A common frustration faced by many small business government contractors, particularly in the construction industry, is how often agencies make very costly unilateral change orders during the course of performance. Although a contractor may be able to receive compensation for the additional work it has performed through a request for an equitable adjustment (“REA”), whether due to agency budgetary constraints or other issues, processing of REAs is often subject to significant delays. The contractor may have serious cash flow constraints because of the additional labor or subcontractor costs arising from such change orders. Thus, if an agency drags its feet on granting (or even wrongfully denying) such REAs, the contractor, while suffering significant cash flow problems, may also incur additional legal and/or administrative costs to pursue for reimbursement of the additional costs they incurred.

However, some help could be on the way. On June 15, 2017, the House Small Business Committee (the “Committee”) announced that it has approved proposed legislation which would, if enacted in law, speed up the process through which small business contractors can be compensated for unilateral change orders in construction contracts. H.R. 2594, which is entitled the ‘‘Small Business Payment for Performance Act of 2017,’’ would amend the Small Business Act by allowing a small business concern performing a construction contract to submit an REA to a contracting officer who issued a change order without the contractor’s agreement. The REA would have to be “timely” in accordance with the terms of the contract and include the estimated amount required to cover the additional costs related to the change order. According to the markup legislation approved by the Committee, the agency is required to provide, “upon receipt” of the REA, an interim initial payment to the contractor in an amount that is at least 50 percent of the cost of work performed as a result of the change order. 

Such partial payments, as they are of an interim nature, would not be, under the proposed legislation, an action to define the REA, and the agency making such a payment will provide the small business concern a notice regarding the status of the REA . This means that that the REA is still subject to final approval by the Agency. In addition, if a small business concern receives a partial payment under this proposed statute, it will be required to pay a first-tier subcontractor or supplier the portion of the payment that is attributable to the increased cost of performance, incurred by such subcontractor or supplier as a result of the change order. Similarly, the first-tier subcontractor is required to pay a lower-tier subcontractor or supplier its share of the interim partial payment. Thus, lower-tier subcontractors will gain a particular benefit from this proposed legislation.

Copies of the original version of H.R. 2594, including the amendments passed during the markup, can be found here.

About the Author: Patrick Rothwell is an associate with PilieroMazza in the Government Contracts Group. He may be reached at [email protected].