[Federal Register Volume 67, Number 169 (Friday, August 30, 2002)]
[Rules and Regulations]
[Pages 56124-56126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-21871]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 52

[FAC 2001-09; FAR Case 2001-012; Item V]
RIN 9000-AJ22


Federal Acquisition Regulation; Payments Under Fixed-Price 
Construction Contracts

AGENCIES: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have agreed on a final rule 
amending the Federal Acquisition Regulation (FAR) to clarify in the 
certification language of the clause entitled Payments Under Fixed-
Price Construction Contracts that all payments due to subcontractors 
and suppliers have been made by the prime contractor from previous 
progress payments received from the Government.

DATES: Effective Date: September 30, 2002.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS 
Building, Washington, DC, 20405, (202) 501-4755, for information 
pertaining to status or publication schedules. For clarification of 
content, contact Mr. Jeremy Olson at (202) 501-3221. Please cite FAC 
2001-09, FAR case 2001-012.

SUPPLEMENTARY INFORMATION:

A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 66 FR 53050, October 18, 2001, with request for comments. 
Six respondents submitted public comments. The Councils considered all 
comments and concluded that the proposed rule should be converted to a 
final rule, with no changes made to the proposed rule.
    The rule revises FAR 52.232-5, Payments Under Fixed-Price 
Construction Contracts, to clarify the certification language. The 
ambiguity surfaced as a result of a decision issued on April 2, 1999, 
by the United States Court of Appeals for the Sixth Circuit in United 
States v. Gatewood, 173 F.3d 983 (6th Cir. 1999). The Court concluded 
that certifying that the prime contractor has made payments to 
subcontractors and suppliers does not explicitly include all payments 
due.
    Of the six respondents who submitted public comments, two endorsed 
the proposed rule as written. The remaining respondents provided 
comments, which are discussed below:
    1. One of the respondents asserted that some of its customers 
``that do not pay their invoices on time use the rationale of this FAR 
regulation to respond to us that it is not necessary to pay us until 
they themselves are paid by the Federal Government.'' The respondent 
requested that the Government close ``a loophole'' for billion dollar 
companies to avoid paying their smaller vendors.

[[Page 56125]]

    Response: It has always been the Government's intent that 
subcontractors be paid all that they are due on a timely basis, in 
accordance with the terms of their subcontract agreements with their 
prime contractors. Because of the decision in United States v. 
Gatewood, it is necessary to make that point with greater clarity by 
inserting the word ``all,'' thus ensuring that the prime contractor has 
made all payments due its subcontractors that have been included in its 
progress payments billings. The FAR change is designed to better ensure 
that subcontractors are paid on a timely basis, thus addressing the 
respondent's request that a ``loophole'' be closed. The final rule 
would prevent construction prime contractors from making only partial 
payments to subcontractors, based on a very narrow reading of the 
current language of FAR 52.232-5(c)(2).
    2. A second respondent suggested a slight rewording of the proposed 
change to FAR 52.232-5(c)(2), to better address not only the 
requirement for the prime contractor to have made previous payments in 
a timely manner, but that it make current payments in a timely manner 
as well. The wording suggested is as follows:
    ``All payments due to subcontractors and suppliers from previous 
payments received under the contract have been made in a timely manner; 
and all payments due to subcontractors and suppliers from the proceeds 
of the payment covered by this certification will be made timely, in 
accordance with subcontract agreements and the requirements of chapter 
39 of Title 31, United States Code * * *.''
    Response: The Councils concluded that the rewording of the proposed 
rule recommended by respondent 2 is not necessary. The 
proposed rule states that ``timely payments will be made from the 
proceeds of the payment covered by this certification, in accordance 
with subcontract agreements and the requirements of chapter 39 of Title 
31, United States Code.'' Consequently, if the prime contractor elects 
to make only a part of the payments due to subcontractors from the 
proceeds of the progress payment, the prime contractor would be making 
some of its payments on an untimely basis, and as such, the prime 
contractor will have made a false certification. Under the language of 
the clause, payments due in accordance with the terms of subcontract 
agreements and the law must be made on a timely basis if they are to be 
included in the prime contractor's payment request.
    3. A third respondent suggested alternative language to paragraph 
(c)(2) of the FAR clause at FAR 52.232-5. The respondent's rationale 
was that the clause should specifically indicate that the prime 
contractor's certification covers payments due for both work completed 
and supplies or services delivered by the subcontractors. Respondent 
3 asserted that prime contractors do not have to pay their 
subcontractors for supplies or services delivered unless and until 
those supplies or services have been incorporated into the scope of 
work. Consequently, the respondent wanted to specifically indicate that 
the payments covered by the certified payment request include payments 
to subcontractors for materials and services that may not have been 
incorporated into the scope of the prime contract at the time the prime 
contractor's payment request is made to the Government. The wording 
suggested by the respondent is as follows:
    ``(2) All payments due to subcontractors and suppliers for work 
completed or materials/equipment delivered have been made from previous 
payments under this contract and timely payments will be made from 
payments due for which this certification and the attached invoice is 
submitted. This requirement supercedes any other payment terms that may 
have been included in any subcontract terms and is required by chapter 
39 of Title 31, United States Code.''
    Response: The Councils concluded that the language suggested by 
respondent 3 is not needed and may lead to confusion with 
regard to the requirements of the entire payment clause at FAR 52.232-
5. FAR 52.232-5(b)(1) requires that the prime contractor's progress 
payment request include a listing of the amount included for work 
performed by each subcontractor under the contract; a listing of the 
total amount of each subcontract under the contract; and a listing of 
amounts previously paid to each subcontractor. The clause also clearly 
indicates in 52.232-5(c)(1) that the contractor's certified payment 
request is for amounts ``only for performance in accordance with the 
specifications, terms, and conditions of the contract.''
    It is not the intent of this clause to enable the billing of 
progress payments for materials and services that may not have been 
incorporated into the scope of work of the contract. It is conceivable 
that a construction prime contractor may have purchased building 
materials from a single vendor sufficient to support not only the 
construction project under the Government's contract, but also on other 
jobs as well. However, the prime contractor can only bill for the 
materials used on the subject Government contract, once it has been 
determined what portion of those materials will be used to perform the 
Government contract. The fact that the prime contractor may not have 
paid the subcontractor for materials as yet unidentifiable to the 
Government contract may be a matter of general concern to the 
contracting officer, but it does not have a bearing on progress payment 
billings under a specific Government contract until after the material 
has been identified as part of the scope of work of that contract.
    4. The fourth respondent asserted that, because the payments made 
under construction prime contracts are almost always covered by payment 
bonds or alternate payment procedures, the Government should not be 
involved in payment disputes between prime contractors and 
subcontractors. Consequently, respondent 4 concluded that the 
prime contractor's certification that payments have been made to its 
subcontractors was redundant and unnecessary, and that the 
certification should be eliminated. Respondent 4 also 
indicated that contracting officer inquiries as to whether a 
subcontractor has been paid on time were usually a reflection of a 
situation where the subcontractor has not been paid because of a 
dispute over subcontractor performance. Consequently, respondent 
4 believed the following language was sufficient:
    ``(2) All past and future payments due to subcontractors and 
suppliers will be or have been made as required by chapter 39 of Title 
31, United States Code.''
    Response: The Councils concluded that adopting respondent 
4's proposed alternative language could be seen as a 
significant weakening of the payment protections afforded to 
construction subcontractors by Government contracts. The certification 
requirement questioned by respondent 4 is provided for in 
chapter 39 of Title 31 of the U.S.C. The certification is needed in the 
event the prime contractor has fraudulently billed the Government for 
progress payments that the prime contractor has represented will be 
used to pay its subcontractors; as such, this certification supports 
the possibility that the Government may need to prosecute the prime 
contractor under laws relating to defrauding the Government. Absent a 
certification, and employing only the words proposed by respondent 
4, the Government could assert that the prime contractor had 
breached its contract if it failed to pay its subcontractors with the 
proceeds

[[Page 56126]]

from progress payments paid to the prime contractor for that purpose. 
But that is well short of the enforcement action potentially available 
under the fraud statute.
    This is not a significant regulatory action and, therefore, was not 
subject to review under Section 6(b) of Executive Order 12866, 
Regulatory Planning and Review, dated September 30, 1993. This rule is 
not a major rule under 5 U.S.C. 804.

B. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify that this 
final rule will not have a significant economic impact on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act, 5 U.S.C. 601, et seq., because most contracts awarded 
to small entities have a dollar value less than the simplified 
acquisition threshold and, therefore, do not have the progress payment 
type of financing. In addition, this change is a clarification of 
existing policy, rather than the addition of new policy.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the changes to 
the FAR do not impose information collection requirements that require 
the approval of the Office of Management and Budget under 44 U.S.C. 
3501, et seq.

List of Subjects in 48 CFR Part 52

    Government procurement.

    Dated: August 21, 2002
Al Matera,
Director, Acquisition Policy Division.

    Therefore, DoD, GSA, and NASA amend 48 CFR part 52 as set forth 
below:

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    1. The authority citation for 48 CFR part 52 continues to read as 
follows:

    Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).


    2. Amend section 52.232-5 by revising the date of the clause and 
paragraph (c)(2) to read as follows:


52.232-5  Payments Under FixeduPrice Construction Contracts.

* * * * *

Payments Under Fixed--Price Construction Contracts (Sept. 2002)

* * * * *
    (c) * * *
    (2) All payments due to subcontractors and suppliers from 
previous payments received under the contract have been made, and 
timely payments will be made from the proceeds of the payment 
covered by this certification, in accordance with subcontract 
agreements and the requirements of chapter 39 of Title 31, United 
States Code;
* * * * *
[FR Doc. 02-21871 Filed 8-29-02; 8:45 am]
BILLING CODE 6820-EP-U