32.406
Letters of credit
Letters of credit are the preferred method for advance payments to contractors with ongoing, high-value relationships, and strict Treasury rules govern their use to ensure timely and appropriate disbursement of government funds.
Overview
FAR 32.406 outlines the requirements for using letters of credit as a method for providing advance payments to contractors. The regulation is based on Treasury Department rules and is designed to ensure proper management and oversight of government funds advanced to contractors. It specifies when letters of credit must be used, how multiple contracts should be handled, and the procedures for minimizing the time between fund receipt and disbursement. The section also addresses what happens if contractors do not comply with timing requirements, including possible termination of the advance payment arrangement or use of a working capital method.
Key Rules
- Treasury Regulations Govern Letters of Credit
- Agencies must follow Treasury Department Circular 1075 and the Treasury Financial Manual for guidance on letters of credit for advance payments.
- Mandatory Use of Letters of Credit
- Letters of credit are required for contractors with ongoing relationships (one year or more) and annual advances of at least $120,000, unless a Treasury waiver is obtained.
- Direct Treasury Check for Other Cases
- If the above criteria are not met, advance payments must be made by direct Treasury check.
- Consolidation of Letters of Credit
- Agencies must consolidate multiple letters of credit for the same contractor when possible, following Treasury procedures.
- Drawdown Timing Techniques
- Agencies should use drawdown techniques (delay of drawdown or checks paid) to minimize the time between fund receipt and disbursement.
- Termination or Adjustment of Advance Methods
- If contractors cannot minimize elapsed time, advance arrangements may be terminated or replaced with a working capital method limiting advances to actual disbursements.
Responsibilities
- Contracting Officers: Ensure compliance with Treasury regulations, select appropriate payment method, and monitor contractor disbursement timing.
- Contractors: Withdraw funds only as needed for disbursements, comply with drawdown techniques, and minimize time between receipt and use of funds.
- Agencies: Oversee consolidation of letters of credit, obtain waivers if needed, and enforce Treasury guidance.
Practical Implications
- This section ensures government funds are advanced responsibly and only as needed for contract performance.
- Contractors must carefully manage cash flow and comply with timing requirements to avoid loss of advance payment privileges.
- Agencies must coordinate with Treasury and maintain oversight to prevent misuse or inefficient use of government funds.