To assign or not to assign: the FAR and the Federal Assignment of Claims Act - Myth and Reality

Law, regulations protect contractors' rights to assign accounts receivable under federal contracts

By Cameron McRae, Vice President of Commercial Lending, Acacia Federal Savings Bank

Once in a while, a company doing business with agencies of the federal government will express reluctance to assigning its accounts receivable from those contracts under the Federal Assignment of Claims Act (FACA). The reason usually stated for such reluctance is the fear that the contracting officers of the firm's government clients will view such assignments as evidence of financial weakness of the firm. In some cases, the company may perceive that the process of assignment will impose a paper-work burden on the company, will slow down the flow of payments from its clients, or both. In a few cases, the contractor may voice all of the above objections to assigning.

The importance of knowing the FAR
If a contracting officer is adversely influenced by the contractor's assignment under the FACA, that contracting officer may either be unaware of Subpart 32 of the FAR or ignoring the provisions of Subparts 32.106 and 32.107 of that regulation.

FAR Subpart 106, Order of Preference, reads in part as follows:

"The contracting officer shall consider the following order of preference when a contractor requests contract financing, unless the exception would be in the Government's best interest in a specific case:

1. Private financing without a Government guarantee. It is not intended, however, that the contractor be required to obtain private financing
   
   1. At unreasonable rates, or
      
   2. From other agencies."

FAR Subpart 107, Need for Contract Financing Not a Deterrent, reads in part as follows:

1. "If a contractor or offeror meets the standards prescribed for responsible prospective contractors at (FAR) 9.104, the contracting officer shall not treat the contractor's need for contract financing as a handicap for a contract award; e.g., as a responsibility factor or evaluation criterion,
   
2. The contractor should not be disqualified from contract financing solely because the contractor failed to indicate a need for contract financing before the contract was awarded."

Therefore, both the law and the regulations protect the contractor's right and freedom to assign its accounts receivable under its contracts with the federal government.

Multiple documents need to be signed
Depending on the circumstances, the paper work required of the contractor in the assignment process can involve signing between one and seven documents for each contract assigned. All of the documents should be prepared by the lender, thereby limiting the burden on the contractor to signing. If an existing assignment does not have to be released in order to assign to a new lender, and depending on the practice of the new lender, the signatures required of the contractor may be only one or up to three per contract.

The assignment process could cause some disruption to the payment flow, but those delays will normally be brief and can be minimized by effective action by the lender. Such disruptions can be eliminated for the assignment of newly awarded contracts by making the assignment as soon as the award process is completed and prior to the submission of any invoices.

Payment protections provided to lenders
The FACA extends specific payment protections to the lender, and those protections represent benefits to the contractor as well. When a valid FACA assignment is in place, the government may not recover a payment made to the lender unless such payment was made in error to the wrong contractor. In addition, the lender is immune to the government's offsetting payments due to the contractor against government claims against the contractor that arose subsequent to the date of the assignment and that are not applicable to the contract to which the assignment applies. Consequently, the payment stream that is assigned under one contract may not be used by any agency of the government to satisfy government claims against the contractor that did not arise from the assigned contract.

Therefore, the contractor's cash flow under an assigned contract is protected against claims arising from any other contract (even with the same agency) and IRS claims for income and withholding tax payments, for example. Should the owner(s) of the contracting firm be guarantors on the firm's loans with the assignee, they have only to ensure that the firm performs on its assigned contract(s), and the lender will receive the payments there from and not have to call on the guarantors for payment. Thus the owner/guarantor benefits from the FACA assignments.

And finally, lenders may lend a higher percentage against assigned accounts receivable.

For more information on this topic, contact Mr. McRae at 703-506-8116, fax 703-506-8160, or e-mail: cmcrae@afsb.com.

Copyright Acacia Federal Savings Bank

About the author (Back to top)
Cameron McRae, Vice President of Commercial Lending, at Acacia Federal Savings Bank (Falls Church, VA), has been in banking 38 years. For 25 of those years, he has specialized in financing government contractors and technology firms. He has spoken on financing and cash flow management issues at numerous seminars for government contractors and has authored several published articles on those topics. He has participated in training a number of banks in government contractor financing and was VP, Finance & Administration, in a government contracting firm for over three years. McRae is a graduate of Duke University and a member of the National Contract Management Association and the Northern Virginia Technology Council.