FAR 28.106-7—Withholding contract payments.
Plain-English Summary
FAR 28.106-7 addresses when the Government may and may not withhold contract payments because subcontractors or suppliers have not been paid. It draws a sharp distinction between withholding during contract performance and withholding after completion, and it also points readers to labor-standards withholding rules in FAR part 22. In general, agencies are prohibited from withholding progress or other payments due to the contractor or an assignee merely because lower-tier firms have not been paid. After the work is complete, however, if the Government receives written notice from the surety that the contractor has failed to pay subcontractors or suppliers, the contracting officer must withhold final payment unless the surety agrees to hold the Government harmless from any resulting liability. Final payment may then be released when the contractor and surety resolve the matter or when a court determines the parties’ rights. In practice, this section protects the Government from becoming a collection mechanism for subcontractor disputes while preserving a narrow post-completion safeguard tied to surety notice and liability protection.
Key Rules
No progress-payment withholding
During performance, agencies may not withhold payments due to the contractor or an assignee simply because subcontractors or suppliers have not been paid. The Government generally must continue making contract payments according to the contract terms and cannot use payment withholding as leverage for private payment disputes.
Post-completion withholding allowed
After the contract work is complete, the contracting officer must withhold final payment if the Government receives written notice from the surety that the contractor has not met its obligations to subcontractors or suppliers. This is a limited exception that applies only at the final-payment stage and only when the surety gives the required written notice.
Surety must protect the Government
Before the Government withholds final payment, the surety must agree to hold the Government harmless from any liability arising from the withholding. This protects the Government from claims if the withholding later proves improper or causes loss to another party.
Release final payment when dispute is resolved
The contracting officer may authorize final payment once the contractor and surety reach an agreement or when a court issues a judicial determination of the parties’ rights. The Government should not continue withholding after the underlying dispute has been resolved through agreement or litigation.
Labor-standards withholding is separate
If withholding is related to labor standards requirements in the contract, the contracting officer must look to FAR part 22 rather than this section. This provision does not govern Davis-Bacon, Service Contract Labor Standards, or other labor-standards withholding procedures.
Responsibilities
Agency
Must not withhold payments during performance merely because subcontractors or suppliers have not been paid. The agency must follow the contract payment terms and use this section only within its limited post-completion and surety-notice framework.
Contracting Officer
Must continue payments during performance, but after completion must withhold final payment upon written notice from the surety if the contractor has failed to pay subcontractors or suppliers. The contracting officer must also verify the surety’s hold-harmless agreement and release final payment when the contractor-surety dispute is resolved or a court determines the parties’ rights.
Surety
Must provide written notice to trigger post-completion withholding and must agree to hold the Government harmless from liability resulting from the withholding. The surety also has an interest in resolving the payment dispute or obtaining a judicial determination so final payment can be released.
Contractor
Must satisfy payment obligations to subcontractors and suppliers and, if final payment is withheld, work with the surety to resolve the dispute or obtain a judicial determination. The contractor should also understand that unpaid lower-tier claims do not justify routine withholding during performance.
Subcontractors and Suppliers
May seek payment from the contractor and, indirectly, may benefit from surety action after completion, but this section does not give them a direct right to have Government progress payments withheld during performance.
Practical Implications
Contracting officers should not use payment withholding as a general remedy for subcontractor nonpayment during performance; doing so can create improper payment delays and disputes with the prime contractor or assignee.
The post-completion withholding rule is narrow and procedural: it depends on written notice from the surety and a hold-harmless commitment, so documentation matters before final payment is stopped.
This section is about payment administration, not a substitute for labor-standards enforcement. If the issue involves wage or labor compliance, FAR part 22 controls.
Contractors should not assume unpaid subcontractor claims will automatically stop Government payments during performance, but they should expect final-payment issues if the surety intervenes after completion.
A common pitfall is confusing subcontractor-payment disputes with claims under the Prompt Payment Act, assignment of claims, or labor-standards withholding; the contracting officer must identify the correct legal basis before acting.
Official Regulatory Text
(a) During contract performance, agencies shall not withhold payments due contractors or assignees because subcontractors or suppliers have not been paid. (b) If, after completion of the contract work, the Government receives written notice from the surety regarding the contractor’s failure to meet its obligation to its subcontractors or suppliers, the contracting officer shall withhold final payment. However, the surety must agree to hold the Government harmless from any liability resulting from withholding the final payment. The contracting officer will authorize final payment upon agreement between the contractor and surety or upon a judicial determination of the rights of the parties. (c) For any withholding incident to the labor standards provisions of the contract, see part 22 .