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Five Issues all Subcontractors and Suppliers on Federal Projects Should Consider
Five Issues all Subcontractors and Suppliers on Federal Projects Should Consider

Providing construction labor or materials to the federal government raises a host of issues that are not present in private or state projects. Prime contracts with the federal government subject companies to numerous federal regulations. While subcontractors and suppliers have less direct obligations to the federal government, there still are several laws to consider. In this blog we discuss five significant considerations all subcontractors or suppliers on federal projects should keep in mind during a project.

1. Rights to Payment. Subcontractors and suppliers can utilize the Miller Act and Prompt Payment Act to secure payment.

Miller Act Bond Claims:

• General contractors must provide payment bonds to the United States for all projects over $100,000. Claimants must either deal directly with the prime contractor or with a first-tier subcontractor. Suppliers to sub-subcontractors cannot pursue a claim.
• Sub-subcontractors or suppliers to subcontractors must provide written notice to the prime contractor within 90 days from the date on which they performed the last of the labor or supplied the last material.
• Suit must be filed more than 90 days, but within one year, after the last labor or materials were supplied.
• As opposed to mechanic’s liens, the general contractor’s prior payment to a subcontractor is not a defense to the claim of a sub-subcontractor or supplier.

Prompt Payment Act:

• All federal prime contractors for a construction project must include the following two provisions in each subcontract:
         o A provision that obligates the prime contractor to pay the subcontractor within seven days of payment by the agency; and
         o An interest penalty clause which obligates the prime contractor to pay an interest penalty in the event payment is not made in accordance with the payment clause.
• Subcontractors are required to include similar terms in their subcontracts to lower-tier subcontractors.
• The Act allows contractors and subcontractors to negotiate terms that allow them to retain a percentage of payment from sub-subcontractors to protect themselves from unsatisfactory performance or to withhold payments from sub-subcontractors if they   failed to perform.

2. Flow-Down Provisions: Prime contracts contain numerous Federal Acquisition Regulations (“FAR”) provisions. The prime contractor typically will flow-down many of these provisions into its subcontracts.

Prime contractors are actually required to flow-down certain FAR clauses, while others are discretionary. For instance, prime contractors are required to include FAR clauses regarding anti-kickback prohibitions, payments made to influence federal transactions, the integrity of prices, certification of non-segregated facilities, affirmative action for veterans and disabled workers, cost accounting standards, and accident prevention, to name a few.

It is important to carefully review the flow-down provisions to ensure you understand what is required. In addition, if the prime contractor has included certain FAR provisions that should not apply, these can tee up further negotiations that otherwise may not be available.

3. Buy American Act: The Buy American Act applies to the procurement of materials that are to be used in any public work in the United States. The Act requires every such contract to require all contractors and suppliers to use only “(1) unmanufactured articles, materials, and supplies that have been mined or produced in the United States; and (2) manufactured articles, materials, and supplies that have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States.”

Certain exceptions apply to the Buy American Act, such as if the materials are not produced or manufactured in the United States in sufficient commercial quantities or satisfactory quality, or the prime contract is for $10,000 or less. It is important to fully understand the Buy American Act requirements to make sure you are in compliance.

4. Small Business Act: Construction contracts in excess of $1.5 million that offer subcontracting possibilities must incorporate small business utilization subcontracting plans. These plans require large subcontractors who in turn are receiving subcontracts in excess of $1.5 million to adopt their own small business subcontracting plans. These plans must address subcontracting with small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business, small disadvantaged business, and women-owned small business concerns.

5. False Claims Act: Under the False Claims Act anyone who knowingly presents a false claim to the government for payment or approval or knowingly uses a false record or statement is civilly liable to the federal government. Individuals and companies that are found to have violated the Act are subject to the following damages and penalties:

• A civil penalty of between $11,181 and $22,363 for each violation (which can include each invoice submitted for payment);
• Three times the damages the government sustains as a result of the violation; and
• Criminal penalties.

In recent years, the government has increased efforts to enforce the Buy American Act by bringing False Claims Act actions against those who have violated the statute. In April 2017, President Trump issued Executive Order 13788, which directed agencies to “scrupulously monitor, enforce, and comply with Buy American Laws” and minimize the use of waivers. Thus, it is imperative that the invoices that you submit to the prime contractor, which are passed on to the federal government, are accurate.

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