The Department of Defense (“DOD”), General Services Administration (“GSA”), and National Aeronautics and Space Administration (‘NASA”), have issued a final rule amending the Federal Acquisition Regulation (“FAR”) to implement a section of the Small Business Jobs Act of 2010.  This final rule is effective January 19, 2017.

This final rule requires prime contractors to self-report late or reduced payments to their small business subcontractors. It also requires contracting officers to record the identity of contractors with a history of late or reduced payments to small business subcontractors in the Federal Awardee Performance and Integrity System (FAPIIS).  DoD, GSA, and NASA initially published the proposed rule on these same issues in the Federal Register on January 20, 2016.  However, the final rule has significant changes from the proposed rule.

(1)  A reporting window of 14 days is added to FAR clause 52.242-5, Payments to Small Business Contractors, for prime contractors to report to the contracting officer an untimely or reduced payment, as defined in the rule, made to their small business subcontractors.

(2)  The following examples of payment and nonpayment situations not considered to be unjustified are added at FAR 42.1502(g)(2)(ii):

There is a contract dispute on performance.

Partial payment is made for amounts not in dispute.

A payment is reduced due to past overpayments.

There is an administrative mistake.

Late performance by the subcontractor leads to later payment by the prime contractor.

(3)  A reference to FAR clause 52.242-5 was added to paragraph (b) of the clause at FAR 52.212-5, Contract Terms and Conditions Required to Implement Statutes or Executive Orders—Commercial Items.

The bottom line on this final rule is to discourage prime contractors from making late payments to their small business subcontractors.  Those small business subs can usually not withstand the impact of the late payments as well as a larger business could.  If you are a small business subcontractor, be aware of this new rule and ensure that it is being reported if it occurs.