New Rule Attempts Clearer Guidance on Timing and Consequences of Fessing Up to a Reduced or Untimely Payment to a Small Business Subcontractor
A new final rule implementing Section 1334 of the Small Business Jobs Act of 2010 amends the Federal Acquisition Regulations (“FAR”) to require a prime contractor to notify the contracting officer (“CO”) within 14 days if the contractor pays a first-tier small business subcontractor a reduced price or if the contractor’s payment to a small business subcontractor is more than 90 days late. When three or more unjustifiably late and/or reduced payments on one contract within any 12-month period are reported, the CO must record the offending contractor’s record of late payments on the Federal Awardee Performance and Integrity Information System (“FAPIIS”). This final rule is effective Jan. 19, 2017.
The requirement to self-report unjustified reduced and late payments to first-tier small business subcontractors is not new — contractors were already required to do so under 13 C.F.R. § 125.3(c)(5). Likewise, COs were already required to notate a contractor’s history of unjustified reduced and late payments in FAPIIS under 13 C.F.R. § 125.3(d)(6). The positive new developments include:
- The predictability of a two-week deadline from the date a reduced payment is made or a payment becomes late, meaning 90 days past due.
- The new instruction at FAR § 42.1502(g)(2)(ii) limiting a CO’s determination of “a history of unjustified reduced or untimely payments” to instances when there are three occurrences under a single contract within a 12-month period.
Where the new rule falls short of prime contractors’ expectations is its overall scheme, as it effectively requires them to report all instances of late or reduced payments to small business subcontractors, even when they are justified. The CO is left as the final arbiter of what is justified. Although the new rule provides helpful examples of situations where nonpayment or reduced payment is justified, such as contract disputes, administrative mistakes or late performance by the subcontractor, that is little solace to prime contractors who must depend on COs to make reasoned decisions in unusual, but potentially justifiable, instances of late or reduced payments. Meanwhile, small business subcontractors enjoy a significant tool to deal with primes who pay late or fail to pay — the protections afforded them are now in both the Small Business Administration’s regulations and the FAR.
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