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  • Question

    Can you execute an assignment of claims instrument for commerical item financing payments? I read FAR 32.805 and I don't see where it is prohibited.


    Answer

    No. It is not in the government’s best interest to execute an assignment of claims for commercial item financing payments.
     
    Government financing of commercial purchases is expected to be different from that used for noncommercial purchases. While the contracting officer may adapt techniques and procedures from the non-commercial contract financing arrangements, the Contracting Officer must have a full understanding of the effects of the differing contract environments and of what is needed to protect the interest of the government in commercial contract financing  FAR 32.202-1(c). Sound business judgment is required to manage the risk involved with administrating a contract with financing for commercial items.  
     
    Normally, a contractor is responsible for providing all the resources needed to perform a contract for commercial items. However, in some markets financing by the buyer is a commercial practice. So, in that circumstance, the contracting officer may finance commercial item purchases, FAR 32.202-1, but note that subsection (e) prohibits contract financing unless it is in the best interest of the government.
     
    In your case, the government is financing the contractor with installment payments, i.e., money is being disbursed to the contractor prior to the government’s acceptance of the commercial item. FAR 32.001.  Now, even while continuing to receive government financing, the contractor wants MORE financing and hopes to get it by giving its installment payments to a bank in exchange for a loan. There is not enough time to discuss all the many reasons why this is inappropriate, so I’ve choose the two most compelling and interesting:  
     
    First, the government permits assignment of claims for the purpose of AIDING THE CONTRACTOR IN SECURING PRIVATE FINANCING [emphasis added]. FAR 32.000(e).  The government pays the bank (instead of the contractor) the monies due under the contract. Why? To enable the contractor to use the contract as collateral to secure a loan with the bank to finance performance under the contract. This is private financing and preferred by the government.  In your case, since the government is already financing the contractor with installment payments, the purpose of executing an assignment (to aid the contractor in securing private financing) is absent. You could however, terminate the installment payments and then execute an assignment of claims for the balance due the contractor upon government acceptance of the commercial items. But, if the contractor continues to receive government financing, any additional financing should be secured independently of the government.
     
    Second, under 31U.S. Code 3727 a “claim” is a right that can be demanded, for example, claiming the right to be paid by the government after it accepts your delivery of goods. Conversely, there is no right to receive contract financing! A contractor cannot demand that the government finance its contract, nor  successfully submit a claim if the government refuses to give it financing.
     
    Warning! It sounds like your  contractor might be having financial problems and looking to the government to increase its risk to help solve them. I suggest you investigate why the contractor needs to “doubly” finance its performance on the contract with both installment payments and an assignment of claims. Is the contractor holding too much debt or working under optimal capacity? Does the contractor lack sufficient working capital to complete performance? Is there a real risk of default? If so, remember to stop or reduce the amount of the installment payments until the government’s interest is securely protected and delivery of the partially financed items is assured.

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