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Payment of Subcontractor's Invoices


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#1 CA-CS

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Posted 01 April 2009 - 11:24 AM

Contract payment terms notwithstanding, is there a federal law or regulation that requires a prime contractor on a federal contract to pay a small business subcontractor within a set period of time from receipt of the subcontractor's invoice?

#2 here_2_help

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Posted 01 April 2009 - 11:56 AM

The clause 52.216-7 is mandatory for certain contract types, including cost-reimbursement types. See the language at (b)(1)(ii), below.


52.216-7 Allowable Cost and Payment.
As prescribed in 16.307(a), insert the following clause:

Allowable Cost and Payment (Dec 2002)

(a) Invoicing.

(1) The Government will make payments to the Contractor when requested as work progresses, but (except for small business concerns) not more often than once every 2 weeks, in amounts determined to be allowable by the Contracting Officer in accordance with Federal Acquisition Regulation (FAR) Subpart 31.2 in effect on the date of this contract and the terms of this contract. The Contractor may submit to an authorized representative of the Contracting Officer, in such form and reasonable detail as the representative may require, an invoice or voucher supported by a statement of the claimed allowable cost for performing this contract.

(2) Contract financing payments are not subject to the interest penalty provisions of the Prompt Payment Act. Interim payments made prior to the final payment under the contract are contract financing payments, except interim payments if this contract contains Alternate I to the clause at 52.232-25.

(3) The designated payment office will make interim payments for contract financing on the _________ [Contracting Officer insert day as prescribed by agency head; if not prescribed, insert "30th"] day after the designated billing office receives a proper payment request. In the event that the Government requires an audit or other review of a specific payment request to ensure compliance with the terms and conditions of the contract, the designated payment office is not compelled to make payment by the specified due date.

(b) Reimbursing costs.

(1) For the purpose of reimbursing allowable costs (except as provided in paragraph (b)(2) of this clause, with respect to pension, deferred profit sharing, and employee stock ownership plan contributions), the term ?costs? includes only?

(i) Those recorded costs that, at the time of the request for reimbursement, the Contractor has paid by cash, check, or other form of actual payment for items or services purchased directly for the contract;

(ii) When the Contractor is not delinquent in paying costs of contract performance in the ordinary course of business, costs incurred, but not necessarily paid, for?

(A) Supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made?

(1) In accordance with the terms and conditions of a subcontract or invoice; and

(2) Ordinarily within 30 days of the submission of the Contractor?s payment request to the Government;

(B) Materials issued from the Contractor?s inventory and placed in the production process for use on the contract;

© Direct labor;

(D) Direct travel;

(E) Other direct in-house costs; and

(F) Properly allocable and allowable indirect costs, as shown in the records maintained by the Contractor for purposes of obtaining reimbursement under Government contracts; and

(iii) The amount of financing payments that have been paid by cash, check, or other forms of payment to subcontractors.

(2) Accrued costs of Contractor contributions under employee pension plans shall be excluded until actually paid unless?

(i) The Contractor?s practice is to make contributions to the retirement fund quarterly or more frequently; and

(ii) The contribution does not remain unpaid 30 days after the end of the applicable quarter or shorter payment period (any contribution remaining unpaid shall be excluded from the Contractor?s indirect costs for payment purposes).

(3) Notwithstanding the audit and adjustment of invoices or vouchers under paragraph (g) of this clause, allowable indirect costs under this contract shall be obtained by applying indirect cost rates established in accordance with paragraph (d) of this clause.

(4) Any statements in specifications or other documents incorporated in this contract by reference designating performance of services or furnishing of materials at the Contractor?s expense or at no cost to the Government shall be disregarded for purposes of cost-reimbursement under this clause.

© Small business concerns. A small business concern may receive more frequent payments than every 2 weeks.

(d) Final indirect cost rates.

(1) Final annual indirect cost rates and the appropriate bases shall be established in accordance with Subpart 42.7 of the Federal Acquisition Regulation (FAR) in effect for the period covered by the indirect cost rate proposal.

(2)(i) The Contractor shall submit an adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years. Reasonable extensions, for exceptional circumstances only, may be requested in writing by the Contractor and granted in writing by the Contracting Officer. The Contractor shall support its proposal with adequate supporting data.

(ii) The proposed rates shall be based on the Contractor?s actual cost experience for that period. The appropriate Government representative and the Contractor shall establish the final indirect cost rates as promptly as practical after receipt of the Contractor?s proposal.

(3) The Contractor and the appropriate Government representative shall execute a written understanding setting forth the final indirect cost rates. The understanding shall specify (i) the agreed-upon final annual indirect cost rates, (ii) the bases to which the rates apply, (iii) the periods for which the rates apply, (iv) any specific indirect cost items treated as direct costs in the settlement, and (v) the affected contract and/or subcontract, identifying any with advance agreements or special terms and the applicable rates. The understanding shall not change any monetary ceiling, contract obligation, or specific cost allowance or disallowance provided for in this contract. The understanding is incorporated into this contract upon execution.

(4) Failure by the parties to agree on a final annual indirect cost rate shall be a dispute within the meaning of the Disputes clause.

(5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates.

(6)(i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may?

(A) Determine the amounts due to the Contractor under the contract; and

(B) Record this determination in a unilateral modification to the contract.

(ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause.

(e) Billing rates. Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor), subject to adjustment when the final rates are established. These billing rates?

(1) Shall be the anticipated final rates; and

(2) May be prospectively or retroactively revised by mutual agreement, at either party?s request, to prevent substantial overpayment or underpayment.

(f) Quick-closeout procedures. Quick-closeout procedures are applicable when the conditions in FAR 42.708(a) are satisfied.

(g) Audit. At any time or times before final payment, the Contracting Officer may have the Contractor?s invoices or vouchers and statements of cost audited. Any payment may be?

(1) Reduced by amounts found by the Contracting Officer not to constitute allowable costs; or

(2) Adjusted for prior overpayments or underpayments.

(h) Final payment.

(1) Upon approval of a completion invoice or voucher submitted by the Contractor in accordance with paragraph (d)(5) of this clause, and upon the Contractor?s compliance with all terms of this contract, the Government shall promptly pay any balance of allowable costs and that part of the fee (if any) not previously paid.

(2) The Contractor shall pay to the Government any refunds, rebates, credits, or other amounts (including interest, if any) accruing to or received by the Contractor or any assignee under this contract, to the extent that those amounts are properly allocable to costs for which the Contractor has been reimbursed by the Government. Reasonable expenses incurred by the Contractor for securing refunds, rebates, credits, or other amounts shall be allowable costs if approved by the Contracting Officer. Before final payment under this contract, the Contractor and each assignee whose assignment is in effect at the time of final payment shall execute and deliver?

(i) An assignment to the Government, in form and substance satisfactory to the Contracting Officer, of refunds, rebates, credits, or other amounts (including interest, if any) properly allocable to costs for which the Contractor has been reimbursed by the Government under this contract; and

(ii) A release discharging the Government, its officers, agents, and employees from all liabilities, obligations, and claims arising out of or under this contract, except?

(A) Specified claims stated in exact amounts, or in estimated amounts when the exact amounts are not known;

(B) Claims (including reasonable incidental expenses) based upon liabilities of the Contractor to third parties arising out of the performance of this contract; provided, that the claims are not known to the Contractor on the date of the execution of the release, and that the Contractor gives notice of the claims in writing to the Contracting Officer within 6 years following the release date or notice of final payment date, whichever is earlier; and

© Claims for reimbursement of costs, including reasonable incidental expenses, incurred by the Contractor under the patent clauses of this contract, excluding, however, any expenses arising from the Contractor?s indemnification of the Government against patent liability.

(End of clause)

#3 MGRumbaugh

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Posted 01 April 2009 - 12:26 PM

Contract payment terms notwithstanding, is there a federal law or regulation that requires a prime contractor on a federal contract to pay a small business subcontractor within a set period of time from receipt of the subcontractor's invoice?


Your question begins with the statement "contract payment terms notwithstanding," but does not identify what those terms are.
Is your company following the payment terms? If the prime isn't following those terms, why? Are there problems with the deliverables in terms of quality or timeliness that might cause delayed payments?

Notwithstanding the foregoing, the Prompt Payment Act does not provide for late interest penalties for payments made to subcontractors. Prime contractors typically pay subcontractors after they receive payment from the Govt and you have no visibility as to when that happens. Under construction contracts, however, an agency may withhold payment to a prime vendor if they learn that the prime vendor has failed to pay their subcontractor in accordance to the terms of their contract. See http://fms.treas.gov...tions.html#rule for more Prompt Payment Q&A

Was the subcontract awarded pursuant to a small business subcontracting plan in the prime's contract? If so, FAR 19.702 states that it's the policy of the U.S. that its prime contractors establish procedures to ensure the timely payment of amounts due pursuant to the terms of their subcontracts with small business... You could gently remind the prime of their payment obligation.

If the prime contract is an award fee contract and "subcontract management" is one of the areas evaluated in the award fee plan, then you could let the CO know that there's a payment issue. But be careful here. Is this a chronic problem that's affecting the company's cash flow to the degree that you can't make payroll? Or is it an occasional annoyance? Remember there's no privity of contract between you and the Govt, and contacting the CO might not work. The CO may tell you to go away or they might ding the prime. If the CO dings the prime over your call, they will not be pleased. So you need to decide if it's worth "biting the hand that feeds you."

Hope this helps,
MGR

#4 here_2_help

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Posted 02 April 2009 - 11:00 AM

Prime contractors typically pay subcontractors after they receive payment from the Govt and you have no visibility as to when that happens.



I disagree with that generalization. Rather, I would say that prime contractors typically pay subcontractors in accordance with the payment terms of the subcontract, else in the normal course of business (in line with payments to other vendors/suppliers). Prime contractors that make a habit of paying subcontractors only after they have received payment from the Government, will find (over time) that they are no longer the preferred customer of choice, and may see their supply base dwindle.

#5 MGRumbaugh

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Posted 02 April 2009 - 12:25 PM

I disagree with that generalization. Rather, I would say that prime contractors typically pay subcontractors in accordance with the payment terms of the subcontract, else in the normal course of business (in line with payments to other vendors/suppliers). Prime contractors that make a habit of paying subcontractors only after they have received payment from the Government, will find (over time) that they are no longer the preferred customer of choice, and may see their supply base dwindle.


I'm glad that your experience with payment from prime contractors is better than mine. As a small business subcontractor I frequently did not get paid until after the prime received their payment. They may not have been the "preferred" customer, but small businesses don't always have the luxury of picking and choosing customers. Now, I'm in a position to decline business from companies who don't have prompt/reliable payment habits. But I'm sorry to say that there are companies out there who don't pay small business subcontractors promptly.

#6 Vern Edwards

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Posted 02 April 2009 - 12:47 PM

Marge is right. The idea that prime contractors "typically" do anything is insupportable. Plenty of prime contractors include terms in their contracts to the effect that they will pay only after they have been paid. Plenty of prime contractors are operating on the financial edge and slow-pay subs in order to facilitate cash flow. Many, many subs have no "preferred customer" options.

Over the years, nonpayment and slow payment have been such issues that in 1995 Congress enacted legislation enabling COs to act in response to subcontractor complaints, despite the lack of privity. See Public Law 102-190, Sec. 806(a)(4). The law is implemented at FAR 32.112-1.

#7 jeffh

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Posted 16 June 2009 - 09:56 PM

Marge is right. The idea that prime contractors "typically" do anything is insupportable. Plenty of prime contractors include terms in their contracts to the effect that they will pay only after they have been paid. Plenty of prime contractors are operating on the financial edge and slow-pay subs in order to facilitate cash flow. Many, many subs have no "preferred customer" options.

Over the years, nonpayment and slow payment have been such issues that in 1995 Congress enacted legislation enabling COs to act in response to subcontractor complaints, despite the lack of privity. See Public Law 102-190, Sec. 806(a)(4). The law is implemented at FAR 32.112-1.


Making payment to subs only after receiving payment from the government is typical. The one area where I have seen a prime run into a problem was withholding payment to a sub (essentially indefinitely) after payment for the sub's work was made by the government. A DCAA audit revealed the situation and DCAA required the payment to made to the sub or reimbursed to the government.

#8 here_2_help

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Posted 17 June 2009 - 10:11 AM

Making payment to subs only after receiving payment from the government is typical.


I must be misinterpreting the payment clauses found in government contracts.

Excerpts from relevant contract payment clauses:

-- For fixed-price contracts in which performance-based payments (PBPs) are utilized, the PBP contract clause (52.232-32) states that PBPs may be reduced or suspended by the Contracting Officer when "The Contractor is delinquent in payment to any subcontractor or supplier under this contract, in the ordinary course of business." Each PBP request must have an accompanying certification, which includes the statement "[Except as reported in writing on], all payments to subcontractors and suppliers under this contract have been paid, or will be paid, currently, when due in the ordinary course of business."

-- For fixed-price contracts in which cost-based progress payments are utilized, the progress-payment clause (52.232-16) states that "The amount of financing and other payments for supplies and services purchased directly for the contract are limited to the amounts that have been paid by cash, check, or other form of payment, or that are determined due and will be paid to subcontractors -- (i) In accordance with the terms and conditions of the subcontract or invoice; and (ii) Ordinarily within 30 days of the submission of the Contractor's payment request to the Government." Moreover, the clause also requires the contractor to exclude from progress payment calculations "Payments made or amounts payable to subcontractors or suppliers, except for -- (i) Completed work, including partial deliveries, to which the Contractor has acquired title; and (ii) Work under cost-reimbursement or time-and-material subcontracts to which the Contractor has acquired title." Similar to PBPs (as noted above), progress payments can be reduced or suspended by the Contracting Officer when "The Contractor is delinquent in payment of the costs of performing this contract in the ordinary course of business."

-- For cost-type contracts, the Allowable Cost and Payment clause (52.216-7) states that allowable (and billable) costs can only include "Those recorded costs that, at the time of the request for reimbursement, the Contractor has paid by cash, check, or other form of actual payment for items or services purchased directly for the contract. When the Contractor is not delinquent in paying costs of contract performance in the ordinary course of business [it may include] costs incurred, but not necessarily paid, for -- Supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made (i) In accordance with the terms and conditions of the subcontract or invoice; and (ii) Ordinarily within 30 days of the submission of the Contractor's payment request to the Government."

-- For T&M contracts, the payment clause (52.232-7) states that "... the Government will reimburse the Contractor for allowable cost of materials provided the Contractor -- (i) Has made payments for materials in accordance with the terms and conditions of the agreement or invoice; and (ii) Ordinarily makes those payments within 30 days of the submission of the Contractor's payment request to the Government and such payment is in accordance with the terms and conditions of the agreement or invoice."

I'm not getting how paying subs after receipt of payment from the government is compliant with the clause language above. In jeffh's situation, what he is describing was arguably a false claim for which the DCAA auditor should have made a Form 2000 referral to the DOJ.

#9 jeffh

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Posted 17 June 2009 - 12:56 PM

Well, seems to me the common denominator of the clauses above is that the contractor shouldn't be delinquent according to the Ts&Cs of their agreement(s) with sub(s), which should normally call for payment of subcontractor invoices within 30 days of the contractor's payment request to the government.

I glanced back at the FAR and the regs are distinct according to the contract type and form. There may also be terms in a subcontract wrt acceptance criteria of work performed, unacceptable costs, refusal of reimbursement by government, etc. which come to bear in a discussion about timing of payments. So, I'm not disagreeing with you at all, I would just say it's an area where the variables specific to the situation would need to be clarified in order to determine a Contractor's compliance with the FAR and with the subcontract.

By the letter of the law, you may very well be right--Ts&Cs timing payments to subs contingent upon timing of reimbursement by the government may not comply with FAR. For me, I'll deem what are reasonable Ts&Cs given the work to be performed, etc. The Government pays pretty fast, so if I can get terms paying me within 30 of the Government's payment, I'm satisfied, unless my customer (the sub in this discussion) needs different terms for cashflow or whatever and then I'll pitch for better terms. But generally, I'll make that pitch based on a business-need argument rather than a compliance issue. If the prime ever becomes delinquent to a point that it's causing me a problem, I may squawk to the Government. But I'm discussing stuff you may not care about... I don't know your situation giving rise to the question.

Wrt the DCAA situation, it wasn't a false claim in the sense that no work had been performed or fictitious invoices submitted. The work had been performed and an invoice submitted by the sub--the sub really didn't care to be paid until the following fiscal, so wasn't pushing the prime for payment. However, when DCAA uncovered and despite everyone's good intentions, DCAA required the payment be made to the sub or reimbursed to the government immediately--about $40k. The sub was notified to expect a check overnight delivery, they didn't complain and DCAA was satisfied.




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