When an agency decides to set aside an acquisition for participation only by small businesses, certain subcontracting limitations apply to the small business awardee. For construction contracts, the small business contractor cannot pay subcontractors more than 85% of the amount they receive from the agency. For service and supply contracts, the small business contractor cannot pay more than 50% of the amount paid to it by the agency to other entities that are not similarly situated. Work performed by similarly situated entities is not considered in determining if the limitation on subcontracting is violated. A similarly situated entity is defined as a small business subcontractor that is a participant of the same small business program as the prime contractor and is small for the NAICS code assigned by the prime contractor to the subcontract.
By: Michael H. Payne
The recession (which really is not over, despite what the economists have to say), has led to greater emphasis by the federal government on assuring prompt payment to government contractors. In fact, on September 14, 2011, the Office of Management and Budget (OMB) issued Memorandum 11-32, "Accelerating Payments to Small Business for Goods and Services.” That Memorandum established the Executive Branch policy “that, to the full extent permitted by law, agencies shall make their payments to small business contractors as soon as practicable, with the goal of making payments within 15 days" of receipt of relevant documents. In addition, a recent Memorandum (M 12-16) issued by the Office of Management and Budget, dated July 11, 2012, addresses the subject of “Providing Prompt Payment to Small Business Subcontractors,” and recognizes that accelerating payments to small business contractors would help those businesses by improving cash flow.
This 15-day payment policy is of no particular benefit to prime construction contractors who, pursuant to FAR 32.904(d)(i), are to receive payments in 14 days after the designated billing office receives a proper payment request, based on contracting officer approval of the estimated amount and value of work or services performed. Nor does it directly benefit construction subcontractors because the clause at FAR 52.232-27(c) obligates the prime contractor to pay the subcontractor for satisfactory performance under its subcontract not later than 7 days from receipt of payment from the government. The obvious prerequisite, of course, is that in order for subcontractors to receive prompt payment, the prime contractors they work for must also receive prompt payment from the government. In recognition of that fact, the Memorandum states “In particular, agencies should, to the full extent permitted by law, temporarily accelerate payments to all prime contractors, in order to allow them to provide prompt payments to small business subcontractors.”
Federal agencies should be reminded that the spirit and intent of this OMB “transitional” policy, which is only to be effective for one year, is that small businesses should receive payments as soon as possible. In reality, the most significant impediment to prompt payment is not the period between the approval of a proper invoice and the release of funds; it is the considerable time that often passes between the time that a contractor performs extra work, or requests payment, and the issuance of a change order or the approval of an invoice. Prompt payment requirements have often been thwarted by contracting officers who fail to negotiate change orders in a timely manner, fail to agree to reasonable prices in an attempt to strike a better bargain for the government, or who nitpick the contractor’s documentation and unreasonably declare that it is not “proper.” In order for OMB’s goal of accelerating payments to subcontractors to be achieved, contracting officers must also expedite the administrative approval process that precedes the approval of a proper invoice.
Michael H. Payne is the Chairman of the firm’s Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution.