FAR Subpart 32.4

FAC 2005–21 NOVEMBER 7, 2007
SUBPART 32.4—ADVANCE PAYMENTS FOR NON-COMMERCIAL ITEMS

Subpart 32.4—Advance Payments for
Non-Commercial Items
32.400 Scope of subpart.
This subpart provides policies and procedures for advance
payments on prime contracts and subcontracts. It does not
include policies and procedures for advance payments for the
types of transactions listed in 32.404. This subpart does not
apply to commercial advance payments, which are subject to
Subpart 32.2.
32.401 Statutory authority.
The agency may authorize advance payments in negotiated
and sealed bid contracts if the action is appropriate under—
(a) Section 305 of the Federal Property and Administrative
Services Act of 1949 (41 U.S.C. 255);
(b)
The
Armed
Services
Procurement
Act
(10 U.S.C. 2307); or
(c) Pub. L. 85-804 (50 U.S.C. 1431-1435) and Executive
Order 10789, November 14, 1958 (3 CFR 1958 Supp. pp.
72-74) (see Subpart 50.1 for other applications of this statute).
32.402 General.
(a) A limitation on authority to grant advance payments
under Pub. L. 85-804 (50 U.S.C. 1431-1435) is described at
50.102-3(b)(4).
(b) Advance payments may be provided on any type of
contract; however, the agency shall authorize advance payments sparingly. Except for the contracts described in
32.403(a) and (b), advance payment is the least preferred
method of contract financing (see 32.106) and generally they
should not be authorized if other types of financing are reasonably available to the contractor in adequate amounts.
Loans and credit at excessive interest rates or other exorbitant
charges, or loans from other Government agencies, are not
considered reasonably available financing.
(c) If statutory requirements and standards for advance
payment determinations are met, the contracting officer shall
generally recommend that the agency authorize advance
payments.
(1) The statutory requirements are that—
(i) The contractor gives adequate security;
(ii) The advance payments will not exceed the
unpaid contract price (see 32.410(b), paragraph (a)(2)); and
(iii) The agency head or designee determines, based
on written findings, that the advance payment—
(A) Is in the public interest (under 32.401(a) or
(b)); or
(B) Facilitates the national defense (under
32.401(c)).
(2) The standards for advance payment determinations
are that—

32.403

(i) The advance payments will not exceed the contractor’s interim cash needs based on—
(A) Analysis of the cash flow required for contract performance;
(B) Consideration of the reimbursement or other
payment cycle; and
(C) To the extent possible, employment of the
contractor’s own working capital;
(ii) The advance payments are necessary to supplement other funds or credit available to a contractor;
(iii) The recipient is otherwise qualified as a responsible contractor;
(iv) The Government will benefit from performance
prospects or there are other practical advantages; and
(v) The case fits one or more of the categories
described in 32.403.
(d) If necessary, the agency may authorize advance payments in addition to progress or partial payments on the same
contract (see 32.501-1(c)).
(e) Each agency that provides advance payments shall—
(1) Place the responsibility for making findings and
determinations, and for approval of contract terms concerning
advance payments (see 32.410), at an organizational level
high enough to ensure uniform application of this subpart (see
the limitation at 50.102-1(b) which also applies to advance
payments
authorized
under
Pub. L. 85-804
(50 U.S.C. 1431-1435)); and
(2) Establish procedures for coordination, before
advance payment authorization, with the activity that provides contract financing support.
(f) If the contract provides for advance payments under
Pub. L. 85-804, the contracting officer shall ensure conformance with the requirements of 50.103-7.
32.403 Applicability.
Advance payments may be considered useful and appropriate for the following:
(a) Contracts for experimental, research, or development
work with nonprofit educational or research institutions.
(b) Contracts solely for the management and operation of
Government-owned plants.
(c) Contracts for acquisition, at cost, of property for Government ownership.
(d) Contracts of such a highly classified nature that the
agency considers it undesirable for national security to permit
assignment of claims under the contract.
(e) Contracts entered into with financially weak contractors whose technical ability is considered essential to the
agency. In these cases, the agency shall closely monitor the
contractor’s performance and financial controls to reduce the
Government’s financial risk.
32.4-1

FAC 2005–21 NOVEMBER 7, 2007
32.404
(f) Contracts for which a loan by a private financial institution is not practicable, whether or not a loan guarantee under
this part is issued; for example, if—
(1) Financing institutions will not assume a reasonable
portion of the risk under a guaranteed loan;
(2) Loans with reasonable interest rates or finance
charges are not available to the contractor; or
(3) Contracts involve operations so remote from a financial institution that the institution could not be expected to
suitably administer a guaranteed loan.
(g) Contracts with small business concerns, under which
circumstances that make advance payments appropriate often
occur (but see 32.104(b)).
(h) Contracts under which exceptional circumstances
make advance payments the most advantageous contract
financing method for both the Government and the contractor.
32.404 Exclusions.
(a) This subpart does not apply to advance payments authorized by law for—
(1) Rent;
(2) Tuition;
(3) Insurance premiums;
(4) Expenses of investigations in foreign countries;
(5) Extension or connection of public utilities for Government buildings or installations;
(6) Subscriptions to publications;
(7) Purchases of supplies or services in foreign countries, if—
(i) The purchase price does not exceed $10,000 (or
equivalent amount of the applicable foreign currency); and
(ii) The advance payment is required by the laws or
government regulations of the foreign country concerned;
(8) Enforcement of the customs or narcotics laws; or
(9) Other types of transactions excluded by agency procedures under statutory authority.
(b) Agencies may issue their own instructions to deal with
advance payment items in paragraph (a) of this section authorized under statutes relevant to their agencies.
32.405 Applying Pub. L. 85-804 to advance payments
under sealed bid contracts.
(a) Actions that designated agencies may take to facilitate
the national defense without regard to other provisions of law
relating to contracts, as explained in 50.101-1(a), also include
making advance payments. These advance payments may be
made at or after award of sealed bid contracts, as well as negotiated contracts.
(b) Bidders may request advance payments before or after
award, even if the invitation for bids does not contain an
advance payment provision. However, the contracting officer
shall reject any bid requiring that advance payments be provided as a basis for acceptance.
32.4-2

FEDERAL ACQUISITION REGULATION
(c) When advance payments are requested, the agency
may—
(1) Enter into the contract and provide for advance payments conforming to this Part 32;
(2) Enter into the contract without providing for
advance payments if the contractor does not actually need
advance payments; or
(3) Deny award of the contract if the request for advance
payments has been disapproved under 32.409-2 and funds
adequate for performance are not otherwise available to the
offeror.
32.406 Letters of credit.
(a) The Department of the Treasury (Treasury) prescribes
regulations and instructions covering the use of letters of
credit for advance payments under contracts. See Treasury
Department Circular 1075 (31 CFR Part 205), and the implementing instructions in the Treasury Financial Manual, available in offices providing financial advice and assistance.
(b) If agencies provide advance payments to contractors,
use of the following methods is required unless the agency has
obtained a waiver from the Treasury Department:
(1) By letter of credit if the contracting agency expects
to have a continuing relationship with the contractor for a year
or more, with advances totaling at least $120,000 a year.
(2) By direct Treasury check if the circumstances do not
meet the criteria in paragraph (b)(1) of this section.
(c) If the agency has entered into multiple contracts (or a
combination of contract(s) and assistance agreement(s))
involving eligibility of a contractor for more than one letter of
credit, the agency shall follow arrangements made under
Treasury procedures for—
(1) Consolidating funding to the same contractor under
one letter of credit or
(2) Replacing multiple letters of credit with a single letter of credit.
(d) The letter of credit enables the contractor to withdraw
Government funds in amounts needed to cover its own disbursements of cash for contract performance. Whenever feasible, the agency shall, under the direction and approval of the
Department of the Treasury, use a letter of credit method that
requires the contractor not to withdraw the Government funds
until the contractor’s checks have been—
(1) Forwarded to the payees (delay of drawdown technique), or
(2) Presented to the contractor’s bank for payment
(checks paid technique) (see 31 CFR 205.3 and 205.4(d)).
(e) The Treasury regulations provide for terminating the
advance financing arrangement if the contractor is unwilling
or unable to minimize the elapsed time between receipt of the
advance and disbursement of the funds. In such cases, if reversion to normal payment methods is not feasible, the Treasury

FAC 2005–17 JUNE 14, 2007
SUBPART 32.4—ADVANCE PAYMENTS FOR NON-COMMERCIAL ITEMS
regulation provides for use of a working capital method of
advance; i.e., for limiting advances to—
(1) Only the estimated disbursements for a given initial
period; and
(2) Subsequently, for only actual cash disbursements
(31 CFR 205.3(k) and 205.7).
32.407 Interest.
(a) Except as provided in paragraph (d) of this section, the
contracting officer shall charge interest on the daily unliquidated balance of all advance payments at the higher of—
(1) The published prime rate of the financial institution
(depository) in which the special account (see 32.409-3) is
established; or
(2) The rate established by the Secretary of the Treasury
under 50 U.S.C. App. 1215(b)(2).
(b) The interest rate for advance payments shall be adjusted
for changes in the prime rate of the depository and the semiannual determination by the Secretary of the Treasury under
50 U.S.C. App. 1215(b)(2). The contracting officer shall
obtain data from the depository on changes in the interest rate
during the month. Interest shall be computed at the end of each
month on the daily unliquidated balance of advance payments
at the applicable daily interest rate.
(c) Interest shall be required on contracts that are for acquisition, at cost, of property for Government ownership, if the
contracts are awarded in combination with, or in contemplation of, supply contracts or subcontracts.
(d) The agency head or designee may authorize advance
payments without interest under the following types of contracts, if in the Government’s interest:
(1) Contracts for experimental, research, or development work (including studies, surveys, and demonstrations in
socio-economic areas) with nonprofit education or research
institutions.
(2) Contracts solely for the management and operation
of Government-owned plants.
(3) Cost-reimbursement contracts with governments,
including State or local governments, or their
instrumentalities.
(4) Other classes of contracts, or unusual cases, for
which the exclusion of interest on advances is specifically
authorized by agency procedures.
(e) If a contract provides for interest-free advance payments, the contracting officer may require the contractor to
charge interest on advances or downpayments to subcontractors and credit the Government for the proceeds from the
interest charges. Interest rates shall be determined as
described in paragraphs (a) and (b) of this section. The contracting officer need not require the contractor to charge interest on an advance to a subcontractor that is an institution of the
kind described in paragraph (d)(1) of this section.

32.409-1

(f) The contracting officer shall not allow interest charges,
required by this 32.407, as reimbursable costs under costreimbursement contracts, whether the interest charge was
incurred by the prime contractor or a subcontractor.
32.408 Application for advance payments.
(a) A contractor may apply for advance payments before or
after the award of a contract.
(b) The contractor shall submit any advance payment
request in writing to the contracting officer and provide the
following information:
(1) A reference to the contract if the request concerns an
existing contract, or a reference to the solicitation if the
request concerns a proposed contract.
(2) A cash flow forecast showing estimated disbursements and receipts for the period of contract performance. If
the application pertains to a type of contract described in
32.403(a) or (b), the contractor shall limit the forecast to the
contract to be financed by advance payments.
(3) The proposed total amount of advance payments.
(4) The name and address of the financial institution at
which the contractor expects to establish a special account as
depository for the advance payments. If advance payments in
the form of a letter of credit are anticipated, the contractor
shall identify the specific account at the financial institution
to be used. This paragraph (b)(4) is not applicable if an alternate method is used under agency procedures.
(5) A description of the contractor’s efforts to obtain
unguaranteed private financing or a V-loan (see 32.301) under
eligible contracts. This requirement is not applicable to the
contract types described in 32.403(a) or (b).
(6) Other information appropriate to an understanding
of (i) the contractor’s financial condition and need, (ii) the
contractor’s ability to perform the contract without loss to the
Government, and (iii) financial safeguards needed to protect
the Government’s interest. Ordinarily, if the contract is a type
described in 32.403(a) or (b), the contractor may limit the
response to this paragraph (b)(6) to information on the contractor’s reliability, technical ability, and accounting system
and controls.
32.409 Contracting officer action.
After analysis of the contractor’s application and any
appropriate investigation, the contracting officer shall recommend approval or disapproval and transmit the request and
recommendation to the approving authority designated under
32.402(e).
32.409-1 Recommendation for approval.
If recommending approval, the contracting officer shall
transmit the following, under agency procedures, to the
approving authority:
(a) Contract data, including—
32.4-3

32.409-2
(1) Identification and date of the award;
(2) Citation of the appropriation;
(3) Type and dollar amount of the contract;
(4) Items to be supplied, schedule of deliveries or performance, and status of any deliveries or performance;
(5) The contract fee or profit contemplated; and
(6) A copy of the contract, if available.
(b) The contractor’s request and supporting information.
(c) A report on the contractor’s past performance, responsibility, technical ability, and plant capacity.
(d) Comments on—
(1) The contractor’s need for advance payments; and
(2) Potential Government benefits from the contract
performance.
(e) Proposed advance payment contract terms, including
proposed security requirements.
(f) The findings, determination, and authorization (see
32.410).
(g) The recommendation for approval of the advance payment request.
(h) Justification of any proposal for waiver of interest
charges (see 32.407).
32.409-2 Recommendation for disapproval.
If recommending disapproval, the contracting officer shall,
under agency procedures, transmit—
(a) The items prescribed in 32.409-1(a), (b), and (c); and
(b) The recommendation for disapproval and the reasons.
32.409-3 Security, supervision, and covenants.
(a) If advance payments are approved, the contracting
officer shall enter into an agreement with the contractor covering special accounts and suitable covenants protecting the
Government’s interest (see 32.411). This requirement generally applies under all statutory authorities, but modified
requirements applicable to certain specific cases are prescribed in paragraphs (e) through (g) of this section.
(b) The agency shall—
(1) Ensure that the amount of advance payments does
not exceed the contractor’s financial needs, and
(2) Closely supervise the contractor’s withdrawal of
funds from special accounts in which the advance payments
are deposited.
(c) In the terms of the agreement, the contracting officer
should provide for a paramount lien in favor of the Government. This lien may supplement or replace other security
requirements. The lien should cover—
(1) Supplies being acquired;
(2) Any credit balance in the special account in which
advance payments are deposited; and
(3) All property that the contractor acquires for performing the contract, except to the extent to which the Government otherwise has valid title to the property.
32.4-4

FEDERAL ACQUISITION REGULATION
(d) Security requirements vary to fit the circumstances of
different cases. Minimum security requirements are covered
by the clauses prescribed in the contract. The contracting
officer may supplement these as necessary in each case for
protection of the Government’s interest. Examples of additional security terms are—
(1) Personal or corporate endorsements or guarantees;
(2) Pledges of collateral;
(3) Subordination or standby of other indebtedness;
(4) Controls or limitations on profit distributions, salaries, bonuses or commissions, rentals and royalties, capital
expenditures, creation of liens, retirement of stock or debt,
and creation of additional obligations; and
(5) Advance payment bonds (rarely required).
(e) In an advance payment agreement with an instrumentality of the Government, a State, a local government, or an
agency or instrumentality of a State or local government, the
contracting officer may omit the requirement for deposit of
the advances in a special account, if the official approving the
advance determines that other adequate security exists to protect the Government’s interest.
(f) The requirements of this 32.409-3 do not apply when
using letters of credit if an agency’s procedures provide for—
(1) The use under a cost-reimbursement contract of Federal funds deposited in the contractor’s account at a financial
institution (without the contractor acquiring title to the funds);
and
(2) The security of such deposit of public moneys in
accordance with governing regulations of the Treasury
Department.
(g) If a separate special account is not required;
e.g., advance payment by a letter of credit, an agency may
require a special account for an individual case, or classes of
cases, if the circumstances warrant.
32.410 Findings, determination, and authorization.
(a) Each determination concerning advance payments shall
be supported by written findings (see 32.402(c)(1)(iii)).
(b) The following is an example of the format and text of
findings, determination, and authorization with alternative
words, phrases, and paragraphs to be selected to conform to
the circumstances involved:
FINDINGS, DETERMINATION, AND AUTHORIZATION FOR
ADVANCE PAYMENTS
FINDINGS
(a) The undersigned hereby finds that:
(1) The ________________ [Insert the name of the contracting activity] and ________________ [Insert the name of
the contractor] (have entered) (propose to enter) into (negotiated) (sealed bid) Contract No.____________, dated
__________. [Summarize the specific facts and significant circumstances concerning the contract and the contractor, that,

SUBPART 32.4—ADVANCE PAYMENTS FOR NON-COMMERCIAL ITEMS
together with the other findings, will clearly support the determination below.]
(2) Advance payments (in an amount not to exceed
$______________ at any time outstanding) (in an aggregate
amount not exceeding $________, less the aggregate amounts
repaid, or withdrawn by the Government) are required by the
Contractor to perform under the contract. The amount does not
exceed the unpaid contract price or the estimated interim cash
needs arising during the reimbursement cycle.
(3) The advance payments are necessary for prompt,
efficient contract performance that will benefit the Government.
(4) The proposed advance payment clause provides for
security for the protection of the Government. The clause
requires that all payments will be deposited in a special account
at the Contractor’s financial institution and that the Government
will have a paramount lien on (i) the credit balance in the special
account, (ii) any supplies contracted for, and (iii) any material
or other property acquired for performance of the contract.
[Insert the following, if applicable: (The Contractor’s financial
management system provides for effective control over and
accountability for all Federal funds under governing regulations of the Treasury Department.) (An advance payment bond
is required.)] This security is considered adequate.
(5) Advance payments are the only adequate means of
financing available to the Contractor, and the amount designated in (2) of this section is based, to the extent possible, on the
use of the Contractor’s own working capital in performing the
contract. [Insert paragraph (6), (7), or (8), as applicable.]
(6) The Contractor is a nonprofit (educational) (and)
(research) institution, and the contract is for (experimental) (,)
(research and development) work.
(7) The contract is solely for the management and operation of a Government-owned plant.
(8) The following unusual facts and circumstances favor
making advance payments to the Contractor without interest:
[List the pertinent facts and circumstances.]

DETERMINATION
(b) Based on the findings in paragraph (a) of this section,
the undersigned determined that the making of the proposed
advance payments, (with interest at the rate of ______ [Insert
the interest rate computed in accordance with 32.407] percent
on the daily unliquidated balance of the advance payments,)
(without interest, except as provided by the proposed advance
payment clause,) (is in the public interest) (will facilitate the
national defense).

AUTHORIZATION
(c) The advance payments, of which (the amount at any time
outstanding) (the aggregate amount, less the aggregate amounts
repaid, or withdrawn by the Government), shall not exceed
$_____________, are hereby authorized under (section 305 of
the Federal Property and Administrative Services Act of 1949
(41 U.S.C. 255)) (the Armed Services Procurement Act
(10 U.S.C. 2307)) (the Extraordinary Contracting Authority of
Government Agencies in Connection with National Defense

32.411

Functions
(50 U.S.C. 1431-1435)
and
Executive
Order No. 10789 of November 14, 1958 (3 CFR 1958 Supp. pp.
72-74)) [or, if other, cite appropriate authority] on (terms substantially as contained in the proposed advance payment clause,
a copy (an outline) of which is annexed to this authorization) (the
following terms:) [Insert the appropriate terms.] (All prior authorizations for advance payments under Contract No. _________
are superseded.)
__________________________________________________
[Signature]
__________________________________________________
[Name Typed]
__________________________________________________
[Title of Authorized Official]
[Each Findings, Determination, and Authorization shall be
individually prepared to fit the particular circumstances at
hand. Paragraphs (a)(1), (2), (3) and (4) and paragraphs (b)
and (c) shall be used in each case. If the contract is (a) for
experimental, developmental or research work and with a nonprofit educational or research institution, or (b) only for management and operation of a Government-owned plant,
paragraph (a)(5) should not be included. If the advance payment is to be made without interest to the contractor, include
paragraph (a)(6), (7), or (8). If any advance payments have previously been authorized for the contract, include the final sentence of paragraph (c). The alternate parenthetical wording or
other modifications may be used as appropriate. The paragraphs actually used shall be renumbered sequentially.]

32.411 Agreement for special account at a financial
institution.
The contracting officer must use substantially the following form of agreement for a special account for advance
payments:
AGREEMENT FOR SPECIAL ACCOUNT
This agreement is entered into this _____ day of _____, 20___,
between the United States of America (the Government), represented by the Contracting Officer executing this agreement,
_____ [Insert the name of the Contractor], a _____ [Insert the
name of the State of incorporation] corporation (the Contractor), and _____, a financial institution operating under the laws
of _____, located at ____________ (the financial institution).

RECITALS
(a) Under date of _____, 20__, the Government and the
Contractor entered into Contract No. _____, or a related supplemental agreement, providing for advance payments to the Contractor. A copy of the advance payment terms was furnished to
the financial institution.
(b) The contract or supplemental agreement requires that
amounts advanced to the Contractor be deposited separate from
the Contractor’s general or other funds, in a Special Account at
a member bank of the Federal Reserve System, any “insured”
bank within the meaning of the Act creating the Federal Deposit

32.4-5

32.412

FEDERAL ACQUISITION REGULATION

Insurance Corporation (12 U.S.C. 1811), or a credit union
insured by the National Credit Union Administration. The parties agree to deposit the amounts with the financial institution,
which meets the requirement.
(c) This Special Account is designated “________ [Insert
the Contractor’s name], _____________ [Insert the name of the
Government agency] Special Account.”

COVENANTS
In consideration of the foregoing, and for other good and valuable considerations, the parties agree to the following
conditions:
(a) The Government shall have a lien on the credit balance
in the account to secure the repayment of all advance payments
made to the Contractor. The lien is paramount to any lien or
claim of the financial institution regarding the account.
(b) The financial institution is bound by the terms of the
contract relating to the deposit and withdrawal of funds in the
Special Account, but is not responsible for the application of
funds withdrawn from the account. The financial institution
shall act on written directions from the Contracting Officer, the
administering office, or a duly authorized representative of
either. The financial institution is not liable to any party to this
agreement for any action that complies with the written directions. Any written directions received by the financial institution through the Contracting Officer on _____ [Insert the name
of the agency] stationery and purporting to be signed by, or by
the direction of _____ or duly authorized representative, shall
be, as far as the rights, duties, and liabilities of the financial
institution are concerned, considered as being properly issued
and filed with the financial institution by the _____ [Insert the
name of the agency].
(c) The Government, or its authorized representatives,
shall have access to the books and records maintained by the
financial institution regarding the Special Account at all reasonable times and for all reasonable purposes, including (but not
limited to), the inspection or copying of the books and records
and any and all pertinent memoranda, checks, correspondence,
or documents. The financial institution shall preserve the books
and records for a period of 6 years after the closing of this Special Account.
(d) In the event of the service of any writ of attachment,
levy of execution, or commencement of garnishment proceed-

32.4-6

ings regarding the Special Account, the financial institution will
promptly notify ______ [Insert the name of the administering
office].
(e) While this Special Account exists, the financial institution shall inform the Government each month of the financial
institution’s published prime interest rate and changes to the rate
during the month. The financial institution shall give this information to the Contracting Officer on the last business day of the
month. [This covenant will not be included in the Special
Account Agreements covering interest-free advance payments.]
Each of the parties to this agreement has executed the agreement
on _________________, 20____.
__________________________________________________
__________________________________________________
[Signatures and Official Titles]

32.412 Contract clause.
(a) The contracting officer shall insert the clause at
52.232-12, Advance Payments, in solicitations and contracts
under which the Government will provide advance payments,
except as provided in 32.412(b).
(b) If the agency desires to waive the countersignature
requirement because of the contractor’s financial strength,
good performance record, and favorable experience concerning cost disallowances, the contracting officer shall use the
clause with its Alternate I.
(c) If a cost-reimbursement contract is contemplated, the
contracting officer shall use the clause with its Alternate II.
(d) If the agency considers a more rapid liquidation appropriate, the contracting officer shall use the clause with its
Alternate III.
(e) If the agency provides advance payments under the
contract at no interest to the prime contractor, the contracting
officer shall use the clause with its Alternate IV.
(f) If the requirement for a special account is eliminated in
accordance with 32.409-3(e) or (g), the contracting officer
shall insert in the solicitation or contract the clause set forth
in Alternate V of 52.232-12, Advance Payments, instead of
the basic clause.