Effective October 17, 2008, the Cost FAR Councils will implement revisions to the policies and procedures for contract debts under FAR Subpart 32.6.  The changes cover all contract debts to the Government resulting from contractor’s compliance or failure to comply with contract terms, and irrespective of how, or by whom, the debt is identified.  The revisions grew out of DoD’s recommendations published on May 26, 2005, and are being applied Government-wide “to improve contract debt controls and procedures, and to ensure consistency within/between existing regulations.”  73 Fed. Reg. 53997.


The changes are primarily directed at streamlining the identification, collection and deferral of contract debts.  Under the new 32.601, “contract debt” is broadly defined as any amounts that either have been paid to the contractor, or are otherwise due from the contractor, where the contractor is not entitled to such amounts under the terms of the contract.  This includes, for example, “breach of contract obligations concerning progress payments, performance-based payments, advance payments, commercial item financing, or Government-furnished property.” FAR 32.601(b)(10).  Under FAR 32.602, the responsibility for identifying contract debts, and demanding payment, rests primarily with the contracting officer.  But the contracting officer is prohibited from collecting the amounts, which is the responsibility of the payment office.  If the contracting officer receives “any indication that a contractor owes money to the Government,” FAR 32.603 imposes an affirmative obligation to promptly make a determination whether an actual debt is due and the amount. 


As soon as a debt is determined to be owed, FAR 32.604 obligates the contracting officer to issue a “demand for payment,” even if the contractor “has agreed to repay the debt.”  The demand must include the debt amount and, to the maximum extent practicable, identify all affected lines of accounting.  Where data regarding the distribution of the principal to varioius contracts and lines of accounting is unavailable, the demand needs to include a date by which the contracting officer will provide such information.  The demand also must notify the contractor that, unless payment is received before, interest will start running 30 days from the date of the demand, unless the contract debt results from a contract clause that provides for a different start date for purposes of accruing interest.  For example, under contract clauses regarding defective pricing and CAS noncompliances, interest is computed from the date of overpayment.


If the contractor disagrees with the demand and the disagreement is not resolved in a “timely manner,” FAR 32.605 prescribes that the contracting officer must issue a final decision with the same payment due date as the previously issued demand.  A final decision also is required if the contractor fails to pay the demand without a request for an installment payment agreement, or if the contractor requests a deferment of collection.  These requests are not approved or denied by the contracting officer.  Rather, a designated office within each agency will have that responsibility.  FAR 32.607(a).


Where the contractor has appealed the debt under the Disputes clause, information submitted in support of deferment agreements may be limited to the contractor’s financial condition.  FAR 32.607-2(a)(1).  If no appeal is pending, the supporting information should include financial condition, contract backlog, projected cash receipts and requirements, and the feasibility of immediate payment.  FAR 32.607-2(a)(3).  The contracting officer then forwards this information to the respective agency office, together with its recommendation on the request.  The terms of any deferment agreement must contain much of the same information that was required under the previous regulations.  Importantly, under 32.607-2(g)(2), a contractor is required to pay the debt even if it has filed an action under the Disputes Clause challenging that debt.


Authored by:


Aleksander Lamvol


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