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ShaunaMSACM

FAR 52.232-27(e) Prime Contractor Withholding Procedures

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Contract Type: Design Build - FFP

Scenario:

First tier subcontractor to prime contractor refuses to submit its invoices in the schedule of values format required by the prime contract.

Background:

1. The prime contractor incorporated the schedule of values invoicing requirement into the subcontract; subcontractor concurred and signed subcontract.

2. Subcontractor attempts to "front load" charges into its invoices and demands prime contractor pay subcontractor well in advance of what prime can bill government for said charges under the required schedule of values.

3. Prime contractor contacts subcontractor to discuss on multiple occasions; in each discussion, subcontractor advises it will not comply with required invoice format.

4. Prime contractor notifies the KO of the situation and its intent to withhold subcontractor payment in accordance with the procedures set forth in 52.232-27(e).

5. Prime contractor issues a formal subcontractor withholding notice conforming to the requirements of 52.232-27(g).

6. In reply, subcontractor notifies prime contractor to "pound sand" and continues in its refusal to submit invoices in the schedule of values format required.

7. Prime contractor notifies KO weekly of status of situation and continues (on a nearly daily basis) in its attempts to get the subcontractor to submit a proper invoice.

Question:

Is the prime contractor required to submit subsequent subcontractor withholding notices until the situation is resolved or will prime's actions in Item 7 above suffice? If additional notices are required, is there a specific frequency required?

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Hi Shauna,

I don't know the answer to your question. But would you please expand on your Point #2, above? How did the prime come to learn that the subcontractor had "front loaded" its charges into its invoices? What does the phrase "demands prime contractor pay subcontractor well in advance of what prime can bill government form" mean, and how does it affect the prime's willingness (or unwillingness) to process the subcontractor's invoices? Is the issue that the subcontractor has to bill in such a way that this is a "pay when paid" relationship, or is this merely a matter of formatting?

Thanks

H2H

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Shauna, I was intimately involved in construction contract progress payment policy and procedures but it has been a few years. However, the Payment and Prompt Payment clauses haven't changed with regard to subcontractor retainage and withholdong of progress payments. I don't know what you are actually including in your progress payment invoices for payment by the government. You said that you are following the procedures in paragraph ( e ), which apply when the contractor discovers - after making a request from the government for a progress payment - that all or part of the subs payment will be withheld from the monies to be paid by the government to the prime in the progress payment.

Are you saying that you, as the prime , are retaining or withholding all or a portion of the subcontractor's progress payment from government progress payments made to you because of its failure to submit a proper invoice using the correct breakdown?

Or, are you including some amount of progress on the subcontract that you feel is appropriate for progress reporting purposes, then asking the government to withhold that amount from it's progress payment until the sub submits a proper invoice that will reflect a correct breakdown?

Under the current terms of the Prompt Payment Act, the prime isn't supposed to ask for progress payment of sums that it intends to retain or withhold from its subs before submission. See paragraph ( h ). The government is the party that is supposed to reduce the amounts requested for withholding or retainage from the progress payments until the prime submits a subsequent invoice indicating that it has reduced or dropped the retainage or withholding and is ready to pay the sub.

Please clarify the specific circumstances surrounding the withholding. We know the reason. Just not sure of the timing and who is actually holding back the monies that would go to the sub.

The PP for Construction contract clause goes hand in hand with clause 52.232-5, Payments Under Fixed-Price Construction Contracts. For instance, see the certification and specifically see paragraph ( c ) (3) under that clause.

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What I am leading to is how often you'd have to provide notices. It depends upon who is actually holding the sub's payments - The Gov't or Prime.

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here_2_help and Joel: thank you for your assistance!

here_2_help: Yes, the subcontract contains "Pay When Paid" terms. Even if it didn't, however, the subcontractor would still be required to invoice the way the prime is requiring. This is such a huge project that it would be an absolute nightmare for the prime to sort out the sub's charges each month and include them in the pay app correctly so it isn't rejected by the government.

Regarding Item 2, the prime didn't know the sub was "front loading" its charges until the government rejected the prime's first pay application and the prime received a more detailed breakdown of charges from the subcontractor.

Regarding "demanding prime contractor pay subcontractor well in advance of what the prime can bill the government", the approved schedule of values is broken down into phases. Phase I includes Paving. If you break down Phase I Paving into further detail, it includes paving of Elm and Maple Streets only. Phase II Paving is limited to one street - Main Street. The subcontractor went ahead and bought the materials to pave Main Street for Phase II. Even though the subcontractor knows we can't ask for a progress payment on their behalf for the Main Street materials since we are only allowed to currently invoice for Phase I, the subcontractor wants to be paid for the Main Street Phase II materials right now.

Joel: the prime is holding the subcontractor's payment. The prime didn't know about the "front loading" issue until it had already submitted its pay app to the government, which is the reason why the prime issued the withholding notice in accordance with 52.232-27(e). Also, by the time the prime contractor discovered the front loading issue, it was too late - DFAS had already paid the prime contractor. The prime contractor notified the KO how much it intended to withhold from the progress payment and continues to update him on the status of resolving the situation.

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Brief clarification of Post #5 regarding timeline:

1. Government rejected prime's first pay app.

2. The sub revised its portion of the rejected pay application and the prime resubmitted the pay app to the government.

3. The government approved the revised pay application.

4. Trying to figure out what happened so as to avoid the same situation from occurring in the future, the prime did a "deep dive" into the subcontractor charges and discovered the front loading issue.

Hope this helps - please let me know if I can provide any further details.

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Brief clarification of Post #5 regarding timeline:

1. Government rejected prime's first pay app.

2. The sub revised its portion of the rejected pay application and the prime resubmitted the pay app to the government.

3. The government approved the revised pay application.

4. Trying to figure out what happened so as to avoid the same situation from occurring in the future, the prime did a "deep dive" into the subcontractor charges and discovered the front loading issue.

Hope this helps - please let me know if I can provide any further details.

Thanks, Shauna

Technically, under the PP clause you are on the hook for interest to the government on the withheld overpayment until you either pay back the overpayment or release it to the sub when appropriate or reduce the next pay estimate to account for the overpayment. See paragraphs ( 5 ) and ( 6 ). I'll wager a bet that the government isn't smart enough about the prompt pay act to figure out that you owe interest to the government though.

If you look at the Payments Clause, backup info and certification required under paragraphs ( b ) and ( c ) of that clause require that each invoice describe how much of the progress payment is for work of the sub, how much the subcontract is for, how much you have paid the sub and certifications that you have paid the sub from previous payments and that you won't withhold anything from this payment.

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Question:

Is the prime contractor required to submit subsequent subcontractor withholding notices until the situation is resolved or will prime's actions in Item 7 above suffice? If additional notices are required, is there a specific frequency required?

So the sub submits an invoice to the prime and the prime withholds payment because the invoice is not in the contractually prescribed form. Your question was whether the prime must send a notice to the sub and a copy to the CO (KO) for each and every invoice or may send the CO a weekly status report ("item 7") instead.

Read the clause. Where does it say anything about weekly status reports to the CO?

The prime must send the required notice to the subcontractor for each and every invoice from which payment was withheld. The notice needn't be long or say much:

Our contract requires that you submit invoices in a prescribed form in order to protect the interests of the Government and ourselves. You agreed to that requirement when you signed the contract. Your invoice was not in the prescribed form. Therefore, we are withholding payment until you submit the invoice in the prescribed form. This was your Xth nonconforming invoice and this is our Xth such notice. We are very concerned about your continuing refusal to comply with the terms of our contract.

The prime must send a copy of each and every such notice to the CO.

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While Vern is technically correct, the prime should do everything possible not to be again put into the position of discovering AFTER submitting a pay request that the sub's invoice doesn't reflect payment for work not yet performed or for off-site stored materials that the government will not allow. And now that you are retaining proceeds from the government that would otherwise go to a sub, you need to take action as soon as possible but at least at the time of your next progress payment request to show that you are no longer withholding the actual funds.

If you won't be able to pay the sub the withholding, then one alternative is to subtract the unearned amount from the next reported progress and/or stored materials list and explain it in the pay request. That will effectively reduce your next payment to reflect that you are no longer holding the funds as retainage/withholding. The government should reduce the payment to be made by that amount because you already have in possession that amount.

The Prompt Payment Act Amendments of 1988 effectively changed the policy of allowing primes to use retain age and with holdings from their subs to finance construction contracts. I developed a form to accompany progress payment requests and procedures for our District to enforce this in 1990, after the FAR was updated to implement the Act in Contracts awarded after March 1990.

I don't know if the government contract admin office will seek interest from you - likely not. But to stop accrual of interest, you need to show that you are no longer physically withholding those funds from payments received from the government.

Due to the complexity of this subject, I would be glad to discuss options with you in confidence. I am not currently representing the government in an official capacity.

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Joel:

Why mention me? I was not "technically correct." I was absolutely correct about the question that was asked.

I don't mind you pontificating about what you think people would do if they had been as "intimately involved" in progress payments as you. But our first duty is to answer the question that is asked. I waited for you to answer the question, but it quickly became apparent that you were off on a tangent. Shauna did not ask for general consulting service, voluntary or otherwise, so I decided to cut you off at the pass before you totally obfuscated the issue.

Now that I have answered Shauna's question, go ahead and advise to your heart's content. I'm sure she'll appreciate the advice, even though she didn't ask for it.

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Vern,

You were technically correct concerning notices where payments were withheld from sub(s) out of progress payments made to the prime under the circumstances in 52.232-27( e ). The contractor provides the notices per 52.232-27 ( e ). However, If this becomes a recurring action on the part of the prime, there are serious management issues involved that would require attention.

The prime is supposed to promptly resolve the overpayment problem that results in the contractor possessing unearned contract funds or other retainage from subs or suppliers.

For the next payment request after the circumstances described in the original post in this thread, paragraph ( h ) kicks in for the current amounts physically retained or withheld. Also, paragraph ( d ) of 52.232-5 (Refund of unearned amounts) kicks in.

Gone are the days where primes were legally allowed to personally hold payments from the government as retainage or withholdings to use for financing construction contracts. This is not meant to be any reflection on or criticism of Shauna's company or their actions.

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The primary focus of the PPA Amendments of 1988 was to speed up payments to Government contractors. Congress also responded to complaints by the subcontractor and supplier industry groups that 1) it was standard practice for prime contractors to withhold or retain portions of subcontractor/supplier share of progress payments from the government to finance the primes outlay for construction contracts and 2) prime payments to subs were often very slow. .

There was much wailing and gnashing of teeth when we implemented the new PPA procedures on contract awarded after March 31, 1990 (I think that was the date), even if the contracts didn't contain the new clauses for 52.232-5 and 52.232-27 and told our contractors that they could no longer physically hold the retainage or withholdings from progress payments, that they would also have to pay their subs within seven days of being paid, that they would have to certify that they did and would pay, etc.

The GAO was tasked to do a follow up study a few years later and report back to Congress on both the Government's implementation and progress in speedier payment, how much interest and penalties were paid as well as how effective the subcontractor/supplier protections were implemented and achieved. We were one of the USACE Districts that GAO visited. We apparently fared well with our implementation of the new requirements. We showed them our procedures and forms submitted by our contractors with their progress payment requests in accordance with the -5 and -27 clauses.

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