Overview
FAR Subpart 32.6 establishes the policies and procedures for identifying, demanding, collecting, and deferring contract debts owed by contractors to the Government. It defines what constitutes a debt—ranging from overpayments and price reductions to damages—and provides a standardized framework for the Government to recover these funds while ensuring due process and financial accuracy.
Key Rules
- Definition of Debt: Contract debts include any amount paid to a contractor to which they are not entitled, or amounts due under contract terms (e.g., defective pricing, CAS noncompliance, duplicate payments, or breach of contract).
- Prompt Determination: Contracting Officers (COs) must act quickly to determine the amount of a debt to prevent the loss of funds to a program or increased difficulty in collection.
- Demand for Payment: A formal demand must be issued as soon as a debt is determined, even if the contractor agrees to pay or the debt is being incorporated into a pending bilateral modification.
- The 30-Day Interest Rule: For most debts, interest begins to accrue 30 days after the demand letter. However, for specific cases like defective pricing or CAS noncompliance, interest may be calculated from the date of the original overpayment.
- Accounting Accuracy: Demand letters must distribute the debt amount across specific lines of accounting (ACRNs) to comply with the Anti-Deficiency Act, even if the underlying funds have expired or been cancelled.
- Compromise Threshold: Debts under $100,000 may be compromised by designated agency officials, but COs generally lack the authority to compromise debts unless specifically authorized.
- Treasury Transfer: Debts that remain delinquent for more than 180 days must be transferred to the Department of the Treasury for collection.
Responsibilities
- Contracting Officer (CO):
- Primary responsibility for identifying debt and determining the specific amount due.
- Issuing the formal demand for payment and the final decision if an agreement is not reached.
- Providing recommendations on installment payments or deferment requests.
- Restriction: The CO does not actually collect the money and cannot unilaterally agree to "offset" debts against other invoices without following agency procedures.
- Payment Office:
- Primary responsibility for the actual collection of the debt.
- Identifying duplicate or erroneous payments.
- Initiating administrative offsets (withholding money from other unpaid invoices).
- Agency-Designated Office:
- Responsible for the formal approval or denial of contractor requests for installment payment plans or deferment of collection.
- Contractor:
- Responsible for liquidating the debt within 30 days or providing detailed financial data (cash flow, backlog, etc.) if requesting a deferment or installment plan.
Practical Implications
- Immediate Action vs. Negotiation: Contractors should be aware that the CO is required to issue a demand letter immediately upon determining a debt exists; they cannot wait for the completion of a contract modification or a settlement negotiation.
- The "Credit Invoice" Strategy: If a contractor identifies an overpayment themselves and submits a credit invoice or lump sum payment before a demand is issued, they can often avoid the formal "demand for payment" process and the associated interest accrual.
- Disputes do not Stop Collection: Filing a claim under the Disputes clause does not automatically stay the Government’s collection efforts. The Government will continue to seek payment or offset the debt unless a formal deferment is granted.
- Risk for Small Businesses: While the FAR allows for deferments for small businesses to avoid "undue hardship," the contractor must be prepared to open their financial books to the Government, including providing projected cash receipts and financial statements.
- Interest as a Penalty: Because interest rates are set by the Treasury and can be compounded in certain scenarios, contract debts can grow significantly if not addressed promptly, making early resolution financially critical for the contractor.