FAR 32.304-3—Asset formula.
Plain-English Summary
FAR 32.304-3 explains how an agency should limit the Government’s exposure when it guarantees loans made primarily to provide working capital for defense production contracts. The core concept is the "asset formula," which caps the guarantee at a percentage of the contractor’s investment in contract-related assets, generally 90 percent or less. This section also identifies what may be counted in the formula, what must be excluded, and how progress payments reduce the amount available under the formula. Finally, it gives the agency limited discretion to relax the formula when the contractor’s working capital and credit are inadequate and the extra flexibility is needed for the time actually required to perform the contract. In practice, this provision is meant to balance two goals: helping a contractor obtain financing to perform defense work, while preventing the Government from guaranteeing more debt than is reasonably supported by the contractor’s actual contract-related investment.
Key Rules
Cap the guarantee amount
For guaranteed loans made primarily for working capital purposes, the agency should normally limit the guarantee to no more than a specified percentage of the contractor’s investment in defense production contracts. The ceiling is 90 percent or less, so the agency cannot routinely guarantee the full amount of the contractor’s contract-related exposure.
Use an asset formula
The guarantee limit is determined by an asset formula tied to the contractor’s investment in defense production contracts, such as payrolls and inventories. The formula is intended to measure actual contract-related assets or expenditures that support performance.
Include eligible contract items
The formula may include all items under defense contracts for which the contractor would be entitled to payment on performance or termination. This allows the agency to count contract-related amounts that are genuinely at risk and supported by performance or termination rights.
Exclude unsupported amounts
The formula must exclude amounts for which the contractor has not done any work or made any expenditure, amounts that would only become due from later performance, and cash collateral or bank deposit balances. These items do not represent current investment supporting the working capital need.
Deduct progress payments
Any progress payments must be subtracted from the asset formula. This prevents the contractor from counting amounts already advanced by the Government as if they were still part of the contractor’s own investment.
Allow limited relaxation
The agency may relax the asset formula to the extent appropriate for the time actually necessary for contract performance if the contractor’s working capital and credit are inadequate. This is a discretionary exception, not a default rule, and it should be tailored to the performance period actually needed.
Responsibilities
Agency
Establish and apply an asset formula when guaranteeing loans for working capital purposes, normally limiting the guarantee to 90 percent or less of the contractor’s investment in defense production contracts. The agency must exclude non-qualifying amounts, deduct progress payments, and decide whether a limited relaxation is justified based on inadequate working capital and credit and the time actually needed for performance.
Contracting Officer / Loan-Approving Official
Evaluate the contractor’s contract-related assets, progress payments, and financing need to determine the appropriate guarantee limit. The official must ensure the formula is applied correctly and document any decision to relax the formula.
Contractor
Provide accurate information about contract-related investments, expenditures, inventories, payrolls, progress payments, and available credit. The contractor must support any request for a relaxed formula by showing inadequate working capital and credit and by demonstrating the financing need is tied to actual performance requirements.
Practical Implications
Contractors should expect the guarantee to be tied to real, current contract investment—not to projected future earnings or unearned amounts.
Progress payments reduce the amount available under the formula, so contractors cannot double-count Government advances as part of their own support base.
A request to relax the formula is discretionary and should be narrowly justified; contractors need evidence of inadequate working capital and credit, not just a preference for more financing.
Contracting and loan officials should carefully distinguish between amounts already earned or expended and amounts that depend on future performance, because that distinction drives what can be counted.
Cash balances and collateral accounts generally do not help increase the formula, so contractors should not assume liquid funds automatically expand guaranteed borrowing capacity.
Official Regulatory Text
(a) Under guaranteed loans made primarily for working capital purposes, the agency shall normally limit the guarantee, by use of an asset formula, to an amount that does not exceed a specified percentage (90 percent or less) of the contractor’s investment ( e.g., payrolls and inventories) in defense production contracts. The asset formula may include all items under defense contracts for which the contractor would be entitled to payment on performance or termination. The formula shall exclude- (1) Amounts for which the contractor has not done any work or made any expenditure; (2) Amounts that would become due as the result of later performance under the contracts; and (3) Cash collateral or bank deposit balances. (b) Progress payments are deducted from the asset formula. (c) The agency may relax the asset formula to an appropriate extent for the time actually necessary for contract performance, if the contractor’s working capital and credit are inadequate.