On December 26, 2013 a new section of the Federal Acquisition Regulation (FAR) was made effective. This was an incorporation of the OMB Memoranda's (M-12-16 & M-13-15) dated July 11, 2012 and July 11, 2013. The OMB Memos will be incorporated into the FAR as clause FAR 52.232-40 and will appear in all solicitations and contracts issued after December 26, 2013. Simply put, it means that primes are required to pay their small business subcontractors in a prompt fashion. It is worth taking a quick look at the OMB Memos to understand the new regulation and what the intent is.
OMB Memorandum M-11-32 dated Sept. 14, 2011 was issued for "Accelerating Payments to Small Business for Goods and Services". This Memorandum established policy that agencies would make payments to small business contractors within 30 days and the goal of paying them within 15 days of receipt of all the proper paperwork. This was to be effective by November 1, 2011. This was a help to any Small business that had a prime contract. It obviously didn't take long for the OMB to realize that there were a significant amount of small businesses that were dependent upon subcontracts from Primes and therefore they should be paid promply as well. That is the impetus for M-12-16.
M-12-16 is passing the requirement to the Prime to pay their small business subcontractors in a prompt manner as well. The OMB saw this policy as a way to further help Small Business so as to increase the participation of Small Business concerns in Federal Government contracts. I think that this is certainly a recognition on the part of the Federal Government that Small Business really drives the American Economy. M-12-16 recommended all agencies pay all primes (not just small business primes) within 15 days of receipt of proper paperwork. The Memo also went on to recommend that the primes pay their small business subcontractors on an accelerated basis to the maximum extend practicable. This Memo was to be in effect for one year (until July 11, 2013). Memorandum M-13-15 merely extended the effectivity of M-12-16 by one year until July 11, 2014. The Memorandums were incorporated into the FAR effective Dec. 26, 2013. It is not expected that this regulation will increase any data collection requirements on the contractors. By the same token, the rule does not create any new remedies for subcontractor payment issues. The biggest enforcement seems to be that if the prime fails to pay the small business subcontractors on an accelerated basis, the government could discontinue paying the prime in an accelerated basis. So, a lot will be on the "honor system".
Here is the wording of the new FAR clause:
52.232-40 Providing Accelerated Payments to Small Business Subcontractors (Dec 2013):
(a) Upon receipt of accelerated payments from the Government, the Contractor shall make accelerated payments to its small business subcontractors under this contract, to the maximum extent practicable and prior to when such payment is otherwise required under the applicable contract or subcontract, after receipt of a proper invoice and all other required documentation from the small business subcontractor.
(b) The acceleration of payments under this clause does not provide any new rights under the Prompt Payment Act.
(c) Include the substance of this clause, including this paragraph (c), in all subcontracts with small business concerns, including subcontracts with small business concerns for the acquisition of commercial items.
When you combine this new regulation with the budget resolution, this should be good news for Small Business doing Federal Contracts.