Effective Immediately: Prime Contractors Must Accelerate Payments to Small Business Subcontractors
September 25, 2012
A new FAR clause at 52.232-99 requires prime contractors, upon receipt of accelerated payments from the Government, to pay small business subcontractors on an accelerated timetable to the maximum extent practicable. This clause is effective immediately, and Contracting Officers are instructed to insert this clause in all new solicitations and resultant contracts and, to the extent feasible, modify existing solicitations and amend existing contracts to include the new clause.
This clause implements Office of Management and Budget (OMB) Policy Memorandum M-12-16, Providing Prompt Payment to Small Business Subcontractors (July 11, 2012). The OMB memorandum directs agencies to accelerate payments to prime contractors so that prime contractors may accelerate payments to small business subcontractors. The goal is for agencies to pay prime contractors within 15 days of receiving proper documentation, rather than the usual 30 days.
DoD issued a memorandum instructing its Contracting Officers to begin inserting the new clause. While the General Services Agency (GSA) has instructed Civilian Agencies to do the same, each Agency must issue its own directive to its Contracting Officers. So far, at least NASA, the Department of Homeland Security, the Department of Commerce, and the Department of the Interior have each issued a directive. The rest of the civilian agencies should soon follow suit, if they haven’t done so already.
OMB noted that this policy does not affect the application of the Prompt Payment Act’s late-payment interest penalty provisions. Under those provisions, the interest penalty begins when an agency does not pay a contractor the amount due “by the required payment date.” The accelerated payment policy does not change the required payment date for purposes of the interest penalty.
The acceleration of payments to prime contractors is a temporary, transitional policy that is set to last for one year from the July 11, 2012 date of the memo. At the conclusion of that period, OMB will provide further guidance as to the appropriate steps agencies should take to ensure that small business subcontractors are paid promptly.
However, this is not the only policy to address small business payments. As previously reported here, OMB already established a policy for accelerating payments to small business prime contractors in Policy Memorandum M-11-32, Accelerating Payments to Small Businesses for Goods and Services (Sept. 14, 2011). Additionally, the 2010 Jobs Act contains provisions that require a prime contractor to notify the contractor officer in writing when the prime reduces payments to a subcontractor and when payments to a subcontractor are 90 days past due. The Jobs Act also requires contracting officers to consider the unjustified failure of a prime contractor to make a full or timely payment to a subcontractor in their evaluation of the prime contractor’s performance.
SBA issued a proposed rule implementing the Jobs Act policies on October 5, 2011, Small Business Subcontracting, 76 Fed. Reg. 61626 (Oct. 5, 2011), but, as of the date of this article, no final rule has been issued. The proposed rule also includes a provision prohibiting prime contractors from preventing subcontractors from discussing material matters pertaining to payments directly with the contracting officer. When final, this rule will strengthen the Government’s ability to ensure that prime contractors pay subcontracts promptly and in full.
Katie Calogero is the attorney responsible for the content of this article.