32.005 Consideration for contract financing
Source: FAR 32.005 on acquisition.gov
Contract financing must be reflected in the contract price or terms at award, and any post-award changes require adequate new consideration without charging interest.
Overview
FAR 32.005 outlines the rules regarding consideration for contract financing in government contracts. It establishes that when contract financing is included at the start of a contract, no separate consideration (such as additional payment) is required for the financing clause. The benefit to the contractor should be reflected in a lower price or more favorable terms for the government. However, if contract financing is added or changed after award, the contractor must provide adequate new consideration, which can be monetary or nonmonetary. The value of this consideration should be fair and reasonable, approximating what would have been negotiated if the financing had been included initially. The section also prohibits charging interest or similar fees for contract financing, except as allowed under specific circumstances in subpart 32.4.
Key Rules
- No Separate Consideration for Initial Financing
- When contract financing is included at contract inception, its value must be reflected in the contract price or terms, not as a separate charge.
- New Consideration for Post-Award Changes
- If financing is added or changed after award, the contractor must provide adequate new consideration, either monetary or nonmonetary, to the government.
- No Interest Charges
- Contracts cannot include specific charges like interest for contract financing, except as permitted under subpart 32.4.
Responsibilities
- Contracting Officers: Ensure contract financing is reflected in price/terms at award, require adequate new consideration for post-award changes, and prohibit interest charges except as allowed.
- Contractors: Reflect financing value in initial proposals, provide new consideration for post-award changes, and avoid charging interest unless permitted.
- Agencies: Oversee compliance with these requirements and ensure fair and reasonable consideration is provided.
Practical Implications
- This section ensures the government receives value for providing contract financing and prevents contractors from double-dipping on consideration. It impacts negotiations, contract modifications, and compliance reviews. Common pitfalls include failing to adjust contract terms for added financing or improperly including interest charges.
(a) Requirement. When a contract financing clause is included at the inception of a contract, there shall be no separate consideration for the contract financing clause. The value of the contract financing to the contractor is expected to be reflected in either (1)a bid or negotiated price that will be lower than such price would have been in the absence of the contract financing, or (2) contract terms and conditions, other than price, that are more beneficial to the Government than they would have been in the absence of the contract financing. Adequate new consideration is required for changes to, or the addition of, contract financing after award.
(b) Amount of new consideration. The contractor may provide new consideration by monetary or nonmonetary means, provided the value is adequate. The fair and reasonable consideration should approximate the amount by which the price would have been less had the contract financing terms been contained in the initial contract. In the absence of definite information on this point, the contracting officer should apply the following criteria in evaluating whether the proposed new consideration is adequate:
(1) The value to the contractor of the anticipated amount and duration of the contract financing at the imputed financial costs of the equivalent working capital.
(2) The estimated profit rate to be earned through contract performance.
(c) Interest. Except as provided in subpart 32.4, Advance Payments for Other Than Commercial Acquisitions, the contract shall not provide for any other type of specific charges, such as interest, for contract financing.