Sometimes the prime contractor may receive inquiries from one of its subcontractor’s vendors (know as second tier subcontractors). While the prime may have more options than subcontractors they are still essentially in the same position and need to follow the guidance in FAR 32.112, Payment of Subcontractors. When it comes to money, things don’t tend to get better with age so there is a need to act quickly before the party’s next call is to the client, bank, congressman, news media, etc. The prime should gather enough information to have a reasoned discussion with the first subcontractor but do not take sides or give the second tier subcontractor reason to have unrealistic expectations. There are things that can minimize the effect of second-tier subcontractors not being paid:

1. Have the first-tier subcontractor provide payment bonds. Under the Miller Act, a payment bond will provide protection in the event a subcontractor does not pay their subcontractors, employees or certain vendors. While the Miller Act applies to government-prime relationships, the prime can require its subcontractors to provide payment bonds anytime – the principles are the same. Though payment bonds are required on fixed price construction projects, clients will often be happy to pay for bonds of second-tier subcontractors on cost type prime contracts of any scope due to the benefits of decreased project risk.

2. Run a pre-award credit check. Dun and Bradstreet and other sources will provide invaluable information about a subcontractor’s current financial status and payment history so eliminating non-responsible subcontractors can preempt future payment problems.

3. Require interim releases and payment certifications. These documents should accompany all invoices submitted by the first tier subcontractor and they should certify that all vendor, employees and subcontractors have been paid or will be paid. Though a prime cannot prevent false certifications, such documents should limit potential liability.

4. Have a dispute outlet for subcontractors before a situation escalates.

Finally, prime contractors should not pay second-tier subcontractors. In certain circumstances a subcontractor will ask for an assignment of debt and this is acceptable with properly legal review or an agency like the Labor Department or the IRS may direct the contractor to garnish or withhold payments. But direct payments to a second tier subcontractor can put contractors in jeopardy of paying twice – if the first tier-subcontractor files for bankruptcy the prime will be at risk for any "offset" receivable.

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