Aug 26, 2015

By Rich Zimmerman

Readers of E.G. Segar’s comic strip Popeye may recognize the famous title line of J. Wellington Wimpy, known to readers as Wimpy. A recurring joke in this strip involves Wimpy’s attempts to convince  others to buy a meal for him with only a vague promise of payment.

Government subcontracts present a not-quite-parallel but well known concern. Both Contractors and Subcontractors expect and depend on timely payment for acceptance of deliverables (the hamburger). What happens when the Government pays late? The Prompt Payment Act ensures that valid and proper invoices submitted by vendors are paid on time by federal agencies. ‘On time’ generally equates to the 30th day after the billing office receives a proper invoice from the Contractor. If the vendor has not been paid, then the payment is late. When Government pays late, it must pay interest. Prompt Payment determines those interest penalties. The Act manifests as FAR clause 52.232-25 Prompt Payment.

What about Primes (Wimpy in this analogy) paying late? A new rule effective 26 December 2014, requires Primes receiving accelerated payments (within 15 days to small business primes) from the Government to make similarly accelerated payments to their small business subcontractors. The new rule is one of many important topics addressed in Centre’s 2015 Annual Review Presentation.

What are the Prime’s responsibilities as far as timeliness of payments? Does timely payment by the Agency figure in? I recently researched this question and I was surprised by the result. The answer begins over 15 years ago. At that time, Contractors who included subcontractor costs in their invoice to the Government were required to pay (not just incur) those costs before submitting the invoice. This is the so-called “Paid to Cost” rule. The Government’s intent was twofold: avoid financing the Prime; and encourage the Prime to pay its subcontractors quickly. Contractors though – especially small business contractors with subs of their own – saw flashing neon “CASH FLOW” warnings. Many Contractors –not only small businesses- had adopted a “we’ll pay our subs once we receive payment from the Government” policy in their subcontracts.

The FAR was amended on March 27, 2000 to eliminate the Paid to Cost rule. The FAR was changed a second time (FAC 2001-10) to tidy-up remnants of Paid to Cost in the area of Time and Materials contracts. However, the Government maintains interest in having subcontractors and small businesses paid promptly. Current requirements are found in two separate FAR clauses. First, Allowable Cost and Payment (FAR 52.216-6(b)(ii)(A)(2)) tells us that “supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made ordinarily within 30 days of the submission of the Contractor’s payment request to the Government.” Second, Payments Under T&M and LH Contracts (FAR 52.232-7(b)(3)(ii)) provides similar guidance: “The Government will reimburse the Contractor for allowable cost of materials provided the Contractor has made payments for materials in accordance with the terms and conditions of the agreement or invoice or ordinarily makes these payments within 30 days of the submission of the Contractor’s payment request to the Government and such payment is in accordance with the terms and conditions of the agreement or invoice.” Slow and repetitive reading of both clauses shows that Primes must pay their subs within 30 days after submitting a proper invoice. As long as Wimpy has included appropriate clauses in his subcontracts, “Paying Tuesday for a Hamburger Today” is entirely reasonable!

Interested in learning more about the policies and rules for subcontracts? Everything you want to know about subcontracting – to include the Paid to Cost rule- is available in Centre’s two-day Subcontracting Under the FAR course.

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