Order of preference

Overview

FAR 32.106 establishes a mandatory hierarchy that Contracting Officers must follow when evaluating a contractor's request for contract financing. This order of preference is designed to minimize the Government’s financial risk by prioritizing private funding and standard payment methods over more direct forms of Government assistance.

Key Rules

• Mandatory Hierarchy: Unless an exception is in the Government's best interest, the Contracting Officer must consider financing in the following specific order:
  1. Private financing without Government guarantee.
  2. Customary contract financing (e.g., progress payments based on costs or performance-based payments).
  3. Loan guarantees (where the Government guarantees a private lender’s loan).
  4. Unusual contract financing (financing that deviates from standard FAR patterns).
  5. Advance payments (the least preferred method, involving payment before work is performed).
• Private Financing Limitations: A Contracting Officer cannot force a contractor to obtain private financing if the terms are unreasonable or if it requires borrowing from other Government agencies.
• Discretionary Exception: The only grounds for deviating from this order is a specific determination that an exception is in the "Government’s best interest."

Practical Implications

• Lender of Last Resort: The Government effectively acts as a secondary source of capital; contractors seeking advance payments must typically demonstrate that higher-priority options, like private loans or customary progress payments, are unavailable or insufficient.
• Justification Burden: Contractors requesting "Unusual" or "Advance" payments face a higher administrative burden to justify why their request should be granted over the more preferred customary methods.