Subcontracting on federal work: whose clock are you on?

As a subcontractor on a federal job, the government is your customer's customer. You have no contract with the agency, the Prompt Payment Act's 30-day clock runs for the prime and not for you, and your money arrives when the prime chooses to send it, within whatever your subcontract says. That makes your float longer and less predictable than the prime's, and it makes the subcontract the most important cash-flow document you will sign.

This guide covers how the timing stacks up, the clauses that decide when you are paid, the protections that do exist for subs, and how to plan the gap.

How the timing stacks up

1. You do the work and invoice the prime, on the schedule and in the form the subcontract requires.
2. The prime folds your work into its own invoice to the agency. If its billing date has just passed, your work may wait for the next cycle.
3. The agency reviews and pays the prime, generally within 30 days of a proper invoice, or 14 days for construction progress payments.
4. The prime pays you, on the terms in your subcontract, counted from whatever event the subcontract names.

Add it up and a sub can wait considerably longer than 30 days from the work to the money, even when everyone does what they are supposed to.

The clauses that decide when you get paid

Payment terms and the trigger. Does the clock start from your invoice, from the prime's receipt of payment, or from something else? Terms that run from your invoice are far better for you than terms that run from the prime being paid.

Pay-when-paid and pay-if-paid. A pay-when-paid clause says the prime pays you after it is paid, which courts in many places treat as a timing provision: the prime still owes you, eventually, even if the owner never pays. A pay-if-paid clause tries to shift the risk entirely, so that if the owner never pays, neither do you. How each clause is read, and whether pay-if-paid is enforceable at all, varies by state and by the exact words. Have your attorney read the clause before you sign, not after you are owed money.

Flow-down of prompt payment. On federal construction, the prime's payment clause requires it to pay subs within seven days of being paid for their work and to pay interest if it is late, and your subcontract should carry those terms down to you. On other federal contracts, primes receiving accelerated payments are directed to accelerate payments to small business subs. Ask for these terms in writing in the subcontract.

Retainage. Whether the prime holds retainage on you, at what percentage, whether it matches what the agency holds on the prime, and when it is released. A prime holding more on you than is held on it is funding itself with your money.

Invoice requirements. What paperwork must accompany each invoice: certified payroll on construction, progress reports, lien or claim waivers, insurance certificates. A missing document is the most common reason a sub's invoice stalls.

Change orders and disputes. How extra work is authorized, how fast changes are priced and added to the subcontract, and whether the prime can withhold undisputed amounts while a dispute runs on something else.

Protections that do exist for subs

• Payment bonds on federal construction. Federal construction contracts above a threshold set by statute require the prime to post a payment bond. Subcontractors and suppliers who are not paid can make a claim against the bond, but the deadlines for notice and for suit are strict and run from dates on the job. Learn them at the start of each project and calendar them.
• The prime's own obligations. If the prime has been paid by the agency for your work and has not paid you within the time its contract requires, the prime is in breach of its federal contract as well as your subcontract. Contracting officers do not collect your money for you, but they generally do not like to hear that a prime is sitting on funds either.
• Your subcontract. Interest clauses, suspension-of-work rights for non-payment, and dispute procedures are only as good as the words in your agreement. Negotiate them in.

Questions to settle before you sign

• What are the payment terms, in days, and from what date do they run?
• Is there pay-when-paid or pay-if-paid language, and what has counsel said about it?
• What paperwork must accompany every invoice, and when is the prime's billing cut-off?
• Is there retainage, at what rate, and when is it released?
• Who at the prime is responsible for your payment, and who do you call when it is late?
• Is there a payment bond, who is the surety, and what are the notice deadlines?
• How quickly are change orders priced and added, and can undisputed amounts be withheld?

Planning the gap

Budget payroll and materials across the whole chain, from the first day of work to the day the prime's payment lands, including the prime's billing cycle and its own payment terms. On a new prime, assume the longer end of what the subcontract allows until you have seen how it actually pays.

If you need to fund the gap, size the funding to the real timeline, not to the subcontract value, match the term to the weeks you expect to wait, and confirm the work still earns a margin after the cost of the money. Federal work rewards the subs who can carry the float; it does not shorten it for them.

The Float is general information, not legal or financial advice. Subcontract terms, pay-if-paid enforceability and bond claim deadlines depend on your contract and your state; have your attorney review them before you sign.