Consignment in Government Procurement

Consignment in government procurement is a supply arrangement in which a contractor places inventory at a government-controlled location - such as a base supply store, a medical facility stockroom, or an installation warehouse - while retaining title to the goods until the government actually draws the stock for use. The government pays only for what it consumes, not for what sits on the shelf. This structure reduces the government's upfront procurement obligation and eliminates the need to predict exact demand quantities at order time, while giving the contractor guaranteed shelf presence and typically a preferred supplier relationship for the consigned commodity.

What is consignment in government procurement?

Consignment arrangements are structured as hybrid agreements that blend elements of a supply contract with a storage-and-custody arrangement. The contract establishes the agreed product list, pricing schedule, restocking frequency, and consumption reporting mechanism. The government's obligation to pay is triggered by consumption events - typically recorded through point-of-use scanners, periodic physical counts, or integrated inventory management systems - not by the contractor's act of stocking the shelves.

Because title remains with the contractor until consumption, the government does not have an obligation recorded in its financial system until the draw-down occurs. This structure can be advantageous for both parties when demand is highly variable and the cost of carrying inventory is significant. The contractor accepts the inventory holding cost in exchange for a captive sales relationship.

From a legal and regulatory standpoint, consignment arrangements must be carefully documented to address several risk allocation questions. The contract or agreement should specify which party bears the risk of loss for consigned inventory damaged or destroyed while in the government's custody. Government-furnished property (GFP) rules under FAR Part 45 may apply if the government provides storage space, shelving, or equipment to support the consignment arrangement. In that case, property accountability requirements under FAR 52.245-1 must be addressed. Additionally, the government's anti-deficiency obligations require that any firm commitment to pay for future consumption be structured as an indefinite-quantity arrangement with a stated minimum, rather than as an open-ended liability.

Medical supply consignment is a common application in the federal health sector. The Defense Health Agency and Veterans Health Administration use consignment or vendor-managed inventory (VMI) arrangements for surgical implants, where the surgeon selects the appropriate implant size intraoperatively and the hospital records and pays for only the specific unit consumed.

Why it matters for contractors

Consignment creates both opportunity and risk for government contractors. The opportunity is a preferred position at the point of consumption with reduced competition from rival suppliers for each individual draw. Once a consignment arrangement is in place, the contractor's inventory is physically present when the government needs it, reducing the likelihood of a competing solicitation for each purchase.

The risk is that the contractor bears inventory financing costs for stock that may turn slowly or not at all. Demand forecasting errors can leave the contractor holding excess inventory at the government facility with limited ability to redeploy it. Contract terms should include provisions for returning slow-moving or obsolete consignment stock and for adjusting the consignment catalog periodically.

Example

A medical device company places a consignment inventory of orthopedic implants in a military hospital's sterile processing department. The hospital calls off individual implant sets for scheduled surgeries. After each procedure, the hospital's materials management system records the specific items consumed, and the contractor invoices the Defense Health Agency for those items within 48 hours. Items that are opened but not used are returned to the contractor's sterile storage. Implants that remain in consignment for more than 180 days without use are rotated back to the contractor's distribution center under a stock rotation provision in the contract.