Proposed Rule Requires Prime Contractor to Report Late or Reduced Payments to Small Business Subcontractors

Written by and

On January 20, 2016, the Department of Defense, General Services Administration, and NASA issued a proposed rule to amend the FAR and implement a section of the Small Business Jobs Act of 2010.

This proposed rule, which will implement Section 1334 of the Small Business Jobs Act of 2010 and the Small Business Administration’s (SBA) implementation of Section 1334, requires that, among other things, a prime contractor (1) notify the contracting officer, in writing, if the contractor makes a reduced or untimely payment to a small business subcontractor; and (2) disclose the reasons for the reduced or untimely payments. “Untimely payment” is defined as “a payment to a subcontractor that is more than 90 days past due under the terms and conditions of a subcontract, for supplies and services for which the Government has paid the prime contractor.”

This proposed rule also revises FAR 42.1502(g) to include that past performance evaluations shall include an assessment of any unjustified reduced or untimely payments made to small business subcontractors. Specifically, the contracting offer must consider and evaluate the contractor’s written explanation for a reduced or untimely payment when determining whether the reduced or untimely payment is justified. If unjustified payments have occurred at least three separate times under a single contract within a 12-month period, then the contracting officer will determine that there is a history of unjustified reduced or untimely payments.

This proposed rule will further expand small business related obligations already imposed on prime contractors. Consequently, prime contractors are well-advised to review this proposed rule and their small business subcontracting plan, or consult with counsel, to ensure that their subcontracting plans comply with both the current SBA rules and this proposed rule.

Government contractors and other interested parties should submit written comments by March 21, 2016, to be considered in the formulation of the final rule.