The 2024 National Defense Authorization Act passed by the Senate and House this week contains provisions that may have an impact on small business contractors.

SEC. 862. PAYMENT OF SUBCONTRACTORS

15 U.S.C. § 637(d)(13) requires prime contractors working on “covered contracts”—i.e., contracts that must have a small business subcontracting plan—to inform the applicable contracting officer if the prime contractor:

pays a reduced price to a subcontractor for goods and ‎services upon completion of the responsibilities of the subcontractor or the payment to a ‎subcontractor is more than 90 days past due for goods or services provided for the covered ‎contract for which the Federal agency has paid the prime contractor.‎

Section 862 of the NDAA amends 15 U.S.C. § 637(d)(13) to require written notice to the contracting officer when a prime contractor’s payment to a subcontractor is more than 30 days, reduced from 90 days, past due.

Section 862 also authorizes (but does not require) the contracting officer to downgrade the prime contractor’s past performance ratings in cases of unjustified failure to pay a subcontractor. The 2024 act adds a new subsection, 15 U.S.C. § 637(d)(13)(C)(ii) that states the contracting officer:

may enter or modify past performance information of the prime contractor in connection with the unjustified failure to make a full or timely payment to a subcontractor subject to this paragraph before or after close-out of the covered contract.

Section 862 further provides that when a contracting officer determines a prime contractor on a covered contract has unjustifiably failed to timely pay a subcontractor:

• The contracting officer will “consult” with the “Director of Small Business Programs or the Director of Small and Disadvantaged Business Utilization … and other representatives of the Government” and
• The prime contractor is required to “cooperate” with the contracting officer

both in an effort to “correct[ ] and mitigate[ ] the unjustified failure to make a full or timely payment to a subcontractor‎.”

The amendment does not specify what constitutes “correcting and mitigating” the lack of payment, or the specific actions that the contracting officer can or should take, other than negatively adjusting the prime contractor’s past performance rating.

Finally, Section 862 requires regulations that will implement this provision to be promulgated within 180 days after enactment of the NDAA.

These amendments attempt both to accelerate payment to subcontractors and to give contracting officers another lever to pressure prime contractors to make timely payments to small business contractors.

SEC. 863. INCREASE IN GOVERNMENT-WIDE GOAL FOR PARTICIPATION IN FEDERAL CONTRACTS BY SMALL BUSINESS CONCERNS OWNED AND CONTROLLED BY SERVICE-DISABLED VETERANS

Section 863 of the NDAA increases the federal government’s service veteran disabled small business contracting goal from 3% to 5% of all prime contract and subcontract awards.

SEC. 865. CONSIDERATION OF THE PAST PERFORMANCE OF AFFILIATE COMPANIES OF SMALL BUSINESS CONCERNS

Section 865 of the NDAA requires the Department of Defense to amend the (Defense Federal Acquisition Regulation Supplement (DFARS) to mandate that Department of Defense agencies consider the past performance information of affiliates. The specific language is:

Not later than July 1, 2024, the Secretary of Defense shall amend section 215.305 of the Defense Federal Acquisition Regulation Supplement (or any successor regulation) to require that when small business concerns bid on Department of Defense contracts, the past performance evaluation and source selection processes shall consider, if relevant, the past performance information of affiliate companies of the small business concerns.

DFAR 215.305 does not require Department of Defense agencies to consider the past performance of affiliates, and, as a result, agencies currently may exclude the past performance of affiliates if they have a reasonable basis for doing so. The new regulation mandated by Section 865 of the NDAA will eliminate this option for Department of Defense agencies, and they will be required to consider the past performance of affiliates.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.