A government contractor holds receivables from the best credit in the country and still runs out of cash. The obligation is not in doubt. The timing is, and the mechanics of getting a lender comfortable are unlike anything in commercial contracting.
Why is a government receivable hard to finance?
Because the strength of the payor does not solve the two problems that matter to a lender: when it pays, and whether the lender can be paid directly.
Payment timing on federal contracts depends on invoice acceptance, and acceptance depends on documentation that meets the contract’s requirements. An invoice that does not conform is not late, it is unaccepted, and it can sit indefinitely without anything appearing wrong in the ageing.
What is the Assignment of Claims Act?
It is the federal framework under which a contractor may assign amounts due under a contract to a financing institution, so the government pays the lender directly. Without a valid assignment, a lender holding a security interest still has no ability to be paid by the government.
The process is procedural and specific: notice to the contracting officer and the disbursing office, acknowledgement, and compliance with the contract’s own terms, some of which prohibit assignment outright. It takes weeks rather than days, and it should be started before the facility is needed rather than when a funding is due.
The details vary by agency and contract, and this is an area where experienced counsel and a lender who does this regularly are worth more than the rate difference.
How does contract type change the picture?
| Contract type | Cash flow characteristics | Financing implication |
|---|---|---|
| Firm fixed price | Payment on delivery or milestones | Longest funding gap, most upfront cost |
| Cost reimbursement | Costs billed as incurred | Shortest gap, requires an adequate accounting system |
| Time and materials | Billed against hours and materials | Predictable, depends on timely timekeeping |
| Indefinite delivery, indefinite quantity | Nothing owed until a task order | Award is not revenue, and lenders know it |
The last row causes the most trouble. A contractor announcing a large ceiling award treats it as backlog, and a lender treats it as an opportunity to receive orders. Nothing is financeable until the task order exists.
What are progress payments?
On certain fixed-price contracts, the government may make payments against costs incurred before delivery, subject to the contract’s clauses and to a liquidation mechanism that recovers those payments as deliveries are invoiced.
Where available, they materially reduce the amount a contractor has to finance privately. They also complicate the collateral analysis, because the government’s rights in the property being financed interact with the lender’s, which is one of the first questions any lender in this space will ask.
What does a lender check?
Five things, in this order.
- Whether the contract permits assignment, before anything else.
- The invoicing and acceptance record, meaning how long from submission to payment historically, by agency.
- The accounting system, since cost-type work requires records adequate for government audit, and a system that cannot support it limits which contracts can be pursued at all.
- Contract concentration, because a contractor with one contract is a single-obligor risk regardless of the obligor, the dynamic in customer concentration.
- Option year and re-compete exposure, since a contract in its final option year is a different asset than one in year one.
What about subcontractors?
A subcontractor on a federal programme has no claim against the government at all. Its receivable is from the prime contractor, and the credit being taken is the prime’s, along with the prime’s own payment behaviour.
This matters because subcontractors frequently describe themselves as having government receivables. Lenders do not read them that way, and pay-when-paid provisions in the subcontract can extend the effective terms well beyond what the schedule implies.
Where does the cash actually go?
Into labour, mostly. Services contractors pay staff on a two-week cycle and invoice monthly against acceptance, so the funding gap is structurally the same as the one in staffing agency financing, with a slower and more procedural payor at the end of it.
For product contractors it goes into materials and work in process ahead of a delivery milestone, which is closer to the situation described in purchase order financing vs factoring.
What should a contractor do before it needs financing?
Three things, all of them cheap in advance and expensive later.
Confirm the assignment provisions on every active contract, and know which are financeable. Build the invoice-to-payment history by agency and contract, because that dataset is the argument. And keep the accounting system compliant with the requirements of the contract types you intend to bid, since it constrains the pipeline before it constrains the balance sheet.
The short version
Federal receivables are strong credit and awkward collateral. What decides financeability is whether the contract permits assignment, what the historical acceptance-to-payment cycle looks like, and whether the work is fixed price or cost reimbursement. Sort the assignment mechanics before the cash is needed, because that process runs on the government’s calendar, not yours.