32.407
Interest
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.