,238

110,052

137,407

52,764,238

113,594

137,407

55,923,437

116,719

145,634

49,519,080

6,404,357

106,042

128,956

45,632,211

6,404,357

95,260

118,834

39,227,854

6,404,357

84,167

102,156

34,797,997

6,404,357

72,656

90,620

28,393,640

6,404,357

61,094

73,942

23,692,289

6,404,357

49,479

61,699

17,287,933

6,404,357

37,448

45,021

12,018,913

6,404,357

25,104

31,299

6,108,182

6,404,357

12,760

15,907

6,404,357

64,043,566

2,054,969

2,477,269

Calculations Used in Model

Lag Time
PBP Lag

DD250 Lag

Other Calculations used by Model

Total Cost to Govt Difference

KTR_NPV_Difference
Actual Effective Progress Payment Rate
Progress Payment DD250 Formula
Cost_Limit (1 = Limit Active, 0 = No Limit)
PBP 90% Cap Adjustment Factor

Total PBPs
Total Pre-PBP Progress Payments
Total PBPs plus Progress Payments
PBP Cap (90% of PBP Price)
Difference
Adjusted PBP Total

(348,182)
297,328
0.8000
0.28542
0.9872

59,225,100
5,573,600

64,798,700
64,043,566
(755,134)
58,469,966

PBPs

Cum PBPs

Lag Adjustment

Lag Adjustment

No PBP Cap Adjustment

No PBP Cap Adjustment

Pre PBP Progress Payments

-

2,000,100

3,000,000
3,000,000
7,000,000
7,000,000
11,750,000
11,750,000
17,100,000
17,100,000
22,800,000
25,800,000
28,700,000
31,400,000
31,400,000
36,500,000
36,500,000
42,100,000
44,100,100

1,900,000

46,000,100

1,800,000

47,800,100

3,000,000
4,000,000
4,750,000
5,350,000
5,700,000
3,000,000
2,900,000
2,700,000
5,100,000
5,600,000

3,200,000
2,550,000

47,800,100
51,000,100
51,000,100
53,550,100

No Lag Adjustment
800,000
972,000
1,120,000
1,280,000
1,401,600

2,000,000
1,725,000
-

53,550,100
55,550,100
55,550,100
57,275,100
57,275,100

1,150,000

58,425,100

500,000

58,925,100

300,000

59,225,100

59,225,100

59,225,100

59,225,100

59,225,100

PBP Formu
Cum
Pre PBP Progress Payments
No Lag Adjustment
800,000
1,772,000
2,892,000
4,172,000
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600
5,573,600

( Combined Formulas needed when Prog

Combined Formula

PBP Formulas
-

800,000

972,000

1,120,000

1,280,000

1,401,600

2,961,749
3,948,999
4,689,436
5,281,786
-

4,527,989
1,600,080
5,628,999
1,760,000
6,729,436
2,080,000
7,481,786
2,240,000

5,627,324

7,947,324

2,961,749

5,361,749

2,863,024

5,183,024

2,665,574

4,825,574

5,034,974
-

2,080,000
7,034,974
1,940,000

5,528,599

7,268,599

1,974,598

3,574,678

5,573,600

1,875,775

3,395,775

5,573,600

1,777,050

3,217,050

5,573,600
5,573,600
5,573,600
5,573,600

3,159,199
2,517,487

1,360,000
4,359,199
1,040,000
3,517,487

5,573,600
5,573,600
5,573,600
5,573,600
5,573,600

1,974,500
1,703,006
-

880,000
2,694,500
700,000
2,383,006
520,000

5,573,600

1,135,337

1,535,337

5,573,600

493,625

893,625

5,573,600

296,175

536,175

5,573,600

5,573,600

5,573,600

5,573,600

PBP Formulas

ned Formulas needed when Progress Payments are made before start of PBPs)
Combined Formula1
Combined Formula2
Combined Formula3
800,000
972,000

800,000
-

972,000
-

Progress Payment Formulas

Pre-PBP Formulas
PP Formulas
800,000
972,000
1,120,000
1,280,000
1,401,600
1,566,240
1,600,080
1,680,000
1,760,000
2,040,000
2,080,000
2,200,000
2,240,000
2,320,000
2,400,000
2,320,000
2,160,000
2,080,000
2,000,000
1,940,000
1,740,000
1,600,080
1,520,000

Post PBP Start

PP Formulas
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%
80%

1,440,000

80%

1,360,000

80%

1,200,000

80%

1,040,000

80%

1,000,000

80%

880,000

80%

720,000

80%

700,000

80%

680,000

80%

520,000

80%

400,000

80%

400,000

80%

240,000

80%

80%

80%

80%

80%

80%

$50,000,000

May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14

Financing Cash Flow Comparison

$70,000,000
Financial Returns

$60,000,000
Prog Pay

Profit
12.00%

IRR
30.98%

NPV
$ 4,715,803

PBP
10.84%

54.19%

$ 5,004,613

$40,000,000

$30,000,000

$20,000,000

$10,000,000

$0

Cost
Progress Pay
PBP

Month

Contractor Expenditure
@ Cost

May-11

1,000,000

Jun-11

1,215,000

Jul-11

1,400,000

Aug-11

1,600,000

Sep-11

1,752,000

Oct-11

1,957,800

Nov-11

2,000,100

Dec-11

2,100,000

Jan-12

2,200,000

Feb-12

2,550,000

Mar-12

2,600,000

CLIN Deliveries @
Price

Performance Based
Payments

What if PBPs

3,000,000

3,000,000

4,000,000

4,000,000

4,750,000

4,750,000

5,350,000

5,350,000

Apr-12

2,750,000

May-12

2,800,000

Jun-12

2,900,000

5,700,000

5,700,000

Jul-12

3,000,000

3,000,000

3,000,000

Aug-12

2,900,000

2,900,000

2,900,000

Sep-12

2,700,000

2,700,000

2,700,000

Oct-12

2,600,000
5,100,000

5,100,000

Nov-12

2,500,000

Dec-12

2,425,000

Jan-13

2,175,000

5,600,000

5,600,000

Feb-13

2,000,100

2,000,100

2,000,100

Mar-13

1,900,000

1,900,000

1,900,000

Apr-13

1,800,000

1,800,000

1,800,000

May-13

1,700,000

Jun-13

1,500,000

3,200,000

3,200,000

Jul-13

1,300,000

7,193,000

Aug-13

1,250,000

7,193,000

2,550,000

2,550,000

Sep-13

1,100,000

7,193,000
2,000,000

2,000,000

1,725,000

1,725,000

Oct-13

900,000

7,193,000

Nov-13

875,000

7,193,000

Dec-13

850,000

7,193,000

Jan-14

650,000

7,193,000

Feb-14

500,000

7,193,000

1,150,000

1,150,000

Mar-14

500,000

7,193,000

500,000

500,000

Apr-14

300,000

7,193,000

300,000

300,000

May-14
Jun-14
Jul-14
Aug-14
Sep-14
Total

64,250,000

71,930,000

59,225,100

59,225,100

Enter number of months contractor will receive

financing prior to first PBP event:
Cumulative
Contractor
Expenditure
@ Cost

PBP CLIN Price

Cumulative
Performance Based
Payments

Cumulative PBP
Cash Flow

1,000,000

(200,000)

2,215,000

(443,000)

3,615,000

(723,000)

5,215,000

(1,043,000)

6,967,000

(1,393,400)

8,924,800

10,924,900

3,000,000

13,024,900

15,224,900

17,774,900

20,374,900

23,124,900

25,924,900

28,824,900

22,800,000

(451,300)

31,824,900

25,800,000

(451,300)

34,724,900

28,700,000

(451,300)

37,424,900

31,400,000

40,024,900

42,524,900

44,949,900

47,124,900

42,100,000

548,700

49,125,000

44,100,100

548,700

51,025,000

46,000,100

548,700

52,825,000

47,800,100

54,525,000

56,025,000

7,000,000
11,750,000
17,100,000
-

36,500,000
-

51,000,100
-

(351,200)
(2,351,300)
(451,300)
(2,651,300)
(451,300)
(3,051,300)
(451,300)
(3,251,300)

(451,300)
(3,051,300)
(451,300)
(2,876,300)

548,700
(1,151,300)
548,700

7,115,952

57,325,000

7,115,952

58,575,000

7,115,952

59,675,000

7,115,952

60,575,000

7,115,952

61,450,000

7,115,952

62,300,000

7,115,952

62,950,000

7,115,952

63,450,000

58,425,100

548,700

7,115,952

63,950,000

58,925,100

548,700

7,115,952

64,250,000

59,225,100

548,700

53,550,100
55,550,100
57,275,100
-

(751,300)
548,700
(551,300)
548,700
(326,300)
548,700
(101,300)

71,159,518

What If CLIN
Deliveries

Adjusted PBP
Values

0 $

20

2,961,749

3,948,999

4,689,436

5,281,786

$
$
$
$

5,627,324
2,961,749
2,863,024
2,665,574

5,034,974

$
$
$
$

5,528,599
1,974,598
1,875,775
1,777,050

3,159,199

2,517,487

1,974,500

1,703,006

$
$
$

1,135,337
493,625
296,175

7,193,000
7,193,000
7,193,000
7,193,000
7,193,000
7,193,000
7,193,000
7,193,000
7,193,000
7,193,000

36

20

Using The Model

Introduction

Performance Based Payments

and the FAR

Purpose of the Model

Win
Tie
Lose

How the Model Works

Performance Based Payment Buttons

Govt
Gov Break Even

KTR
Ktr Break
BreakEven
Even

Win/Win
Solution
Approximate
Win/Win Solution

RESET
RESET
PBPs

Important Note:

PBP Event "What-ifs"

Event Completed Late

Event Completed Early

Comparison Graph

Performance Based Payments offer a unique opportunity for a real "WinWin" financial arrangement for the Government and the contractor. This
opportunity presents itself due to the Government and the contractor
having differing views of the time-value of money. The "Win" for the
contractor is better cash flow resulting in a better Internal Rate of Return
(IRR) and Net Present Value (NPV) of the cash flows even at a reduced
contract price. The "Win" for the Government is a lower contract price that
more than offsets the additional financing costs of providing a better cash
flow to the contractor. This tool employs a discounted cash flow analysis to
determine the "Win-Win" financial solution.
Performance Based Payments (PBPs), like progress payments, are a
customary type of contract financing. In fact, per FAR 32.1001(a) PBPs
are the "preferred Government contracting method when the
contracting officer finds them practical and the contractor agrees to
their use ." Government financing is provided to assist contractors in
paying the costs they incur in the performance of a contract. PBPs are
financing payments, not incentive payments.

FAR 32.1004(b)(2) states that "Total performance-based payments

must : (i) reflect prudent contract financing provided only to the
extent needed for contract performance and (ii) not exceed 90
percent of the contract price if on a whole contract basis, or 90
percent of the delivery item price if on a delivery item basis." It is
important to note that the 90% of price is the upper limit, not a mandated
financing level. The proper total and timing of financing payments should
be determined in light of FAR 32. 1004(b)(3)(ii) which states that the
contracting officer must ensure that PBPs "are not expected to result in
an unreasonably low or negative level of contractor investment in the
contract." A link to FAR Part 32 is provided below.
FAR Part 32

The amount and timing of contract financing has a direct impact on the
cost to the Govt and the financial rate of return or Internal Rate of Return
(IRR) achieved by the contractor. The purpose of this model is to
demonstrate the financial impact to both the Govt and the Contractor of
using Performance Based Payments versus Progress Payments.
Using the Govt and Contractor perspectives of the time-value of money
as represented by the "Govt Cost of Money Rate" and the "KTR Hurdle
Rate" respectively, the model will calculate the "Final Cost to Govt" and
"KTR NPV @ Hurdle Rate" values. "KTR NPV @ Hurdle Rate" reflects
the Net Present Value (NPV) of the cash flows to the contractor when
discounted at the contractor's Hurdle Rate.

Clearly it is in the Govt's interest to minimize the "Final Cost to Govt" and
it is in the Contractor's interest to maximize its return in terms of the IRR
and the "KTR NPV @ Hurdle Rate". If the only variable is profit, these two
financial interests are directly and unalterably opposed to one another.
However, by introducing the variable of contract financing into the equation,
it is possible to achieve a true Win-Win financial deal because of the
differing perspectives of the time-value of money between the Govt and the
Contractor.
The Progress Payment scenario is used as the benchmark for
determining a Win/Win arrangement for several reasons. First, it is the
financing method most likely to be used if a Performance Based Payment
arrangement cannot be agreed to or is determined to be impractical.
Second, it is the financing method most commonly utilized between the
Government and Industry. And third, it is considered by industry to be a
low-risk form of financing. For these reasons, the Progress Payment
scenario is the right financial benchmark for a risk/reward analysis. The
objective profit rate utilized for the Progress Payment scenario should be
the profit rate that the Government would expect to negotiate if Progress
Payments are the financing method.

Since Win-Win should always be the goal of any business deal, the
model is set up to visually indicate when the PBP arrangement is a
financial "Win" for both parties. The PBP cells for "IRR (Internal Rate of
Return)", "Final Cost to Govt and "KTR NPV @ Hurdle Rate" will change
color to reflect a Win, Tie or Lose status. If the cell is Red it means that
the PBP financial outcome is worse than what would be experienced using
Progress payments. If the cell is Yellow it means that PBP and Progress
Payments financial scenarios are the same. If the cell is Green it means
that the PBP financial outcome is better than the outcome under Progress
Payments. The goal should be to construct a win-win deal where all three
cells are Green.
The "Win-Win Analysis" worksheet uses a Discounted Cash Flow
analysis technique to measure the financial impact of various contract
financing scenarios. The model uses a customary progress payment rate
scenario as the baseline against which to measure the financial
cost/benefits of a PBP financing arrangement.

The "Final Cost to Govt" is the sole measure of financial impact from the
Govt point of view. The model displays two ways that Contractors look at
financial opportunities. The first is the "IRR (Internal Rate of Return)"
which represents the annual, pre-tax rate of return represented by the
contract cash flows. The second is the "KTR NPV @ Hurdle Rate" which
represents the present value of the cash flows when discounted at the
Contractor's hurdle rate. (See the "Assumption Explanations" worksheet
tab below for more discussion of the hurdle rate)

nt Buttons
Clicking the "Gov Break Even" button will cause the model to search for
the PBP Profit Rate that results in the "Final Cost to Govt" to be equal
under both Progress Payments and PBPs.
Clicking the "Ktr Break Even" button will cause the model to search for
the PBP Profit Rate that results in the "KTR NPV @ Hurdle Rate" to be
equal under both Progress Payments and PBPs.
Clicking the "Approximate Win/Win Solution" button will cause the model
to find the suggested Win/Win solution which will be the midpoint between
the two break-even values. However, this suggested Win-Win solution
might not be the optimal solution. The timing and amount of the PBP
events will determine if the optimal Win/Win solution lies closer to one of
the break-even values than the other. (See the "What if" discussion below
to see how to test the risk/benefit aspects of the Win/Win solution.)

Clicking the "RESET" button will restore the PBP event timing to the
profile as it existed before running "what ifs" on the slipping or accelerating
of PBP events. This button should be clicked after running "what-ifs"
pertaining to event slippage or acceleration.
The model checks to make sure that total PBP amounts do not exceed
90% of the contract price per the FAR. As the model searches for a PBP
profit rate solution and the PBP Price is reduced, downward adjustments, if
necessary, are made to the PBP amounts on the Win-Win Analysis
worksheet in order to remain at or below the 90% limit. It does this by
reducing the PBP event amounts proportionally. Therefore, in order to be
consistent with the final Win-Win solution, the contract values for the
events should reflect the reduced values.

A Win-Win deal should result in a better financial outcome for the

contractor with PBPs versus progress payments, when the contractor
performs well . It should not be structured so that the contractor is
financially better off regardless of how the contractor performs.

Contractors may consider PBPs to be inherently more risky than

progress payments. In PBPs, an event payment is made only upon
successful completion of that event. If an event is not completed by the
date anticipated, the payment is delayed accordingly. Conversely, if an
event is completed earlier than anticipated, the payment is accelerated
accordingly. This model will calculate the financial impact of delays and
acceleration in event completion and payment. This allows for an objective
versus notional discussion of risk.
The model allows for "what if" exercises regarding the early or late
completion of PBP events.
Double-clicking on a PBP event payment in the "PBP" column on the
"Win-Win Analysis" worksheet, will move that payment out one month
(down one row) and the financial impact of that slip will be displayed in the
"IRR (Internal Rate of Return)", "Final Cost to Govt" and "KTR NPV @
Hurdle Rate" values. The PBP cell will turn red to indicate that this is a
slipped event. This will allow both sides to determine how delays in event
completion financially impact the contractor and at what point event
slippages would yield a less rewarding financial outcome to the contractor
than progress payments. The outcome under PBPs is less advantageous
to the contractor when the "KTR NPV @ Hurdle Rate" block for PBPs
becomes red. The user should try several event slippage scenarios
involving later events as well as early events to gauge the true risk
sensitivity of the PBP arrangement.

Right-clicking on a PBP event payment in the "PBP" column on the "WinWin Analysis" worksheet will move the payment in one month (up one row).
The cell will turn green to indicate that the event is completed ahead of
schedule. This will have a positive financial impact on the contractor IRR
and "KTR NPV @ Hurdle Rate". You must select the cell before rightclicking in order for this feature to work.

This ability to analyze the financial impact of various "what if" scenarios
will allow the user to objectively structure a PBP arrangement that
appropriately balances the risk and benefits of PBPs.
NOTE: When running a "what-if" on a PBP event, the cell color will change
to green or red based on whether the user has right-clicked or doubleclicked the cell. If an event is double-clicked the value will move down one
row and the cell will turn red. If that red cell is then right-clicked, the event
value will move up one row and the cell color will become green even
though the event has been restored to its original position. To reset the
PBP events to the original position and colors, click the "Reset" button.

This worksheet contains a graphic comparison of the financing cash

flows resulting from PBPs versus Progress Payments. Within the graph is
also a summary of the financial returns acheived under each scenario.
The chart will reflect the latest data contained on the Win-Win Analysis
sheet. Therefore, if you go to the Comparsion Chart sheet after running a
"what-if" on the slipping of an event or changing the lag times for instance,
the chart will reflect the changed data.

Assumptions

Progress Payment Rate

Government Cost of Money Rate (%)

Contractor Hurdle Rate (%)

Progress Payment Lag Days

PBP / DD250 Lag Days

PBP Cost Limitation

Changes to any assumption will result in an automatic recalculation

of the approximate Win-Win PBP profit solution.
Enter the progress payment rate: The rate to enter will be based on the
contractor's business status:
Large Business 80%
Small
Business 90%
Small
Disadvantaged Business 95%

This value represents the "Time-Value" of money to the Government.

The value entered should be the applicable Nominal Treasury Rate
contained in the OMB Circular A-94, Appendix C based on the period of
performance for the action. This percentage rate is used to calculate the
"Final Cost To The Govt". The model will only accept values between 2%
and 10%. The link below will take you to the OMB A-94, Appendix C.
http://www.whitehouse.gov/omb/circulars/a094/a94_appx-c.html
This value represents the "Time-Value" of money to the contractor.
Corporations establish a threshold, expressed as an annualized
percentage rate, that all financial projects must achieve in order to be
considered economically viable. This is often called the "Hurdle Rate" and
is based on the corporation's Weighted Average Cost of Capital (WACC).
The WACC is a complicated formula that takes into account the two ways
corporations raise money: Debt (borrowing) and Equity (selling stock)
based on the Capital Asset Pricing Model (CAPM). The WACC or Hurdle
Rate for each corporation will be different. The contractor's corporate
WACC is the rate that should be entered here. If the contractor cannot
provide its WACC calculation, the link below will take you to a website that
will calculate a WACC for most publicly traded corporations. You will need
to enter the corporation's stock symbol. The website identifies the CAPM
formula and the corporation's financial data relied upon to populate the
CAPM. However, there are two variables within the CAPM that are not
based on a corporation's financial statements: Market Return and Risk
Free Rate both of which affect the Return on Equity portion of the WACC.
The website identifies the values used for both variables but does not cite
the basis for these values.

http://thatswacc.com/
The purpose of this entry is to recognize the period of time from when the
contractor spends cash to pay its contract costs and when it recovers
some or all of that cash via progress payments.

The value entered should be the average number of days between

expenditure of cash and receipt of a progress payment from the
Government. This value should take into consideration the difference
between "costs" and "cash expenditures". Specifically, under the "paid
cost rule" for subcontract costs, prime contractors no longer need to have
paid their subcontractors in order to include the subcontract "costs" in their
progress payment vouchers. Therefore, prime contractors should
experience little or no lag time for subcontract costs which, in turn, should
reduce the average overall lag time.

The model accounts for the approximate impact of lag times by

assuming a 30 day month. For example, a 30 day lag time will push
payments out one month (down 1 row on the spreadsheet). A 15 day lag
time would move 50% of the payment into the next month. A 10 day lag
time would move 33% of the payment into the next month.
The model will only accept values between 0 and 60 days.

The purpose of this entry is to recognize the period of time from when a
contractor submits a PBP or DD250 payment request and when it actually
recevies payment from the Government. This lag time has nothing to do
with cost incurred.
This entry will affect the timing of the DD250 payments for both the
Progress Payment and PBP scenarios as well as PBP event payments.

The model will only accept values between 0 and 45 days.

The purpose of contract financing is to assist the contractor in the

payment of costs incurred on the contract. FAR 32.104 states that
contracting officers must "provide Government financing only to the extent
actually needed to ensure prompt and efficient performance". At any point
in the contract, the contractor can never "need" financing that exceeds total
cost incurred at that time. FAR 32.1004(b)(3)(ii) further states that
Performance Based Payments should not be expected to result in an
unreasonably low or negative level of contractor investment in the contract.
In situations where the Government does not have a high degree of
confidence in the expenditure profile, the Government has used a cost
limitation provision in Performance Based Payment contracts in order to
eliminate the possibility of a negative level of contractor investment from
occurring.

In the absence of a consistent expenditure history for the item being

procured, determining a reliable expenditure profile can be extremely
difficult. Therefore, both sides, while agreeing on the total cost of the
contract action, may have significant differences on how that cost will be
incurred over time. In fact, it is significantly more difficult to predict the
monthly expenditures than it is to predict the total cost of a contract.
When using progress payments, this difficulty is irrelevant since the
Government will pay a percentage of the actual cost incurred each month,
not the forecasted costs. However, when using PBPs, the accuracy of that
expenditure profile can have a significant effect on the financial outcome to
both parties.

Including PBP Cost Limitation language in the contract may be the

simplest and most equitable solution to this problem. If a PBP cost
limitation is used, cumulative payments to the contractor will never be
allowed to exceed cumulative cost incurred. This can allow the
Government to be more flexible relative to the expenditure profile and the
resulting PBP event values since the possibility of a "negative contractor
investment" is eliminated. While this will preclude an "advance payment"
or windfall cash flow scenario to the contractor, it does not relieve the
Government from analyzing the expenditure profile and event values for
reasonableness. It does however provide the Government considerably
more flexibility in this area.
While the use of a PBP cost limitation eliminates the possibility of a
"negative contractor investment", or "advance payments", it is important for
the user to understand how such a situation can arise when a PBP cost
limitation is not included in the contract. The following scenarios are likely
to result in cumulative PBPs exceeding cumulative cost incurred:

1. The PBP payment schedule was based on a projected expenditure

profile that was not accurate. Specifically, if the expenditure profile
assumed significant costs would be incurred in the early phase of the
contract (front loaded) but actual cost turned out to be more evenly spread
or back loaded, PBP event payments in the early phase of the contract
could significantly exceed actual cost.
2. The assumed completion dates for PBP events were not accurate.
Specifically, if in generating the PBP schedule, PBP event completion
dates are assumed to happen later in the contract performance than is
warranted based on the master program schedule, simply performing the
events "on time" could result in cumulative payments that significantly
exceed actual cost.

3. The contractor may underrun the cost of performing the contract.

Depending on the size of the underrun and the level of PBPs provided (%
of total price), this is likely to result in payments that exceed actual cost at
some point in contract performance. The contractor's view of this situation
is that payments in excess of cost represents the payment of the additional
profit that the contractor's is "earning" via the underrun. The contractor
may describe this as an added incentive to underrun the contract.
However, PBPs are financing, not incentive payments. Additional profit
earned through cost underruns are properly paid to the contractor at the
time of DD 250, just as it is under a contract that uses progress payment
financing.

Month

Contractor
Expenditure @
Cost

Jul-09

1,000,000

Aug-09

1,215,000

Sep-09

1,400,000

Oct-09

1,600,000

Nov-09

1,752,000

Dec-09

1,957,800

Jan-10

2,000,100

Feb-10

2,100,000

Mar-10

2,200,000

CLIN Deliveries
@ Price

Performance
Based Payments

What if PBPs

PBP CLIN Price

-

2,215,000

2,215,000

3,000,000

3,000,000

5,300,000

5,300,000

4,300,000

4,300,000

5,150,000

5,150,000

Apr-10

2,550,000

May-10

2,600,000

Jun-10

2,750,000

Jul-10

2,800,000

Aug-10

2,900,000

Sep-10

3,000,000

Oct-10

2,900,000

Nov-10

2,700,000

Dec-10

2,600,000

Jan-11

2,500,000

Feb-11

2,425,000

Mar-11

2,175,000

Apr-11

2,000,100

May-11

1,900,000

6,075,000

6,075,000

Jun-11

1,800,000

1,800,000

1,800,000

Jul-11

1,700,000

Aug-11

1,500,000

3,200,000

3,200,000

Sep-11

1,300,000

Oct-11

1,250,000

2,550,000

2,550,000

Nov-11

1,100,000

Dec-11

900,000

Jan-12

875,000

Feb-12

850,000

Mar-12

650,000

17,668,750

Apr-12

500,000

17,668,750

May-12

500,000

17,668,750

17,478,830

Jun-12

300,000

17,668,750

17,478,830

8,400,000

8,400,000

8,600,000

8,600,000

7,525,000

7,525,000

2,875,000

2,875,000

17,478,830

2,000,000

2,000,000

17,478,830

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-16

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Jul-18

Aug-18

Sep-18

Oct-18

Nov-18

Dec-18

Jan-19

Feb-19

Mar-19

Apr-19

May-19

Jun-19

64,250,000

70,675,000

62,990,000

69,915,321

Cumulative
Contractor
Cumulative
Expenditure @
Performance
Cost
Based Payments
1,000,000
2,215,000
3,615,000
5,215,000
6,967,000
8,924,800
10,924,900
13,024,900
15,224,900
17,774,900
20,374,900
23,124,900
25,924,900
28,824,900
31,824,900
34,724,900
37,424,900
40,024,900
42,524,900
44,949,900

2,215,000
5,215,000

Cumulative PBP
Cash Flow
(1,000,000)
(1,400,000)
-

(1,752,000)

(3,709,800)

10,515,000
14,815,000
19,965,000

(409,900)
(2,509,900)
(409,900)
(2,959,900)
(409,900)

(3,159,900)

(5,959,900)

28,365,000

(459,900)

(3,459,900)

(6,359,900)

36,965,000

(459,900)

(3,059,900)

(5,559,900)

44,490,000

(459,900)

47,124,900

(2,634,900)

49,125,000

(4,635,000)

51,025,000

50,565,000

52,825,000

52,365,000

54,525,000
56,025,000
57,325,000
58,575,000
59,675,000
60,575,000
61,450,000
62,300,000
62,950,000
63,450,000

55,565,000
58,115,000

(460,000)
(460,000)
(2,160,000)
(460,000)
(1,760,000)
(460,000)

(1,560,000)

(2,460,000)

60,990,000

(460,000)

(1,310,000)

15,708,750

62,990,000

34,877,500

63,950,000

52,046,250

64,250,000

69,415,000