Thursday, July 14, 2011

Improving Subcontractors' Cash Flows - Part II

This is the second of three parts on an all to frequent occurrence - prime contractors not making timely payments to their subcontractors. If you missed Part I, go here.

A number of years ago, the GAO (Government Accountability Office) sent out a questionnaire to 33 contractor organizations, asking them to survey their members about their experiences in receiving payments from prime contractors. There were 151 responses from subcontractors that complained about late payments. These late payments totaled $345 million or about 23 percent of the subcontractors' revenues. Payments took an average of 146 days from the time the subcontractors submitted their invoices to their prime contractors. This was not a scientific survey by any means and the GAO did not attempt to project these results. However, in absolute terms alone, the survey clearly identified some significant problems.

The National Defense Authorization Act for Fiscal Years 1992 and 1993 requires DoD to disclose payment information about prime contracts and allows contracting officers to respond to subcontractor assertions of nonpayment, even though these is no "privity of contract" between the Government and subcontracts. The act stated that under procedures established in regulations, when the prime contractor has not complied with subcontract payment terms, a contracting officer may encourage a prime contractor to make timely payment to the subcontractor; or reduce or suspend progress payments to the contractor if contract terms allow it. The act also authorizes the contracting officer to pursue administrative or legal action if the contractor's certification that accompanies a payment request is inaccurate.

The regulations coming out of these authorization acts eventually wound up in FAR (Federal Acquisition Regulation) 32.112. This FAR provision provides that, upon assertion by a subcontractor or supplier of a Federal contractor that the subcontractor or supplier has not been paid in accordance with the payment terms of the subcontract, purchase order, or other agreement with the prime contractor, the contracting officer may look into the matter and if the subcontractor assertion is found to be true can (i) encourage the prime to make timely payments to the subcontractor or supplier or reduce or suspend payment to the prime contractor. Additionally, if the contracting officer determines that a prime contractor's certification is inaccurate, the contracting officer shall initiate administrative or other remedial action.

A subcontractor has a regulatory right to payment information relative to the prime contractor. FAR 32.112 states that upon the request of a subcontractor or supplier under a Federal contract for a non commercial item, the contracting officer shall promptly advise the subcontractor or supplier as to whether the prime contractor has submitted requests for progress payments or other payments to the Federal Government under the contract and whether final payment under the contract has been made by the Federal Government to the prime contractor.

Tomorrow we will wrap up this series by offering some strategies to consider when subcontractors are faced with slow paying primes.

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