FAR 32.106—Order of preference.
Plain-English Summary
FAR 32.106 establishes the Government’s preferred sequence for considering contract financing when a contractor asks for it. It covers the order of preference among private financing without a Government guarantee, customary contract financing other than loan guarantees and certain advance payments, loan guarantees, unusual contract financing, and advance payments, including the exception in FAR 32.402(b). The rule exists to protect the Government by encouraging the least risky and least intrusive financing method that still allows the contractor to perform, while preserving flexibility to depart from the preference order when doing so is in the Government’s best interest. In practice, this section tells contracting officers how to evaluate financing requests and reminds contractors that Government financing is not automatic and is generally a last resort after less risky alternatives are considered. It also clarifies that the Government should not force a contractor into private financing on unreasonable terms or require financing from other agencies. The section is a decision-making framework, not a rigid mandate, so the contracting officer must document and justify any exception based on the specific circumstances of the procurement.
Key Rules
Follow the preference order
When a contractor requests financing, the contracting officer must consider financing options in the listed sequence: private financing, customary contract financing, loan guarantees, unusual contract financing, and advance payments. The order reflects the Government’s preference for lower-risk, less direct forms of support before more exceptional or costly methods are used.
Private financing comes first
The first preference is private financing without a Government guarantee. However, the contracting officer should not require the contractor to obtain private financing on unreasonable terms or from other agencies, so the preference is limited by practicality and fairness.
Customary financing is next
If private financing is not appropriate, the next preference is customary contract financing other than loan guarantees and certain advance payments. This category generally includes standard financing arrangements commonly used in federal contracting before moving to more exceptional tools.
Loan guarantees and unusual financing are lower preferences
Loan guarantees come after customary financing, and unusual contract financing comes after loan guarantees. These options are available when earlier alternatives are not suitable, but they are not the preferred starting point.
Advance payments are the last resort
Advance payments are the least preferred option and may be used only after the other financing methods are considered, subject to the exceptions in FAR 32.402(b). Because advance payments expose the Government to greater risk, they require careful justification and compliance with the applicable limitations.
Best-interest exceptions are allowed
The contracting officer may depart from the stated order of preference if an exception is in the Government’s best interest in a specific case. This means the rule is flexible, but any deviation should be based on the facts of the procurement and supported by a sound business judgment.
Responsibilities
Contracting Officer
Evaluate contractor financing requests using the FAR 32.106 order of preference, consider whether an exception is justified, avoid requiring unreasonable private financing or financing from other agencies, and select the financing method that best serves the Government’s interests in the specific case.
Contractor
When requesting contract financing, present the need for financing and be prepared to consider private financing or other lower-preference alternatives before seeking Government-supported financing such as guarantees, unusual financing, or advance payments.
Agency
Support contracting officers with policy, legal, and financial guidance so financing decisions are consistent with the FAR, prudent risk management, and the Government’s best interests.
Practical Implications
This section is mainly a sequencing rule: it does not create an entitlement to any particular financing method, but it does require the contracting officer to think through options in a specific order.
A common pitfall is treating private financing as mandatory in all cases; FAR 32.106 expressly warns against forcing contractors into unreasonable terms or into financing from other agencies.
Another risk is skipping documentation when departing from the preference order. If the Government chooses a lower-preference method first, the file should show why that approach was in the Government’s best interest.
Contractors should expect scrutiny if they request advance payments or unusual financing, because those options are less preferred and usually require stronger justification and closer oversight.
Contracting officers should coordinate with finance, legal, and program personnel early when financing is likely to be an issue, because the chosen method can affect pricing, risk, cash flow, and contract administration.
Official Regulatory Text
The contracting officer must consider the following order of preference when a contractor requests contract financing, unless an exception would be in the Government’s best interest in a specific case: (a) Private financing without Government guarantee. It is not intended, however, that the contracting officer require the contractor to obtain private financing- (1) At unreasonable terms; or (2) From other agencies. (b) Customary contract financing other than loan guarantees and certain advance payments (see 32.113 ). (c) Loan guarantees. (d) Unusual contract financing (see 32.114 ). (e) Advance payments (see exceptions in 32.402 (b)).