Government Involvement When Prime Contractors Fail To Pay Subcontractors
Subcontractors who have not been paid for their goods or services as a general rule do not have the ability to seek redress from the government. Because subcontractors lack privity, their recourse lies in an action against the prime for breach of contract or some other commercial law claim. The federal government, however, expects primes flowing money down to subcontractors to honor their business agreements. As a result, acquisition regulations exist that create consequences for non-payment at the prime/government level.
Noncommercial Item Acquisitions – Federal Acquisition Regulation 32.112-1
FAR 32.112-1 allows a subcontractor to make an assertion of non-payment directly to the Contracting Officer. If the Contracting Officer concludes the prime has not met its payment obligations, it may reduce or suspend payments to the prime under the government contract.
Contracts Subject To Small Business Subcontracting Plans – FAR 52.242-5 and 15 U.S.C. 637
When a subcontracting plan is in place, the prime must self-disclose to the Contracting Officer when a small business subcontractor receives a reduced or untimely payment and the reasons for such. An unjustified failure to make a full or timely payment must be considered by the Contracting Officer in performance evaluations, and a history of unjustified, untimely payments may result in negative performance history for the prime to such a degree as to affect its prospects for future awards.
Practical Advice For Primes and Subs
Non-payment creates a risk of legal claims brought by the subcontractor as well as negative implications to a prime’s current and future government contracts. As such, these contractors should take care to pay their subs and suppliers according to the terms of the governing agreement and take any necessary and appropriate action when a payment issue arises, both with the affected subcontractor and the Contracting Officer.
Subcontractors on the other hand may move to obtain payment by instituting legal action and as noted above by reporting non-payment and bad faith to the relevant Contracting Officer. Prospectively, though, subcontractors should strike language prohibiting communication with the Contracting Officer pertaining to payment in any written subcontract agreement or other documentation memorializing the arrangement.
Kristi Morgan Aronica, Attorney