32.306
Loan guarantees for subcontracts
Agencies should encourage contractors to make progress payments to financially weak subcontractors to reduce or eliminate the need for government loan guarantees and shift risk away from the government.
Overview
FAR 32.306 addresses situations where a subcontractor seeking a loan guarantee is financially weaker than the prime contractor. The regulation encourages agencies to consider whether the contractor can make progress payments to the subcontractor, which may reduce or eliminate the need for a government-backed loan guarantee. This approach shifts some or all of the financial risk from the government to the contractor, especially regarding the subcontractor's performance and financial stability.
Key Rules
- Financially Weak Subcontractors
- When a subcontractor is financially weaker than the contractor, agencies should evaluate alternatives to government loan guarantees.
- Progress Payments by Contractor
- Agencies are directed to attempt to arrange for the contractor to make progress payments to the subcontractor, potentially reducing the need for a loan guarantee.
- Risk Allocation
- If progress payments are arranged, the contractor assumes part or all of the risk of loss associated with the subcontractor's financial condition.
Responsibilities
- Contracting Officers: Assess subcontractor financial strength, consider progress payments as an alternative to loan guarantees, and facilitate arrangements between contractors and subcontractors.
- Contractors: May be asked to provide progress payments to financially weak subcontractors and assume associated risks.
- Agencies: Should seek to minimize government risk by promoting contractor-provided progress payments where feasible.
Practical Implications
- This section aims to protect government interests by reducing reliance on loan guarantees and encouraging contractors to support their subcontractors financially. Contractors should be prepared for potential requests to make progress payments, and agencies must carefully assess subcontractor financial health and risk allocation. Common pitfalls include failing to properly evaluate subcontractor risk or not documenting progress payment arrangements.