Overview
This section prescribes the requirements and procedures for using letters of credit as a mechanism for advance payments to contractors, ensuring compliance with Department of the Treasury regulations. It establishes the specific financial thresholds and timing methods intended to minimize the interval between the withdrawal of government funds and their actual disbursement by the contractor.
Key Rules
- Regulatory Authority: Advances via letters of credit are governed by Treasury Department Circular 1075 (31 CFR Part 205) and the Treasury Financial Manual.
- Mandatory Thresholds: Agencies must use a letter of credit if the relationship with the contractor is expected to last at least one year and advances will total $120,000 or more annually; otherwise, direct Treasury checks are used.
- Consolidation: If a contractor has multiple contracts or assistance agreements, the agency must consolidate funding into a single letter of credit.
- Drawdown Timing: Contractors are generally required to use the "delay of drawdown" technique (withdrawing funds when checks are mailed) or the "checks paid" technique (withdrawing funds when checks are presented to the bank) to prevent premature fund accumulation.
- Non-Compliance Penalties: If a contractor fails to minimize the time between fund receipt and disbursement, the government may terminate the arrangement or switch to a "working capital" method, which limits advances to specific estimated or actual cash disbursements.
Practical Implications
- Financial Control Requirements: Contractors receiving advance payments must maintain sophisticated accounting systems capable of precisely timing drawdowns to match actual cash outlays, as failing to do so risks losing favorable financing terms.
- Administrative Efficiency: The requirement to consolidate multiple funding streams into a single letter of credit simplifies financial management for both the agency and the contractor when large-scale, multi-contract relationships exist.