On January 20, 2016, the FAR Council published a proposed rule calling for changes to FAR Parts 19 and 52 that address payments to small business subcontractors.  The proposed changes, which are intended to implement regulations adopted by the Small Business Administration (SBA) in 2013, will expand the range of small business-related obligations imposed on prime contractors.

The proposed rule stems from the Small Business Jobs Act of 2010, which, as noted in a previous post, called for regulations governing prime contractors’ compliance with their small business subcontracting plans. Among the Act’s requirements was that prime contractors notify their contracting officer if they pay a “reduced price” or make an “untimely payment” to a small business subcontractor.  Although the SBA adopted regulations implementing this statutory directive in July 2013, the Far Council is taking on the task for the first time.

The proposed rule amends the FAR by:

• adding definitions to FAR 19.701 for “reduced payment” (“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”) and “untimely payment” (“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”);

• adding a clause to FAR Part 52 that requires prime contractors to provide the contracting officer with written notice of reduced or untimely payments to small business subcontractors, including the reason(s) for making the reduced or untimely payment;

• adding provisions to FAR 19.704 and 52.219-9 that require subcontracting plans to include “assurances” that successful offerors or bidders will pay small business subcontractors on time and in accordance with the terms and conditions of the subcontract, and notify the contracting officer when reduced or untimely payments are made;

• amending the past performance criteria at FAR 42-1502(g) and FAR Table 42-2 to include the contracting officer’s assessment of a contractor’s “unjustified” reduced or untimely small business subcontractor payments (in assessing whether a reduced or untimely payment is unjustified, the contracting officer must consider the contractor’s written explanation);

• amending FAR 42-1503 to require that contracting officers report to FAPIIS any determination that a contractor has a “history” of unjustified reduced or untimely small business subcontractor payments, defined as 3 or more unjustified reduced or untimely payments under a single contract within a 12 month period.

Of central importance to many prime contractors is the fact that, as proposed, the new FAR rule extends to acquisitions of commercial items, including commercial-off-the-shelf (COTS) items. The FAR Council determined that commercial item procurements should not be exempted from the proposed rule, as steps to curtail reduced or untimely payments would have the effect of improving small business subcontractor cash flow and increasing participation in federal contracting. The burden on prime contractors would not be significant because, as estimated by the FAR Council, the number of affected contractors (40% of all covered entities) and estimated reporting time (2 hours) are not significant. Additionally, the FAR Council determined that the proposed rule should apply to COTS items procurements, since contracts for COTS items in excess of $700,000 are covered by the Small Business Act. The FAR Council welcomed public feedback on its preliminary determination that its proposed rule should apply to acquisitions of commercial items and COTS items.

Although SBA regulations already impose a reporting requirement for reduced and untimely subcontractor payments, prime contractors are well-advised to review the proposed FAR changes to ensure that they understand the full extent of the reporting requirement. Prime contractors should also confirm that their subcontracting plans comply with both the SBA rule and the proposed FAR rule. As the proposed rule is likely to lead to greater awareness among contracting officers, it may be invaluable for prime contractors to evaluate whether their payment systems are set up in a way to prevent and catch untimely payments, and to ensure that they accurately record the circumstances behind reduced or untimely payments in case a written explanation is required. Prime contractors should be wary of these requirements even in commercial item and COTS item procurements.

Comments on the proposed rule must be submitted by March 21, 2016.  Comments should reference “FAR Case 2014-004” and may be submitted by mail, email, or online.