Government Contractor ABL: How the Assignment of Claims Act, FAR 32.8, and the No-Setoff Clause Make Federal Receivables Bankable

Federal contract receivables are the single largest concentrated pool of high-quality counterparty risk in the US economy. The United States government does not default. It does, however, pay slowly, demand contract-specific compliance, and reserve broad rights of setoff against contractors -- rights that, left unaddressed, would make federal AR effectively un-financeable. The mechanism that makes it bankable is a 1940 statute that most CFOs have never read: the Assignment of Claims Act.

For four decades, Donald Clarke -- SFNet Hall of Fame, Lifetime Achievement Award, author of Asset Based Lending Disciplines, the first ABL textbook published -- has taught underwriters at GE Capital, JP Morgan Chase, Lloyds, and Barclays how to structure around the Act. This is the playbook we run at DCE and ABLC on every prime-contractor ABL deal.

The Statutory Backbone: 31 USC 3727, 41 USC 6305, and FAR Subpart 32.8

The general rule under federal law is that claims against the United States cannot be assigned. The exception that makes government-contractor lending possible is codified at 31 U.S.C. Section 3727 and 41 U.S.C. Section 6305. The procedures that operationalize the exception are at FAR Subpart 32.8, and the contract clause that implements it is at FAR 52.232-23.

Per the statute, a contractor may assign moneys due or to become due under a federal contract if all of the following are true:

• The contract calls for payments aggregating $1,000 or more.
• The assignment is to a bank, trust company, or other financing institution -- including a federal lending agency.
• The contract does not prohibit assignment (a few contracts do; most do not).
• Unless the contract says otherwise, the assignment covers all unpaid amounts under the contract, is made to only one party (or to one party as agent for a syndicate), and is not subject to further assignment.
• The assignee files a written notice of the assignment with the contracting officer, the disbursing officer, and the surety on any payment or performance bond.

Get those mechanics right and the lender steps into the contractor's payment rights against the government. Get any one wrong and the lender is still secured under the UCC but has no contractual claim against the government -- payments continue to flow to the contractor, and the lender depends entirely on its lockbox and DACA mechanics to capture proceeds.

UCC and FACA work together, not in place of each other

Per SFNet's October 2023 article on lending on government receivables, perfecting under the UCC and assigning under FACA are complementary actions, not alternatives. The UCC filing creates the secured creditor's lien priority against other creditors. The FACA notice gives the lender direct payment rights against the federal payor. Sophisticated government contractor ABL facilities do both, in tandem.

The No-Setoff Commitment: The Single Most Valuable Provision in the Toolkit

The Act has a hidden trap. Without a "no-setoff commitment," the government may set off payments otherwise due to the assignee against any liability of the contractor to the government -- including liabilities arising independently of the assigned contract. That means an unrelated tax debt, an unrelated overpayment, an unrelated False Claims Act settlement can reduce payments the lender expected to capture.

Per FAR 32.803(d), the no-setoff commitment is not automatic. It must be expressly included in the contract through use of Alternate I to FAR 52.232-23, and only when the head of the contracting agency makes a written determination that no-setoff is in the government's interest -- typically to facilitate national defense, address an emergency, or enable private financing of contract performance.

What no-setoff actually protects

When a contract includes the no-setoff clause, the assignee is entitled to receive payments free of reduction for:

• Any liability of the contractor to the government arising independently of the contract.
• Renegotiation liabilities under any statute or contract clause.
• Fines.
• Penalties (excluding penalties collected or withheld under the contract itself).
• Taxes or social security contributions.
• Withholding or non-withholding of taxes or social security contributions.

The no-setoff commitment does not protect against setoffs for excess costs assessed under the Default clause, Davis-Bacon withholdings, Walsh-Healey penalties, or Contract Work Hours Standards Act assessments. Those remain available to the government even with no-setoff in place. And per FAR 32.803(c)(2), no-setoff protection is limited to the amount of loans actually made or committed under a firm financing arrangement -- it does not cover excess contract value.

What CFOs and CROs need to know

The no-setoff commitment is almost always present on Department of Defense, Department of Energy, and General Services Administration contracts of meaningful size. It is hit-or-miss across civilian agencies. Before assuming a contract pool is fully no-setoff protected, the lender's counsel reads every prime contract and confirms inclusion of Alternate I in the contract clauses. A reserve gets struck against contracts without it.

The Notice of Assignment Package: Six Documents, Three Recipients

Per FAR 32.802(e), the notice package must be delivered to three counterparties: the contracting officer, the disbursing officer, and the surety (if any). The package itself includes:

• Notice of Assignment identifying the contract by number, the assignor (contractor), the assignee (lender), the date of assignment, and the address to which payments should be directed.
• Instrument of Assignment -- the executed assignment document itself, typically signed by an authorized officer of the contractor under penalty of perjury.
• Certified copy of the resolution of the contractor's board authorizing the assignment.
• Certificate of incumbency for the signing officer.
• Power of attorney (if executed by an attorney-in-fact).
• Return receipts and acknowledgments from each recipient confirming receipt of the package.

The government will not redirect payments until the package is complete, properly delivered, and acknowledged in writing. The 30 to 60 days from filing to confirmed payment redirection is a window the lender plans around in the funding schedule.

Borrowing Base Mechanics for Federal Receivables

Government AR is high-quality counterparty risk, but it does not pay quickly. The DSO discipline is fundamentally different from commercial AR, and borrowing base mechanics reflect that.

Eligibility

• Aging cut-off. Typical commercial ABL excludes AR over 90 days. Government contractor ABL routinely allows eligibility to 120-150 days from invoice date, reflecting realistic federal payment cycles. Prompt Payment Act baseline is 30 days, but in practice 60-90 days is common, and large agency invoice review can push beyond.
• Pre-assignment carve-out. AR generated before the FACA notice was filed and acknowledged is sometimes excluded or reserved, because the government's right of setoff against pre-assignment receivables is broader.
• Non-prime carve-out. Sub-contractor receivables are not eligible for FACA assignment -- only prime contracts qualify. Subcontractor AR is treated as commercial AR with concentration limits.
• Setoff risk reserve. Contracts without the no-setoff clause carry a reserve sized to historical and probable setoff exposure.
• Contract performance risk. Per Potomac Law's analysis of government shutdown effects on ABL loans, suspended contracts, stop-work orders, and contracts pending termination for convenience trigger ineligibility until resolved.

Advance rates

• Prime contract receivables with no-setoff commitment: 80% to 90% of eligible AR, with strong-credit borrowers occasionally pushing higher.
• Prime contract receivables without no-setoff: 70% to 85%, with a setoff reserve layered on top.
• Subcontractor receivables: 75% to 85% under standard commercial eligibility rules.
• Cost-type contracts (cost-plus-fixed-fee, cost-plus-incentive-fee): additional reserves for DCAA audit risk and final settlement adjustments.

DCAA Audit Risk and Cost-Type Contracts

For contractors with cost-reimbursement or T&M contracts, the Defense Contract Audit Agency (DCAA) audits incurred costs after performance. Disallowed costs can be clawed back from later payments. Per Brown LLP's compliance guide, lenders typically reserve against:

• Open DCAA audits where indirect rates are not finalized.
• Unallowable cost categories (entertainment, certain marketing, alcohol, lobbying) that show up in incurred-cost submissions.
• Compensation reasonableness exposure for executives above the statutory cap.
• Contracts where final indirect rates have not been settled for prior years.

A clean DCAA history reduces these reserves materially. Borrowers with chronic audit findings, repeated disallowances, or open False Claims Act exposure pay for it in advance rate compression.

Lockbox and Cash Management Under FACA

Once the FACA notice is filed, the government's disbursing officer is legally required to redirect payments to the lender-designated lockbox address. Operationally the structure looks similar to a commercial DACA-controlled lockbox, but with one critical addition: the lender's lockbox address is hard-coded into the FACA notice and cannot be changed without filing an amended notice with the contracting officer, disbursing officer, and surety. This makes payment redirection extremely stable -- and makes any mid-deal change of depository bank a multi-week paperwork exercise.

For background on cash dominion structures, see our piece on full vs springing cash dominion and on double-lockbox structures for regulated payors.

Special Situations: Novation, Termination for Convenience, Government Shutdown

Novation

If the contractor is acquired or merges, the federal contract does not automatically transfer to the new entity. A novation agreement must be approved by the contracting officer. The original FACA assignment dies with the original prime contract; a new assignment must be re-noticed under the novated contract. The lender's counsel coordinates the novation timeline and the re-assignment package -- another reason why government contractor M&A integrations run longer than commercial deals.

Termination for convenience

The government may terminate any contract for convenience under FAR 49.5. The contractor's claim becomes a settlement claim under FAR 49.6 rather than the original contract value. Lenders typically retain coverage of the termination settlement under the FACA assignment but reserve against the haircut between billed AR and final settlement value.

Government shutdown

During a funding gap, payments on covered contracts may pause. The lender's exposure is to a temporary timing mismatch, not a credit loss -- the contractor is still owed the money, the disbursing officer is just not authorized to release it. Borrowing bases tighten as eligible AR ages, but well-structured facilities include a shutdown carve-out that holds eligibility constant for a defined window.

Who Lends Government Contractor ABL

The active lender universe in 2026:

• Commercial bank ABL groups with government-contracts depth: Bank of America Business Capital, Wells Fargo Capital Finance, JPMorgan ABL, PNC Business Credit, BMO, Truist Bank Business Credit, Citizens Business Capital. Strongest for large primes and integrated defense suppliers.
• Specialty platforms: Pinnacle Bank Government Contracting, Eagle Bank Government Contracting Solutions, Live Oak Bank, Atlantic Union Bank. Often best for mid-size primes and 8(a) / small business set-aside contractors.
• Private credit and BDCs with government exposure: Hercules, Runway Growth, Trinity Capital -- active in growth-stage prime contractors with stretch advance needs.

For sponsor-backed government contractors, the structuring overlap with our sponsor-backed ABL playbook applies, layered with the FACA mechanics.

Pre-Market Checklist for Government Contractor CFOs

1. Confirm assignability. Read every prime contract for the FAR 52.232-23 clause and identify any that prohibit assignment.
2. Map no-setoff coverage. Identify which contracts include Alternate I. Lenders price the difference.
3. Reconcile DCAA status. Final indirect rates settled? Open audits documented? Disallowance history quantified?
4. Inventory prime vs subcontract AR. Subcontract AR is treated as commercial -- different advance rate, different concentration rules.
5. Pre-position the notice package. Resolutions, certificates, attorney-in-fact powers prepared, ready to file on closing day.

For the full diligence framework these layer onto, see our ABL due diligence checklist and field exam playbook.

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