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Topics in Advanced Subcontracting: New Tools to Accelerate Payment

Deploy Tools to Hedge Against Delayed Payment

A new FAR provision requires prime contractors to self-report to their CO if they pay their subs too little or too late. The rule should benefit small business subcontractors by incentivizing their prime to make prompt and complete payments. See, 81 FR 93481.

But there’s more here than meets the eye. When combined with existing regulations, the new rule appears to give subs a way of influencing their prime’s CPARS and FAPIIS record—that depository of all bad things, such as terminations for cause, determinations of non-responsibility, and convictions for human-trafficking. Now, add to the list “slow-rolling payments to your sub.”

Pursuant to FAR 52.219-9 (Small Business Subcontracting Plans), a prime’s subcontracting plan is already required to provide assurances that their subs will have unfettered access to government COs to discuss payment or use issues. And the language addressing possible topics of discussion is quite broad: primes can’t prohibit their subs from speaking directly to their COs about “any material matter pertaining to payment or utilization of a subcontractor.”

Subs previously affected their prime’s CPARS indirectly, through subcontract performance; now, subs can directly influence their prime’s government report card by engaging in direct communication with the government CO over payment issues.

An example is instructive. Imagine a sub has persistent late-payment issues with its prime, who claims the late payments are due to the sub’s consistent submission of “improper” invoices, a well-worn rationale for untimely payment. Under the new rule, the prime would have to report the late payment issue to its CO, unless the late payment is justified. (Permissible justifications include (i) a contract dispute over performance, (ii) a partial payment for an undisputed amount, (iii) compensating for a previous overpayment, (iv) an administrative mistake, and (v) the sub’s late performance.) So, presumably, if the prime believes its sub’s invoices are improper, an “administrative mistake,” it could (conveniently) conclude that notice to the CO is not required under the new rule.

But not so fast: the new rule becomes effective within the context of unfettered, direct communications between the sub and the CO on questions of payment. Because of earlier changes to FAR 52.219-9, the prime’s decision not to report its late payment is functionally subject to the sub’s concurrence. If the sub believes it’s not being treated fairly, under existing regulations it can communicate this fact directly to the CO. (Clearly, the fact of the late payments is a “material matter pertaining to payment[.]”) And, under the new rule, the CO can cite the late payments in the prime’s past performance evaluation, and tag it in the prime’s FAPIIS records.

Savvy subcontractors will seek to use the interplay of these regulations as both a carrot and a stick. Subcontractors can communicate positive information directly to the CO as well as negative information, as both are equally “material” to issues respecting use or payment. If skillful, subcontractors can begin to directly influence how the government perceives their prime partner and, in doing so, marginally improve their business position vis-à-vis their prime.

Primes are well-advised to make timely and complete payment to their subs. When delays do occur, they should self report to their CO. When they claim an exception to the new self-reporting rule, the basis for the exception should be carefully documented. Under the evolving regulatory landscape, subs have a greater ability to directly influence their prime’s past performance evaluations by engaging in communications with the CO concerning payment issues. And the prime may be called upon to defend both their decision not to report and their CPARS.

The new self-reporting rule became effective on January 19, 2017.