Asset formula
The asset formula limits government loan guarantees for defense contracts to a percentage of actual contractor investment, excluding unexpended and future amounts, with possible temporary relaxation if needed.
Overview
FAR 32.304-3 outlines the use of an asset formula to limit the amount guaranteed by agencies under guaranteed loans made primarily for working capital purposes in defense production contracts. The regulation specifies that the guarantee should not exceed a set percentage (typically 90% or less) of the contractor’s investment in items like payrolls and inventories. The asset formula must exclude amounts not yet expended, amounts due from future performance, and cash collateral or bank deposits. Progress payments are also deducted from the formula. Agencies may relax these limits temporarily if the contractor’s working capital and credit are insufficient for contract performance.
Key Rules
- Asset Formula Limitation
- Guarantees are capped at 90% or less of the contractor’s investment in defense production contracts, excluding certain amounts.
- Exclusions from Asset Formula
- Exclude unexpended amounts, future performance amounts, and cash collateral/bank deposits from the calculation.
- Deduction of Progress Payments
- Progress payments already made must be deducted from the asset formula.
- Temporary Relaxation
- Agencies may temporarily relax the formula if the contractor lacks sufficient working capital or credit for performance.
Responsibilities
- Contracting Officers: Ensure guarantees do not exceed the asset formula limits and apply exclusions and deductions as required; consider temporary relaxation only when justified.
- Contractors: Maintain accurate records of investments, expenditures, and progress payments; provide necessary documentation to support asset formula calculations.
- Agencies: Oversee compliance with asset formula requirements and document any relaxation of the formula.
Practical Implications
This regulation ensures that government guarantees for working capital loans are based on actual contractor investment and performance, minimizing risk to the government. Contractors must carefully track eligible investments and understand what is excluded from the formula. Failure to comply can result in reduced guarantee amounts or delays in loan processing.