Overview
This section outlines the procedures and requirements for prime contractors to provide financing—specifically progress payments, performance-based payments, or commercial financing—to their subcontractors. It defines how prime contractors can include these subcontractor costs in their own payment requests to the Government and establishes mandatory clause flow-down requirements.
Key Rules
- Payment Exclusivity: Subcontracts may utilize either performance-based payments or progress payments, but they are prohibited from using both simultaneously for the same work.
- Reimbursement Timing: A prime contractor may include subcontractor financing amounts in its own progress payment requests to the Government before actually paying the subcontractor, provided the prime pays the subcontractor within 30 days of submitting the request.
- Mandatory Clause Flow-down: Primes must flow down the substance of FAR 52.232-16 (Progress Payments) or 52.232-32 (Performance-Based Payments) to subcontractors, modified to show that the prime contractor administers the payments.
- Vesting of Title: Even in subcontracts, title to property acquired through progress payments must vest directly in the Government, not the prime contractor.
- Management Controls: Prime contractors are responsible for ensuring subcontractor financing conforms to FAR standards; the Government must verify that the prime has adequate management control systems and internal audit procedures in place.
- Unusual Progress Payments: If a subcontractor requires "unusual" progress payments, the prime contract must be formally modified to reflect the specific rate change before the prime can include those costs in their invoices.
Practical Implications
- Prime Contractor Responsibility: Prime contractors act as the primary administrator and auditor of subcontractor financing, bearing the risk of ensuring subcontractor performance and financial compliance.
- Administrative Diligence: Primes must be careful when drafting subcontracts to ensure that modified flow-down clauses correctly preserve the Government’s title to property and right to access subcontractor records.