2020 NDAA: Subcontractors May Be Allowed to Take Non-Payment Allegations to OSDBU

The draft 2020 National Defense Authorization Act includes a dispute process for subcontractors when the prime contractor fails to pay.

Section 831 of the draft bill would amend the Small Business Act to allow subcontractors to report nonpayment to the Office of Small and Disadvantaged Business Utilization.

According to the draft bill, a subcontractor on a federal contract may, if it “has not received payment for performance . . . within 30 days of the completion of performance, notify the of the [OSDBU] of the Federal agency and the prime contractor of such lack of payment.”

(Most, but not all, federal agencies have an Office of Small and Disadvantaged Business Utilization, or OSDBU.)

OSDBU will then have 15 days to determine whether payment is due and, perhaps, whether the prime has a good reason for not paying, such as the agency not paying it or another governmental restriction. During those 15 days, the prime contractor will be able respond to both OSDBU and the subcontractor. If OSDBU determines that payment is due, it will tell the prime to make payment within 15 days.

If the prime fails to pay after those 15 days, the prime will receive a negative Contractor Performance Assessment Reporting system rating—not a huge penalty, but a serious one. Contractors with negative CPARS ratings often have trouble receiving future work.

According to the introductory paragraph, the goal of this section of the NDAA is to “provide small business with an alternative avenue for nonpayment issues with the prime contractor.”

Currently, the only real avenue subcontractors have is to sue for breach of contract. As small businesses know all too well, that can be expensive and time consuming. It is often not worth it. Providing an administrative path to recovery is therefore likely to be popular, especially with small businesses that perform a lot of work as subcontractors.

Three questions come to mind: 1) What does the NDAA mean by “within 30 days of completion of performance”? Does that mean the subcontractor has to wait until completion of the entire project, just its piece of the project, or a smaller piece than that? 2) What happens when an agency doesn’t have an OSDBU? 3) Can all subcontractors take advantage of this process, or just small businesses? The NDAA says that the goal is to help small businesses, but the actual text does not specify.

This is a long way from law, so maybe Congress will answer these questions. Either way, we think small businesses will be on board.