FAR 32.305—Loan guarantees for terminated contracts.
Plain-English Summary
FAR 32.305 addresses when the Government may guarantee loans to finance contracts that have been terminated, or are about to be terminated, for the convenience of the Government. It explains that the same basic loan-guarantee concept used for defense production financing can extend to termination financing, including situations where a contract has been totally terminated, partially terminated, or is known to be about to be terminated. The section also makes clear that these loans are intended to bridge the contractor’s cash needs while termination settlements are being negotiated and paid, and they may also support continued performance of other eligible defense production contracts. It points readers to the general procedures in FAR 32.304, but creates an important exception: certificates of eligibility are not required for totally terminated contracts or the terminated portion of partially terminated contracts. The section also requires the agency to protect the Government from loss and to ensure the loan will be repaid from proceeds of defense production contracts. Finally, it prohibits providing termination-financing guarantees until the specific terminations are certain, which is a key safeguard against premature or speculative financing.
Key Rules
Termination financing is allowed
Loan guarantees may be used to finance contracts that have been terminated, either totally or partially, for the convenience of the Government. They may also be used when a termination is known to be imminent, even before the formal termination occurs.
Purpose is bridge financing
These guaranteed loans are meant to provide working capital pending termination settlements and payments. They can also help finance continued performance on other defense production contracts that remain eligible for guaranteed loans.
General procedures still apply
The procedure for these guarantees is substantially the same as under FAR 32.304. That means the normal loan-guarantee framework still governs unless this section specifically changes it.
No eligibility certificate for terminated work
Certificates of eligibility are not required for contracts that have been totally terminated or for the terminated portion of partially terminated contracts. This removes a documentation step that otherwise applies in the standard loan-guarantee process.
Agency must protect the Government
The agency must take precautions needed to avoid Government losses. It must also ensure the loan will be self-liquidating from the proceeds of defense production contracts, meaning repayment should come from expected contract-related cash flow.
No guarantees until termination is certain
Loan guarantees for termination financing cannot be provided before specific contract terminations are certain. The Government may not commit to this financing based on speculation or an uncertain possibility of termination.
Responsibilities
Contracting Officer / Agency
Determine whether the contract termination is for the convenience of the Government and whether the termination is totally or partially complete, or sufficiently certain to justify financing. Apply the FAR 32.304 procedures as modified by this section, omit certificates of eligibility where allowed, and take precautions to prevent Government loss and ensure the loan is self-liquidating.
Borrower / Contractor
Use the guaranteed loan to cover financing needs tied to the terminated contract while awaiting settlement and payment, and to support any continuing eligible defense production work. The contractor must be able to show that the financing is tied to recoverable investment and that repayment can come from contract proceeds.
Agency financial and program officials
Evaluate the financial risk, verify that the loan structure will be repaid from defense production contract proceeds, and monitor the arrangement to reduce exposure to Government loss. They should also confirm that the termination is specific and certain before any guarantee is issued.
Lender / Financing institution
Structure the loan in accordance with the Government guarantee requirements and rely on the expected contract-related repayment stream. The lender must work within the agency’s safeguards and the applicable procedures for guaranteed loans.
Practical Implications
This section is mainly a cash-flow bridge for contractors facing termination, not a general rescue mechanism. It helps keep a contractor solvent while termination settlement amounts are being finalized.
A common pitfall is treating a likely termination as if it were already certain. FAR 32.305(c) requires specific terminations to be certain before termination-financing guarantees can be provided.
Another risk is assuming a certificate of eligibility is always needed. For totally terminated contracts and the terminated portion of partially terminated contracts, the certificate is not required.
Agencies need to be careful that the loan is truly self-liquidating. If repayment depends on uncertain or unrelated revenue, the guarantee may expose the Government to avoidable loss.
Contractors should expect close scrutiny of the relationship between the loan amount, the terminated work, and the expected settlement proceeds, especially where some contract performance continues and some has been terminated.
Official Regulatory Text
(a) The purpose of guaranteed loans; i.e., to provide for financing based on the borrower’s recoverable investment in defense production contracts, may also apply to contracts that have been terminated (partially or totally) for the convenience of the Government. Guaranteed loans also may be made before such termination if it is known that termination of particular contracts for the convenience of the Government is about to occur. These loans are expected to provide necessary financing pending termination settlements and payments. They may also finance continuing performance of defense production contracts that are eligible for guaranteed loans. (b) The procedure for such guarantees is substantially the same as that outlined in 32.304 , except that certificates of eligibility are not required for (1) contracts that have been totally terminated or (2) the terminated portion of contracts that have been partially terminated. The agency shall take precautions necessary to avoid Government losses and to ensure the loans will be self-liquidating from the proceeds of defense production contracts. (c) Loan guarantees for contract termination financing shall not be provided before specific contract terminations are certain.