Both prime contractors and small business subcontractors should pay attention to new rules designed to encourage small business subcontracting and influence the administration and content of those contracts. The first, which goes into effect on December 26, 2013, requires federal contractors, in certain instances, to make accelerated payments to small business subcontractors. The second is a related rule that went into effect earlier this year, which increases prime contractors’ reporting obligations, requiring the reporting of any reductions or delays in payments to small business subcontractors and any post-award deviations from contractors’ small business subcontracting plans.

Under the new clause at FAR 52.232-40, Providing Accelerated Payments to Small Business Subcontractors (DEC 2013), when a prime contractor receives an accelerated payment from the government, it will be required to similarly make an accelerated payment to its small business subcontractors upon receipt of the subcontractors’ invoices and supporting documentation. This clause trumps any contrary terms that may be included in the parties’ subcontract agreement. This new clause will apply to all solicitations and contracts issued on or after December 26, including commercial item contracts. The rule is not limited to first-tier subcontracts, and thus also requires higher-tier subcontractors that receive accelerated payments to make accelerated payments to their lower-tier small business subcontractors.

In the event that a prime contractor fails to make an accelerated payment, the government may stop making accelerated payments to the prime. Notably, however, the new rule does not create any remedies for subcontractors seeking accelerated payments beyond the existing rules concerning non-payment of subcontractors under FAR subpart 32.112. Nor does the rule create any new rights under the Prompt Payment Act.

In addition, under recently amended U.S. Small Business Administration (“SBA”) rules at 13 C.F.R. § 125.3, prime contractors are now required to report in writing any reduced payments to small business subcontractors and any payments that are ninety (90) days or more past due. The SBA rules also require prime contractors to provide notice of any deviations from the small business subcontracting plans that were submitted with their proposals and explain why an originally proposed subcontractor was not used, whether it be due to post-award changes in the scope of work or any other business reason. Prime contractors are required to provide notice to the government whenever they do not use a small business subcontractor that was included in their proposal, and at contract completion must report why they did not meet all of their stated small business subcontracting goals.

When viewed together, these new rules reflect a trend of providing greater oversight of contractors’ use of small business subcontractors and of monitoring whether those small businesses are promptly being paid for the work performed. The rules aim to curb any instances of large businesses receiving credit or an evaluation preference for including small businesses in their proposals and then backing out of those partnerships or failing to make full and timely payments once the contract is awarded. Although the full extent to which either of these rules has any teeth is yet to be seen, they will at least serve to increase the burdens on prime contractors and provide small businesses with greater leverage in negotiating their subcontracts, both pre- and post-award.