Friday, January 25, 2013

Subcontractors and Suppliers Must Be Paid

Most contractors are familiar with the Prompt Payment Act of 1988 when it comes to receiving timely payments from the Government. Any billings, invoices, progress payments, or public vouchers not paid withing a certain period (typically 30 days) will begin accruing interest. The Government finance offices are extremely efficient in calculating interest and adding it to the invoiced amounts.

What is less well known about the Prompt Payment Act is its requirement for prime contractors, in turn, to promptly pay their subcontractors and suppliers after they receive payment from the Government. Failure to do so will require contractors to pay interest back to the Government.

For example, Part 32 of the Federal Acquisition Regulations (FAR) and the clause at FAR 52.232-5 (Payments Under Fixed-Price Construction Contracts), require that contractors under fixed-price construction contracts certify for every progress payment request  that payments to subcontractors and suppliers have been made from previous payments received under the contract and timely payments will be made from the proceeds of the payment covered by the certification, and that this payment request does not include any amount which the contractor intends to withhold from a subcontractor or supplier.

FAR Part 32 further requires that (i) contractors notify subcontractors and suppliers of any amount to be withheld and furnish a copy of the notification to the contracting officer, (ii) pay interest to subcontractors and suppliers if payment is not made by seven days after receipt of payment form the Government, and (iii) pay interest to the Government if amounts are withheld from subcontractors and suppliers after the Government has paid the contractor the amounts subsequently withheld.

Making timely payments to subcontractors and suppliers is the right and ethical thing to do, it helps maintain a healthy supplier base, and it helps avoid any contract performance problems. There are sometimes legitimate reasons to withhold payments to subcontractors and suppliers. There could be quality control issues, warranty issues, or any number of performance related reasons. When that happens, contractors must (i) not bill for the amount of the withholds and (ii) notify the contracting officer of the issue.

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