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Subcontracting Payment Rules: Make the Payment or Incur the Penalty

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Centre Law & Consulting

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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.

The post Subcontracting Payment Rules: Make the Payment or Incur the Penalty appeared first on Centre Law & Consulting.


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