Inside New FAR Rule On Untimely Payments To Subcontractors

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New changes to the Federal Acquisition Regulation impose mandatory reporting requirements on federal prime contractors who fail to make full and timely payments to their small business subcontractors. Although little more than a month old, these new requirements already have been the source of considerable confusion for both federal prime contractors and small business subcontractors. Accordingly, this article aims to provide a user-friendly overview of the new requirements, and concludes by offering context and analysis from the perspective of both federal prime contractors and small business subcontractors.

Overview of New Mandatory Self-Reporting Requirements

Congress and the regulating agencies have implemented numerous requirements over the years in an effort to protect subcontractors against non-payment by federal prime contractors. Along these lines, the FAR Council recently issued a final rule to implement a section of the Small Business Jobs Act of 2010. The new rule, which was codified at FAR 52.242-5 and became effective Jan. 19, 2017, requires certain prime contractors to “self-report” to the relevant contracting officer all reduced or untimely payments to their small business subcontractors within 14 days of when the payment was due, and to provide the reason for the reduced or untimely payment.

The new rule applies to federal prime contractors who are required to develop and implement a small business subcontracting plan (currently contracts valued over $700,000 and public facility construction contracts over $1.5 million) and requires a prime contractor to notify the contracting officer within 14 days after (1) a small business subcontractor was entitled to payment under its subcontract, and (2) the prime contractor made a reduced or untimely payment to the subcontractor. FAR 52.242-5(a) defines “reduced payment” as a payment for less than the amount agreed upon, and defines “untimely payment” as a payment that is more than 90 days past due under the terms and conditions of the contract, “for supplies and services for which the Government has paid the prime contractor.” Where a contractor reports a reduced or untimely payment to a small-business subcontractor, “[t]he Contractor shall include the reason(s) for making the reduced or untimely payment.”[1]

In connection with this new rule, FAR 19.704 and FAR Clause 52.219-9 also were amended to require federal prime contractors to include in their small business subcontracting plans “[a]ssurances that [the prime contractor] will pay its small business subcontractors on time and in accordance with the terms and conditions of the underlying contract, and [the obligation to] notify the contracting officer when the prime contractor makes a reduced or untimely payment to a small business subcontractor (see 52.242-5).”

Under the FAR, reports of habitual and unjustified late or otherwise deficient payments to small business subcontractors will be included in an agency’s evaluation of the prime contractor’s past performance.[2] In considering whether a history of unjustified reduced or untimely payments must be notated in a prime contractor’s past performance evaluation, a contracting officer must “[d]etermine that ... the contractor has reported three or more occasions of unjustified reduced or untimely payments under a single contract with the 12-month period.”[3] Not all nonpayments are unjustified, however: A payment is not considered “unjustified” if there is a contract dispute regarding performance, a partial payment is made for amounts not in dispute, a payment is reduced due to past overpayments, there is an “administrative mistake,” or late performance of the subcontractor leads to later payment by the prime contractor.[4]

Context and Analysis

Federal Prime Contractors

Federal prime contractors should first determine whether the new requirements apply to them. If the new requirements do apply, then federal prime contractors should familiarize themselves with the content of the new requirements and promptly identify which of their current subcontractors are small businesses. Federal prime contractors also should promptly amend their small business subcontracting plans to comply with the new rules, which will require adding “[a]ssurances that [the prime contractor] will pay [their] small business subcontractors on time and in accordance with the terms and conditions of the underlying contract, and [the obligation to] notify the contracting officer when the prime contractor makes a reduced or untimely payment to a small business subcontractor (see 52.242-5).”

Additionally, federal prime contractors should determine the status of payments to small business subcontractors and promptly implement internal processes that will help identify when payments to small business subcontractors are more than 90 days past due under the terms and conditions of the contract. These internal processes, implemented by federal prime contractors, should also identify when the 14-day deadline for notifying the relevant contracting officer of reduced or untimely payments is approaching.

Moreover, as noted above, a payment is not considered “unjustified” if there is a contract dispute regarding performance, a partial payment is made for amounts not in dispute, a payment is reduced due to past overpayments, there is an “administrative mistake,” or late performance of the subcontractor leads to later payment by the prime contractor. Thus, federal prime contractors should carefully document each instance that justifies partial or untimely payments to small business subcontractors.

Small Business Subcontractors

Small business subcontractors, likewise, should first determine whether the new requirements apply to them. If the new requirements do apply, then small business subcontractors should promptly familiarize themselves with the substance of the new requirements and implement internal procedures that will help identify when payments from federal prime contractors are more than 90 days past due under the terms and conditions of the relevant contract. Small business subcontractors also should implement internal procedures that will help identify when payments from federal prime contractors are more than 104 days past due, as that date will coincide with the 14-day deadline by which the federal prime contractor will be required to notify the relevant contracting officer of the reduced or untimely payment.

Finally, small business subcontractors should carefully document the circumstances surrounding contract disputes with federal prime contractors regarding performance, reduced payments from federal prime contractors resulting from alleged past overpayments, non-payments resulting from alleged “administrative mistakes,” and nonpayments stemming from alleged late performance by the subcontractor.

Republished with permission. This article first appeared in Law360 on February 23, 2017.