Is there anything from a regulatory standpoint that does not allow for consignment contracts. I do not find consignment contracts addressed in the FAR.
Consignment agreements are not addressed in the FAR. They are used sparingly and only for a very limited purpose. We found nothing regulatory that prohibits the use of these types of agreements, however, they should be used only when this method of acquisition is determined to be in the best interests of the government. Given that you work for DoD you should seek approval from your Head of the Contracting Activity (HCA).
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A consignment agreement is an agreement (not a contract) for a specified period of time under which a vendor provides an item(s) for government use and the vendor receives reimbursement only if and when the government actually uses the item. Unused items are returned to the vendor at the end of the effective period of the agreement without reimbursement or other expense to the Government.
For your information, policy/guidance on consignment agreement use within the federal government is scarce. For your reference, the only relatively current guidance comes from the Department of Veterans Affairs where consignment agreements are in limited use primarily for non-biological implantable devices. The Veterans Affairs Acquisition Regulation (VAAR) prior to 2008 covered consignment agreements under section 870.108-2 however the language was removed during a VAAR plain language rewrite in 2008. The current version of the VAAR mentions review of consignment agreements in passing under 801.602-72(8). There is a Veteran's Health Administration Directive 2009-062, "Management of Non-Biological Implantable Devices" dated 23 November 2009 that does address consignment agreements use within the VA.