32.202-4 Security for Government financing.

(a) Policy.

(1) 10 U.S.C. 3805 and 41 U.S.C.4505 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 Products and Commercial Services). 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 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) Titleto 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.

Parent topic: 32.202 General.