January 31, 2017 - Compliance, Small Business

Prime Contractors Beware: Reduced or Untimely Subcontractor Payments May Require Reporting

Small BusinessA new Federal Acquisition Regulation (“FAR”) final rule that implements a section of the Small Business Jobs Act of 2010 requires certain prime contractors to “self-report” to their contracting officers all reduced or untimely payments to their small business subcontractors. 82 Fed. Reg. 93481.

New FAR 52.242-5(b) explains that the “Contractor shall notify the Contracting Officer, in writing, not later than 14 days after-(1) A small business subcontractor was entitled to payment under the terms and conditions of the subcontract; and (2) The Contractor-(i) Made a reduced or untimely payment to the small business subcontractor; or (ii) Failed to make a payment, which is now untimely.”  Id.  If a contractor fails to make the required payment, it is required to “include the reason(s) for making the reduced or untimely payment in any Notice required under paragraph (b) of this clause.”  Id.

The scope of this provision is somewhat limited, as it only applies to contracts where small business subcontracting plans are required (see FAR 52.219-9).  Id.  Additionally, the reporting requirement covers payments between the prime contractor and small business subcontractor—it does not include lower-tier subcontractor payments.

Commercial Items Covered

Despite pushback from contractors questioning the applicability of this clause to commercial items, the rule makes clear that the new clause applies to contracts for the acquisition of commercial items and commercially available off-the-shelf items.

Past Performance

Although there is some margin for error, contracting officers are required to report to the Federal Awardee Performance and Integrity Information System (“FAPIIS”) when the prime contractor has reported three or more occasions of unjustified reduced or untimely payments under a single contract within a 12-month period.  82 Fed. Reg. 93486.  A report to the FAPIIS may result in a negative rating on the prime contractor’s past performance evaluation under the “Small Business Subcontracting Evaluation Factor” in the Contractor Performance Assessment Reporting System (CPARS).  Id.

Relevant Definitions

A reduced payment is “a payment that is for 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.”   FAR 52.242-5(a).

An untimely payment is “a payment that is more than 90 days past due under the terms and conditions of a subcontract, for supplies and services for which the Government has paid the prime contractor.”  Id.

Examples of Payment Situations “Not Unjustified”

The regulators have offered guidance about circumstances that will be deemed appropriate.  In particular, the following payment or nonpayment situations are excluded from the self-reporting requirement:

  • There is a contract dispute on performance;
  • A partial payment is made for amounts not in dispute;
  • A payment is reduced due to past overpayments;
  • There is an administrative mistake; and/or
  • Late performance by the subcontractor leads to later payment by the prime contractor.

(82 Fed.Reg. 93486).

MoFo Recommendations

Given this new requirement, contractors should consider whether they are able to identify from their accounting systems, or elsewhere, which of their subcontractors are small businesses and the ongoing status of payments to these subcontractors.  There is room for disagreement with subcontractors within some of these exceptions, most obviously when there is a performance “dispute” or when a subcontractor’s performance is late.  This suggests contractors must be diligent in documenting their correspondence with subcontractors—especially if a dispute is brewing.  In light of the foregoing, contractors should:

  • Maintain listings of small business subcontractors along with payment status.
  • Prepare internal controls that will identify payments that are more than 90 days overdue.
  • Document through clear, written correspondence any explanations for delayed or untimely payments. This includes diligently documenting performance issues and potential disputes.
  • Small businesses should consider this to be another tool in their toolkit for demanding prompt payment.
  • To preserve their ability to report failure to comply with these requirements, small business subcontractors may want to reject provisions that bar them from communicating directly with the government.