Jul 14, 2016

The Payment of Subcontractors proposed rule, which appeared in the Federal Register in January 2016, is the latest in a series of efforts to hold the Prime accountable for timely payments to its Subs.

Those who follow these blogs know that ‘payment’ is a hot button topic for me whether it is payment to the Prime by the Government or payment to the Subcontractor by the Prime. We’ve previously highlighted the “Accelerating Payments to Small Businesses” rule whose aim is to enable small businesses subcontractors to receive payments within 15 days of receipt of a proper invoice. And not quite a year ago, I reviewed the finer points of the “Paid to Cost” rule, which requires payment to Subs thirty days after the Prime submits its invoice to the Government.

This Payment of Subcontractors proposed rule has made a long trip. It originated as Section 1334 of the Small Business Jobs Act of 2010! This statute requires the Prime to self-report to the Contracting Officer (CO) when the Prime makes late or reduced payments to small business subcontractors. In addition, the CO is required to record the identity of contractors with a history of three or more unjustified reduced payments to small business subcontractors within a 12-month period [FAR 42.1502(g)(2)] in the Federal Awardee Performance and Integrity Information System (FAPIIS).

What Does It Mean?

That’s a lot to take in, but essentially:

  • In an era of mandatory disclosure, the contractor must turn itself in to the CO along with the reason(s) for the reduced payment.
  • The CO will add the contractor’s identity to FAPIIS, the database that has been established to track contractor misconduct and performance.

The FAPIIS database also contains Federal contractor criminal, civil, and administrative proceedings in connection with federal awards, suspensions and debarments, administrative agreements issued in lieu of suspension or debarment, non-responsibility determinations, contracts terminated for fault, and defective pricing determinations – truly a tough neighborhood!

What Are the Points to Consider in This Rule?

First, what does a reduced payment mean? FAR 19.701 defines it as a payment that is less than the amount agreed upon in a subcontract in accordance with its terms and conditions for supplies and services for which the Government has paid the prime contractor.

Second, are any other processes affected? FAR 42.1502 is revised to include reports of reduced payments in the past performance evaluation in each of the ratings definitions found at Table 42-2. A new clause, FAR 52.242-XX, implements the rule.

Finally, to which contracts does this apply? This statute defines a ‘covered contract’ as a contract under which a prime contractor is required to develop a subcontracting plan. I was almost through an initial reading of this rule before that point was made clear. That narrows the scope of affected Prime contracts but only a little. FAR 19.702 [The Small Business Subcontracting Program] instructs that in negotiated acquisitions, each solicitation of offers to perform a contract or contract modification, that individually is expected to exceed $700,000 and that has subcontracting opportunities, shall require the apparently successful offeror to submit an acceptable subcontracting plan.

As of last week the Councils were comparing notes with the objective of issuing a final rule. Payment rules are typically welcomed by one party and dreaded by the other, but the dynamics are universally interesting.

Contact me if you have questions about this, but I’ll also review – probably the final rule – in my Federal Contract Basics or Subcontracting Under the FAR courses this fall.

About the Author:

Rich Zimmerman | Centre Law & Consulting Rich Zimmerman
Project Manager

Richard E. Zimmerman has more than 25 years of experience as a contracts professional both in Government and the private sector. His excellent background in FAR, Agency supplements, and their application over the procurement life cycle make him a critical resource for PMs, prime contractors, and subcontractors.
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  • Elissa Holman says:

    When you represent a company either through documentation or negotiation role do you include a subcontracting plan and include yourself for your own protection?
    I ask this because we represent companies to the GSA for Proposals and negotiations and bid documentation etc ,

    We have been unpaid by one Prime because they did not pay our mutually agreed to commission.

    They presently are responsible to pay us upon contract award. We won the award for them through our documentation expertise to service the elevators at 2 VA hospitals.

    If we had to have a subcontracting plan that included contract services then we can enforce our payment? Without a subcontracting plan , we could not enforce payment?

    • Centre Law & Consulting says:

      First, remember that subcontracting plans are required on contracts >$700,000. Second, from your note it appears your company is only involved during pre-award and the award; you do not perform the contract tasks after award. I recommend that your agreement with your customers does not include winning the task/contract – that sounds dangerously like a Contingent Fee, which is frowned upon in federal contracts.

  • Meghan Gough says:

    I enjoy following your blog! Thanks for this helpful information.

  • Brian Mandel says:

    So does this only cover small business subcontractors? Is there not a reporting requirement for missed payments?

    • Centre Law & Consulting says:

      This blog addresses payments from the Prime to a small business subcontractor. If you are a large subcontractor and your Prime is late (>30 days) paying you (especially if you are certain that the Government has paid), then you can notify the CO directly of your situation. This is an explicit exception to privity.

      • Elissa Holman says:

        These contracts are < 700,000. Our company was employed as subcontractor. We have in writing the promise of payment upon award. Post award work
        commences until there is no reimbursement to us.. In fact the Federal contractors respect our paperwork so much they award our clients because of the ease of process we bring to the table.