Overview
FAR 32.411 prescribes the mandatory standard form for establishing a segregated "Special Account" at a financial institution to manage and protect advance payments made to a contractor. This agreement ensures that government-provided funds are isolated from the contractor’s general assets and remain under the oversight of the Contracting Officer.
Key Rules
- Mandatory Segregation: Advance payments must be deposited into a dedicated account separate from the contractor’s general or other operating funds.
- Eligible Institutions: The account must be held at a Federal Reserve System member bank, an FDIC-insured bank, or an NCUA-insured credit union.
- Government Lien: The Government maintains a paramount lien on the account balance to secure repayment, which takes precedence over any claims or liens held by the financial institution.
- Control and Direction: The financial institution is required to act upon written directions from the Contracting Officer or authorized representatives regarding the deposit and withdrawal of funds.
- Audit and Access: The Government has the right to inspect or copy bank records related to the account at any time, and the institution must retain these records for six years after the account is closed.
- Notification Requirements: The financial institution must promptly notify the government of any legal actions against the account, such as attachments, executions, or garnishments.
- Interest Reporting: Unless the advance payments are interest-free, the bank must report its prime interest rate to the Government on the last business day of each month.
Practical Implications
- Risk Mitigation: By requiring a tripartite agreement, the government reduces the risk of funds being diverted for purposes unrelated to the contract or being seized by other creditors in the event of contractor insolvency.
- Direct Oversight: The Contracting Officer gains a direct mechanism to freeze or control the flow of cash if the contractor fails to meet obligations, without needing to litigate against the contractor first.