Getting Paid Under Government Contracts

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1 Getting Paid Under Government Contracts Virtual Class April 6, 2017 Ralph Nash Professor Emeritus of Law The George Washington University Sandy Hoe Justin Ganderson Covington & Burling

2 Agenda Requesting And Receiving Payment Obtaining Financing Getting Paid When There Is Delay Or Dispute 2

3 Requesting and Receiving Payment 3

4 SAM Registration Must register in the System for Award Management (SAM) at to contract with USG and receive payment No fees to register Must obtain a DUNS, Cage Code and TIN Registration, and certifications and representations Required to receive payment SAM registration information is public unless opt out Caveat Accurate certifications/representations potential fraud exposure 4

5 SAM Registration Need assistance registering go to the SAM User Guide 5

6 Payment Requests at Acceptance Invoices FAR (b) identifies the content of an invoice to be submitted for prompt payment purposes (1) Name and address of contractor (6) Name and address of contracting official to whom payment is sent (2) Invoice date and number (7) Contact information for notification of defective invoices (3) Contract number (8) TIN (4) Description and pricing; (9) EFT banking information (5) Shipping and payment terms (10) Any other information required by contract Additional details may be needed for interim payment requests under a cost-reimbursement contract for services Vouchers SF 1034 and 1035 are form vouchers 6

7 Payment Requests at Acceptance Invoice or Voucher? Invoice means a contractor's bill or written request for payment under the contract for supplies delivered or services performed (FAR 2.101) Voucher is an internal USG document which evidences USG s obligation to pay an invoice, and must be signed by authorized USG representative Typically contractors prepare a voucher under a costreimbursement type contract, which is then treated as an invoice 7

8 Payment Requests at Acceptance Proper submission of an invoice/voucher is a prerequisite to payment USG shall pay the Contractor, upon the submission of proper invoices or vouchers (E.g., FAR ) Proper invoice/voucher not in dispute If the invoice does not comply with these requirements, the designated billing office must return it within 7 days after receipt (FAR (b)(3)) 8

9 USG processing Payments at Acceptance The agency receiving official should forward the receiving report or other Government documentation [e.g., USG certified voucher] to the designated payment office by the 5th working day after Government acceptance or approval (FAR ) USG documentation must include indicia of acceptance, date of acceptance, signature of authorized USG official Acceptance [of payment package] should be completed as expeditiously as possible (FAR ) 9

10 Payments at Acceptance Timing of payment Payment due within later of 30 days of receiving proper invoice or accepting supplies/services; exceptions include payments for food items, construction contracts (FAR ) USG will not make invoice payment earlier than 7 days prior to the due dates specified in the contract unless agency permits accelerated payments or grants an exception (FAR ) Discounts for prompt payment (FAR ) As prescribed in contract 10

11 Payments at Acceptance Prompt Payment Act Codified at 31 USC 3901, et seq. Interest automatically begins to accrue at Treasury rate if unpaid after due date (FAR ) See Penalty for late payment of interest If interest not paid within 10 days after invoice is paid, contractor may make written demand within 40 days of payment for additional penalty Additional penalty equals to 100% of late payment amount, not to exceed $5,000 11

12 Payment requests OMB Memo No. M (July 17, 2015) Directs agencies, by the end of FY 2018, to transition to electronic invoicing for appropriate Federal procurements DOD Agencies Invoicing, Receipt, Acceptance, and Property Transfer (irapt) system (formerly Wide Area Work Flow) at DFARS , Electronic Submission of Payment Requests and Receiving Reports Civilian Agencies Varies by agency Electronic Systems 12

13 Receiving payments Electronic Systems Electronic Funds Transfer (EFT) generally used to make contract payments (See FAR 32.11) Enter EFT information when registering in SAM EFT information is not disclosed to public 13

14 Financing 14

15 Non-Commercial Item Financing Advance payments (FAR 32.4) Payments made in anticipation of, and for the purpose of complete performance under one or more contracts To be used sparingly Progress payments based on costs (FAR 32.5) Payments made on the basis of costs incurred by the contractor as work progresses under the contract Customary rate is 80% of costs for large businesses; 85% for small businesses Progress payments based on percentage of completion (DFARS ) Progress payments based on percentage or stage of completion Authorized only for contracts for construction, shipbuilding, and ship conversion, alteration, or repair 15

16 Non-Commercial Item Financing Performance based payments (FAR 32.10) Payments made on the basis of quantifiable measures of results like [o]bjective, quantifiable methods or [a]ccomplishment of defined events Commonly referred to as milestone payments Provisional delivery payments (DFARS ) May establish provisional delivery payments to pay contractors for the costs of supplies and services delivered to and accepted by the Government... if undefinitized Applies to certain types of contracts like orders under basic ordering agreements and indefinite delivery contracts To be used sparingly 16

17 Commercial Item Financing Commercial advance payment (FAR 32.2) A payment made before any performance of work under the contract Delivery payment (FAR 32.2) A payment for accepted supplies or services, including payments for accepted partial deliveries Commercial interim payment (FAR 32.2) Any payment that is not a commercial advance payment or a delivery payment A payment after some work has been done (includes installment payments) Only if appropriate or customary in the commercial marketplace and in the best interest of the United States 17

18 USG Security Contract Financing Lien on contractor assets Commercial item financing Advance payments for non-commercial items Reduction or suspension of payments Failing to comply with material requirements or contract performance is endangered Applies to performance based and progress payments Substantial evidence that the contractor s request for... payments is based on fraud Applies to advance, partial, or progress payments Loss projected on fixed price contract Reduction in percentage of progress payments 18

19 Payment Requests and Payments Contract Financing Submission and timing Form of submission/request and timing of payment varies based on contract terms Concept of liquidation To decrease a payment for an accepted supply item or service under a contract for the purpose of recouping financing payments previously paid to the contractor Late financing payments Prompt Payment Act interest? No! 19

20 Third-Party Financing Interim contract financing obtained by assigning contract proceeds to a private, third-party Contract proceeds provide the credit for the third-party financing Third-party is secured by assignment of contractor proceeds What is an assignment? The transfer of certain rights or property under a contract 20

21 Assignments of USG Contract Proceeds Anti-Assignment Act Assignment of Claims Act (31 USC 3727) Prohibits the contractor from freely transferring claims against USG to another party Assignment of Contracts Act (41 USC 6305) Prohibits the contractor from freely transferring USG contracts or rights in USG contracts to another party Violation annuls USG contract Exceptions USG waiver Made by operation of law Assigning proceeds due under USG contract to a bank, trust company, Federal lending agency, or other financing institution Implemented in FAR subpart

22 Assigning Proceeds to Third-Party Financial Institutions Assignment must cover full balance Single assignment Single entity or single entity as agent or trustee for others Must provide USG with written notice of assignment Assignee must be registered separately in SAM Implemented in FAR subpart

23 Protecting the Third-Party Assignee Cash flow No-setoff" provision avoiding payment offsets arising from causes that are independent of the contract Doctrine of contract severability protecting against crossdefaults when portions of contract are severable Step-in rights agreement allowing financing party to cure a potential breach of contract to avoid contract termination Take action directly against USG for non-payments Not required to refund amounts paid by USG if subsequent issue arises with contractor performance/payment Perfecting security interest in receivables Advisable to comply with UCC requirements 23

24 Changing the Payment Recipient 24

25 Business Changes Name Same company, new name Must enter into a change-of-name agreement with USG (see FAR ) Must update SAM (see FAR (c)(1)(i)) Case law has recognized that this transfer is made pursuant to the operation of law, and therefore, not subject to Anti-Assignment Act 25

26 Business is Purchased (Asset Purchase) All of a contractor s assets (or the entire portion of assets involved in performing the USG contract) are purchased by another company USG, contractor (transferor) and successor-in-interest (transferee) permitted to enter into a Novation Agreement to effectuate transfer (FAR ) FAR delineates specific deliverables to process/approve novation and rights/obligations thereunder Asset transfer documentation and approvals Opinion of legal counsel regarding the transfer Guarantee of performance Assumption of obligations / waiver of rights Contractor still liable for performance until novation agreement is executed 26

27 Business is Purchased (Stock Purchase) All of a business s stock is purchased by another company Novation agreement not required, but may need to address change in ownership with Contacting Officer (FAR (b)) Could result in change of name Certain case law has recognized that this transfer is made pursuant to the operation of law and therefore not subject to Anti-Assignment Act 27

28 Getting Paid When There Is A Delay Or Dispute 28

29 Getting Paid When There Is A Delay Or Dispute 29

30 Resolving Delayed Payment From USG Simple delay of payment no dispute Proper invoice submitted Due date has passed No payment received Steps to get paid Contact the CO Contact DFAS or the civilian agency payment office Convert routine request for payment into a claim Prompt Payment Act interest accrues, where applicable 30

31 Subcontractor Delayed Payment Request information from CO about status of payments to prime contractor (FAR ) CO shall promptly advise whether prime contractor has submitted requests for payments or whether final payment has been made Assert prime contractor non-payment to CO (FAR ) If prime contractor is not in compliance with subcontract payment provisions, the CO may [e]ncourage timely payment or [i]f authorized by the applicable payment clauses, reduce or suspend progress payments to the contractor If prime contractor s certification of payment of a subcontractor is inaccurate in any material respect, CO shall initiate administrative or other remedial action 31

32 Resolving Disputed Payments Disputes Failure to pay a routine payment request within a reasonable amount of time Entitlement to amounts due under contract Expenses to correct defects Deduction of payments based on allowability of costs Reduction or suspension of payments under contract clauses Price adjustments resulting from Cost Accounting Standards (CAS) noncompliance 32

33 Resolving Disputed Payments Disputes Withholding and set-offs Withholding of contract payments due to violations or disapproval of certain requirements like the Service Contract Labor Standards (FAR ) or Contractor Business Systems (DFARS ) Set-off debts that arise independently of the contract 33

34 Resolving Disputed Payments The Contract Disputes Act (CDA) Provides current statutory framework for prosecuting and resolving claims arising out of or related to USG executive agency contracts (41 USC 7101, et seq.) Definition of a claim : A written demand... seeking, as a matter of right, the payment of money in a sum certain... arising under or relating to the contract..... A voucher, invoice, or other routine request for payment that is not in dispute when submitted is not a claim. (FAR 2.101) Obligation to continue performance pending resolution of dispute 34

35 Contractor claim CDA Claims Contractor submits claim to CO Claim provides legal/factual basis for challenging basis for USG nonpayment (e.g., failure to adjust contract for full amount of changed work performed under the contract) A voucher, invoice, or other routine request for payment... may be converted to a claim, by written notice to the contracting officer as provided in (a), if it is disputed either as to liability or amount or is not acted upon in a reasonable time. (FAR 2.101) If claim is greater than $100,000, then must certify CDA interest (for benefit of contractor) begins to accrue on date of claim submission CO issues Final Decision to contractor 35

36 USG claim CDA Claims USG submits claim through CO Final Decision that provides basis for nonpayment (e.g., finding of defective pricing under the contract and offset of future payments) USG interest CO issues Final Decision to contractor Debt deferment permitted under certain circumstances Allows contractor to enter into a deferment agreement to defer payment of contact debt pending resolution of dispute Granted based on various factors, including contractor s financial condition 36

37 Litigating a CDA Claim Appealing a CO Final Decision Appeal to Board of Contract Appeals or US Court of Federal Claims De novo trial review; ADR is possible Further appeals to US Court of Appeals for the Federal Circuit, and then US Supreme Court 37

38 Recovering on a Successful Claim Against the USG From agency appropriations Judgment Fund Codified at 31 U.S.C Permanent indefinite appropriation Available to pay any judgments and awards against the USG Agencies required to reimburse the Judgment Fund for judgments rendered in a CDA dispute 38

39 Contact us with any questions Sandy Hoe Justin Ganderson Ralph Nash 39