FAR 32.110—Payment of subcontractors under cost-reimbursement prime contracts.
Plain-English Summary
FAR 32.110 explains when a contracting officer may treat a contractor’s financing payments to a subcontractor as allowable reimbursable costs under a cost-reimbursement prime contract. It addresses three possible subcontract financing methods: customary progress payments based on costs, commercial product or commercial service purchase financing, and performance-based payments. It also ties reimbursement to specific safeguards, including the applicable progress payment rate, approval of unusual progress payments when needed, compliance with liquidation principles for progress payments and performance-based payments, and inclusion of proper financing payment terms in the subcontract. In practice, this section is meant to prevent the Government from reimbursing subcontract financing arrangements that are more generous or less controlled than FAR permits, while still allowing legitimate subcontract financing to support contract performance. For contractors, it is a cost allowability and subcontract administration rule; for contracting officers, it is a gatekeeping standard for deciding whether those financing payments can be accepted as prime contract costs.
Key Rules
Only certain financing methods qualify
The contracting officer should accept subcontract financing payments as reimbursable prime contract costs only when the payments are made under the criteria for customary progress payments based on costs, commercial product or commercial service purchase financing, or performance-based payments, as applicable. If the subcontract financing does not fit one of these FAR-authorized methods, the prime contractor generally should not expect reimbursement.
Progress payments must stay within rate limits
When customary progress payments are used, the subcontractor’s payments may not exceed the progress payment rate in FAR 32.501-1 unless unusual progress payments have been approved under FAR 32.501-2. This prevents the prime from passing through overly aggressive financing terms to the Government without prior approval.
Progress payment liquidation rules apply
If customary progress payments are made, the subcontractor must comply with the liquidation principles in FAR 32.503-8, 32.503-9, and 32.503-10. These rules ensure the financing is properly recovered through contract performance and that the Government is not left funding costs beyond the intended repayment structure.
Performance-based payment liquidation must be followed
If performance-based payments are used, the subcontractor must comply with the liquidation principles in FAR 32.1004(d). The payment structure must therefore be tied to the FAR’s required liquidation treatment, not just to milestone completion in a general sense.
Subcontract terms must authorize financing
The subcontract must contain financing payment terms prescribed by FAR Part 32. This means the subcontract cannot merely mention financing in general terms; it must include the specific clauses and terms needed to make the financing arrangement compliant and enforceable under the FAR.
Responsibilities
Contracting Officer
Determine whether subcontract financing payments under a cost-reimbursement prime contract may be accepted as reimbursable costs. Verify that the financing method is authorized by FAR Part 32, that any progress payment rate limits are respected or properly approved, and that the subcontract includes the required financing terms and liquidation provisions.
Prime Contractor
Structure subcontract financing in accordance with FAR Part 32 if it expects reimbursement from the Government. Ensure the subcontract uses an authorized financing method, does not exceed applicable progress payment limits unless approved, and includes the required financing payment terms and liquidation requirements.
Subcontractor
Accept and administer financing payments in accordance with the applicable FAR liquidation principles and the financing terms written into the subcontract. Comply with the payment structure so the financing can be properly liquidated and supported for reimbursement purposes.
Agency/Government
Through the contracting officer, apply the FAR reimbursement conditions consistently and avoid reimbursing subcontract financing that does not meet the required standards. Approve unusual progress payments only when justified under the applicable FAR procedures.
Practical Implications
This section is a reimbursement filter: even if a prime contractor actually pays a subcontractor, the Government will only treat that payment as an allowable prime contract cost if the financing arrangement fits FAR Part 32.
A common pitfall is assuming any subcontract advance or progress payment is reimbursable under a cost-reimbursement prime contract; the financing method must match the FAR-authorized categories and the subcontract must be properly drafted.
Another frequent issue is exceeding the normal progress payment rate without obtaining approval for unusual progress payments, which can make the excess amount nonreimbursable or create audit problems.
Contractors should confirm that liquidation terms are built into the subcontract and that accounting systems can track the recovery of financing payments correctly; otherwise, the prime may have difficulty supporting its cost claim.
Contracting officers should review subcontract financing terms early, because missing clauses or noncompliant payment structures can affect cost allowability, cash flow, and the Government’s risk exposure.
Official Regulatory Text
If the contractor makes financing payments to a subcontractor under a cost-reimbursement prime contract, the contracting officer should accept the financing payments as reimbursable costs of the prime contract only under the following conditions: (a) The payments are made under the criteria in subpart 32.5 for customary progress payments based on costs, 32.202-1 for commercial product or commercial service purchase financing, or 32.1003 for performance-based payments, as applicable. (b) If customary progress payments are made, the payments do not exceed the progress payment rate in 32.501-1 , unless unusual progress payments to the subcontractor have been approved in accordance with 32.501-2 . (c) If customary progress payments are made, the subcontractor complies with the liquidation principles of 32.503-8 , 32.503-9 , and 32.503-10 . (d) If performance-based payments are made, the subcontractor complies with the liquidation principles of 32.1004 (d). (e) The subcontract contains financing payments terms as prescribed in this part.