Wednesday, July 13, 2011

Improving Subcontractors' Cash Flows - Part I

Subcontractors depend on cash flow generated by progress or other periodic payments from prime contractors to meet payrolls and pay other bills. Payments to subcontractors sometimes constitute well over 50 percent of prime contract costs.

The federal government provides interim financing to prime contractors. On fixed-price contracts, the government uses progress payments, which can reimburse contractors for 75 to 100 percent of allowed incurred costs each month. On cost-reimbursement contracts, the government can reimburse contractors for all allowable incurred costs on a biweekly basis. Under both types of contracts, the prime contraators' payment requests to the government will often include costs incurred to pay subcontractors.

Prime contractors have primary responsibility for managing payments to subcontractors. Although the federal government has concerns about payment protection for subcontractors, the government does not have a contractual relationship with the subcontractors. As a result, the federal government has been a reluctant participant in resolving payment problems between its prime contractors and their subcontractors.

A number of statutes and regulations provide payment protection to subcontractors. For example, large business prime contractors working on non-construction projects are required to pay subcontractors before billing the government. In contrast, prime contractors working on federal construction projects are allowed to bill the government before paying their subcontractors, however, they are required to pay their subcontractors within seven days after receiving payment from the government and certify that they will make timely payment to their subcontractors.

Tomorrow we will look at some of the remedies available to subcontractors when they don't receive timely payment from their prime contractors.

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