Providing contract financing
Contract financing is permitted only when necessary, with strict thresholds and oversight to protect government interests, especially for small businesses and high-value contracts.
Overview
FAR 32.104 outlines the principles and requirements for providing contract financing in government acquisitions. It emphasizes that contract financing should be used prudently to expedite contract performance, but only to the extent necessary and with careful consideration of private financing options and the contractor’s working capital needs. Contracting officers are directed to resolve doubts in favor of including financing, but must avoid undue risk to the government and select the most appropriate form of financing. Special attention is required for small business concerns, though a Small Business Administration certificate of competency does not guarantee financing. The section also sets out specific conditions and thresholds for providing performance-based or progress payments, including higher thresholds for non-small businesses and lower ones for small businesses, with reference to the simplified acquisition threshold and a $3.5 million benchmark for certain contracts.
Key Rules
- Prudent Use of Contract Financing
- Financing should only be provided when necessary for prompt and efficient contract performance, considering private financing and working capital impacts.
- Risk Management
- Contracting officers must avoid undue risk of monetary loss to the government when providing financing.
- Form and Monitoring of Financing
- The form of financing must be in the government’s best interest, and contractor use of funds and financial status must be monitored.
- Special Consideration for Small Businesses
- Small businesses receive special attention, but SBA certificates do not guarantee financing.
- Thresholds and Conditions for Financing
- Performance-based or progress payments are allowed if certain time, financial need, and contract value thresholds are met, with different rules for small and non-small businesses.
Responsibilities
- Contracting Officers: Assess need, select appropriate financing, manage risk, monitor contractor finances, and apply thresholds and conditions.
- Contractors: Demonstrate financial need or inability to obtain private financing, comply with monitoring, and use funds appropriately.
- Agencies: May set additional procedures or authorizations for financing.
Practical Implications
- This section ensures contract financing is used to support, not hinder, contract performance while protecting government interests. Contractors must be prepared to justify their need for financing and comply with monitoring. Common pitfalls include misunderstanding eligibility thresholds, failing to demonstrate financial need, or improper use of funds.