[Code of Federal Regulations]
[Title 48, Volume 1]
[Revised as of October 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 48CFR32.202-4]

[Page 638-639]
 
            TITLE 48--FEDERAL ACQUISITION REGULATIONS SYSTEM
              (This book contains chapter 1, parts 1 to 51)

                CHAPTER 1--FEDERAL ACQUISITION REGULATION
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PART 32_CONTRACT FINANCING--Table of Contents
 
             Subpart 32.2_Commercial Item Purchase Financing
 
Sec. 32.202-4  Security for Government financing.

    (a) Policy. (1) 10 U.S.C. 2307(f) and 41 U.S.C. 255(f) require the 
Government to obtain adequate security for Government financing. The 
contracting officer shall specify in the solicitation the type of 
security the Government will accept. If the Government is willing to 
accept more than one form of security, the offeror shall be required to 
specify the form of security it will provide. If acceptable to the 
contracting officer, the resulting contract shall specify the security 
(see 32.206(b)(1)(iv)).
    (2) Subject to agency regulations, the contracting officer may 
determine the offeror's financial condition to be adequate security, 
provided the offeror agrees to provide additional security should that 
financial condition become inadequate as security (see paragraph (c) of 
the clause at 52.232-29, Terms for Financing of Purchases of Commercial 
Items). Assessment of the contractor's financial condition shall 
consider both net worth and liquidity. If the contracting officer finds 
the offeror's financial condition is not adequate security, the 
contracting officer shall require other adequate security. Paragraphs 
(b), (c), and (d) of this subsection list other (but not all) forms of 
security that the contracting officer may find acceptable.
    (3) The value of the security must be at least equal to the maximum 
unliquidated amount of contract financing payments to be made to the 
contractor. The value of security may be adjusted periodically during 
contract performance, as long as it is always equal to or greater than 
the amount of unliquidated financing.
    (b) Paramount lien. (1) The statutes cited in 32.201 provide that if 
the Government's security is in the form of a lien, such lien is 
paramount to all other liens and is effective immediately upon the first 
payment, without filing, notice, or other action by the United States.
    (2) When the Government's security is in the form of a lien, the 
contract shall specify what the lien is upon, e.g., the work in process, 
the contractor's plant, or the contractor's inventory. Contracting 
officers may be flexible in the choice of assets. The contract must

[[Page 639]]

also give the Government a right to verify the existence and value of 
the assets.
    (3) Provision of Government financing shall be conditioned upon a 
contractor certification that the assets subject to the lien are free 
from any prior encumbrances. Prior liens may result from such things as 
capital equipment loans, installment purchases, working capital loans, 
various lines of credit, and revolving credit arrangements.
    (c) Other assets as security. Contracting officers may consider the 
guidance at 28.203-2, 28.203-3, and 28.204 in determining which types of 
assets may be acceptable as security. For the purpose of applying the 
guidance in part 28 to this subsection, the term ``surety'' and/or 
``individual surety'' should be interpreted to mean ``offeror'' and/or 
``contractor.''
    (d) Other forms of security. Other acceptable forms of security 
include--
    (1) An irrevocable letter of credit from a federally insured 
financial institution;
    (2) A bond from a surety, acceptable in accordance with part 28 
(note that the bond must guarantee repayment of the unliquidated 
contract financing);
    (3) A guarantee of repayment from a person or corporation of 
demonstrated liquid net worth, connected by significant ownership to the 
contractor; or
    (4) Title to identified contractor assets of adequate worth.
    (e) Management of risk and security. In establishing contract 
financing terms, the contracting officer must be aware of certain risks. 
For example, very high amounts of financing early in the contract 
(front-end loading) may unduly increase the risk to the Government. The 
security and the amounts and timing of financing payments must be 
analyzed as a whole to determine whether the arrangement will be in the 
best interest of the Government.