FAR 32.304-5—Assignment of claims under contracts.
Plain-English Summary
FAR 32.304-5 addresses when a contractor must execute an assignment of claims in connection with a guaranteed loan, specifically in the defense production contract context. It explains the Government’s general expectation that a contractor receiving a guaranteed loan will assign contract proceeds to protect the loan, and it identifies three situations where the agency may decide not to require that assignment: when the contractor’s financial condition is strong enough that the protection is unnecessary, when additional assignments on smaller contracts would not materially improve protection beyond a major contract assignment, and when the administrative burden would be disproportionate to the protection gained. The section also covers the contractor’s separate duty to execute an assignment if the guarantor or financing institution requests it. Finally, it explains when a subcontract or purchase order is not eligible for financing under a guaranteed loan because the issuer reserves payment or setoff rights that would undermine the assignment. In practice, this rule is about protecting lenders and the Government while preventing unnecessary paperwork or overreach, and it affects how prime contracts, subcontracts, financing arrangements, and payment rights are structured.
Key Rules
General assignment required
When a contractor is provided a guaranteed loan, the agency will generally require an assignment of claims under defense production contracts. This includes contracts entered into during the loan term that are eligible for financing under the loan.
Financial strength exception
The agency may waive the assignment requirement if the contractor’s financial condition is strong enough that the Government does not need the added protection of an assignment of claims.
Limited value of extra assignments
If an assignment on a major contract already provides adequate protection, the agency may decide that additional assignments on smaller related contracts are unnecessary.
Administrative burden exception
The agency may decline to require an assignment when the paperwork and administration would be disproportionate to the protection gained, such as where the contractor has many small-dollar contracts.
Additional assignment on request
The contractor must also execute an assignment of claims if the guarantor or financing institution asks for one. This makes the contractor’s obligation broader than the agency’s initial requirement alone.
Subcontract eligibility limits
A subcontract or purchase order is not eligible for financing under a guaranteed loan if the issuer keeps the right to pay the assignor directly or jointly after notice of assignment, or keeps the right to reduce or set off assigned proceeds based on unrelated claims arising after notice.
Responsibilities
Agency
Generally require an assignment of claims for contractors receiving guaranteed loans under defense production contracts, unless one of the listed exceptions applies. The agency must also judge whether the contractor’s financial condition, the scope of existing assignments, or the administrative burden justifies waiving the requirement.
Contractor
Execute the assignment of claims when required by the agency, and also execute it if requested by the guarantor or financing institution. The contractor must structure financing arrangements and related contract documents so they remain eligible under the guaranteed loan rules.
Guarantor
May request that the contractor execute an assignment of claims to protect the guaranteed loan. The guarantor should evaluate whether the assignment is needed as part of the loan protection package.
Financing institution
May request an assignment of claims from the contractor and should ensure that the financing arrangement complies with the eligibility restrictions for subcontracts and purchase orders.
Subcontractor / seller under subcontract or purchase order
Must understand that financing eligibility can be lost if the issuing party reserves direct payment or setoff rights inconsistent with the assignment structure.
Issuer of subcontract or purchase order
Must avoid reserving payment or setoff rights that would make the subcontract or purchase order ineligible for financing under the guaranteed loan, if the goal is to preserve financing eligibility.
Practical Implications
Contractors seeking guaranteed loan financing should expect assignment-of-claims language to be part of the deal, especially on defense production work.
The agency has discretion, but contractors should not assume a waiver; they should be prepared to show strong financial condition or explain why additional assignments add little value.
A common pitfall is overlooking smaller related contracts that become eligible for financing during the loan term; those may also need to be assigned unless an exception applies.
Subcontract and purchase order terms matter: retaining direct-payment or setoff rights can unintentionally make the financing ineligible.
Financing parties should review payment and setoff clauses early, because eligibility can be lost by contract language that conflicts with the assignment structure.
Official Regulatory Text
(a) The agency shall generally require a contractor that is provided a guaranteed loan to execute an assignment of claims under defense production contracts (including any contracts entered into during the term of the guaranteed loan that are eligible for financing under the loan); however, the agency need not require assignment if any of the following conditions are present: (1) The contractor’s financial condition is so strong that the protection to the Government provided by an assignment of claims is unnecessary. (2) In connection with the assignment of claims under a major contract, the increased protection of the loan that would be provided by the assignments under additional, relatively smaller contracts is not considered necessary by the agency. (3) The assignment of claims would create an administrative burden disproportionate to the protection required; e.g., if the contractor has a large number of contracts with individually small dollar amounts. (b) The contractor shall also execute an assignment of claims if requested to do so by the guarantor or the financing institution. (c) A subcontract or purchase order issued to a subcontractor shall not be considered eligible for financing under guaranteed loans when the issuer of the subcontract or purchase order reserves- (1) The privilege of making payments directly to the assignor or to the assignor and assignee jointly, after notice of the assignment, or (2) The right to reduce or set off assigned proceeds under defense production contracts by reason of claims against the borrower arising after notice of assignment and independently of defense production contracts under which the borrower is the seller.