Is the government entitled to the discount?
Using the IFB process, your contract should have resulted in a FFP construction contract. There is no provision in a FFP contract where the government could claim the discount unless it is one of the terms and conditions of the main government contract. The payments clause for construction 52.232-5 does not discuss discount for prompt payment. This condition is contained in 52.232-8 and is associated with FP Supply contracts.
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Your scenario talks to the materials portion of the contract and suggests that this is “extra profit. ” Note that this is speculation and is not necessarily true: First, nothing in the construction industry is that simple. Secondly, internal terms and conditions between a prime and their subs and suppliers are not normally items for government concern unless protected/specified by law (i.e. labor wages).
The counter argument to the extra profit assertion: The prime was obliged by the terms of the government contract to deliver a quality product within the period of performance and bound by their internal materials contract to pay upon delivery - which evidently contained an internal discount provision for early payment. Their risk was to get materials on site, paid for (in time to get the discount) and then bill and get paid by the government in time to make their cash flow work – attempting to remain solvent while essentially floating the government a loan for $2,580,000 worth of stuff (plus paying for the labor to do something with that material). Does the government contract contain a requirement for them to maintain a letter of credit? Is the government holding the normal Retainage of 10% or additional withholding? Internal prime-supply contract terms Payment Net 30? What is the interest differential? Check the net present value, they may have only broken even.
Moreover, would the government pay extra if the case were reversed? No, this is a FFP contract and therefore the contractor’s risk (with the sole exception of interest associated with prompt payment act for a late progress payment). Contract was awarded competitive IFB to lowest bidder. Was the work acceptable? If yes, pay and move on, if not address the quality/safety/environmental/labor concerns through retainage/withholding.