Wednesday, February 24, 2016

Be Sure That You're Paying Your Subcontractors and Vendors in a Timely Manner

Contractors need to examine their contracts to determine when they can bill for payments made to subcontractors and for material purchases. Typical contract clauses allow contractors to seek reimbursement for accrued expenses as long as those expenses are paid in the normal course of business, "usually 30 days". It is not the Government's policy or intent to provide all of a contractor's working capital. Contractors need to have some skin in the game as well.

Yesterday the Department of Justice issued a press release concerning a contractor who tried to skirt the billing rules. A company hired to renovate warehouses at a Naval facility hired 17 subcontractors to work on the project. The work began in May. The following month and the month after that, the company submitted progress payment requests to the Navy for work performed. Attached to the progress payment requests were signed certifications stating that all of the subcontractors had been paid for their work. Relying on the contractor's representations, the Navy paid the contractor $1.2 million for the two progress payment requests.

There should have been a red flag right away. To liquidate 25 percent ($1.2 million out of a $4.4 million contract value) of a construction project in the first two months of performance would be highly unusual. But the Navy did not make any inquiries. The Navy realized something was amiss in September (four months into the project) when all of the subcontractors walked off the job. Turns out that none of the subcontractors had been paid for anything.

The contractor plead guilty to making a false statement and is now awaiting sentencing which carries a maximum sentence of five year in prison and a $250 thousand fine. In all likelihood, it will be much less than that. In addition, the contractor agreed to make restitution to victims in the amount of $1.2 million.

You can read the full DOJ press release here.

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