Getting Paid Under Government Contracts

Sandy Hoe

Justin GandersonCovington & Burling

Virtual Class

April 6, 2017

Ralph NashProfessor Emeritus of Law

The George Washington University

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Requesting And Receiving Payment

Obtaining Financing

Getting Paid When There Is Delay Or Dispute

Agenda

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Requesting and Receiving Payment

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Must register in the System for Award Management (SAM) at www.sam.gov 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

SAM Registration

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Need assistance registering … go to the SAM

User Guide

https://www.sam.gov/sam/SAM_Guide/SAM_User_Guide.htm

SAM Registration

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Invoices FAR 32.905(b) identifies the content of an invoice to be submitted

for prompt payment purposes

Additional details may be needed for interim payment requests under a cost-reimbursement contract for services

Vouchers SF 1034 and 1035 are form vouchers

(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

Payment Requests at Acceptance

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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 cost-

reimbursement type contract, which is then treated as an

invoice

Payment Requests at Acceptance

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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 52.232-1)

• 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 32.905(b)(3))

Payment Requests at Acceptance

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USG processing• “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 32.905)

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 32.905)

Payments at Acceptance

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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

32.904)

• 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 32.906)

Discounts for prompt payment (FAR 32.906)

• As prescribed in contract

Payments at Acceptance

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Prompt Payment Act• Codified at 31 USC § 3901, et seq.

• Interest “automatically” begins to accrue at Treasury rate if

unpaid after due date (FAR 32.907)

See http://www.fms.treas.gov/prompt/

• 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

Payments at Acceptance

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Payment requests• OMB Memo No. M-15-19 (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

http://www.dfas.mil/contractorsvendors/irapt.html

DFARS 252.232-7003, Electronic Submission of Payment Requests and

Receiving Reports

Civilian Agencies Varies by agency

Electronic Systems

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Receiving payments• 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

Electronic Systems

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Financing

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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 232.102)

• “Progress payments based on percentage or stage of completion”

• Authorized only for contracts for construction, shipbuilding, and ship conversion, alteration, or repair

Non-Commercial Item Financing

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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 232.102-70)

• 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”

Non-Commercial Item Financing

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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”

Commercial Item Financing

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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

USG SecurityContract Financing

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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!

Payment Requests and PaymentsContract Financing

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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

Third-Party Financing

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“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 32.8

Assignments of USG Contract Proceeds

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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 32.8

Assigning Proceeds to Third-Party Financial Institutions

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Cash flow• “No-setoff" provision – avoiding payment offsets arising from

causes that are independent of the contract

• Doctrine of contract severability – protecting against cross-

defaults 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

Protecting the Third-Party Assignee

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Changing the Payment Recipient

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Same company, new name• Must enter into a change-of-name agreement with USG

(see FAR 42.1205)

• Must update SAM (see FAR 4.1102(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

Business Changes Name

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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 42.1204)

• FAR 42.1204 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

Business is Purchased (Asset Purchase)

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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 42.1204(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

Business is Purchased (Stock Purchase)

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Getting Paid When There Is A Delay Or Dispute

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Getting Paid When There Is A Delay Or Dispute

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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

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Subcontractor – Delayed Payment

Request information from CO about status of payments to prime contractor (FAR 32.112-2)

• 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 32.112-1)

• 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”

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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

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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 52.222-41) or Contractor Business Systems (DFARS

242.7000)

Set-off debts that arise independently of the contract

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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

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CDA Claims

Contractor claim

• 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 33.206(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

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CDA Claims

USG claim• 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”

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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

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Recovering on a Successful ClaimAgainst the USG

From agency appropriations

Judgment Fund

• Codified at 31 U.S.C. § 1304

• 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

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Sandy Hoeshoe@cov.com

202-662-5394

Justin Gandersonjganderson@cov.com

202-662-5422

Ralph Nash

Contact us with any questions