Federal Contracting Subcontractor Payment & Retainage Considerations

After working with a client recently I thought it appropriate to discuss withholding and AIA_Billingretainage considerations for Federal contractors.  Similar to many other facets of government contracting, it is wise to be fully aware of the Federal Acquisition Regulation clauses in your contract and their impact on your business decisions.  So one tool a contractor has to encourage a particular behavior is to withhold payment from a subcontractor.  However, there are a few rules to live by.

Under the Prompt Payment for Construction Contracts Clause (FAR 52.232-27) payment to subcontractors is required within seven (7) days of receipt of funds paid to the Contractor.  Under this clause “Subcontractor Payment Entitlement” the contractor may not request payment from the Government any amount withheld or retained under this clause.  However, this clause does not limit or restrict the right of a contractor or subcontractor at any tier to retain (without cause) payment for work performed without incurring any obligation to pay late payment interest penalty.  The amount (percentage) to be retained is not stipulated in this clause, it is negotiated in the subcontract.  This allows flexibility based on unique factors of each subcontract.

Should this tool become necessary, the general requirements for retainage & withholding payment include:

  1. Provide notice to the subcontractor specifying:
    1. The amount withheld;
    2. The specific causes for the withholding under the terms of the subcontract; and
    3. The remedial actions to be taken by the subcontractor in order to receive payment of the amounts withheld.
  2. Provide a copy of the subcontractor notification to the Contracting Officer.

Under extenuating circumstances the determination of the need for retainage, or withholding payment from a subcontractor may be discovered after making a request for payment to the Government, but before making payment to the subcontractor.  If it is determined that all or a portion of the payment due to the subcontractor is subject to withholding under these circumstances, the following must be complied with:

  1. Subcontractor Notice – Provide notice as soon as practicable upon ascertaining cause for withholding, but prior to due date for payment to subcontractor {FAR 52.232-27(g)}.
    1. The amount withheld;
    2. The specific causes for the withholding under the terms of the subcontract; and
    3. The remedial actions to be taken by the subcontractor in order to receive payment of the amounts withheld.
  2. Contracting Officer Notice – Provide notice to the Contracting Officer (copy of the subcontractor notification), as soon as practicable {FAR 52.232-27(e)(1)}
  3. Subcontractor Progress Payment Reduction – reduce the subcontractor’s progress payment by an amount not to exceed the amount specified in the notice of withholding furnished to the Contracting Officer and Subcontractor {FAR 52.232-27(e)(1)}.
  4. Subsequent Subcontractor Payment – Pay the subcontractor as soon as practicable after the correction of the identified subcontractor performance deficiency, and;
    1. Make payment within seven (7) days after correction of subcontractor MoneyChangingHands_webperformance deficiency (unless funds must be recovered from the government).
    2. Make payment within seven (7) days after funds are recovered from the government.
    3. Contractor to incur an obligation to pay interest for late payments in accordance with FAR 52.232-27(e)(4)(ii).
  5. Notice to the Contracting Officer, upon:
    1. Reduction of the amount of any subsequent certified application for payment.
    2. Payment to the subcontractor (withheld amounts and corresponding dates of withholding).
  6. Interest to Government – Provide interest payment to the government as stipulated by FAR 52.232-27(e)(6) for late payments.

As with many contractual issues it is always recommended to discuss withholdings and retainage with legal counsel for any questions or concerns.

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