§ 3905. — Payment provisions relating to construction contracts.
[Laws in effect as of January 7, 2003]
[Document not affected by Public Laws enacted between
January 7, 2003 and December 19, 2003]
[CITE: 31USC3905]
TITLE 31--MONEY AND FINANCE
SUBTITLE III--FINANCIAL MANAGEMENT
CHAPTER 39--PROMPT PAYMENT
Sec. 3905. Payment provisions relating to construction contracts
(a) In the event that a contractor, after making a certified payment
request to an agency pursuant to section 3903(b) of this title,
discovers that a portion or all of such payment request constitutes a
payment for performance by such contractor that fails to conform to the
specifications, terms, and conditions of its contract (hereafter in this
subsection referred to as the ``unearned amount''), then the contractor
shall--
(1) notify the agency of such performance deficiency; and
(2) be obligated to pay the Government an amount equal to
interest on the unearned amount (computed in the manner provided in
section 3903(c) of this title), from the date of the contractor's
receipt of such unearned amount until--
(A) the date the contractor notifies the agency that the
performance deficiency has been corrected; or
(B) the date the contractor reduces the amount of any
subsequent certified application for payment to such agency by
an amount equal to the unearned amount.
(b) Each construction contract awarded by an agency shall include a
clause that requires the prime contractor to include in each subcontract
for property or services entered into by the prime contractor and a
subcontractor (including a material supplier) for the purpose of
performing such construction contract--
(1) a payment clause which obligates the prime contractor to pay
the subcontractor for satisfactory performance under its subcontract
within 7 days out of such amounts as are paid to the prime
contractor by the agency under such contract; and
(2) an interest penalty clause which obligates the prime
contractor to pay to the subcontractor an interest penalty on
amounts due in the case of each payment not made in accordance with
the payment clause included in the subcontract pursuant to paragraph
(1) of this subsection--
(A) for the period beginning on the day after the required
payment date and ending on the date on which payment of the
amount due is made; and
(B) computed at the rate specified by section 3902(a) of
this title.
(c) The construction contract awarded by the agency shall further
require the prime contractor to include in each of its subcontracts (for
the purpose of performance of such construction contract) a provision
requiring the subcontractor to include a payment clause and an interest
penalty clause conforming to the standards of subsection (b) of this
section in each of its subcontracts and to require each of its
subcontractors to include such clauses in their subcontracts with each
lower-tier subcontractor or supplier.
(d) The clauses required by subsections (b) and (c) of this section
shall not be construed to impair the right of a prime contractor or a
subcontractor at any tier to negotiate, and to include in their
subcontract, provisions which--
(1) permit the prime contractor or a subcontractor to retain
(without cause) a specified percentage of each progress payment
otherwise due to a subcontractor for satisfactory performance under
the subcontract, without incurring any obligation to pay a late
payment interest penalty, in accordance with terms and conditions
agreed to by the parties to the subcontract, giving such recognition
as the parties deem appropriate to the ability of a subcontractor to
furnish a performance bond and a payment bond;
(2) permit the contractor or subcontractor to make a
determination that part or all of the subcontractor's request for
payment may be withheld in accordance with the subcontract
agreement; and
(3) permit such withholding without incurring any obligation to
pay a late payment penalty if--
(A) a notice conforming to the standards of subsection (g)
of this section has been previously furnished to the
subcontractor; and
(B) a copy of any notice issued by a prime contractor
pursuant to subparagraph (A) of this paragraph has been
furnished to the Government.
(e) If a prime contractor, after making application to an agency for
payment under a contract but before making a payment to a subcontractor
for the subcontractor's performance covered by such application,
discovers that all or a portion of the payment otherwise due such
subcontractor is subject to withholding from the subcontractor in
accordance with the subcontract agreement, then the prime contractor
shall--
(1) furnish to the subcontractor a notice conforming to the
standards of subsection (g) of this section as soon as practicable
upon ascertaining the cause giving rise to a withholding, but prior
to the due date for subcontractor payment;
(2) furnish to the Government, as soon as practicable, a copy of
the notice furnished to the subcontractor pursuant to paragraph (1)
of this subsection;
(3) reduce the subcontractor's progress payment by an amount not
to exceed the amount specified in the notice of withholding
furnished under paragraph (1) of this subsection;
(4) pay the subcontractor as soon as practicable after the
correction of the identified subcontract performance deficiency,
and--
(A) make such payment within--
(i) 7 days after correction of the identified
subcontract performance deficiency (unless the funds
therefor must be recovered from the Government because of a
reduction under paragraph (5)(A)); or
(ii) 7 days after the contractor recovers such funds
from the Government; or
(B) incur an obligation to pay a late payment interest
penalty computed at the rate specified by section 3902(a) of
this title;
(5) notify the Government, upon--
(A) reduction of the amount of any subsequent certified
application for payment; or
(B) payment to the subcontractor of any withheld amounts of
a progress payment, specifying--
(i) the amounts of the progress payments withheld under
paragraph (1) of this subsection; and
(ii) the dates that such withholding began and ended;
and
(6) be obligated to pay to the Government an amount equal to
interest on the withheld payments (computed in the manner provided
in section 3903(c) of this title), from the 8th day after receipt of
the withheld amounts from the Government until--
(A) the day the identified subcontractor performance
deficiency is corrected; or
(B) the date that any subsequent payment is reduced under
paragraph (5)(A).
(f)(1) If a prime contractor, after making payment to a first-tier
subcontractor, receives from a supplier or subcontractor of the first-
tier subcontractor (hereafter referred to as a ``second-tier
subcontractor'') a written notice in accordance with section 3133(b) of
title 40, asserting a deficiency in such first-tier subcontractor's
performance under the contract for which the prime contractor may be
ultimately liable, and the prime contractor determines that all or a
portion of future payments otherwise due such first-tier subcontractor
is subject to withholding in accordance with the subcontract agreement,
then the prime contractor may, without incurring an obligation to pay an
interest penalty under subsection (e)(6) of this section--
(A) furnish to the first-tier subcontractor a notice conforming
to the standards of subsection (g) of this section as soon as
practicable upon making such determination; and
(B) withhold from the first-tier subcontractor's next available
progress payment or payments an amount not to exceed the amount
specified in the notice of withholding furnished under subparagraph
(A) of this paragraph.
(2) As soon as practicable, but not later than 7 days after receipt
of satisfactory written notification that the identified subcontract
performance deficiency has been corrected, the prime contractor shall
pay the amount withheld under paragraph (1)(B) of this subsection to
such first-tier subcontractor, or shall incur an obligation to pay a
late payment interest penalty to such first-tier subcontractor computed
at the rate specified by section 3902(a) of this title.
(g) A written notice of any withholding shall be issued to a
subcontractor (with a copy to the Government of any such notice issued
by a prime contractor), specifying--
(1) the amount to be withheld;
(2) the specific causes for the withholding under the terms of
the subcontract; and
(3) the remedial actions to be taken by the subcontractor in
order to receive payment of the amounts withheld.
(h) A prime contractor may not request payment from the agency of
any amount withheld or retained in accordance with subsection (d) of
this section until such time as the prime contractor has determined and
certified to the agency that the subcontractor is entitled to the
payment of such amount.
(i) A dispute between a contractor and subcontractor relating to the
amount or entitlement of a subcontractor to a payment or a late payment
interest penalty under a clause included in the subcontract pursuant to
subsection (b) or (c) of this section does not constitute a dispute to
which the United States is a party. The United States may not be
interpleaded in any judicial or administrative proceeding involving such
a dispute.
(j) Except as provided in subsection (i) of this section, this
section shall not limit or impair any contractual, administrative, or
judicial remedies otherwise available to a contractor or a subcontractor
in the event of a dispute involving late payment or nonpayment by a
prime contractor or deficient subcontract performance or nonperformance
by a subcontractor.
(k) A contractor's obligation to pay an interest penalty to a
subcontractor pursuant to the clauses included in a subcontract under
subsection (b) or (c) of this section may not be construed to be an
obligation of the United States for such interest penalty. A contract
modification may not be made for the purpose of providing reimbursement
of such interest penalty. A cost reimbursement claim may not include any
amount for reimbursement of such interest penalty.
(Added Pub. L. 100-496, Sec. 9(a)(2), Oct. 17, 1988, 102 Stat. 2460;
amended Pub. L. 107-217, Sec. 3(h)(7), Aug. 21, 2002, 116 Stat. 1300.)
Prior Provisions
A prior section 3905 was renumbered section 3906 of this title.
Amendments
2002--Subsec. (f)(1). Pub. L. 107-217 substituted ``section 3133(b)
of title 40'' for ``section 2 of the Act of August 24, 1935 (40 U.S.C.
270b)''.
Effective Date
Section applicable to payments under contracts awarded, contracts
renewed, and contract options exercised during or after the first fiscal
quarter which begins more than 90 days after Oct. 17, 1988, see section
14(a) of Pub. L. 100-496, set out as an Effective Date of 1988 Amendment
note under section 3902 of this title.
Section Referred to in Other Sections
This section is referred to in section 3903 of this title.
