Logo Placeholder

The Danger of Not Strictly Following the Assignment of Claims Process

by | Jun 15, 2021 | Government Contracts

For a contractor, making sure it gets a steady cash flow so it can perform a government contract may be one of the most important prerequisites for successfully performing a contract. One way a contractor can be assured of steady cash flow is by doing “an assignment of claims” under FAR Part 32.8. An assignment allows a financial institution like a bank to give a contractor a line of credit to finance contract performance in exchange for the bank getting contract payments from the government. But this valuable process must be strictly followed. A contractor’s failure to monitor the process can irreparably damage the critical relationship between a contractor and the financial institution. A recent decision of the U.S. Civilian Board of Contract Appeals, Allied Meridian Funding LLC v. Department of Agriculture, CBCA 6893, March 18, 2021, is an excellent example of how to do an assignment correctly and an example of how to do one incorrectly.

The correct way. In 2015, Genesis International Management Group LLC (Genesis) won a contract to provide staffing services to the U.S. Forest Service in the Department of Agriculture. Genesis arranged to facilitate its cash flow under the contract by assigning its rights to receive contract payments to Allied Meridian Funding LLC (Allied).  As required by FAR, the contracting officer was promptly notified, the contract was modified to incorporate the assignment of claims, and Allied began to receive contract payments.

The wrong way. In 2016, Genesis got another contract from the Forest Service. Again it assigned the contracts cash flow to Allied. But it was not until almost 2 months later that the contracting officer was notified of the assignment and the assignment was finalized, notarized, and reflected in a contract amendment. The decision is silent on whether it was Genesis or Allied that caused the delay. Meanwhile, Genesis kept receiving the government payments leaving Allied without these payments until December 2, 2016.

Allied’s government claim for the payments. After the contract was over, Allied filed a claim with the government that included a request for the payments it had not received from the government during the six-week period between the time Genesis and Allied finalized the assignment and the time the contracting officer was notified of the assignment and it was reflected in the contract modification. After the contracting officer refused to pay, Allied appealed the contracting officer’s decision to the CBCA seeking $86,840.83.

Allied argued that the government had improperly continued to pay Genesis after the assignment had been made between Genesis and Allied but before the contracting officer had been notified of the assignment. The board, however, concluded that Allied was not entitled to payment because the contracting officer only learned of the assignment on December 1. One of the requirements of a proper assignment is that Allied had to file written notice of the assignment “and a true copy of the instrument of assignment with the contracting officer.” In this case, Allied had failed to provide written notice of the assignment. Once the notice was given, Allied received the payments. But until the contracting officer was notified, the government had no duty to pay Allied. The Board denied the appeal.

The decision is a lesson for both the financial institution as well as contractors. In this situation, the financial institution can always sue the contractor for the money the government “improperly” sent the contractor. But whether the financial institution could recover all the lost funds is uncertain especially if the contractor had gone bankrupt.

Here, the important lesson for contractors is the benefit of monitoring the assignment process. Because a contractor’s continuing good relationship with funding institutions is so important, making sure assignments are done correctly is something that contractors can do to avoid putting their financial source in trouble. Contractors can protect their relationship with its funding source by making sure the assignment process is strictly followed.

Terry O’Connor is a Partner and Director of Government Contracts at Berenzweig Leonard.