December 19, 2012
by Jason Dickstein
Did you know that under current law, a prime contractor might get an accelerated payment from the government, but be under no obligation to similarly accelerate payments to its small business subcontractors?
On July 11, 2012, the White House Office of Management and Budget issued Policy Memorandum M-12-16. The memorandum directed agencies to temporarily accelerate payments to all prime contractors, in order to allow them to provide prompt payments to their small business subcontractors. This is a temporary one-year policy.
While the policy memo is in effect, agencies are required to encourage prime contractors to pay small business subcontractors on an accelerated timetable to the maximum extent practicable. The government has developed a three-pronged approach to implement the policy:
- For existing contracts, contracting officers are asked to communicate the policy to contractors and encourage their voluntary cooperation and participation. All prime contractors will receive accelerated payment from the Government and are encouraged to, in turn, pay their small business subcontractors on an accelerated basis. But there is no obligation to do so under this prong.
- For current solicitations and future contracts, the FAR Council developed a contract clause that would require prime contractors to pay small business subcontractors on an accelerated timetable to the maximum extent practicable. Such a clause would make the payment of subcontractors on an accelerated basis a contractual obligation.
- A government team was assigned to analyze and make recommendations for Federal Acquisition Regulation changes aimed at improving payments by primes to small business subcontractors.
The result of this last prong, the recommendations for Federal Acquisition Regulation changes, is now apparent. The Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) have jointly published a proposed rule that would require federal contracts to include a clause that expressly requires prime contractors to accelerate payment to their small business subcontractors when the payment to the prime contractor is accelerated.
The proposed language for federal contracts looks like this:
Providing Accelerated Payments to Small Business Subcontractors
(a) Upon receipt of accelerated payments from the Government, the Contractor shall make accelerated payments to a small business subcontractor, to the maximum extent practicable and prior to when such payment is otherwise required under the applicable contract or subcontract, after receipt of a proper invoice and all other required documentation from the small business subcontractor.
(b) The acceleration of payments under this clause does not provide any new rights under the Prompt Payment Act.
(c) Include the substance of this clause, including this paragraph (c), in all subcontracts with small business concerns, including subcontracts with small business concerns for the acquisition of commercial items.
This seems like a positive measure for industry; however, one concern would be that the terms used in this clause are not well defined, and therefore a prime contractor who does not change their internal system to accelerate payments may claim that it is not practicable to accelerate payments. In such a case, the prime would get the benefit of accelerated payment but might not pass-along the full value of the acceleration to the small business subcontractors. With this in mind, it might make sense to improve this language to provide firmer metrics for compliance.
ASA members with comments or concerns should contact the Association to register their comments, so we can know your concerns, and should also file comments with the government in accordance with the directions found at 77 Federal Register 75089 (December 19, 2012). Please let us know whether you feel this clause may be important enough to your business to warrant ASA comments to the docket.
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