1. Monitoring Prompt Payment and Return of Retainage
Christine Thorkildsen, FHWA Civil Rights Program Manager

2. Presentation Objective
Review the Federal requirements of prompt payment and return of retainage (49 CFR 26.29)
Provide methods of administration and oversight
Share examples of challenges, solutions and best practices
Lots of audience interaction!

3. What is Prompt Payment and Return of Retainage?
The DBE regulations require Recipients to ensure prime contractors pay all subcontractors:
Promptly (no later than 30* days of receipt) and,
Prompt and full payment of retainage 30 days after the subcontractor’s work is satisfactorily completed.
*30-day limit is fed requirement – STA might have shorter timeframe which is great!
So if the prime is paid for work the sub has completed then the sub must be paid NLT 30 days later

4. Why Prompt Payment & Return of Retainage?
To address the barriers created by delays in payment to subcontractors
Slow payment is a problem affecting many subcontractors, not just DBEs
Prompt payment provisions are an important race-neutral mechanism that can benefit DBEs and all other small businesses
Need to support small businesses which include DBEs
It is clear that DBE subcontractors are significantly—and, to the extent that they tend to be smaller than non-DBEs, disproportionately—affected by late payments from prime contractors. Lack of prompt payment constitutes a very real barrier to the ability of DBEs to compete in the marketplace.

5. Which Subcontractors Does PP Apply?
All subcontractors!
On and off site
DBEs and non-DBEs
Truckers, suppliers, engineering services, etc, etc
All firms associated with the project
Why is this confusing?
The Prompt Pay provision is included in 49 CFR 26
State’s define “subcontractor” differently
Tiering of subcontracting
All subcontractors??

6. More Talk on Tiering
For each tier of subcontracting another NTE 30-days for payment is added
Example:
3 Tiers of subcontracting:
Prime – Paid
1st Tier – NTE 30 days
2nd Tier – NTE 30 days of when 1st tier was paid
3rd Tier – NTE 30 days of when 2nd tier was paid
From when prime is paid could take up to 90 days to pay 3rd tier sub

7. Who is responsible for Prompt Payment?
FHWA
State Transportation Agency
Non-traditional recipients of Federal funding
Developers
Prime contractors
Subcontractors

8. DBE Program Plan DBE Program Plan Should include:
Affirmation that recipient has contract clauses for prompt payment and return of retainage
Method used for return of retainage
Description of monitoring mechanism and staff responsibilities
Description of dispute resolution mechanism
Description of contract remedies and sanctions applicable to prompt payment
How prompt payment complaints will be investigated

9. Contract Clause
Obligates the contractor to pay the subcontractor for satisfactory completion of their work
No later than 30 days of when the prime or upper tier has been paid
Must be included in every DOT-assisted contract
How does STA assure the clause is in their federal contracts?

10. What is retainage?
Withholding a certain percentage of payment until all work is satisfactorily completed
Benefit: motivates sub to complete work faster and completely – including submittal of documentation such as certified payrolls
Challenge: more oversight

11. Return of Retainage There are 3 options for retainage:
Recipient does not hold retainage from prime
Recipient does not hold retainage from prime – but prime can withhold from subcontractor
Recipient can hold retainage from prime and pay retainage based on payment for portions of work (incremental acceptance)
Once work is accepted, prime must pay all retainage owed within 30 days.
The STA must state in their DBE PP and in their standard specifications and contract language with the prime if the STA is allowing either 2 or 3 above

12. When should retainage be returned?
The prime withholding a subcontractor’s retainage until the end of the project is not permitted
Primes must release retainage when the subcontractor’s work (according to their contract) is completed
Incremental or monthly progress payments may constitute incremental acceptance by the recipient
To assure accepted work, subcontractors must submit acceptable documentation to the prime.

13. Monitoring Mechanisms
Recipient must have procedures to assure compliance by all program participants
How will Recipient know:
PP clause is in contract language
Date prime is paid
Date when subcontractor is paid
When a contract is under dispute
What is being asked of the prime/sub for data collection
What if they don’t comply

14. Why accurate/timely data is important
If recipient does not have a way to provide oversight of all firms on the project then monitoring is really based on complaints
Contract language must require the prime to submit information on all subcontractors
The firms are responsible for verifying they have been paid
What if they don’t verify their payments?
Is there a cure period?

15. Dispute Resolution Process (DRP)
DBE Program Plan should describe the process the recipient uses to resolve disputes
Having a DRP process that is enforced resolves the disputes effectively and efficiently
Disputed work does not fall under the PP provisions since it represents work which not yet accepted
Drawn out disputes puts small businesses out of business!

16. Contract Remedies or Sanctions
Enforcement is expected since non-compliance with PP is considered a breach of contract
Examples of penalties:
Terminating the contract
Withholding progress payments
Assessing sanctions
Disqualifying contractor on future federal contracts
Withholding compliance points (P3 multi year contract)
When – who – cure period? -

17. Relying on Complaints
Recipients oversight process and assurance of compliance with PP CANNOT rely solely on complaints or notifications from subcontractors
Unpaid subcontractors are reluctant to complain for fear of retaliation
Recipient must take affirmative steps to monitor and enforce prompt payment and retainage requirements
Must be proactive – waiting for complaint is reactive
Significant problem in the field

18. Processing Complaints
All firms on the project should be aware how to file a complaint (with the public agency)
Recipient must investigate (doesn’t mean ask the prime to resolve)
Recipient must provide a timely response – no more than the time to promptly pay sub
If the recipient does not respond to the unpaid sub, the sub can contact the FHWA. (this is not a good sign!)

19. What is acceptable work?
Payment is required only for satisfactory completion of the subcontractor’s work
Check your standard specifications to see the definition of acceptable/completed work
If work has been paid for by the recipient to the prime then the work has been accepted
If the prime has been paid, then the subcontractors providing any work under that payment must be paid

20. Advice to Recipients
Review your DBE Program Plan and assure all provisions of PP/Retainage requirements are included
Assure the elements of your DBE Program Plan are reflected in Standard Specifications and in contract language
Assure internal oversight procedures are aligned with DBE PP
Include training on PP in your DBE Supportive Services program
Provide training to oversight staff
Reach out to subcontractors – be assessable
Perform PP audits on larger projects
Go back to slide 7

21. Advice to Prime Contractors
Compliance with PP will save time and money
Assure all subs understand their responsibility of acknowledging payments
Execute DRP as soon as dispute is evident
Major projects (>$500M) contracted under D-B typically allows for tiering of subcontracting – make sure all subs know their responsibility under PP

22. Advice to Subcontractors
Read your contract before signing!
How/when you are paid is super important
Make sure you understand how to submit payment data
Make sure you understand the dispute resolution process
Make sure it contains the prompt payment/release of retainage clause that binds the prime to pay at the sub at most 30 days after they are paid
Know who the oversight agency is

23. Real Life! Goethals Bridge Replacement (NY/NJ)
D/B, P3, multiple layers of subcontracting (tiering)
Web-based electronic system for data
Recipients procedures of oversight – appeared to be great
Contract language – weak (comply with 49 CFR 26)
What could go wrong??
Web-based system
Flags
Disputed work was beginning
After resolution payments still not made
Not all firms were entered into database
Firms were confused on system – (were you paid??)
Firms waited until they had to get a loan to stay solvent
Work

24. Yikes! 3 significant events of non-compliance of prompt payment
All started with disputed work
Significant number of firms were not in database
Recipient was not aware of late payments
Tiering is very difficult for recipient to monitor
Tiering is very difficult for prime to monitor
Prompt payment issues threatened delay of the project
Sanctions included with holding TIFIA dispursement

25. Solutions! Recipient changed their oversight procedures
Checked for PP clause in all contracts they were aware of
Created an outreach to known subcontractors
Asked known subcontractors if they have subcontracted and the names of those firms
list grew 
On-site reviews (CUF and wages) also asked if firm was subcontracting and if they have heard of any issues with payments
Prompt payment audits

26. More Solutions! Prime Contractor
Gave training on electronic data collection system to all subcontractors once PP issues were discovered
Made Improvements to standard subcontract provisions relating to prompt payment
Required subcontractors and suppliers to acknowledge that they are aware of their prompt payment obligations
Improved prompt payment project controls

27. Watch out for….
Project civil rights data collection is not just for DBEs
The term “subcontractor” – could mean for some STAs just on-site firms
No relationship between recipient and subcontractor… Doesn’t matter
Reluctance of Prime or subcontractor to share project/contract information (see 49 CFR (c))
Tiering of subcontracting
Issues grow exponentially on major projects

28. Best Practices Use electronic system on larger projects
Flags of late payments
If contract language is clear and well thought out, onus is put on contractor(s)
Payment data is accurate, timely and complete
Good relationship between recipient and subcontractors
Training!
By STA to oversight staff
By prime to subs

29. Resources 49 CFR 26 – specifically 26.29 USDOT DBE Q&As
February 2, 1999 DBE Final Rule
USDOT DBE Q&As
Clarification issued in 2016
“Prompt Payment Section Sample Template” (posted 4/5/18) – Issued by USDOT
A fill in the blanks template
But specific details for monitoring mechanisms, issuing

30. Christine Thorkildsen
Thank You!
Christine Thorkildsen
FHWA New York Division
FHWA Civil Rights HQ