The Assignment of Claims Act is a federal law that generally prohibits assigning claims against the United States unless specific conditions are met. For government contractors, it controls whether and how a factor can be paid directly on federal contract invoices.
How it works in factoring
The ordinary UCC rules that let a seller assign receivables do not override federal law for claims against the US government. Under the Act and its implementation in the Federal Acquisition Regulation, an assignment of contract payments is generally recognized only if, among other conditions:
- It is made to a bank, trust company or other financing institution
- It covers all amounts payable under the contract that have not already been paid, rather than selected invoices
- It is not made to more than one party, except to a party acting as agent or trustee for multiple lenders
- Written notice and a copy of the assignment are filed with the contracting officer, the disbursing officer and any surety
The contract itself may also contain clauses affecting assignment. Once the government acknowledges a proper assignment, payments go to the assignee.
Factors that buy federal receivables without a compliant assignment take on risk: the government may continue paying the contractor, and the factor's rights depend on the contractor passing the money along.
What to check
- Whether the contract permits assignment
- That all required notices are filed and acknowledged
- How long acknowledgment takes; plan funding around it
- Separate state and local rules for non-federal government contracts