Overview
This section establishes the policies and procedures for providing Government financing for the acquisition of commercial products and services. It balances the general rule that contractors are responsible for their own financing with the recognition that Government-provided financing may be appropriate when it aligns with commercial market practices and protects the Government's interests.
Key Rules
- Responsibility and Authorization: While contractors are generally expected to provide their own resources, Contracting Officers (COs) may provide financing if the item is commercial, the price exceeds the Simplified Acquisition Threshold (SAT), and the financing is customary in the marketplace and in the Government's best interest.
- Advance Payment Limitations: Commercial advance payments (made before any work is performed) are strictly capped at 15% of the total contract price.
- Security Requirements: The Government must obtain adequate security for all financing. This can include a lien on assets (which is "paramount" or superior to other liens), an irrevocable letter of credit, a surety bond, or a determination that the contractor’s financial condition (net worth and liquidity) is sufficiently robust.
- Market Research: COs are required to research whether financing is a standard practice in the specific industry and determine the typical levels and methods of such financing.
- Payment Categorization: Commercial financing payments are not subject to Prompt Payment Act interest penalties, as they are considered contract financing rather than payments for accepted supplies or services.
- Competitive Consideration: If financing is provided in a non-competitive environment and is more advantageous than the contractor's normal financing, the Government must obtain adequate consideration for the time value of the money.
Practical Implications
- Justification Burden: Contracting Officers must document that financing is a "commercial practice" through market research before including such terms in a solicitation, preventing arbitrary use of Government funds.
- Risk Management: Contractors must be prepared to provide high-quality collateral or prove financial stability to qualify for financing, while the Government must actively monitor the "unliquidated" balance to ensure the security held always meets or exceeds the amount of financing provided.