In short: a defence contractor's best asset is often the money a government owes it. Governments pay, but they also protect themselves: by restricting assignment, by taking title to work they have paid for in advance, by keeping the right to terminate for convenience, and by setting off their own claims. A lender that treats a government receivable like any other trade debt can find its collateral is worth less than it looks.
The US rule: the Assignment of Claims Act
In the US, two statutes (31 U.S.C. 3727 and 41 U.S.C. 6305), together known as the Assignment of Claims Act, generally make assignments of claims against the government void against it. The exception is an assignment to a bank, trust company or other financing institution, where the contract is for US$1,000 or more and does not prohibit assignment. The Federal Acquisition Regulation (FAR Subpart 32.8) sets out the conditions. Unless the contract says otherwise, the assignment must:
- cover all amounts payable under the contract and not yet paid;
- be made to one party only, although that party can act as agent or trustee for a group of lenders; and
- not be assigned again.
The assignee must then send written notice, with a true copy of the assignment, to the contracting officer, to any surety on a contract bond and to the disbursing officer.
The rest of this guide covers how borrowing bases treat government receivables, the springing notice structure, title under progress and performance-based payments, and a lender checklist. It is free with a work email, along with the register downloads and the in-house counsel tools.
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Questions
Can a lender take security over US government contract payments?
Yes, if the contract does not prohibit it and the Assignment of Claims Act is followed: the assignment goes to a bank or other financing institution, covers all unpaid amounts, and written notice with a copy of the assignment goes to the contracting officer, any surety and the disbursing officer.
What happens if the Assignment of Claims Act is not followed?
The assignment does not bind the government, which can keep paying the contractor and can set off its own claims. The lender may still have a valid security interest against the contractor, but not a direct claim on the government.
Who owns inventory paid for with progress payments?
Under the standard US progress payment clause, title to the work in progress, materials and inventory paid for passes to the government. A lender's lien on that inventory is subject to the government's title.
Sources
- FAR Subpart 32.8: Assignment of Claims
- FAR 32.805: Procedure (notice of assignment)
- DoD Financial Management Regulation, Volume 10, Chapter 3
- FAR 52.232-16: Progress Payments
- FAR 52.249-2: Termination for Convenience of the Government (Fixed-Price)
General information on public law and market practice as at 28 Oct 2026, not legal advice on any transaction.