Subpart 32.2 - Commercial Product and

Commercial Service Purchase Financing

Parent topic: Part 32 - Contract Financing

32.200 Scope of subpart.

This subpart provides policies and procedures for commercial financing arrangements under

commercial purchases pursuant to part 12.

32.201 Statutory authority.

10 U.S.C. 3805 and 41 U.S.C.4505 provide that payment for commercial products or commercial

services may be made under such terms and conditions as the head of the agency determines are

appropriate or customary in the commercial marketplace and are in the best interest of the United

States.

32.202 General.

32.202-1 Policy.

(a) Use of financing in contracts. It is the responsibility of the contractor to provide all resources

needed for performance of the contract. Thus, for purchases of commercial products or commercial

services, financing of the contract is normally the contractor’s responsibility. However, in some

markets the provision of financing by the buyer is a commercial practice. In these circumstances,

the contracting officer may include appropriate financing terms in contracts for commercial

purchases when doing so will be in the best interest of the Government.

(b) Authorization. Commercial interim payments and commercial advance payments may be made

under the following circumstances-

(1) The contract item financed is a commercial supply or service;

(2) The contract price exceeds the simplified acquisition threshold;

(3) The contracting officer determines that it is appropriate or customary in the commercial

marketplace to make financing payments for the item;

(4) Authorizing this form of contract financing is in the best interest of the Government (see

paragraph (e) of this sub-section);

(5) Adequate security is obtained (see 32.202-4);

(6) Prior to any performance of work under the contract, the aggregate of commercial advance

payments shall not exceed 15 percent of the contract price;
(7) The contract is awarded on the basis of competitive procedures or, if only one offer is solicited,

adequate consideration is obtained (based on the time value of the additional financing to be

provided) if the financing is expected to be substantially more advantageous to the offeror than the

offeror’s normal method of customer financing; and

(8) The contracting officer obtains concurrence from the payment office concerning liquidation

provisions when required by 32.206(e).

(c) Difference from other than commercial financing. Government financing of commercial

purchases under this subpart is expected to be different from that used for other than commercial

purchases under subpart 32.1 and its related subparts. While the contracting officer may adapt

techniques and procedures from the other than commercial subparts for use in implementing

commercial contract financing arrangements, the contracting officer must have a full understanding

of effects of the differing contract environments and of what is needed to protect the interests of the

Government in commercial contract financing.

(d) Unusual contract financing. Any contract financing arrangement not in accord with the

requirements of agency regulations or this part is unusual contract financing and requires advance

approval in accordance with agency procedures. If not otherwise specified, such unusual contract

financing shall be approved by the head of the contracting activity.

(e) Best interest of the Government. The statutes cited in 32.201 do not allow contract financing by

the Government unless it is in the best interest of the United States. Agencies may establish

standards to determine whether contract financing is in the best interest of the Government. These

standards may be for certain types of procurements, certain types of items, or certain dollar levels of

procurements.

32.202-2 Types of payments for commercial product and commercial service

purchases.

These definitions incorporate the requirements of the statutory commercial financing authority and

the implementation of the Prompt Payment Act.

Commercial advance payment, as used in this section, means a payment made before any

performance of work under the contract. The aggregate of these payments shall not exceed 15

percent of the contract price. These payments are contract financing payments for prompt payment

purposes (i.e., not subject to the interest penalty provisions of the Prompt Payment Act in

accordance with subpart 32.9). These payments are not subject to subpart 32.4, Advance Payments

for Other Than Commercial Acquisitions.

Commercial interim payment (see 32.001).

Delivery payment (see 32.001).

32.202-3 Conducting market research about financing terms.

Contract financing may be a subject included in the market research conducted in accordance with

part 10. If market research for contract financing is conducted, the contracting officer should

consider-
(a) The extent to which other buyers provide contract financing for purchases in that market;

(b) The overall level of financing normally provided;

(c) The amount or percentages of any payments equivalent to commercial advance payments (see

32.202-2);

(d) The basis for any payments equivalent to commercial interim payments (see 32.001), as well as

the frequency, and amounts or percentages; and

(e) Methods of liquidation of contract financing payments and any special or unusual payment terms

applicable to delivery payments (see 32.001).

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.

32.203 Determining contract financing terms.

When the criteria in 32.202-1(b) are met, the contracting officer may either specify the financing

terms in the solicitation (see 32.204) or permit each offeror to propose its own customary financing

terms (see 32.205). When the contracting officer has sufficient information on financing terms that

are customary in the commercial marketplace for the item, those terms may be specified in the

solicitation.

32.204 Procedures for contracting officer-specified

commercial contract financing.

The financing terms shall be included in the solicitation. Contract financing shall not be a factor in

the evaluation of resulting proposals, and proposals of alternative financing terms shall not be

accepted (but see 14.208 and 15.206 concerning amendments of solicitations). However, an offer

stating that the contracting officer-specified contract financing terms will not be used by the offeror

does not alter the evaluation of the offer, nor does it render the offer nonresponsive or otherwise

unacceptable. In the event of award to an offeror who declined the proposed contract financing, the

contract financing provisions shall not be included in the resulting contract. Contract financing shall

not be a basis for adjusting offerors’ proposed prices, because the effect of contract financing is

reflected in each offeror’s proposed prices.
32.205 Procedures for offeror-proposed commercial contract

financing.

(a) Under this procedure, each offeror may propose financing terms. The contracting officer must

then determine which offer is in the best interests of the United States.

(b) Solicitations. The contracting officer must include in the solicitation the provision at 52.232-31,

invitation to Propose Financing Terms. The contracting officer must also-

(1) Specify the delivery payment (invoice) dates that will be used in the evaluation of financing

proposals; and

(2) Specify the interest rate to be used in the evaluation of financing proposals (see paragraph (c)(4)

of this section).

(c) Evaluation of proposals.

(1) When contract financing terms vary among offerors, the contracting officer must adjust each

proposed price for evaluation purposes to reflect the cost of providing the proposed financing in

order to determine the total cost to the Government of that particular combination of price and

financing.

(2) Contract financing results in the Government making payments earlier than it otherwise would.

In order to determine the cost to the Government of making payments earlier, the contracting officer

must compute the imputed cost of those financing payments and add it to the proposed price to

determine the evaluated price for each offeror.

(3) The imputed cost of a single financing payment is the amount of the payment multiplied by the

annual interest rate, multiplied by the number of years, or fraction thereof, between the date of the

financing payment and the date the amount would have been paid as a delivery payment. The

imputed cost of financing is the sum of the imputed costs of each of the financing payments.

(4) The contracting officer must calculate the time value of proposal-specified contract financing

arrangements using as the interest rate the nominal discount rate specified in AppendixC of the

Office of Management and Budget (OMB) CircularA-94, "Guidelines and Discount Rates for BenefitCost Analysis of Federal Programs," appropriate to the period of contract financing. Where the

period of proposed financing does not match the periods in the OMB Circular, the interest rate for

the period closest to the finance period shall be used. AppendixC is updated yearly, and is available

from the Office of Economic Policy in the Office of Management and Budget (OMB).

32.206 Solicitation provisions and contract clauses.

(a) The contract shall contain the paragraph entitled "Payment" of the clause at 52.212-4, Contract

Terms and Conditions-Commercial Products and Commercial Services. If the contract will provide

for contract financing, the contracting officer shall construct a solicitation provision and contract

clause. This solicitation provision shall be constructed in accordance with 32.204 or 32.205. If the

procedure at 32.205 is used, the solicitation provision at 52.232-31, invitation to Propose Financing

Terms, shall be included. The contract clause shall be constructed in accordance with the
requirements of this subpart and any agency regulations.

(b) Each contract financing clause shall include:

(1) A description of the-

(i) Computation of the financing payment amounts (see paragraph (c) of this section);

(ii) Specific conditions of contractor entitlement to those financing payments (see paragraph (c) of

this section);

(iii) Liquidation of those financing payments by delivery payments (see paragraph (e) of this section);

(iv) Security the contractor will provide for financing payments and any terms or conditions

specifically applicable thereto (see 32.202-4); and

(v) Frequency, form, and any additional content of the contractor’s request for financing payment (in

addition to the requirements of the clause at 52.232-29, Terms for Financing of Purchases of

Commercial Products and Commercial Services; and

(2) Unless agency regulations authorize alterations, the unaltered text of the clause at 52.232-29,

Terms for Financing of Purchases of Commercial Products and Commercial Services.

(c) Computation of amounts, and contractor entitlement provisions.

(1) Contracts shall provide that delivery payments shall be made only for completed supplies and

services accepted by the Government in accordance with the terms of the contract. Contracts may

provide for commercial advance and commercial interim payments based upon a wide variety of

bases, including (but not limited to) achievement or occurrence of specified events, the passage of

time, or specified times prior to the delivery date(s). The basis for payment must be objectively

determinable. The clause written by the contracting officer shall specify, to the extent access is

necessary, the information and/or facilities to which the Government shall have access for the

purpose of verifying the contractor’s entitlement to payment of contract financing.

(2) If the contract is awarded using the offeror-proposed procedure at 32.205, the clause

constructed by the contracting officer under paragraph (b)(1) of this section shall contain the

following:

(i) A statement that the offeror’s proposed listing of earliest times and greatest amounts of projected

financing payments submitted in accordance with paragraph (d)(2) of the provision at 52.232-31,

invitation to Propose Financing Terms, is incorporated into the contract, and

(ii) A statement that financing payments shall be made in the lesser amount and on the later of the

date due in accordance with the financing terms of the contract, or in the amount and on the date

projected in the listing of earliest times and greatest amounts incorporated in the contract.

(3) If the security accepted by the contracting officer is the contractor’s financial condition, the

contracting officer shall incorporate in the clause constructed under paragraph (b)(1) of this section

the following-

(i) A statement that the contractor’s financial condition has been accepted as adequate security for

commercial financing payments; and
(ii) A statement that the contracting officer may exercise the Government’s rights to require other

security under paragraph (c), Security for Government Financing, of the clause at 52.232-29, Terms

for Financing of Purchases of Commercial Products and Commercial Services, in the event the

contractor’s financial condition changes and is found not to be adequate security.

(d) Instructions for multiple appropriations. If contract financing is to be computed for the contract

as a whole, and if there is more than one appropriation account (or subaccount) funding payments

under the contract, the contracting officer shall include, in the contract, instructions for distribution

of financing payments to the respective funds accounts. Distribution instructions and contract

liquidation instructions must be mutually consistent.

(e) Liquidation. Liquidation of contract financing payments shall be on the same basis as the

computation of contract financing payments; that is, financing payments computed on a whole

contract basis shall be liquidated on a whole contract basis; and a payment computed on a line item

basis shall be liquidated against that line item. If liquidation is on a whole contract basis, the

contracting officer shall use a uniform liquidation percentage as the liquidation method, unless the

contracting officer obtains the concurrence of the cognizant payment office that the proposed

liquidation provisions can be executed by that office, or unless agency regulations provide

alternative liquidation methods.

(f) Prompt payment for commercial purchase payments. The provisions of subpart 32.9, Prompt

Payment, apply to contract financing and invoice payments for commercial purchases in the same

manner they apply to other than commercial purchases. The contracting officer is responsible for

including in the contract all the information necessary to implement prompt payment. In particular,

contracting officers must be careful to clearly differentiate in the contract between contract

financing and invoice payments and between items having different prompt payment times.

(g) Installment payment financing for commercial products and commercial services. Contracting

officers may insert the clause at 52.232-30, Installment Payments for Commercial Products and

Commercial Services, in solicitations and contracts in lieu of constructing a specific clause in

accordance with paragraphs (b) through (e) of this section, if the contract action qualifies under the

criteria at 32.202-1(b) and installment payments for the item are either customary or are authorized

in accordance with agency procedures.

(1) Description. Installment payment financing is payment by the Government to a contractor of a

fixed number of equal interim financing payments prior to delivery and acceptance of a contract

item. The installment payment arrangement is designed to reduce administrative costs. However, if

a contract will have a large number of deliveries, the administrative costs may increase to the point

where installment payments are not in the best interests of the Government.

(2) Authorized types of installment payment financing and rates. Installment payments may be made

using the clause at 52.232-30, Installment Payments for Commercial Products and Commercial

Services, either at the 70 percent financing rate cited in the clause or at a lower rate in accordance

with agency procedures.

(3) Calculating the amount of installment financing payments. The contracting officer shall identify

in the contract schedule those items for which installment payment financing is authorized. Monthly

installment payment amounts are to be calculated by the contractor pursuant to the instructions in

the contract clause only for items authorized to receive installment payment financing.

(4) Liquidating installment payments. If installment payments have been made for an item, the

amount paid to the contractor upon acceptance of the item by the Government shall be reduced by
the amount of installment payments made for the item. The contractor’s request for final payment

for each item is required to show this calculation.

32.207 Administration and payment of commercial financing

payments.

(a) Responsibility. The contracting officer responsible for administration of the contract shall be

responsible for review and approval of contract financing requests.

(b) Approval of financing requests. Unless otherwise provided in agency regulations, or by

agreement with the appropriate payment official-

(1) The contracting officer shall be responsible for receiving, approving, and transmitting all

contract financing requests to the appropriate payment office; and

(2) Each approval shall specify the amount to be paid, necessary contractual information, and the

account(s) (see 32.206(d)) to be charged for the payment.

(c) Management of security. After contract award, the contracting officer responsible for approving

requests for financing payments shall be responsible for determining that the security continues to

be adequate. If the contractor’s financial condition is the Government’s security, this contracting

officer is also responsible for monitoring the contractor’s financial condition.