What limitations exist on the government right to set offs under the Assignment of Claims Act?
By way of background, an assignment of claims permits contractors to assign claims on Government contracts to financing institutions as collateral for loans. As the contractor earns compensation for partial supplies or services
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rendered under the contract, the contractor can request that these payments be made (assigned) directly to a financial institution. When a contractor owes the Government money (past due taxes, overpayments, liquidated damages), the Government contracting officer can deduct that amount from the payments due to the financial institution on behalf of the contractor. This process is called a "setoff." The setoff is an inherent part of an assignment of claims.
The basic clause at FAR 52.232-23 assumes that a setoff can be utilized by the Government. Alternate I of the basic clause is required when a no-setoff commitment will be included in the contract. So, the default for an assignment of claims is to include the setoff. In DoD, Alternate I of the clause is to be used unless an exception applies. Please check GSA's FAR supplement and legal counsel to determine your agency's specific policy on setoffs.