Factoring or Invoice Discounting on a Federal Contract

The Assignment of Claims Act generally prohibits assigning a claim against the federal government to a third party without the government's consent, a rule written to keep the government from having to track who actually owns a payment obligation. Factoring companies that work with government contractors build their process around this, typically through a formal notice and acknowledgment to the contracting officer rather than a private assignment the way a factor would handle a commercial invoice. Skipping this step, or assuming a commercial factoring agreement translates directly to a federal contract, can lead to a factoring arrangement being rejected or challenged, so confirm the assignment rules with your contracting officer and attorney first.

Factoring on a government contract is almost always notification based: the contracting officer is formally told that payments should be directed to the factor, and the government pays the factor directly. True confidential invoice discounting, where the customer never learns a third party is involved, is much harder to structure against a federal receivable precisely because of the assignment and notice requirements, and few providers offer it in that form for government work. If a lender is marketing confidential discounting on a federal invoice, confirm exactly how they're getting around the notice requirement before you rely on it.

Most government receivables financing is recourse, meaning you remain responsible for repaying the advance if the government withholds or disputes payment, which happens more often on federal work than with a typical commercial customer because of DCAA audit findings, incurred cost disputes, or a contracting officer's final decision withholding part of an invoice. Ask specifically how your provider handles a partial withhold rather than an outright non-payment, since a dispute over a portion of an invoice is far more common in federal contracting than a full non-payment ever is.

Confirm these points with any provider before you sign:

• Whether the facility is recourse, and what you owe if the government withholds or disputes payment.
• How the provider treats invoices held up by DCAA audit findings, incurred cost disputes or a contracting officer's final decision.
• Who sends the notice of assignment to the contracting officer, and whether you have received the acknowledgment.
• Whether the lender has experience specifically with government contracts rather than only commercial invoices.
• Why a federal facility is priced differently from a comparable commercial one.

Say a prime contractor is owed a progress payment on a services contract and needs the cash before the government's typical payment cycle clears. Structuring this through a factor means formally notifying the contracting officer of the assignment, at which point the government redirects payment to the factor directly. An invoice discounting arrangement, where the contractor still collects and simply borrows against the receivable's value rather than assigning it outright, sidesteps some of the assignment notice mechanics but usually requires the lender to be comfortable that the contractor, not the government, remains the party actually responsible for repayment either way.

A subcontractor isn't owed money by the government directly, it's owed money by the prime, so the Assignment of Claims Act's federal notice requirements don't apply the same way, but flow down clauses in the prime's own subcontract can still restrict assigning that receivable without the prime's consent. Some primes also use joint check agreements, directing the government or their own payment to name both the prime and a subcontractor's lender on the same check, which functions like a security mechanism without a formal assignment. Read your specific subcontract's assignment and flow down language before assuming factoring works the same way it would as a prime.

Ask the prime directly whether it's willing to sign a joint check agreement or a formal consent to assignment before you sign a factoring agreement, since some primes resist this out of a general reluctance to acknowledge a subcontractor's financing arrangement at all. Getting that consent in writing up front avoids a factor discovering mid contract that the prime won't cooperate with the payment redirection the factoring arrangement depends on.