FAR 32.005—Consideration for contract financing.
Plain-English Summary
FAR 32.005 explains how the Government must treat consideration when contract financing is included in a contract, and what happens if financing is added or changed after award. It covers three main topics: the rule that no separate consideration is required when a financing clause is included at the outset; how the value of that financing is expected to be reflected in the contract price or in other more favorable contract terms for the Government; and the requirement for adequate new consideration when financing is later added or modified. It also addresses how to judge whether new consideration is adequate, including the use of monetary or nonmonetary consideration and the factors a contracting officer should use when exact pricing information is unavailable. Finally, it prohibits charging separate interest or similar specific charges for contract financing except as allowed under the advance payment rules in FAR subpart 32.4. In practice, this section protects the Government from paying twice for financing, while giving contracting officers a framework for evaluating whether post-award financing changes are supported by fair and reasonable consideration.
Key Rules
No separate consideration at award
If a contract financing clause is included when the contract is first awarded, the contractor does not receive separate consideration just for that clause. The financing value is expected to be built into the overall bargain through price or other contract terms.
Financing value must be reflected
The benefit of contract financing should show up either as a lower bid or negotiated price than would otherwise be offered, or as other contract terms and conditions that are more favorable to the Government than they would have been without financing.
New consideration for later changes
If contract financing is added or changed after award, the contractor must provide adequate new consideration. This prevents the contractor from receiving additional financing benefits without giving something of value in return.
Adequacy of consideration
New consideration may be monetary or nonmonetary, but it must be fair and reasonable. The amount should generally approximate the price reduction that would have been expected if the financing terms had been included in the original contract.
Evaluation factors for COs
When there is no definite information to measure the expected price effect, the contracting officer should consider the contractor’s expected financing benefit based on the amount and duration of financing, using imputed financial costs of equivalent working capital and the estimated profit rate from performance.
No separate interest charges
Except where allowed under FAR subpart 32.4 for advance payments in noncommercial acquisitions, the contract may not include separate charges such as interest for contract financing.
Responsibilities
Contracting Officer
Ensure that no separate consideration is paid for financing included at contract inception; confirm that the financing benefit is reflected in price or other favorable terms; require adequate new consideration before approving any post-award addition or change to financing; and evaluate whether proposed consideration is fair and reasonable using the regulatory factors when exact pricing evidence is unavailable.
Contractor
Account for the value of contract financing in the initial offer or negotiated terms when financing is included from the start; provide adequate new consideration if financing is added or modified after award; and avoid proposing separate interest or similar charges unless specifically authorized by the applicable advance payment rules.
Agency
Apply contract financing policies consistently so the Government does not pay separately for financing already embedded in the contract bargain; support contracting officers with pricing, financial, and legal review as needed; and ensure financing arrangements comply with FAR subpart 32.4 when advance payments are involved.
Practical Implications
At award, financing is treated as part of the overall deal, not as a separately priced line item, so contracting officers should look for the financing effect in the price or in other contract terms.
If financing is added after award, the Government should not grant it for free; the file should show what new consideration was received and why it is adequate.
A common pitfall is treating financing as if it were a separate fee or interest charge. FAR 32.005 generally forbids that unless a specific advance-payment rule applies.
Another risk is failing to document the basis for adequacy when the price effect of financing is not obvious. The contracting officer should explain the analysis using the amount, duration, working-capital cost, and expected profit factors.
Contractors should understand that financing can affect competitiveness and negotiated pricing, but they should not expect a separate payment simply because financing is included in the contract.
Official Regulatory Text
(a) Requirement. When a contract financing clause is included at the inception of a contract, there shall be no separate consideration for the contract financing clause. The value of the contract financing to the contractor is expected to be reflected in either (1)a bid or negotiated price that will be lower than such price would have been in the absence of the contract financing, or (2) contract terms and conditions, other than price, that are more beneficial to the Government than they would have been in the absence of the contract financing. Adequate new consideration is required for changes to, or the addition of, contract financing after award. (b) Amount of new consideration. The contractor may provide new consideration by monetary or nonmonetary means, provided the value is adequate. The fair and reasonable consideration should approximate the amount by which the price would have been less had the contract financing terms been contained in the initial contract. In the absence of definite information on this point, the contracting officer should apply the following criteria in evaluating whether the proposed new consideration is adequate: (1) The value to the contractor of the anticipated amount and duration of the contract financing at the imputed financial costs of the equivalent working capital. (2) The estimated profit rate to be earned through contract performance. (c) Interest. Except as provided in subpart 32.4 , Advance Payments for Other Than Commercial Acquisitions, the contract shall not provide for any other type of specific charges, such as interest, for contract financing.