Prompt payments may become contract selection factor

The Obama administration uses federal contracts to get money to small subcontractors faster.

The Obama administration has directed agencies to make contract payments faster to all their prime contractors for the next year with the understanding that those companies will pass along those accelerated payments to their small-business subcontractors, officials said July 11.

The administration is aiming to get money into the hands of more small businesses, although it’s a short-term relief. Indeed, officials are setting clear expectations for prime contractors by making payment habits a future factor in the bid selection process.

Officials said they are expanding the Quick Pay plan that President Barack Obama announced in September 2011. The administration has agencies working to pay their small-business prime contractors in 15 days, instead of 30 days. Now agencies are to urge prime contractors to pass along that sped-up payment cycle.

The accelerated payments policy is for one year. It’s a temporary, transitional policy, according to a new OMB memo released July 11. The aim is to aid businesses in the tough economic climate.

According to the memo, agencies are to encourage their prime contractors to:

  • Include contract provisions to accelerate payments to small-business subcontractors.
  • Consider modifying their existing contracts with small subcontractors to add the provision.
  • Insert a similar clause in future contracts.

In addition, OMB wants the Federal Acquisition Regulatory Council to develop standard wording for a contract clause on a prompt payment policy that agencies should add to their contracts with prime vendors.

“How they pay their subcontractors will be factored into who the future prime contractors are in that contract selection process,” Jeffrey Zients, acting OMB director, said July 11 during a conference call about the new policy.

“So we have full expectations that this will be passed along and this will be part of the system going forward,” he said.

Nevertheless, OMB's memo emphasizes that the policy is temporary, although officials may consider future changes afterward. When the policy has ended in a year, OMB will then provide further guidance on steps agencies should consider to ensure that small-business subcontractors continue to be paid promptly by their prime contractors.

For instance, OMB may continue to provide accelerated payments to prime contractors with prompt subcontractor payment contract clauses. Officials may allow for flexibilities they are considering as part of implementing regulations of the Small Business Jobs Act that enables contracting officers to consider payment habits as an award factor.

During the conference call with Zients, Karen Mills, administrator of the Small Business Administration, said the Quick Pay plan for prime contractors has helped small businesses already. She said companies have had better cash flow, a stronger financial base, and the resources needed to start new projects.

The policy could have a strong effect on where most small businesses work—as subcontractors. However, the administration has to keep prime contractors in check, said Guy Timberlake, co-founder and chief visionary officer of the American Small Business Coalition.

The benefits “depend on the wiggle room allowed for primes to deny or delay payments and what actions the government will take to ensure the program is executed as intended,” he said.

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