Wednesday, December 27, 2017

Contract Financing on Commercial Contracts

In many circumstances, the Government will award "commercial contracts". Usually, under commercial contracts, it is contractors' responsibility to provide all resources necessary for contract performance including financing. However, Government regulations also recognize that in some markets, the provisions for financing by the buyer is a commercial practice.

Under FAR (Federal Acquisition Regulations) 32.2 (and corresponding statutes), the Government will allow for interim payments and advance payments for commercial purchases under certain circumstances. The overarching requirement that needs to be satisfied is a determination that offering financing will be in the best interests of the Government. Beyond that, the following circumstances must be satisfied.

  1. The contract item financed is a commercial supply or service
  2. The contract price exceeds the simplified acquisition threshold (currently set at $150,000)
  3. The contracting officer determines that it is appropriate or customary in the commercial marketplace to make financing payments for the item
  4. Adequate security is obtained (more on this below)
  5. Prior to any performance of work, the aggregate of commercial advance payments shall not exceed 15 percent of the contract price
  6. The contract is awarded on the basis of competitive procedures
  7. The contracting officer obtains concurrence from the payment office concerning liquidation provisions when required.
Security for Government Financing. Statutes require that the Government obtain adequate security for Government financing. Typically the solicitation will specify the type of security the Government will accept. In some cases, the offeror's financial condition could be considered adequate security provided the offeror agree to provide additional security should the financial condition become inadequate as security.

If the security is in the form of a lien on work-in-process, inventory, property, etc, it is considered paramount to all other liens and is effective immediately upon the first payment without filing, notice, or other action by the Government.

Other forms of security would include a surety, irrevocable letter of credit, bond, a third-part guarantee, and title to identified assets.

The ability to obtain contract financing on commercial contracts should reduce the need for many companies to go out and borrow working capital in order to pursue Government contracts.

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