This analysis provides a structured summary and expert insights into FAR Subpart 32.2, which governs the financing of commercial products and commercial services.
Overview
FAR Subpart 32.2 establishes policies and procedures for the Government to provide financing for commercial acquisitions under FAR Part 12. While contractors are generally responsible for providing their own resources, this subpart allows for Government-provided advance or interim payments when such arrangements are customary in the commercial marketplace and serve the best interests of the United States.
Key Rules
- Eligibility Criteria: To authorize commercial financing, the item must be a commercial product/service, the contract price must exceed the Simplified Acquisition Threshold (SAT), and the arrangement must be in the Government's best interest.
- Advance Payment Cap: Aggregate commercial advance payments (made before any work is performed) are strictly limited to 15% of the contract price.
- Security Requirement: The Government must obtain "adequate security" for any financing. This can include a paramount lien on assets, irrevocable letters of credit, bonds, or a guarantee from a parent corporation.
- Financial Condition as Security: A contractor's financial condition may be accepted as security if it demonstrates sufficient net worth and liquidity, provided the contractor agrees to provide alternative security if their financial health declines.
- Market Research: Contracting Officers (COs) are required to research whether buyer financing is a standard practice in the specific industry before offering it in a solicitation.
- Evaluation of Proposals: If offerors propose their own financing terms, the CO must calculate the "imputed cost" of those payments using OMB Circular A-94 interest rates to ensure a fair "price-only" comparison during evaluation.
Responsibilities
- Contracting Officer (CO):
- Determines if financing is customary and in the Government's best interest.
- Specifies required security types in the solicitation.
- Calculates the time value of money (imputed cost) when evaluating offeror-proposed financing.
- Approves and monitors the adequacy of security throughout the contract life.
- Reviews and approves financing payment requests.
- Contractor:
- Provides all necessary performance resources unless financing is specifically agreed upon.
- Maintains adequate security and certifies that assets subject to Government liens are free from prior encumbrances.
- Provides financial statements if the Government is using the firm's financial condition as security.
- Payment Office:
- Provides concurrence on liquidation provisions.
- Executes payments based on the CO’s approval and specific distribution instructions.
- Head of Contracting Activity (HCA):
- Approves "unusual" contract financing arrangements that deviate from standard agency regulations.
Practical Implications
- Market Alignment: This subpart allows the Government to act more like a private-sector buyer. In industries where "pay-as-you-go" or "upfront deposits" are standard (e.g., high-end software development or heavy machinery manufacturing), these rules prevent the Government from being a "difficult customer" and help attract top-tier commercial vendors.
- Risk Mitigation: The "Paramount Lien" is a powerful legal tool. Unlike private lenders who must file UCC-1 financing statements, the Government’s lien is effective immediately upon the first payment without any filing, giving the Government priority over other creditors.
- Competitive Evaluation: Contractors should be aware that requesting aggressive financing (early or large payments) may make their bid less competitive. Because the CO adds the "imputed cost" of that financing to the bid price for evaluation purposes, a higher-priced bid with no financing might actually beat a lower-priced bid that requires heavy upfront payments.
- Prompt Payment Act: Unlike "other than commercial" financing (which is exempt from interest penalties), commercial financing payments under this subpart are subject to the Prompt Payment Act, meaning the Government must pay on time or owe interest.