Each year the Federal Highway Administration, or FHWA, allocates
about forty billion dollars in federal funds to State Departments of
Transportation, or State DOTs,
and Local Public Agencies, or LPAs,
to construct and maintain the country's highway system.
These federal funds provide contract opportunities for prime contractors and
their subcontractors
to participate in the construction and maintenance of our nation's roadways.
Frustration can set in when subcontractors do not receive timely
payment from prime contractors for services rendered.
As the LPA,
one of the requirements for your federally assisted project
is to ensure that your prime contractors adhere to the disadvantaged business
enterprise, or DBE, program requirement
to promptly pay all subcontractors for completed work.
Let's consider a hypothetical case,
suppose prime contractor, Zenith Construction Incorporated, contracts with
ABC Construction to build retaining walls on a federally funded LPA
highway contract.
ABC,
as the subcontractor to Zenith,
notifies you, the LPA,
that it has not yet received payment from the prime contractor even though the
work is finished.
Your records show that, ABC construction constructed the retaining
walls,
and that you accepted the retaining walls as complete and paid Zenith
construction for the work.
You contact the prime contractor to find out why ABC has not been paid.
Zenith advises you that it decided to withhold payment for the retaining walls
on the LPA highway contract
until ABC fixes a problem on an earlier State DOT contract currently
in dispute.
Can Zenith withhold payment from ABC on this contract?
The answer is no.
Zenith must abide by what is known as the prompt payment provisions in the LPA
highway contract
regardless of any problems Zenith may have had with the ABC on previous
contracts.
As the LPA,
your enforcement of the prompt payment and return of retainage provisions of
the DBE program will help remedy this situation.
Over the next few minutes
we will explain prompt payment and return of retainage provisions
and how you as an LPA
can comply with the applicable federal regulations.
Why are prompt payment provisions needed?
In the past, contracts did not include the prompt payment and return of retainage
provisions.
When small businesses were not promptly paid
little or no recourse was available for them to seek a payment for their
services from unresponsive prime contractors.
Some state statutes do allow subcontractors to file a lien against
the prime contractor
but small businesses still faced a dilemma
of whether to take formal action against their unresponsive prime contractors
and risk jeopardizing future opportunities to subcontract with that
prime contractor.
Prompt payment can become a problem for small businesses such as subcontractors
because they tend to have less capital and tighter cash flow than larger
businesses, such as prime contractors.
Late payment from a prime contractor can create barriers for subcontractors to
compete in the marketplace.
When the prime contractor is slow in paying, the subcontractors revenue flow
is disrupted.
The untimely receipt of payment
can limit the ability of a small business to pay its employees and keep
current with its bills.
Small businesses lack the resources of larger companies to supplement needed
cash from savings or lines of credit.
In 1999,
prompt payment and return of retainage provisions were specifically added
as contract requirements under the DBE program for federally assisted projects.
These provisions are intended to remove the late payment barriers not only for
DBEs, but for all subcontractors.
A key element to ensure subcontractors are promptly paid
is to have your prime contract for federally funded projects include a
prompt payment clause.
The DBE program prompt payment provision
requires prime contractors to pay all subcontractors including DBEs within
thirty days of the prime contractors receipt of payment from you, the LPA.
The regulations also require prompt return of retainage,
which is when a portion of the payment owed to either the prime or the
subcontractor
is held pending the satisfactory completion of work.
Satisfactory completion means
that all tasks specified in the contract or subcontract have been accomplished
and that the LPA has accepted the work.
Federal regulations require each State DBE program to specify which of three
retainage options the State DOT uses.
The State DBE program will specify which of the three options is applicable.
The first option is when the State DOT or LPA does not withhold
from the prime contractor,
and the prime contractor does not withhold from subcontractors.
The second option is when the State DOT, or LPA
does not withhold from the prime contractor,
but the prime contractor does withhold from the subcontractor.
In this option,
the prime contractor must pay all retainage to the subcontractor for
completion of accepted work within thirty days of the prime contractors
receipt of payment from you, the LPA.
In the third option,
the State DOT or LPA
withholds from the prime contractor and the prime contractor withholds from the
subcontractor.
In this option,
the LPA must make partial retainage payments to the prime contractor as work
is completed, and the prime contractor must pay all retainage to the
subcontractor for completion of the accepted work within thirty days of the
prime contractors receipt of payment from you,
the LPA.
Consult your State DBE program plan to determine which retainage
provision applies in your state.
So how can you ensure as the LPA
that subcontractors and DBEs are not being adversely affected due to the
prime contractors late payments?
First, the prompt payment and retainage clauses must be included in all prime
contracts and subcontracts.
Second,
do not wait for complaints from subcontractors and DBEs about not
receiving their payments,
proactively monitor your prime contractors
to ensure they are paying their subcontractors within the contractual
thirty day timeframe through a non-complaint driven tracking mechanism.
Refer to your state's DBE program plan
for suggestions on how to monitor your contracts for compliance.
Third, if you find your prime contractors are not in compliance with their contractual
obligations regarding prompt payments and return of retainage,
initiate enforcement actions.
Your state's DBE program plan outlines enforcement actions such as withholding
payment to the prime contractor.
If the DBE program plan does not contain enforcement sanctions,
add enforcement language to your contract with the prime contractor.
As the LPA,
proactively ensure that the prime contractors follow the prompt payment
and retainage requirements.
Do this by including the prompt payment and retainage clauses in your
contract,
actively monitoring the construction payments, and enforcing the contract
specifications before they begin to adversely affect the subcontractor.