Progress Payments - 1901.3

Definition of Progress Payments

A progress payment is a partial payment approach identified in a contract related to steps or phases toward the completion of the contract for goods and/or services.  Use of this payment approach can require withhold of a percentage of payment pending completion of the entire contract and a bond. The portion of the payment withheld due to progress payments is paid upon final delivery or acceptance of goods or services.

When Progress Payments are Allowed

Pursuant to Public Contract Code (PCC), Section 12112 (IT goods and services), and PCC, Section 10314 (non-it goods), progress payments are allowable for work performed and costs incurred at the contractor’s shop or plant if the purchase transaction is unique to State business, not suitable for sale to others in the ordinary course of business.  In these instances, not less than 10 percent of the contract price is required to be withheld until delivery and acceptance of the final goods and/or services.

For IT goods and services, lessor withholding levels may be appropriate based on an evaluation of risk determined under PCC, Section 12112(b). Under these circumstances, if the contract price is $10,000,000 or more, the department shall withhold no less than 5% of the contract price until final delivery or acceptance of final goods or services. If the contract price is less than $10,000,000 the department shall withhold no less than 3% of the contract price until final delivery or acceptance of final goods or services.

For non-IT goods, the contractor is also required to provide a faithful performance bond, acceptable to the department, in a sum of not less than one-half of the total amount payable under the contract.

Consideration of Progress Payments

In the course of the procurement planning activities, it should be carefully evaluated whether progress payments are warranted and whether the contract administrator will have the expertise to properly monitor contract activities before entering into purchases that include progress payments.

Recommendations Regarding Progress Payments

The following should be conformed to when dealing with progress payments:

• Discourage progress payments whenever possible.
• Purchase documents shall require a withholding  of each progress payment in accordance with the above section, When Progress Payments are Allowed, pending satisfactory completion of the purchase transaction or a separate and distinct task.
• Establish a procedure to indicate the amount to be withheld on invoices.
• Do not allow progress payments on purchase documents with a term of less than three months.
• If progress payments are to be made, they should be made not more frequently than monthly in arrears or at clearly identifiable stages of progress, based upon written progress reports submitted with the contractor’s invoices.
• Progress payments shall not be made in advance of delivery or acceptance of goods or services.
• Include a procedure in the purchase document for the contractor to request release of the amount withheld.
• A written Statement of Work or Scope of Work should be developed to clearly define the tasks that constitute when a  project is completed.