Pay Your Invoices When Due - Or Else....

DCAA recently issued an audit alert telling its auditors that if a contractor doesn't pay its bills within "... the ordinary course of business (ordinarily within 30 days of the request for payment to the Government)" that auditors should question the amounts and to " ... consider whether this is a fraud risk indicator."

The full text of the 'alert' can be read here.

According to FAR 52.216-7(b)(1), Allowable Cost and Payment, the term "costs" for purposes of reimbursement, includes two things. First, "costs" include recorded costs that, at the time of the request for reimbursement (e.g. a public vouchers and progress payments), the Contractor has paid the bill by cash, check, or other form of actual payment. Secondly, when the contractor is not delinquent in paying its bills in the ordinary course of business, "costs" include those that are incurred but not necessarily paid for supplies and services purchased directly for the contract. In this second case, the payments will be made in accordance with the terms and conditions of a subcontract or invoice, and ordinarily within 30 days of the contractor's payment request to the Government.

Now, DCAA is instructing its auditors to go out and design some audit tests to determine whether contractors are in compliance with FAR 52.216-7(b)(1). And, if the auditors find non-compliance, they are to suspend the costs using the DCAA Form 1 and must consider the likelihood that fraud has occurred. If there is a suspicion, the auditor must refer it up the chain using the DCAA Form 2000.

So here's the problem. Auditors like to focus on the "ordinarily within 30 days" criteria and ignore the first criteria; "payments made in accordance with the terms and conditions of the subcontract or invoice." We have seen quite a number of subcontracts for example that have payment terms of 30 days after the prime contractor has been reimbursed by the Government. Obviously, that's going to stretch out much longer than 30 days after receipt of the subcontractor invoice - we've seen subcontractor payments mad 90 days and longer. Also, not all vendor invoices have terms like "Net 30". Terms are often negotiable and some contractors have negotiated very favorable terms with their vendors.

We recommend that contractors perform a risk assessment to ascertain their level of compliance with this contract provision. Its better to know your vulnerabilities and fix them then to have them discovered by a contract auditor.