32.407 Interest
Source: FAR 32.407 on acquisition.gov
FAR 32.407 requires contractors to pay interest on government advance payments at specified rates unless a regulatory exception applies, and prohibits reimbursement of such interest as a contract cost.
Overview
FAR 32.407 establishes the rules for charging interest on advance payments made by the government to contractors, except in certain specified cases. The regulation sets forth how interest rates are determined, when interest must be charged, and the exceptions where interest-free advances are permitted. It also addresses the treatment of interest in subcontracting situations and clarifies that interest charges required by this section are not allowable as reimbursable costs under cost-reimbursement contracts.
Key Rules
- Interest Rate Determination
- Interest on advance payments is charged at the higher of the depository's published prime rate or the rate set by the Secretary of the Treasury.
- Interest Rate Adjustments
- The interest rate must be adjusted for changes in the depository's prime rate and the Treasury rate, with monthly computations based on the daily unliquidated balance.
- Mandatory Interest for Certain Contracts
- Interest is required for contracts involving the acquisition of property for government ownership when linked to supply contracts or subcontracts.
- Exceptions to Interest Requirement
- Agency heads may authorize interest-free advances for specific contract types, such as research with nonprofits, management of government plants, cost-reimbursement contracts with governments, or other cases as authorized by agency procedures.
- Subcontractor Interest Charges
- Contractors may be required to charge interest on advances to subcontractors and credit the government, except for certain nonprofit institutions.
- Interest Not Reimbursable
- Interest charges required by this section are not allowable as reimbursable costs under cost-reimbursement contracts.
Responsibilities
- Contracting Officers: Must determine and apply the correct interest rate, monitor rate changes, ensure compliance with exceptions, and prevent reimbursement of interest charges.
- Contractors: Must comply with interest charges on advances, potentially charge interest to subcontractors, and not claim interest as a reimbursable cost.
- Agencies: May authorize exceptions and must ensure proper oversight of interest-free advances.
Practical Implications
- This section ensures the government is compensated for the use of its funds when providing advance payments, except in cases where waiving interest serves the public interest. Contractors must be vigilant in applying the correct rates and understanding when exceptions apply. Common pitfalls include failing to adjust rates, improperly claiming interest as a reimbursable cost, or misapplying exceptions.
(a) Except as provided in paragraph (d) of this section, the contracting officer shall charge interest on the daily unliquidated balance of all advance payments at the higher of-
(1) The published prime rate of the financial institution (depository) in which the special account (see 32.409-3) is established; or
(2) The rate established by the Secretary of the Treasury under 50 U.S.C. App.1215(b)(2).
(b) The interest rate for advance payments shall be adjusted for changes in the prime rate of the depository and the semiannual determination by the Secretary of the Treasury under 50 U.S.C. App.1215(b)(2). The contracting officer shall obtain data from the depository on changes in the interest rate during the month. Interest shall be computed at the end of each month on the daily unliquidated balance of advance payments at the applicable daily interest rate.
(c) Interest shall be required on contracts that are for acquisition, at cost, of property for Government ownership, if the contracts are awarded in combination with, or in contemplation of, supply contracts or subcontracts.
(d) The agency head or designee may authorize advance payments without interest under the following types of contracts, if in the Government’s interest:
(1) Contracts for experimental, research, or development work (including studies, surveys, and demonstrations in socio-economic areas) with nonprofit education or research institutions.
(2) Contracts solely for the management and operation of Government-owned plants.
(3) Cost-reimbursement contracts with governments, including State or local governments, or their instrumentalities.
(4) Other classes of contracts, or unusual cases, for which the exclusion of interest on advances is specifically authorized by agency procedures.
(e) If a contract provides for interest-free advance payments, the contracting officer may require the contractor to charge interest on advances or downpayments to subcontractors and credit the Government for the proceeds from the interest charges. Interest rates shall be determined as described in paragraphs (a) and (b) of this section. The contracting officer need not require the contractor to charge interest on an advance to a subcontractor that is an institution of the kind described in paragraph (d)(1) of this section.
(f) The contracting officer shall not allow interest charges, required by this 32.407, as reimbursable costs under cost-reimbursement contracts, whether the interest charge was incurred by the prime contractor or a subcontractor.