Overview
FAR Subpart 32.1 establishes the policies and procedures for providing government financing to contractors performing non-commercial contracts. It outlines various financing methods—such as progress payments and performance-based payments—designed to provide working capital and expedite performance while minimizing monetary risk to the Government.
Key Rules
- Order of Preference: Contracting Officers (COs) must prioritize financing in a specific sequence: (1) Private financing without guarantee, (2) Customary financing, (3) Loan guarantees, (4) Unusual financing, and (5) Advance payments.
- Eligibility Thresholds: For non-small businesses, financing is generally available for contracts of $3.5 million or more. For small businesses, the threshold is the Simplified Acquisition Threshold (SAT).
- Performance Requirements: To qualify, contractors must typically demonstrate that they cannot bill for the first delivery for a substantial period (usually 6 months for large business, 4 months for small business) or lack private financing.
- Working Capital Only: Financing is intended for contractor working capital and "self-liquidating" through performance; it cannot be used for the expansion of contractor-owned facilities or fixed asset acquisition (with minor exceptions for guaranteed loans).
- Construction Retainage: In construction contracts, the CO may retain up to 10% of a progress payment if performance is unsatisfactory, but retainage must not be used as a substitute for active contract management.
- Prohibited Combinations: Generally, a contractor cannot receive both cost-based progress payments and performance-based payments on the same contract.
Responsibilities
- Contracting Officers (CO):
- Determine the appropriate form of financing to include in solicitations.
- Monitor the contractor’s financial status and use of provided funds.
- Consult with financial experts/personnel to evaluate credit and financial risks.
- Investigate subcontractor assertions of nonpayment by the prime contractor.
- Prime Contractors:
- Must use financing specifically for contract performance/working capital.
- Responsible for making timely payments to subcontractors and providing accurate certifications of payment to the Government.
- Subcontractors:
- Entitled to request information from the CO regarding whether the prime contractor has submitted payment requests or received final payment.
- Agency Heads:
- Required to approve any "unusual contract financing" arrangements that deviate from standard FAR part 32.1 procedures.
Practical Implications
- Cash Flow Management: For long-lead-time acquisitions (like shipbuilding or complex R&D), these rules are vital for contractor liquidity. Without these provisions, many contractors could not afford the "front-loaded" costs of performance before the first delivery.
- Small Business Advocacy: The FAR explicitly requires COs to give "special attention" to small business financing needs, recognizing that these entities often lack the deep capital reserves of large defense integrators.
- Subcontractor Protection: This subpart provides a mechanism for subcontractors to bypass the prime contractor to check payment status, providing a layer of transparency and leverage if a prime contractor is withholding funds unfairly.
- Risk of False Certification: Because the CO can initiate remedial action for inaccurate certifications regarding subcontractor payments, prime contractors must maintain rigorous accounting and payment records to avoid administrative or legal penalties.
- Award Neutrality: A company’s need for government financing cannot be used as a reason to disqualify them or lower their evaluation score, provided they are otherwise "responsible."