Overview
This section prescribes the mandatory procedures and documentation a Contracting Officer (CO) must follow when evaluating a contractor's request for advance payments, detailing the requirements for both approval recommendations and the implementation of security measures to protect the Government's interests.
Key Rules
- Recommendation Requirement: The CO must provide a formal recommendation for approval or disapproval to the designated approving authority after analyzing the contractor's application and conducting an investigation.
- Documentation for Approval: A recommendation for approval must include comprehensive data, including contract details, past performance reports, justification for the contractor's need, potential Government benefits, proposed security terms, and findings and determinations (F&D).
- Documentation for Disapproval: A recommendation for disapproval requires the contract data, the contractor’s original request, and the specific reasons for the negative recommendation.
- Financial Safeguards: Agencies must ensure advance payments do not exceed actual financial needs and must closely monitor the withdrawal of funds from required "special accounts."
- Government Liens: The CO should establish a "paramount lien" in favor of the Government covering the supplies being acquired, the credit balance in special accounts, and property acquired for the contract.
- Supplemental Security: Beyond standard clauses, the CO may require additional security such as personal or corporate guarantees, pledges of collateral, or restrictions on the contractor’s financial activities (e.g., limits on salaries, dividends, or capital expenditures).
- Exemptions: Specific requirements for special accounts may be waived for Government instrumentalities or when using letters of credit under specific agency and Treasury procedures.
Practical Implications
- High Administrative Burden: The CO acts as a financial auditor and risk manager, requiring significant due diligence into a contractor’s "plant capacity," "technical ability," and "responsibility" before recommending an advance.
- Lender-Like Controls: Because advance payments are a high-risk form of contract financing, the Government imposes restrictive financial covenants—similar to a bank—that can limit a contractor’s autonomy over its internal financial distributions and debt management.
- Continuous Oversight: Approval is not a "set and forget" action; the Government maintains ongoing supervision of the contractor’s cash flow to prevent the misuse of public funds or over-funding.