Small subcontractors sometimes find themselves facing a cash flow crunch when they take on new work.  Under some subcontract payment clauses, a small subcontractor might not be entitled to payment until 30 days or more after the prime contractor receives payment from the government for the subcontractor’s work.  Even subcontracts with more generous payment terms often require small subcontractors to make significant up-front investments in terms of employee salaries, materials, and the like before receiving payment.

The Office of Management and Budget apparently recognizes that there is a problem, because yesterday OMB issued a memorandum entitled “Providing Prompt Payment to Small Business Subcontractors,” setting forth three steps the government is taking to address the matter.  One of these steps–if it comes to fruition–may even have some “teeth.”

Here are the three steps the memorandum sets forth:

• Accelerated Payments to Large Primes.  Yes, you heard that right.  The immediate beneficiaries of the new policy are large prime contractors.  The memorandum imposes a goal of paying large prime contractors within 15 days of receiving the proper documentation.  The idea, of course, is that the sooner the money gets in the hands of the prime contractors, the sooner the small subcontractors will get paid.  Whether that happens, of course, remains to be seen, but if payments are accelerated, at least large primes will not be able to make the “but the government hasn’t paid us yet” excuse as often.  The acceleration of payments to large primes is supposed to be a temporary, one-year measure.

• Encourage Prompt Payment to Subcontractors.  The memorandum provides that agencies are to “encourage” large prime contractors to make accelerated payments to small subcontractors, consider modifying existing subcontracts to include accelerated payment schedules, and include accelerated payment schedules in future subcontracts.  Although the sentiment  is noble, my sense is that such “encouragement” will only lead to tangible results if agencies aggressively promote the new policy.  Otherwise, large primes have little substantive incentive to accelerate payments to their small subcontractors.

• Adopt a New FAR Accelerated Payment Clause.  Now we’re talking.  The memorandum asks the FAR Council to develop standard wording for a clause that would be included in the agency’s contract with the prime contractor, pursuant to a deviation, providing for prompt payment from the prime contractor to its small business subcontractors.  The memorandum also asks the FAR Council to work with the SBA to develop a standard clause to be used in future prime contracts and subcontracts to address prompt payment to small contractors.  Depending on the ultimate wording, these clauses could provide the “teeth” that mere encouragement likely will not.

To use the word of the day, I am encouraged by OMB’s push for prompt payment to small subcontractors, and am particularly intrigued by the possibility of a new FAR accelerated payment clause for small business subcontractors.  I will track this issue closely, and bring you any more developments as they occur.