[Code of Federal Regulations]

[Title 48, Volume 1]

[Revised as of October 1, 2005]

From the U.S. Government Printing Office via GPO Access

[CITE: 48CFR32.202-4]



[Page 655-656]

 

            TITLE 48--FEDERAL ACQUISITION REGULATIONS SYSTEM

 

                CHAPTER 1--FEDERAL ACQUISITION REGULATION

 

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)).



[[Page 656]]



    (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 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.