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 other common law and statutory claims. The federal government, however, expects primes flowing public funds down to subcontractors to honor their business agreements. As a result, acquisition regulations exist that create consequences for non-payment of subcontracts 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.

Payments to Small Business Subcontractors – 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.

Prompt Payment for Construction Contracts - Federal Acquisition Regulation 52.232-27

When a government contract includes this clause, the prime contractor is required to adhere to certain payment terms as to its subcontractors. For instance, this provision mandates payment to the subcontractor within seven days after payment from the government. Withholding payments from a sub is allowed under this clause, provided doing so is not in contravention of the parties’ agreement. However, a prime contractor is required to notice the subcontractor of the withholding and the reasons for such. Importantly, the prime is also required to notify the Contracting Officer of the same.

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, 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 working arrangement. Subs will not want to potentially foreclose a notice remedy.