If adopted as proposed, the costs to government contractors to implement changes necessary to meet the reporting obligations could be substantial.

On January 20, the Department of Defense, General Services Administration, and National Aeronautics and Space Administration issued a proposed rule to amend the Federal Acquisition Regulation (FAR) to require contractors to notify the contracting officer in writing if the contractor pays a reduced price to a small business subcontractor or if the contractor’s payment to a small business subcontractor is more than 90 days late.[1] The proposed rule implements the requirements of section 1334 of the Small Business Jobs Act of 2010 and aims to further the Obama administration’s goal of supporting small businesses that contract or provide goods or services to the government by requiring prime contractors to promptly and efficiently pay small business subcontractors.

The new clause, 52.242-XX (Payment to Small Business Subcontractors) will be required in all solicitations and contracts containing the Small Business Subcontracting Plan clause at 52.219-9, and would cover acquisitions for commercial items, including acquisitions for commercial-off-the-shelf (COTS) items.

The proposed rule adds definitions[2] for “reduced payment” and “untimely payment” to FAR 19.701 and 52.219-9:

  • “Reduced payment” means “a payment that is for less than the amount agreed upon in a subcontract in accordance with its terms and conditions, for supplies and services for which the Government has paid the prime contractor.”  
  • “Untimely payment” means “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."

Importantly, both definitions set a baseline expectation that (i) the amount or timing of the payment is set by the subcontract terms and conditions, and (ii) the government has paid the prime contractor for the supplies or services that the small business subcontractor has provided.

The proposed rule also revises FAR 42.1502(g) to require that contracting officers record in the Federal Awardee Performance and Integrity Information System (FAPIIS) the identity of contractors with a history of three or more unjustified reduced or untimely payments to small business subcontractors under a single contract within a 12 month period. A contracting officer’s determination of whether a reduced or untimely payment is “unjustified” must consider a contractor’s written explanation for the reduced or untimely payment.

The proposed rule estimates that the average time required for a contractor to prepare the information for the required report is two hours, though it is not clear whether this anticipated two hours relates to a one-time requirement or is the estimate for each instance identified by the contractor of a reportable incident. Under either reading, this two-hour estimate likely is grossly underestimated. Further, the two-hour estimate necessarily assumes that contractors already have a system in place that identifies every “first-tier subcontractor” that is a small business in their accounts payable system such that the timing and amount of payments to those subcontractors easily can be tracked.

The practical reality is that many large contractors, especially those selling primarily in the commercial marketplace, have centralized accounts payables departments that do not have visibility into whether a particular supplier is a “small business subcontractor.” In fact, many vendors that receive payments from a contractor could be supporting business units that do not sell directly to the federal government. While such contractors that have subcontracting plans do maintain information relating to the small business size status of their vendors, this information generally is maintained outside of accounts payable in a purchasing module, or in many cases in a different system altogether. It is often the case that this information cannot easily be transmitted to accounts payable or cannot be electronically transmitted at all. The costs to implement changes to the system so that a contractor can track the timing and amount of payments to its small business subcontractors could be substantial and is likely to impose a bigger burden on contractors than the proposed rule anticipates.

The FAR Council noted that “the limited information currently available to the FAR Council on reporting in accordance with the rule’s requirements suggests the burdens are not expected to be significant.” The FAR Council specifically requests feedback on the need for and cost of retrofitting payments systems to meet the requirements in the rule.

Government contractors and other interested parties are invited to submit comments on the proposed rule—which are due by March 21, 2016—in order to be considered in the formulation of the final rule.