Legal Protections for Subcontractors on
Federal Prime Contracts
Kate M. Manuel
Legislative Attorney
January 27, 2014
Congressional Research Service
7-5700
www.crs.gov
R41230
Legal Protections for Subcontractors on Federal Prime Contracts
Summary
Payment and other protections for subcontractors on federal contracts are of perennial interest to
Members and committees of Congress, in part, because many subcontractors are small
businesses, and it is the “declared policy of the Congress that the Government should aid,
counsel, assist, and protect, insofar as is possible, the interests of small business concerns.”
Subcontractors on federal contracts are not in privity of contract, or direct contractual
relationship, between the government and the subcontractors. As such, subcontractors would
generally lack the payment and other protections that federal prime contractors enjoy. However,
Congress has enacted several measures that give small business and other subcontractors certain
protections. Key among these are the Miller Act, the 1988 amendments to the Prompt Payment
Act, and Section 8(d) of the Small Business Act.
The Miller Act of 1935, as amended, authorizes subcontractors who furnished labor or materials
used in carrying out federal construction projects valued in excess of $150,000 to bring a civil
action against prime contractors’ payment bonds to obtain payments due. Congress enacted the
Miller Act to compensate for the difficulties that subcontractors would otherwise have in
obtaining payment from federal construction contractors, given that they cannot place a
mechanic’s lien on the work because the government has sovereign immunity. The doctrine of
sovereign immunity protects the government from being sued without its consent, and the
Contract Disputes Act waives the government’s sovereign immunity only as to suits involving
contracts to which the government is a party, not subcontracts under these contracts. Relatedly,
because there is no privity of contract between the government and the subcontractor, the
subcontractor generally cannot sue to enforce the payment or other terms of the subcontract
against the government.
The 1988 amendments to the Prompt Payment Act provide an additional form of payment
protection for subcontractors on federal construction contracts by requiring federal agencies to
include in their contracts a clause obligating the prime contractor to pay the subcontractor for
“satisfactory” performance within seven days of receiving payment from the government. Absent
such a clause in the prime contract, the prime contractor would generally be free to agree to
whatever payment terms it wishes with the subcontractor and would not necessarily pay the
subcontractor as quickly. However, the federal government cannot be interpleaded as a party to
any disputes between contractors and subcontractors over late payments or interest, and
contractors’ obligations to pay subcontractors cannot be passed on to the federal government in
any way, including by contract modifications or cost-reimbursement claims.
Section 8(d) of the Small Business Act provides yet another payment protection for
subcontractors by requiring that prime contractors notify the contracting officer in writing
whenever they pay a “reduced price” to a subcontractor for completed work, or whenever
payment is more than 90 days past due. Section 8(d) also (1) generally requires that prime
contractors agree to plans for subcontracting certain percentages of the work to be performed
under federal contracts to various types of small businesses; and (2) make “good faith efforts” to
work with the subcontractors whom they “used” in preparing their bids or proposals, and provide
the contracting officer with a written explanation whenever they fail to do so. Without these
subcontracting plans, or similar contract terms, prime contractors would generally be free to
subcontract with whomever they wish for the completion of work under the contract and would
not be required to deal with various categories of small businesses.
Congressional Research Service
Legal Protections for Subcontractors on Federal Prime Contracts
Contents
Introduction ...................................................................................................................................... 1
The Miller Act .................................................................................................................................. 1
The Prompt Payment Act ................................................................................................................. 4
Obama Administration Payment Policies .................................................................................. 6
The Small Business Act ................................................................................................................... 7
Subcontracting Plans ................................................................................................................. 7
Good Faith Efforts to Work with Subcontractors “Used” in Bids or Proposals &
Notification of Late or Reduced Payments .......................................................................... 10
Contacts
Author Contact Information........................................................................................................... 12
Acknowledgments ......................................................................................................................... 12
Congressional Research Service
Legal Protections for Subcontractors on Federal Prime Contracts
Introduction
This report provides an overview of the payment and other protections for subcontractors on
certain federal prime contracts under the Miller Act, the 1988 amendments to the Prompt
Payment Act, and the Small Business Act.1 Congress enacted these statutes to give subcontractors
rights and remedies they would not otherwise have because of legal doctrines relating to
sovereign immunity, privity of contract, and freedom to contract. Payment and other protections
for subcontractors on federal contracts are of perennial interest to Members and committees of
Congress, in part, because many subcontractors are small businesses,2 and it is the “declared
policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is
possible, the interests of small business concerns.”3
A separate report, CRS Report R42390, Federal Contracting and Subcontracting with Small
Businesses: Issues in the 112th Congress, by Kate M. Manuel and Erika K. Lunder, discusses
enacted or introduced legislation pertaining to small business subcontractors in the 112th
Congress.
The Miller Act
A Depression-era enactment named after its sponsor, Representative John Elvis Miller of
Arkansas, the Miller Act creates a federal remedy for subcontractors who “furnish[] labor or
material in carrying out work provided for” in certain federal construction contracts.4 Absent the
Miller Act, such subcontractors would generally have to rely on breach of contract actions against
the prime contractor under state law to recover payments due to them because of the operation of
the legal doctrines of privity of contract and sovereign immunity. Although working pursuant to a
subcontract under a federal contract, subcontractors generally cannot enforce the payment or
other terms of the contract or subcontract against the federal government because there is no
privity of contract, or direct contractual relationship, between the subcontractor and the
government.5 The subcontractor’s contract is with the prime contractor, as is the government’s
1 The report does not discuss protections for subcontractors’ employees provided under other provisions of law. See,
e.g., 40 U.S.C. §3145(a) (requiring that employees of subcontractors on certain federal construction contracts be paid
prevailing wages); Executive Order 13495, 74 Federal Register 6103 (February 4, 2009) (giving employees of
subcontractors of the incumbent contractor the right of first refusal to non-management and non-supervisory positions
when a new contractor takes over performance of the contract); 48 C.F.R. §22.802(a) (affirmative action requirements
for subcontractors); 48 C.F.R. Subpart 22.14 (protections for subcontractor employees with disabilities); 48 C.F.R.
§3.907 (protections for subcontractor employees who are whistleblowers).
2 See, e.g., Are Government Purchasing Policies Failing Small Businesses? A Roundtable before the Committee on
Small Business and Entrepreneurship, 107th Cong., 2nd sess., at 38 (June 19, 2002) (“A lot of prime contractors today ...
start off as subcontractors.”).
3 15 U.S.C. §631(a).
4 An Act Requiring Contracts for the Construction, Alteration, and Repair of Any Public Building or Public Work of
the United States to be Accompanied by a Performance Bond Protecting the United States and an Additional Bond for
the Protection of Persons Furnishing Material or Labor for the Construction, Alteration, or Repair of Said Public
Buildings or Public Work, P.L. 74-321, 49 Stat. 793 (August 24, 1935) (codified at 40 U.S.C. §§3131-3134).
5 See, e.g., Williams v. Fenix & Scisson, 608 F.2d 1205 (9th Cir. 1979) (finding that the defendant owed no contractual
duty to the plaintiff because the defendant’s contract was with the plaintiff’s employer, not the plaintiff). Under narrow
circumstances, persons who are not parties to a contract but are “third party beneficiaries” to it are entitled to enforce
the contract’s terms. However, this is generally only the case when the purpose of the contract is to confer a gift on the
(continued...)
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Legal Protections for Subcontractors on Federal Prime Contracts
contract; there is no contract between the subcontractor and the government. Additionally,
because the government has sovereign immunity and cannot be sued without its consent,6 the
subcontractor cannot place a mechanic’s lien on the improved property, as it potentially could
with a private construction project.7
The Miller Act requires that, before any contract of more than $150,000 is awarded for the
construction, alteration, or repair of a “public building or public work of the Federal
government,” the contractor furnish two bonds to the government.8 The first of these is a
performance or completion bond, which would compensate the government for any defects in the
contractor’s performance under the contract. The second is a payment bond, which would assure
that certain persons who supply labor or materials used in carrying out the work provided for in
the contract receive payment. Both bonds become legally binding upon award of the contract,9
and their “penal amounts,” or the maximum amounts of the surety’s obligation, must generally be
100% of the original contract price plus 100% of any price increases.10
The act further authorizes “[e]very person that … furnished labor or material” in carrying out
work provided for in the contract who was not paid in full within 90 days of completing
performance to bring a civil action on the payment bond for the amount due.11 However, “[e]very
person,” as used here, includes only first- and second-tier subcontractors.12 Lower-tier
subcontractors are excluded,13 as are “materialmen” or other parties who supply materials or labor
without a contract.14 These exclusions are partly based on policy considerations and partly based
(...continued)
third party, or when the purpose of one party to the contract is to discharge an actual, supposed, or asserted duty to the
third party. See, e.g., Young Ref. v. Pennzoil, 46 S.W.3d 380 (Tex. App. 2001). Subcontractors under federal prime
contracts would generally not qualify as third-party beneficiaries entitled to enforce the terms of the prime contract
under either of these tests.
6 The Contract Disputes Act waives the government’s sovereign immunity concerning claims arising under or relating
to its contracts, but not for claims arising under or relating to subcontracts under its contracts. See 41 U.S.C. §§7101-
7109.
7 See, e.g., F.D. Rich Co. v. United States for Use of Indust. Lumber Co., 417 U.S. 116, 122 (1974) (“Ordinarily, a
supplier of labor or materials on a private construction project can secure a mechanic’s lien against the improved
property under state law. But a lien cannot attach to Government property, … so suppliers on Government projects are
deprived of their usual security interest. The Miller Act was intended to provide an alternative remedy to protect the
rights of these suppliers.”).
8 A bond is a promise by a surety, or third party, to pay any debts of the contractor or make good any default by or
failure of the contractor to satisfy a contractual obligation. See Taylor Constr. Inc. v. ABT Serv. Corp., Inc., 163 F.3d
1119 (9th Cir. 1998).
9 40 U.S.C. §3131(b).
10 48 C.F.R. §28.102-2(b)(2)(i) (“Unless the contracting officer makes a written determination supported by specific
findings that a payment bond in this amount is impractical, the amount of the payment bond must equal (A) 100 percent
of the original contract price; and (B) If the contract price increases, an additional amount equal to 100 percent of the
increase.”).
11 40 U.S.C. §3133(b)(1).
12 40 U.S.C. §3133(b)(2) (authorizing suits by “person[s] having a direct contractual relationship with a subcontractor
but no contractual relationship, express or implied, with the contractor furnishing the payment bond”).
13 See, e.g., J.W. Bateson Co., Inc. v. United States ex rel. Board of Tr. of the Nat’l Automatic Sprinkler Indus. Pension
Fund, 434 U.S. 586 (1978) (only persons who contract with the prime contractor or a contractor in privity of contract
with the prime contractor may recover under the Miller Act; subcontractors at or below the “third-tier” are not
protected); United States for the Use and Benefit of Global Bldg. Supply v. WNH Ltd. P’ship, 995 F.2d 515 (4th Cir.
1993) (same).
14 See, e.g., Clifford F. MacEvoy Co. v. United States, 322 U.S. 102, 108-09 (1944) (finding that “those who merely
(continued...)
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on the definition of “subcontractor.” Prime contractors would have greater difficulties in
protecting themselves from liability to remote tiers of subcontractors or materialmen than they
would in protecting themselves from liability to first- or second-tier subcontractors.15
Materialmen are excluded because the usage of “subcontractor” in the building trades includes
only “one who performs for or takes from the prime contractor a specific part of the labor or
material requirements of the original contract.”16 The term “thus exclude[s] ordinary laborers and
materialmen.”17
Within one year of completing performance, first- and second-tier subcontractors seeking
payment on a Miller Act bond must file suit in the name of the United States in the federal district
court for the area where the subcontractor provided labor or services under the contract.18 They
must also provide the prime contractor with notice served in the same manner as a summons, or
by any other means that provides written, third-party verification of delivery to the contractor at
its place of business or primary residence.19 Failure to provide proper notice may bar recovery
from either the prime contractor or the surety.20 Assuming proper notice, the amount a
subcontractor may recover if it prevails in the litigation is generally based on the contract amount
for the goods or services or, if no amount is specified in the contract, the amount that a person in
the subcontractor’s position at the time and place the services were rendered would have spent
completing those services.21 However, after performance is completed, subcontractors may waive
in writing their right to bring a civil action, in which case no recovery may be made on the
bond.22
(...continued)
sold materials to materialmen, who in turn sold them to the prime contractor,” are not entitled to recover on Miller Act
payment bonds).
15 Id. at 110 (internal citations omitted) (“The relatively few subcontractors who perform part of the original contract
represent in a sense the prime contractor and are well known to him. It is easy for the prime contractor to secure
himself against loss by requiring the subcontractors to give security by bond, or otherwise, for the payment of those
who contract directly with the subcontractors. But this method of protection is generally inadequate to cope with
remote and undeterminable liabilities incurred by an ordinary materialman, who may be a manufacturer, a wholesaler
or a retailer. Many such materialmen are usually involved in large projects; they deal in turn with innumerable sub-
materialmen and laborers. To impose unlimited liability under the payment bond to those sub-materialmen and laborers
is to create a precarious and perilous risk on the prime contractor and his surety.”).
16 Id. at 109.
17 Id.
18 40 U.S.C. §3133(b)(3)(B) (filing in the name of the United States and in the district court for the area where the
subcontractor provided the labor or services); 40 U.S.C. §3133(b)(4) (“An action brought under this subsection must be
brought no later than one year after the day on which the last of the labor was performed or material was supplied by
the person bringing the action.”). See also United States for Use and Benefit of Harvey Gulf Int’l Marine Inc. v.
Maryland Cas. Co., 573 F.2d 245 (5th Cir. 1978) (noting that the venue provision is intended to benefit the defendant
and is strictly construed); United States for Use and Benefit of Statham Instruments, Inc. v. Western Cas. & Sur. Co.,
359 F.2d 521 (6th Cir. 1966) (suit within one year a condition precedent of the right to bring suit).
19 40 U.S.C. §3133(b)(2)(A)-(B). Notice to the surety is generally not required. See Cont’l Cas. Co. v. United States for
Use and Benefit of Robertson Lumber Co., 305 F.2d 794 (8th Cir. 1962).
20 See, e.g., United States for Use of John D. Ahern Co., Inc. v. J.F. White Contracting Co., 649 F.2d 29 (1st Cir. 1981)
(notice a condition precedent to the existence of a right of action on the bond); Nat’l Union Indem. Co. v. R.O. Davis,
Inc., 393 F.2d 897 (5th Cir. 1968) (recovery may be precluded when proper notice is not given).
21 See, e.g., W.F. Magann Corp. v. Diamond Mfg. Co., Inc., 775 F.2d 1202 (4th Cir. 1985) (awarding the subcontractor
damages in quantum meruit); United States v. Algernon Blair, Inc., 479 F.2d 638 (4th Cir. 1973) (same).
22 40 U.S.C. §3133(c)(1)-(3).
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Legal Protections for Subcontractors on Federal Prime Contracts
Contractors that fail to obtain performance bonds as required under the Miller Act are in breach of
their contract with the government and could potentially be terminated for default by the
government. However, the subcontractor cannot recover from the government for the prime
contractor’s failure to obtain a bond,23 or its failure to obtain a sufficient bond.24
The Prompt Payment Act
Enacted in response to agencies’ widely reported delays in paying their bills,25 the Prompt
Payment Act of 1982, as amended, generally requires federal agencies to pay interest on any
payments they fail to make by the date(s) specified in the contract, or within 30 days of receipt of
a “proper invoice,” if no date is specified in the contract.26 This act originally applied only to
payments made by the government to prime contractors, although it encompassed payments
under all types of contracts (e.g., manufacturing, construction, service). However, the Prompt
Payment Act was amended in 1988 to extend certain payment protections to subcontractors on
federal construction contracts,27 in part, because agencies’ continued practice of paying late
created particular difficulties for subcontractors on construction projects.28 Subcontractors
reportedly perform 80% of the work on construction projects, and they generally do not get paid
until after the prime contractor has been paid.29 Without the 1988 amendments, or similar contract
terms, prime contractors would generally be free to agree to whatever payment terms they wish
with their subcontractors and would not necessarily pay their subcontractors as quickly.
23 See, e.g., Arvanis v. Noslo Eng’g Consultants, Inc., 738 F.2d 1287, 1289-90 (7th Cir. 1984) (“Appellants argue that
the Miller Act requires the government to insist that its contractors furnish Miller Act payment bonds. This is incorrect.
The statute requires only that contractors obtain performance and payment bonds. The statute places no affirmative
obligation on the government, and says absolutely nothing about what happens when the contractor fails to furnish the
bond.”).
24 See, e.g., Automatic Sprinkler Corp. of Am. v. Darla Envtl. Specialists Inc., 53 F.3d 181, 182 (7th Cir. 1995)
(denying recovery from the government when the bonds were found to be insufficient because the prime contractor had
failed to properly qualify the bond securities); United States for Use and Benefit of Gulf States Enters., Inc. v. R.R.
Tway, Inc., 938 F.2d 583 (5th Cir. 1991) (remedies can only be obtained from parties having a direct contractual
relationship with the subcontractor). Although the United States must be named as a party to the suit, it has no actual
financial interest involved. See United States ex rel. Haycock v. Hughes Aircraft Co., 98 F.3d 1100 (9th Cir. 1996).
25 See H.Rept. 97-461, 97th Cong., 2nd sess. 108 (1982). See also David M. F. Lambert & Nancy B. Wilson, The Prompt
Payment Act: Requiring Government Agencies to Pay Their Bills on Time, 42 Nat’l Pub. Acct. 1 (January/February
1997) (referencing a 1978 study by the Government Accountability Office which found that government agencies paid
up to 30% of their bills after their due dates).
26 P.L. 97-177, 96 Stat. 85 (May 21, 1982) (codified, as amended, at 31 U.S.C. §§3901-3907). Among other things, a
proper invoice contains (1) the name of the contractor, the invoice date, and the contract number; (2) a description of
the goods rendered and the shipping and payment terms; (3) other substantiating documentation or information required
under the contract; and (4) the name, title, telephone number, and complete mailing address of the person to whom
payment should be sent. 31 U.S.C. §3901(a); 48 C.F.R. §32.905(b)(1)(i)-(x). The interest rate to be used is that
determined by the Secretary of the Treasury twice a year under the Contract Disputes Act. See 31 U.S.C. §3902(a).
27 Prompt Payment Act Amendments of 1988, P.L. 100-496, §9, 102 Stat. 3460-63 (October 17, 1988) (codified at 31
U.S.C. §3905(b)(1)-(2)).
28 See Gov’t Accountability Office, Prompt Payment Act: Agencies Have Not Fully Achieved Available Benefits,
AFMD-86-69, August 28, 1986, available at http://archive.gao.gov/f0502/131181.pdf (reporting that federal agencies
still paid 24% of their bills late despite enactment of the Prompt Payment Act).
29 See, e.g., H.Rept. 100-784, at 26 (percentage of work on federal construction contracts performed by subcontractors);
S.Rept. 100-78, at 23 (same).
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Legal Protections for Subcontractors on Federal Prime Contracts
The 1988 amendments require that every construction contract awarded by a federal agency
contain clauses obligating the prime contractor to (1) pay the subcontractor for “satisfactory
performance” under the subcontract within seven days of receiving payment from the agency30
and (2) pay interest on any amounts that are not paid within the proper time frame.31 The contract
must also obligate the prime contractor to include similar payment and interest penalty terms in
its subcontracts, as well as require its subcontractors to impose these terms on their
subcontractors.32 This latter provision, requiring subcontractors to impose the terms on their
subcontractors, ensures that the payment and interest penalty requirements “flow down” to all
tiers of subcontractors. The prime contractors would have obligations to any first-tier
subcontractors, who would have obligations to second-tier subcontractors, who would have
obligations to third-tier subcontractors, etc.
The 1988 amendments do, however, allow contractors and higher-tier subcontractors to negotiate
terms permitting them to retain or withhold payment from subcontractors or lower-tier
subcontractors without incurring interest penalties.33 “Retainage” occurs when a contractor or
subcontractor holds back a specified percentage (generally 10%) of each progress payment
otherwise due to a subcontractor in order to protect itself against unsatisfactory performance on
the remainder of the contract.34 “Withholding,” in contrast, occurs when a contractor or
subcontractor holds back contract amounts because a subcontractor failed to carry out some
obligation under the contract or, in some cases, under another contract.35 Contractors withholding
funds under a contract subject to the Prompt Payment Act must generally provide both the
procuring agency and the subcontractor with written notification of withholding, and the amount
withheld cannot exceed the amount specified in this notice.36 Contracting parties often agree to
30 31 U.S.C. §3905(b)(1). A subcontractor’s work is satisfactory if the “property and services received conform to the
requirements of the contract.” See New York Guardian Mortg. Corp. v. United States, 916 F.2d 1558, 1560 (Fed. Cir.
1990) (relying on the definition of “satisfactory performance” in Office of Management and Budget (OMB) Circular A-
125). OMB Circular A-125 instructed agencies on implementing the Prompt Payment Act. It was rescinded after
regulations implementing the act were promulgated.
31 31 U.S.C. §3905(b)(2). The interest is to be computed for the period beginning on the day after the required payment
was due and ending on the date on which payment is made. The interest rate is that determined by the Secretary of the
Treasury. See supra note 26.
32 31 U.S.C. §3905(c).
33 31 U.S.C. §3905(d)(1)-(3) (“The clauses required by subsections (b) and (c) of this section shall not be construed to
impair the right of a prime contractor or a subcontractor at any tier to negotiate, and to include in their subcontract,
provisions which—(1) permit the prime contractor or a subcontractor to retain (without cause) a specified percentage of
each progress payment otherwise due to a subcontractor for satisfactory performance under the subcontract …; (2)
permit the contractor or subcontractor to make a determination that part or all of the subcontractor’s request for
payment may be withheld in accordance with the subcontract agreement.”). Although not expressly mentioned in
statute, defendants in Miller Act suits may similarly plead that that they “set off” payments for retainage or
withholding. See United States for Use and Benefit of Kashulines v. Thermo Contracting Corp., 437 F. Supp. 195
(D.N.J. 1976).
34 31 U.S.C. §3905(d)(1); PCL Constr. Servs., Inc. v. United States, 2008 WL 4725463 (Fed. Cl., October 16, 2008);
Am. Airlines, Inc. v. Austin, 778 F. Supp. 72 (D.D.C. 1991).
35 See, e.g., Imperial Excavating & Paving, LLC v. Rizzetto Constr. Mgmt., Inc., 935 A.2d 557 (Pa. Super. Ct. 2007)
(contractor withholding $262,330 in payments from a subcontractor under one contract because of problems with work
under another contract that were not discovered until after payment on that contract had been made).
36 31 U.S.C. §3905(e)(1). A proper written notice must generally include the amount to be withheld; the specific causes
for withholding under the terms of the subcontract; and the remedial actions to be taken by the subcontractor in order to
receive payment of the amounts withheld. 31 U.S.C. §3905(g)(1)-(3). When withholding, the contractor must also (1)
deduct the amount withheld from the progress payment otherwise due to the subcontractor; (2) pay the subcontractor
“as soon as practicable” after correction of the deficiency; (3) notify the government of the amount of the reduction;
and (4) pay interest on the withheld amount from the eighth day after receipt of such funds from the government. 31
(continued...)
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retainage and withholding in order to encourage timely completion of the contract and ensure full
understanding between the parties regarding the terms of completion.
Because the payment and interest clauses of the contract apply only to the parties, the federal
government’s obligations run only to the prime contractor.37 Prime contractors have the duty to
pay subcontractors, and subcontractors have the duty to pay lower-tier subcontractors. The federal
government cannot be interpleaded as a party to any disputes between contractors and
subcontractors over late payments or interest,38 and contractors’ obligations to pay subcontractors
also cannot be passed on to the federal government in any way, including by contract
modifications or cost-reimbursement claims.39
Obama Administration Payment Policies
In 2011-2012, the Obama Administration issued guidance that supplements the requirements of
the Prompt Payment Act as to the payment of small business contractors and subcontractors.
Initially, this guidance called for agencies to pay small business contractors within 15 days of
receipt of a proper invoice.40 However, subsequent guidance sought to address payment of small
business subcontractors by calling for agencies to “accelerate payments to all prime contractors,
in order to allow them to provide prompt payments to small business subcontractors.”41
Subsequently, in November 2013, the Administration amended the Federal Acquisition
Regulation (FAR) to implement the accelerated payment policy as to small business
subcontractors.42 As amended, the FAR requires that agencies’ prime contracts include terms that
obligate the contractor,
[u]pon receipt of accelerated payments from the Government, [to] make accelerated
payments to its small business subcontractors under this contract, to the maximum extent
practicable and prior to when such payment is otherwise required under the applicable
contract or subcontract, after receipt of a proper invoice and all other required documentation
from the small business contractor.43
(...continued)
U.S.C. §3905(e)(1)-(6).
37 See, e.g., 31 U.S.C. §3905(k) (“A contractor’s obligation to pay an interest penalty to a subcontractor pursuant to the
clauses included in a subcontract under subsection (b) or (c) of this section may not be construed to be an obligation of
the United States for such interest penalty.”).
38 31 U.S.C. §3905(i) (“[A] dispute between a contractor and subcontractor relating to … section (b) or (c) of this
section does not constitute a dispute to which the United States is a party.”).
39 31 U.S.C. §3905(k).
40 Exec. Office of the President, Office of Mgmt. & Budget, Accelerating Payments to Small Businesses for Goods and
Services, September 14, 2011, available at http://www.whitehouse.gov/sites/default/files/omb/memoranda/2011/m11-
32.pdf.
41 Exec. Office of the President, Office of Mgmt. & Budget, Providing Prompt Payment to Small Business
Subcontractors, July 11, 2012, available at http://www.whitehouse.gov/sites/default/files/omb/memoranda/2012/m-12-
16.pdf.
42 Dep’t of Defense, Gen. Servs. Admin. & Nat’l Aeronautics & Space Admin., Federal Acquisition Regulation:
Accelerated Payment to Small Business Subcontractors: Final Rule, 78 Federal Register 70477 (November 25, 2013).
43 Id. at 70479 (codified at 48 C.F.R. §52.232-40(a)).
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The FAR amendment also requires that agencies’ contracts include terms which obligate prime
contractors to incorporate similar language in their subcontracts with small businesses (including
those for the acquisition of commercial items), thereby binding themselves to make accelerated
payments to their subcontractors.44 However, agencies are not required to pay interest on any
payments that are not made within “accelerated” time frames, unlike with “late” payments under
the Prompt Payment Act.45 In addition, because they lack privity of contract with the government,
small business subcontractors generally cannot hold agencies accountable if the prime contractor
fails to incorporate the requisite clauses in its subcontracts, or fails to make accelerated payments
pursuant to such clauses.46
The FAR has not been similarly amended to address “accelerated” payments to small business
contractors, although the general policy of accelerating payments to such entities remains in
effect.47
The Small Business Act
Section 8(d) of the Small Business Act provides several different protections to subcontractors
that qualify as “small businesses” pursuant to the act,48 by generally requiring prime contractors
to (1) agree to subcontract certain percentages of the work to be performed under federal
contracts to various types of small businesses; (2) make “good faith efforts” to work with the
subcontractors whom they “used” in preparing their bids or proposals; and (3) notify the
contracting officer in writing if payment to a subcontractor is late or reduced.
Subcontracting Plans
Amendments made to Section 8(d) of the Small Business Act in 1978 established the “Small
Business Subcontracting Program,” a program designed to benefit certain prospective
subcontractors on federal prime contracts.49 The requirements of this program vary depending
upon the anticipated value of the contract. Contracts valued at over $150,000 and performed
within the United States must generally include two clauses pertaining to subcontracting with
44 Id. (codified at 48 C.F.R. §52.232-40(c)).
45 Id. (codified at 48 C.F.R. §52.232-40(b)). (“The acceleration of payments under this clause does not provide any new
rights under the Prompt Payment Act.”).
46 See supra note 5 and accompanying text (generally discussing privity of contract).
47 The Department of Defense FAR supplement has, however, been amended to address accelerated payment of
contractors. See Dep’t of Defense, Defense Federal Acquisition Regulation Supplement: Accelerate Small Business
Payments: Final Rule, 76 Federal Register 71468 (codified at 48 C.F.R. §232.093) (“DoD policy is to assist small
business concerns by paying them as quickly as possible after invoices and all proper documentation, including
acceptance, are received and before normal payment due dates established in the contract.”).
48 For purposes of the Small Business Act, a small business is one that is “independently owned and operated;” is “not
dominant in its field of operation;” and meets any definitions or standards established by the Small Business
Administration. 15 U.S.C. §632(a)(1)-(2)(A). These standards focus primarily upon the size of the business, as
measured by the number of employees, its annual average gross income, and the size of other businesses within the
same industry. See 13 C.F.R. §§121.101-121.108. For example, recreational vehicle dealers are small if their annual
receipts (averaged over three years) are less than $30 million, while line-haul railroads are small if they have fewer than
1,500 employees. Id.
49 An Act to Amend the Small Business Act and the Small Business Investment Act of 1958, P.L. 95-507, §211, 92
Stat. 1767-70 (October 24, 1978).
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small businesses.50 The first of these clauses articulates federal policies regarding subcontracting
with small businesses and timely payment of subcontractors:
It is the policy of the United States that small business concerns, small business concerns
owned and controlled by veterans, small business concerns owned and controlled by service-
disabled veterans, qualified [Historically Underutilized Business Zone] HUBZone small
business concerns, small businesses owned and controlled by socially and economically
disadvantaged individuals, and small business concerns owned and controlled by women
shall have the maximum practicable opportunity to participate in the performance of
contracts let by any Federal agency, including contracts and subcontracts for subsystems,
assemblies, components, and related services for major systems. It is further the policy of the
United States that its prime contractors establish procedures to ensure the timely payment of
amount[s] due pursuant to the terms of their subcontracts with small business concerns, small
business concerns owned and controlled by veterans, small business concerns owned and
controlled by service-disabled veterans, qualified HUBZone small business concerns, small
businesses owned and controlled by socially and economically disadvantaged individuals,
and small business concerns owned and controlled by women.51
The second of these clauses embodies the contractor’s agreement to carry out the aforementioned
policy “to the fullest extent consistent with the efficient performance of this contract,” as well as
cooperate in any studies necessary to determine the extent of its compliance.52
Contracts in excess of $650,000 ($1.5 million for construction contracts) that offer subcontracting
possibilities generally must also incorporate a subcontracting plan that includes the following:
• “[s]eparate percentage goals” for subcontracting with small businesses, veteran-
owned small businesses, service-disabled veteran-owned small businesses,
HUBZone small businesses, small disadvantaged businesses, and women-owned
small businesses;
• a statement of the total dollars planned to be subcontracted and the total dollars
planned to be subcontracted to small businesses;
• a description of the principal types of supplies and services to be subcontracted;
and
• assurances that the contractor will (1) include terms relating to the government’s
policy of promoting contracting with small businesses in all subcontracts that
offer subcontracting opportunities and (2) require all subcontractors receiving
subcontracts valued in excess of $650,000 ($1.5 million for construction) that are
not themselves small businesses to adopt their own subcontracting plans.53
50 15 U.S.C. §637(d)(2)-(3).
51 15 U.S.C. §637(d)(3)(A). Regulations promulgated under the authority of this act, however, qualify the “maximum
practicable opportunity to participate in contract performance” by adding “consistent with its efficient performance.”
48 C.F.R. §19.702. The “timely payment” provided for here refers to the payment terms of the subcontract, not the
requirements of the Prompt Payment Act. Id.
52 15 U.S.C. §637(d)(3)(B).
53 48 C.F.R. §19.704(a)(1)-(11). Prospective contractors that are not themselves small businesses are generally required
to submit a proposed subcontracting plan as part of their bid or offer, and agencies may not find a contractor
affirmatively “responsible” for purposes of the award of a federal contract unless it agrees to a plan that is also
acceptable to the agency. See 48 C.F.R. §19.705-4. As an alternative to the plans described here, contractors may
establish “master plans” that contain similar elements and are valid for three years, or “commercial plans,” which apply
(continued...)
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Contractors on these “larger” contracts are also required by Small Business Administration (SBA)
regulations to provide pre-award written notification to unsuccessful small business offerors on
all subcontracts valued at over $100,000 for which a small business concern received a
preference.54 This notification must include the name and location of the apparently successful
offeror and its small business status, if any.55 “Large” prime contractors are encouraged, but not
required, to provide similar notice to offerors for subcontracts valued at less than $100,000.56
The contracting officer has substantial discretion in determining whether particular contracts
require a subcontracting plan,57 and the percentage goals for particular contracts need not
correspond to the procuring activities’ goals for the percentage of contract and/or subcontract
dollars awarded to various categories of small businesses.58 However, any subcontracting plan
that is required constitutes a material part of the contract,59 potentially allowing the contractor to
be terminated for default if it fails to substantially perform in accordance with the requirements of
the plan.60 Additionally, the contract must include a clause requiring the contractor to pay
liquidated damages of an “amount equal to the actual dollar amount by which the contractor
failed to achieve each subcontracting goal”61 if the contractor fails to make a good faith effort to
(...continued)
to the entire production of commercial items sold by the entire company or a portion of it, in the case of contractors
furnishing commercial items. 48 C.F.R. §19.704(b) & (d).
54 13 C.F.R. §125.3(c)(v). The regulations here explicitly reference “$100,000,” and not the “simplified acquisition
threshold” (SAT). The SAT was $100,000 until October 1, 2010, when it was increased to $150,000 to reflect inflation.
55 Id.
56 13 C.F.R. §125.3(c)(vi) (also referencing “$100,000,” and not the SAT).
57 48 C.F.R. §19.705-2. Neither the Small Business Act nor regulations promulgated under its authority define the
scope of the contracting officer’s discretion here. However, contracting officers have historically been granted broad
discretion to utilize the powers granted to them by Congress. See, e.g., Precision Std., Inc. v. United States, 228 F.
App’x 980, 982 (Fed. Cir. 2007) (holding that contracting officers have broad discretion in responsibility
determinations); Night Vision Corp. v. United States, 469 F.3d 1369, 1375 (Fed. Cir. 2006) (noting that contracting
officers have broad discretion “to execute and amend contracts, administer contractual performance and decide
contractual claims”); E.W. Bliss Company v. United States, 77 F.3d 445, 449 (Fed. Cir. 1996) (holding that contracting
officers have broad discretion in their evaluation of bids when awarding contracts).
58 See, e.g., B.H. Aircraft Co., Inc., Comp. Gen. Dec. B-295399.2 (July 25, 2005) (denying a protest that alleged, in
part, that the Defense Logistics Agency (DLA) improperly agreed to a small business subcontracting goal in a
contracting plan that was lower than the overall DLA goal). There are government-wide and agency-specific goals for
the percentage of federal contract and/or subcontract dollars awarded to various categories of small businesses. See 15
U.S.C. §644(g)(1)-(2). The government-wide goal is that 23% of all contract dollars be awarded to small businesses;
3% of all contract and subcontract dollars be awarded to service-disabled veteran-owned small businesses; 3% of all
contract and subcontract dollars be awarded to HUBZone small businesses; 5% of all contract and subcontract dollars
be awarded to small businesses owned and controlled by socially and economically disadvantaged individuals; and 5%
of all contract and subcontract dollars be awarded to women-owned small businesses. 15 U.S.C. §644(g)(1). The
agency-specific goals are generally the same as the government-wide ones. See Small Business Goaling Report: Fiscal
Year 2012, available at https://www.fpds.gov/downloads/top_requests/FPDSNG_SB_Goaling_FY_2012.pdf. The
report on FY2013 has not yet been compiled. There are no government-wide goals for contracting and subcontracting
with small businesses owned and controlled by veterans who do not have service-related disabilities, and only the
Department of Veterans Affairs has agency-specific goals for contracting and subcontracting with such firms. See 38
U.S.C. §8172(a).
59 15 U.S.C. §637(d)(8); 48 C.F.R. §19.702(c).
60 When the contractor’s performance is defective, the procuring agency may generally reject the defective supplies or
services, reduce the contract price, or terminate the contract for default. See John Cibinic, Jr., Ralph C. Nash, & James
F. Nagle, Administration of Government Contracts 815-27, 850-63 (4th ed. 2006).
61 48 C.F.R. §19.705-7(b). See also 15 U.S.C. §637(d)(4)(F); 48 C.F.R. §19.702(c). Liquidated damages are damages
whose amount was agreed upon, as compensation for specific breaches, by the parties at the time of the contract’s
formation.
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comply with the plan.62 Agencies are also required to consider contractors’ performance vis-à-vis
their subcontracting plans when evaluating their past performance,63 determining whether
prospective contractors are responsible,64 and making source selection decisions in negotiated
procurements.65
If such percentage goals were not contained in the subcontracting plan, prime contractors would
generally be free to subcontract with whomever they wish, and various categories of small
businesses would not necessarily have this opportunity to obtain federal contract dollars.
However, although subcontracting plans are intended to benefit small businesses, these businesses
are not parties to the contract between the government and the contractor, and they generally
cannot enforce its terms against the prime contractor.66 Only the government may generally do so.
Good Faith Efforts to Work with Subcontractors “Used” in Bids or
Proposals & Notification of Late or Reduced Payments
The 111th Congress expanded the payment and other protections for small business
subcontractors under Section 8(d) of the Small Business Act when it enacted the Small Business
Jobs Act (SBJA) of 2010.67 Among other things, the SBJA amended Section 8(d) to require that
prime contracts incorporating subcontracting plans also include terms obligating the contractor to:
make a good faith effort to acquire articles, equipment, supplies, services, or materials, or
obtain the performance of construction work from the small business concerns used in
preparing and submitting … the bid or proposal, in the same amount and quality used in
preparing and submitting the bid or proposal,
and provide the contracting officer with a written explanation whenever it fails to do so.68 In
addition, the SBJA amended Section 8(d) to require that prime contractors with subcontracting
62 Contractors often avoid having to pay such damages because the Federal Acquisition Regulation defines “[f]ailure to
make a good faith effort” to mean a “willful or intentional failure to perform in accordance with the requirements of the
subcontracting plan, or willful or intentional action to frustrate the plan.” 48 C.F.R. §19.701. Good faith can be shown
even if the contractor does not achieve all the goals established in the contract provided that it either (1) exceeds one
goal by an amount that is at least equal to any deficiency on another goal or (2) takes certain steps, such as breaking
contract work-items into economically feasible units to facilitate small business participation or conducting market
research to identify small business contractors and subcontractors. 13 C.F.R. §125.3(d). Compliance is determined
based on on-site reviews conducted 12 months after contract award and follow-up reviews conducted 6 to 8 months
after a compliance review. 13 C.F.R. §125.3(f).
63 48 C.F.R. §15.304(c)(3)(ii).
64 48 C.F.R. §19.705-5(a)(1). Firms must be determined to be affirmatively responsible before receiving each federal
contract. For more on responsibility determinations, see generally, CRS Report R40633, Responsibility Determinations
Under the Federal Acquisition Regulation: Legal Standards and Procedures, by Kate M. Manuel.
65 48 C.F.R. §19.1202-3; 48 C.F.R. §15.304(c)(3)-(5); 13 C.F.R. §125.3(g). While agencies generally have “broad
discretion” in selecting evaluation factors, they must include a factor to “evaluate past performance indicating the
extent to which the offeror attained applicable goals for small business participation under contracts that required
subcontracting plans.” 48 C.F.R. §15.304(c)(3)(ii).
66 There does not appear to be any published federal case in which a small business attempted to assert that it was a
third party beneficiary of the subcontracting plan in a government contract. See, e.g., Ralte v. Helen Keller Int’l, Inc.,
1998 U.S. App. LEXIS 6573, at *8 n.3 (noting that the plaintiff did not allege that she was a third-party beneficiary of
the contract in whose subcontracting plan she was listed).
67 P.L. 111-240, 124 Stat. 2504 (September 27, 2010).
68 Id. at §1322, 124 Stat. 2540-41 (codified at 15 U.S.C. §637(d)(6)). The SBA regulations implementing these
(continued...)
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plans notify the contracting officer in writing if they pay a subcontractor a reduced price, or if
payment is more than 90 days past due on a contract for which the federal agency has paid the
prime contractor.69 Contracting officers are also required to consider any “unjustified failure” by a
prime contractor to make full or timely payments to a subcontractor in evaluating the contractor’s
performance,70 and note any “history” of unjustified failures to make full or timely payment in the
Federal Awardee Performance and Integrity Information System (FAPIIS).71
Regulations promulgated by SBA to implement these provisions of the SBJA further bar prime
contractors from restricting subcontractors’ ability to “discuss[] any material pertaining to
payment or utilization with the contracting officer,”72 apparently with the intent of promoting
reporting by subcontractors in the event that prime contractors fail to provide the requisite
notices. However, the preface to these regulations also clarifies that SBA does not view the SBJA
as requiring contracting officers to involve themselves in disputes regarding reduced or late
payments, or regarding whether particular subcontractors were “used” in preparing bids or
proposals.73 Instead, SBA envisions contracting officers factoring contractors’ failure to work
with small businesses “used” in their bids or offers, or unjustifiable late or reduced payments, into
contractors’ performance evaluations.74
(...continued)
provisions of the SBJA specify that a prime contractor can be said to have “used” a small business in preparing its bid
or proposal when: (1) the offeror references the small business as a subcontractor in the bid or proposal, or associated
small business subcontracting plan; (2) the offeror has a subcontract or agreement in principle to subcontract with a
small business to perform a portion of the specific contract; or (3) the small business drafted a portion of the bid or
proposal, or the offeror used the small business’s pricing or cost information, or technical expertise, in preparing the
bid or proposal, and there is written evidence of an intent or understanding that the small business would be awarded a
subcontract for the related work if the offeror is awarded the contract. See Small Bus. Admin., Small Business
Subcontracting: Final Rule, 79 Federal Register 42390, 42405 (July 16, 2013) (codified at 13 C.F.R. §125.3(c)(3)(i)-
(iii)).
69 P.L. 111-240, at §1334, 124 Stat. 2542-43 (codified at 15 U.S.C. §637(d)(12)(B)).
70 Agencies are generally required to evaluate contractors’ performance on all contracts valued in excess of $150,000
($30,000 for architect-engineer contracts, $650,000 for construction contracts) when the contract is completed or on an
interim basis, in the case of multi-year contracts. 48 C.F.R. §42.1502(b) (general requirement); 48 C.F.R. §42.1502(e)
(construction contracts); 48 C.F.R. §42.1502(f) (architect-engineer contracts). For more on evaluations of contractors’
performance, see CRS Report R41562, Evaluating the “Past Performance” of Federal Contractors: Legal
Requirements and Issues, by Kate M. Manuel.
71 15 U.S.C. §637(d)(12)(C). The act does not define what constitutes a history of “unjustified failure” to make full or
timely payments. However, regulations promulgated under the authority of the act define this to mean three incidents
within a 12 month period. 79 Federal Register at 42393.
72 78 Federal Register at 42404 (codified at 13 C.F.R. §125.3(c)(1)(iii)).
73 Id. at 42393 (expressing SBA’s view that the regulations will not result in contracting officers “becom[ing] the entry
point for contract disputes between primes and subcontractors,” since contracting officers “cannot be a party” to such
disputes).
74 Id.
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Author Contact Information
Kate M. Manuel
Legislative Attorney
kmanuel@crs.loc.gov, 7-4477
Acknowledgments
CRS intern Leah Branch conducted the legal research underlying this report and wrote the initial drafts of
it. The sections on the Miller Act and the Prompt Payment Act, in particular, reflect her work.
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