DFARS Final Rule Establishes Goal Of 15-Day Accelerated Payments For Small Business Contractors

McCarter & English - Government Contracts & Export Controls

On April 8, 2020, a final rule (the Rule) was issued amending the Defense Federal Acquisition Regulation Supplement (DFARS) and implementing Section 852 of the National Defense Authorization Act (NDAA) for FY 2019 to provide for accelerated payments to DoD’s small business prime contractors and subcontractors supporting DoD contracts. The Rule applies to contracts at or below the simplified acquisition threshold (SAT) – currently $250,000 for DoD contracts – and to contracts for the acquisition of commercial items including commercially available off-the-shelf (COTS) items. With an estimated 96% of DoD contracts valued at or under the SAT, the rule appears to reflect DoD’s recognition that it is in the best interests of the government and small business contractors alike to apply this Rule to contracts at or below the SAT and to accelerate payments to small business prime contractors and subcontractors.

The Rule provides two types of accelerated payments (but both are applicable to DoD contracts only). First, it provides accelerated payments to small business prime contractors, “to the fullest extent permitted by law,” with a goal of making payments within 15 days after receipt of a proper invoice unless the contract provides for another date for such payment. Second, it provides accelerated payments to any DoD prime contractor that subcontracts with small businesses, to the fullest extent permitted by law, with a goal of issuing payment 15 days after receipt of a proper invoice if (a) a specific payment date is not established in the contract and (b) the prime contractor agrees to make accelerated payment to a small business subcontractor without any further consideration from, or fees charged to, the subcontractor.

Current DoD policy, as codified at DFARS 232.903 and FAR 52.232-40, is to pay small business contractors as quickly as possible after receipt of invoices and proper documentation. This new Rule adds a definition of “accelerated payment” to the clause at DFARS 252.232-7017, which specifies that accelerated payments are to be made as quickly as possible, with a goal of 15 days or less after receipt of payment from the Government or receipt of a proper invoice from the subcontractor, whichever is later. It is important to note that the Rule establishes the 15-day timeframe as a goal rather than a firm deadline. Nevertheless, even though the Rule does not guarantee payment within 15 days of invoicing, this new language is certainly a welcome improvement to existing prompt payment provisions that do not contain this 15-day goal. Moreover, the Rule’s prohibition on “further consideration from, or fees charged to” subcontractors means the Rule will not only lead to faster payments, but to fewer costs associated with receiving those accelerated payments.

This Rule is excellent news for the more than 30,000 small businesses that will receive accelerated payments each year from DoD, including NHOs, ANCs, and the tens of thousands of small businesses that serve as prime contractors or subcontractors on DoD procurements. Prospectively, contractors should carefully review existing solicitations and requests for quotations to ensure that DFARS 252.232-7017 is included where required. If the clause is improperly omitted, companies should engage with the designated Contracting Officer in writing – before submitting a proposal or quotation – to ensure that the clause is included. Similarly – to the extent that the clause is required to be included at the prime contract level – the standard terms and conditions of subcontracts should be amended to reflect the flowdown requirements of the clause.

Finally, in response to the current COVID-19 pandemic, the Office of Management and Budget announced it is increasing the SAT for COVID-19-related procurements in connection with the President’s emergency declaration under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. §§ 5121-5207 (the “Stafford Act”): increasing the SAT to $750,000 for domestic purchases and to $1.5 million for international purchases; and raising the threshold from $7 million to $13 million for FAR Part 13 commercial items acquisitions. (We discussed these changes previously in more depth here.) This means that, especially with regard to procurements related to the current pandemic, even more money could be paid on an accelerated basis to small business contractors and subcontractors supporting DoD acquisitions.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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