Progress Payments Based on Cost
Also known as: Customary progress payments, cost-based progress payments
What you do here: Bill for costs incurred before delivery
At a Glance
- Who it's for
- Fixed-price contractors on long-lead / high-cost work, especially small businesses
- When you get paid
- As you incur costs, before delivery
- Customary rate
- 80% of costs (large firms) / 85% (small businesses)
- Governing clause
- FAR 52.232-16, Progress Payments
- Cash-flow effect
- Reimburses most of your cash outlay during performance
What It Is
A progress payment based on cost is contract financing, not a payment for delivered work. On a fixed-price contract that takes a long time or ties up a lot of cash before delivery, FAR Subpart 32.5 lets the government reimburse you for a percentage of the costs you have actually incurred as the work progresses. The customary rate is 80% of incurred costs for other-than-small businesses and 85% for small businesses — a deliberate small-business advantage. Because these are financing payments, they are eventually "liquidated": as you deliver and invoice, the government recovers the progress payments it advanced by reducing what it pays on your delivery invoices. Progress payments are secured by a government title to the work in process, and they don't earn Prompt Payment Act interest.
When It’s Used
- On fixed-price contracts where performance stretches beyond a normal billing cycle (manufacturing, build-to-print, long-lead materials).
- When the contract is above the simplified acquisition threshold and financing is authorized in the solicitation.
- When the contractor needs working capital to buy materials and pay labor well before any deliverable is accepted.
- As the customary financing method for non-commercial fixed-price work when performance-based payments are not used.
Key Features
| Feature | What It Means |
|---|---|
| Based on incurred cost | You bill a percentage of the costs you have actually incurred and paid (or will pay promptly), not a percentage of the contract price or an estimate of completion. |
| The small-business bump | The customary rate is 85% of incurred costs for small businesses versus 80% for large firms — real extra liquidity for an SDVOSB prime. |
| Liquidation | Progress payments are recovered as you deliver: the government reduces each delivery payment by the liquidation rate so it recoups the financing it advanced. |
| Government title | As financing security, title to materials, work in process, and inventory allocable to the contract vests in the government to the extent of unliquidated progress payments. |
| SF 1443 request | You request progress payments on Standard Form 1443, Contractor's Request for Progress Payment, supported by your cost records. |
The SDVOSB Cash-Flow Angle
For a small prime with a manufacturing or build-heavy fixed-price award, cost-based progress payments can be the difference between taking the contract and turning it down — the 85% small-business rate reimburses most of your material and labor outlay before you ever deliver. But you must have an accounting system that can track and support incurred costs by contract, and you have to watch liquidation so you're not surprised when delivery payments come in reduced. Confirm progress-payment financing is in the solicitation before you price a long-lead job assuming it.
How to Get Paid
- Confirm the Progress Payments clause (FAR 52.232-16) is in your contract and note the progress-payment and liquidation rates.
- Stand up cost accounting that can segregate and support incurred costs by contract.
- Submit Standard Form 1443 with the costs you've incurred to date, at the intervals the contract allows.
- Track unliquidated progress payments so you understand how much each future delivery invoice will be reduced.
- Reconcile at delivery: your delivery invoices are paid net of liquidation until the financing is fully recovered.
Watch Out For
- Progress payments are financing, not profit — you don't get the marked-up price until you deliver and invoice.
- They do not accrue Prompt Payment Act interest if paid late the way delivery invoices do.
- Liquidation reduces your delivery payments; failing to model it wrecks your cash-flow forecast late in the contract.
- Overbilling incurred costs (billing costs you haven't actually incurred) is a serious compliance problem and can trigger recovery and penalties.
- You generally cannot use both progress payments and performance-based payments on the same contract line item.
Run the Numbers
Frequently Asked
What percentage do progress payments cover for a small business?
The customary progress-payment rate is 85% of incurred costs for small businesses, compared with 80% for other-than-small businesses (FAR 32.501-1). This higher rate is a deliberate small-business financing advantage, letting an SDVOSB prime recover more of its cash outlay during performance.
What is the difference between progress payments and performance-based payments?
Progress payments based on cost pay you a percentage of the costs you have incurred as you go (FAR Subpart 32.5). Performance-based payments pay you when you hit defined events or milestones, regardless of cost incurred (FAR Subpart 32.10). Performance-based payments are the government's preferred fixed-price financing method, but progress payments are far more common for small businesses and don't require negotiating a payment schedule of events. You generally use one or the other on a given line item, not both.
Do I have to pay back progress payments?
Not as a separate repayment — they are liquidated automatically. As you deliver and invoice, the government reduces each delivery payment by a liquidation rate to recover the progress payments it advanced. By the time the contract is complete, the financing is fully recouped and you've been paid the full contract price.
Primary Sources
- FAR Subpart 32.5 — Progress Payments Based on Costs
- FAR 32.501-1 — Customary progress payment rates
- FAR 52.232-16 — Progress Payments (clause)
Plain-English reference, not legal, accounting, or financial advice. Payment and financing terms are set by each contract, and the FAR is amended from time to time — always read the actual contract clauses and invoicing instructions, confirm the applicable procedures with the contracting officer and payment office, and consult qualified counsel or an accountant for your specific situation before relying on this.
Change log (1)
- LaunchedPublished the federal contract financing & payment methods reference covering how an SDVOSB gets paid — invoice payment and the Prompt Payment Act (FAR Subpart 32.9 / 52.232-25), progress payments based on cost (FAR Subpart 32.5 / 52.232-16), performance-based payments (FAR Subpart 32.10 / 52.232-32), commercial product & service financing (FAR Subpart 32.2 / 52.232-29 & -30), construction progress payments and retainage (FAR 32.103 / 52.232-5 & -27), cost-reimbursement and T&M public vouchers (FAR 52.216-7 / Subpart 42.7), payment by electronic funds transfer through SAM (FAR Subpart 32.11 / 52.232-33), electronic invoicing via WAWF and IPP (FAR 32.905 / DFARS 252.232-7003), assignment of claims for bank financing (FAR Subpart 32.8 / 52.232-23), and contract debts and government offsets (FAR Subpart 32.6 / 52.232-17) — each with an at-a-glance quick-facts card, a when-it's-used list, a key-features table, an SDVOSB cash-flow angle, a how-to-get-paid checklist, watch-outs, FAQPage, Article, Dataset, and BreadcrumbList structured data, primary-source citations, and cross-links into the glossary, how-to guides, FAQ, contract types, clauses, forms, thresholds, and the price-to-win and limitations-on-subcontracting calculators.