32.304-5 Assignment of claims under contracts
Source: FAR 32.304-5 on acquisition.gov
Contractors receiving guaranteed loans under defense production contracts must generally assign claims, unless specific exceptions apply, to protect government and lender interests.
Overview
FAR 32.304-5 outlines the requirements for the assignment of claims under contracts when a contractor is provided a guaranteed loan, particularly in the context of defense production contracts. The regulation generally requires contractors to execute an assignment of claims, which allows the government or a financing institution to receive payments directly from the contract proceeds. However, exceptions exist if the contractor is financially strong, if the administrative burden outweighs the benefit, or if the additional protection is unnecessary for smaller contracts. Contractors must also execute assignments if requested by the guarantor or financing institution. Additionally, subcontracts or purchase orders are not eligible for guaranteed loan financing if the issuer retains certain payment privileges or setoff rights after assignment notice.
Key Rules
- Assignment Requirement
- Contractors with guaranteed loans under defense production contracts must generally assign claims, unless specific exceptions apply.
- Exceptions to Assignment
- No assignment is required if the contractor is financially strong, if the protection is unnecessary for smaller contracts, or if the administrative burden is disproportionate.
- Assignment Upon Request
- Contractors must execute assignments if requested by the guarantor or financing institution.
- Subcontract Eligibility Restrictions
- Subcontracts or purchase orders are ineligible for guaranteed loan financing if the issuer reserves direct payment privileges or setoff rights after assignment notice.
Responsibilities
- Contracting Officers: Ensure assignment of claims is executed unless exceptions apply; verify eligibility of subcontracts for financing.
- Contractors: Execute assignments as required; comply with requests from guarantors or financing institutions; understand when subcontracts are ineligible for financing.
- Agencies: Assess contractor financial condition and administrative burden; determine necessity of assignments for smaller contracts.
Practical Implications
- This section protects government and lender interests by ensuring contract proceeds can be assigned as collateral for guaranteed loans. Contractors must be prepared to execute assignments and understand when exceptions apply. Failure to comply can jeopardize loan eligibility or contract payments. Agencies must balance administrative efficiency with risk protection.
(a) The agency shall generally require a contractor that is provided a guaranteed loan to execute an assignment of claims under defense production contracts (including any contracts entered into during the term of the guaranteed loan that are eligible for financing under the loan); however, the agency need not require assignment if any of the following conditions are present:
(1) The contractor’s financial condition is so strong that the protection to the Government provided by an assignment of claims is unnecessary.
(2) In connection with the assignment of claims under a major contract, the increased protection of the loan that would be provided by the assignments under additional, relatively smaller contracts is not considered necessary by the agency.
(3) The assignment of claims would create an administrative burden disproportionate to the protection required; e.g., if the contractor has a large number of contracts with individually small dollar amounts.
(b) The contractor shall also execute an assignment of claims if requested to do so by the guarantor or the financing institution.
(c) A subcontract or purchase order issued to a subcontractor shall not be considered eligible for financing under guaranteed loans when the issuer of the subcontract or purchase order reserves-
(1) The privilege of making payments directly to the assignor or to the assignor and assignee jointly, after notice of the assignment, or
(2) The right to reduce or set off assigned proceeds under defense production contracts by reason of claims against the borrower arising after notice of assignment and independently of defense production contracts under which the borrower is the seller.