Restrictions. Generally government agencies are prohibited from paying for goods and services in advance of their receipt. However both military and civilian statues authorize advanced payments where (1) the contractor provides adequate security (2) such payment do not exceed the unpaid contract price and (3) the head of the agency determines, in writing, either before award or during performance that such payment facilitates the national interests. Certain restrictions apply such as: (a) advanced payments may not exceed interim cash flow needs (b) such payments must be necessary to supplement other funds or credit available to you (c) the CO must find that you otherwise qualify as a "responsible" contractor (d) the government must obtain some type of prospective benefit from such payments and (e) the contract to be financed must fall within categories discussed below.

Who qualifies? The FAR identifies certain contracts as potential candidates for advanced payment based on the subject matter of the contract and legal status of the contractor. For example, contracts for experimental research or development work at nonprofit educational or research institutions are appropriate as well as with small business concerns, management and operations at government-owned facilities and classified contractors whose sensitive subject matter bars more traditonal financing vehicles. In addition, FAR recognizes a number of factual situations such as where commercial financing is as a practical matter, unavailable such as where commercial interest rates are excessive, a financial institution refuses to carry a portion of the risk under a guaranteed loan or where the remote location of contract performance precludes effective administration of a guaranteed loan. Other "exceptional circumstances" might include where urgent supply schedules and delivery delays exist. Additionally, advanced payments may be authorized in conjunction with progress payments when, for example, you are having trouble arranging financing. If one or more of these conditions exist the CO "shall generally recommend" the advance payments be authorized.

Application. Your request for advanced payments, whether sought before or during contract performance, must be submitted in writing to the CO. The application must include a reference to the solicitation or contract, a cash flow forecast for the contract period, total amount of advance payment sought, name of financial institution designated to hold such payments and a statement of your efforts to obtain alternative financing. Though not required you may want to include in your application any additional information such as that having a bearing on your overall financial condition, your ability to perform the contract without loss to the government and any anticipated financial safeguards to protect the government’s interests.

Security. In addition to a priority lien on your special bank account the government is further secured by a paramount lien on all materials, supplies, equipment and other things acquired for the contract. You will be required to identify and segregate all such equipment and supplies subject to the lien. The government may, at its discretion, seek supplemental security in the form of personal or corporate endorsements or guarantees, pledges of collateral, subordination of other debts or limitations on, for example, profit distributions, salaries, bonuses and capital expenditures. In rare cases, a bond may be sought.

Interest. You will be required to pay interest on the daily unliquidated balance of all advanced payments at the higher of (1) the published prime rate at the bank where your advanced payments are deposited or (2) the federal rate established by the Treasury Department. Interest will be computed monthly and will be adjusted for prime rate variations. The government has the authority to exempt interest charges and remember, interest payments are unallowable costs on contracts.