The Assignment of Claims Act: What Government Contractors Need to Know

If you have ever asked why a lender can finance a federal contract but not, say, a handshake agreement with a commercial customer, the answer largely comes down to one statute: the Assignment of Claims Act.

What the Act actually does

The Assignment of Claims Act (31 U.S.C. § 3727 and 41 U.S.C. § 6305) governs whether and how a contractor can assign money owed under a federal contract to someone else, in practice to a lender.

The default rule in federal law is that claims against the government cannot be assigned. The Act creates the exception: a contractor may assign amounts due under a contract to a bank, trust company, or other financing institution, provided specific conditions are met. Without that exception, a lender advancing against a federal receivable would have no enforceable claim to the payment.

Why it matters for financing

Contract-based lending works because the lender can look through the contractor to the paying agency. A federal agency is exceptionally strong credit, far stronger than most contractors’ balance sheets. The Act is the legal mechanism that lets that credit strength transfer into the facility. It is what makes invoice factoring on federal receivables work at all.

This is why a contractor with thin financials and a strong award can get financed on the award. The lender is not betting purely on the company; it is betting on a government payment obligation it can be named against.

How assignment works in practice

The process is procedural and well-worn. Broadly:

• The contract must permit it. Assignment is available where the contract does not expressly prohibit it. Most federal contracts include FAR clause 52.232-23, Assignment of Claims.
• The assignment goes to a financing institution. Banks, trust companies, and other financing institutions qualify. A private individual generally does not.
• Notice is filed. Written notice of assignment, with a true copy of the instrument, is provided to the contracting officer, the disbursing officer, and the surety on any bond.
• Payments are redirected. Once the assignment is acknowledged, the agency remits payment to the assignee rather than to the contractor directly.
• It is generally all-or-nothing per contract. Assignment typically covers all amounts payable under the contract, not a hand-picked subset of invoices.

The no-setoff clause

One provision matters more than contractors expect. Where a contract includes the no-setoff commitment, payments to the assignee are not reduced by claims the government has against the contractor arising independently of that contract, such as liabilities under a different award.

For a lender, that protection is meaningful: it narrows the risk that the receivable being financed evaporates because of an unrelated dispute. Whether the clause applies depends on the contract and agency determination, and it is one of the first things underwriting checks.

Where contractors get tripped up

• Assuming assignment is automatic. It is not. Notice must be properly prepared, delivered, and acknowledged before payments redirect.
• Missing the surety. On bonded work, the surety must receive notice. Skipping it delays acknowledgment.
• Signing conflicting agreements. An existing lender with a blanket lien may need to consent. This is what intercreditor agreements resolve.
• Waiting until funding is urgent. Acknowledgment takes agency processing time. Starting the paperwork the week payroll is due compresses a timeline you do not control.
• Ignoring the prohibition language. A minority of contracts restrict assignment. Read the clause before you assume a facility can be structured against it.

Common questions

Does assignment mean I lose control of my contract? No. Assignment concerns payment of amounts due, not performance. You still perform and administer the contract.

Does it apply to subcontracts? The Act governs claims against the federal government, so it applies to prime contracts. Subcontractor financing is structured differently, against the receivable owed by the prime.

Can I keep my bank if I assign a contract? Usually yes, through an intercreditor agreement that defines each lender’s priority in specific collateral.

Do state and local contracts work the same way? No. State and local assignment rules vary by jurisdiction and contract terms, which is why underwriting treats them separately.

The bottom line

The Assignment of Claims Act is not something most contractors need to master, but it is worth understanding why it exists. It is the reason a federal award can be financed on its own strength, and the reason the paperwork around that financing is more procedural than a typical business loan.

The practical takeaway is timing. Assignment involves agency processing, and processing takes days you cannot compress. Contractors who start the conversation at award rather than at the shortfall consistently get funded faster.