Overview
This section establishes the requirement for charging interest on the unliquidated balance of advance payments made to contractors and defines the specific rates and conditions for such charges. It also identifies specific categories of contracts and organizations that may be eligible for interest-free advance payments at the discretion of the agency head.
Key Rules
- Interest Rate Calculation: Interest is charged on the daily unliquidated balance at the higher of the depository institution's published prime rate or the rate established by the Secretary of the Treasury.
- Computation and Adjustments: Interest must be computed monthly, with the rate adjusted to reflect changes in either the prime rate or the semiannual Treasury determination.
- Mandatory Interest: Interest is specifically required for contracts involving the cost-basis acquisition of property for Government ownership when tied to supply contracts.
- Interest-Free Exceptions: The agency head may authorize interest-free advances for nonprofit educational/research institutions (R&D), Government-owned plant management contracts, and cost-reimbursement contracts with state or local governments.
- Subcontractor Interest: If a prime contractor receives interest-free advances, the contracting officer may still require them to charge interest to subcontractors and credit those proceeds back to the Government.
- Non-Reimbursability: Interest charges incurred under this section are strictly unallowable/non-reimbursable costs under cost-reimbursement contracts for both prime contractors and subcontractors.
Practical Implications
- Contractors must treat interest on advance payments as a bottom-line expense because FAR 32.407(f) explicitly prohibits these costs from being billed back to the Government.
- Contracting officers and contractor accounting departments must maintain rigorous monthly tracking of daily unliquidated balances and fluctuating interest rates to ensure accurate financial reporting and repayment.