Withholding contract payments
Agencies cannot withhold payments during contract performance for unpaid subcontractors or suppliers, but must withhold final payment after completion if the surety notifies of nonpayment and agrees to hold the government harmless.
Overview
FAR 28.106-7 outlines the rules for withholding contract payments in relation to surety and subcontractor/supplier payment issues. It clarifies that during contract performance, agencies cannot withhold payments from contractors or their assignees simply because subcontractors or suppliers have not been paid. However, after contract completion, if the surety notifies the government in writing that the contractor has failed to pay its subcontractors or suppliers, the contracting officer must withhold final payment—provided the surety agrees to hold the government harmless from liability. Final payment can only be released once the contractor and surety reach an agreement or a court determines the parties' rights. The section also refers to FAR Part 22 for withholdings related to labor standards provisions.
Key Rules
- No Withholding During Performance for Unpaid Subcontractors/Suppliers
- Agencies cannot withhold payments due to unpaid subcontractors or suppliers during contract performance.
- Withholding After Completion Upon Surety Notice
- After contract completion, if the surety provides written notice of nonpayment, the contracting officer must withhold final payment, contingent on the surety holding the government harmless.
- Release of Final Payment
- Final payment is authorized only after agreement between contractor and surety or a judicial decision.
- Labor Standards Withholding
- Withholding related to labor standards is governed by FAR Part 22.
Responsibilities
- Contracting Officers: Must not withhold payments during performance for unpaid subcontractors/suppliers; must withhold final payment post-completion if notified by surety and release only under specified conditions.
- Contractors: Should resolve payment issues with subcontractors/suppliers and sureties to avoid delayed final payment.
- Agencies: Must ensure compliance with these withholding rules and refer to Part 22 for labor standards issues.
Practical Implications
- This section protects contractors from payment delays during performance due to subcontractor/supplier disputes, while also safeguarding the government and sureties after completion. Contractors should proactively manage subcontractor payments and surety relationships to avoid final payment delays. Failure to resolve payment disputes can result in withheld funds and potential legal proceedings.