Speeding up collections are half the battle – timing of contract payment is equally essential whether you are a prime contractor/upper tier subcontractor or are the lower tier subcontractor/vendor. Helping subcontractors get paid is important on all types of contracts but is critical on cost-type contracts. The subcontractor’s invoices must be consistent with contract terms and sufficiently detailed to satisfy the client as well as government auditors. It must be clear with enough detail what was purchased, delivered and accepted, unit prices with backup and any other relevant information. Subcontractors and vendors need to know when invoices will be submitted by the prime contractor – if they submit an invoice the day after the prime contractor invoices its client, their invoice will not be sent to the government for another 29 days. To eliminate this time, establish a fixed date each month (or more often) in subcontracts and purchase orders. Let vendors know, for example, if the invoice to the client goes out on the 15th of each month, their invoices need to be received no later than the 10th, providing time to review and approve the invoice, request additional backup and submit the invoice with that month’s voucher.

Timing of Payment. The question of when do I pay a vendor can depend on what state you are in, the agency you are working for and the type of contract. While "Net 30" or "Net 60" is clear certain terms may be "Pay When Paid" (vendor will receive payment when payment is received from prime contractor). The recent changes to the Paid Cost Rule has simplified matters – large businesses under cost type contracts used to have to certify that vendor invoices had been paid before they were entitled to payments but the change has eliminated this requirement allowing large businesses to bill the government for invoiced goods and services when the cost is "incurred" rather than having to be physically paid.

Similar to non-government contractors, prime and subcontractors need to consider prompt payment discounts. Such discounts are stated in the purchase order or vendor’s proposal and should be carried over to the resulting subcontract. Early payments are usually expressed as a percentage with a time period – e.g. "2 percent/10" meaning a 2% discount if invoice is fully paid within 10 days. The decisions on whether to offer discounts are similar with all companies but government contractors need to be especially sensitive to the efforts to review subcontractors’ work. While discounts may make sense for commodity supply contracts which are easy to administer contractors may not want to put on additional time burdens on top of the normal review cycle of complicated cost type contracts.

Tax Exemptions. On many government projects the issue of tax exemptions arise, particularly state and local sales tax exemptions. The prime or upper tier subcontractor must clearly address the issue with their subcontractors and vendors. Subcontractors may assume the exemption and provide quotes and bids based on the assumption. If the exemption does not go through, the subcontractor will seek reimbursement sometimes up to 8 or 9 percent of the price. The contractor will either bear the cost or seek a change order from the client. The increased cost can also call into question the contractor’s purchasing processes – for example, if the vendor was evaluated assuming the tax exemption, would they still be the lowest responsible bidder if the exemption does not apply. When seeking bids from vendors, the contractor should state in the solicitation whether the price quote will include taxes, fees, permits, etc. so bids can be evaluated equally. Contractors need to let their vendors know how to obtain tax exemptions - just because the last contract they worked on had an exemption does not mean the new one will. Also, contractors need to clarify in the subcontract documents that in the event an exemption form any tax is obtained, a change order or other mechanism will be issued requesting a credit. Be aware that under non-competitive circumstances, FAR 52.229-4 may apply which allows contractors to recover any after-imposed federal, state or local taxes if they exempt them from the proposals or similarly, require them to provide the government a credit if the contractor did not have to pay the tax or received a refund.

Relations with Subcontractors. Though the government does not have a legal relationship with a subcontractor (lacks "privity") normal disputes between the contractor and subcontractor may result in subcontractors calling the government representatives directly with complaints of not being paid. Since such actions can provide big headaches to the contractor, they need to minimize these occurrences. If a subcontractor wants to contact the client, the contractor should not react negatively but should educate the subcontractor on the likely outcome of such a call. If it believes a subcontractor is likely to make a call, it should contact the CO first and explain the situation to avoid surprises and one-sided accounts told by the subcontractor. Prime contractors should also ensure their subcontract agreement and purchase order terms and conditions restrict the subcontractor’s ability to communicate directly with the client. Though it may not prevent the subcontractor from breaching those terms, it will provide some ammunition if the dispute ends in litigation. There is usually no better means to avoid escalating problems than to communicate frequently with the subcontractor.

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