Monday, October 28, 2019

Prompt Payment Interest Rate Drops by One Percent

Do you remember the early 1980s when prompt payment interest rates peaked at over 15 percent? A decade later, interest rates dropped to less than half that and a decade after that, dropped to less than half again. In the last few years, interest rates have been hovering around two to three percent. The all-time low was 1.375 percent in 2013.

The Treasury Department just announced the prompt payment interest rate (also used for the Contract Disputes Act) for the second half of this year. It has dropped a whole percentage point from 3.625 percent for the first half of 2019 to 2.625 percent for the second half.

This rate is used to calculate interest due contractors when payment is made late - usually after 30 days from receipt of "acceptable" billing documents. Most of the time, the Government calculates and pays this penalty regardless of whether the business concern has requested payment of such penalty. It is calculated from the day after the required payment is due until the date that payment is made.

The Prompt Payment Act was enacted in 1982 at a time when interest rates were high (greater than 15 percent) and the Government did not seem to regularly meet its 30 day goal for making payments. Contractors who had to borrow for working capital couldn't afford to "finance the Government" as well - a lot of them watched their anticipated profits wither away. Over the ensuing years, Government "paying offices" (like DFAS) have improved their systems so that late payments are relatively rare. Still, the 'Act' remains and because of it, contractors can count on prompt payments for cash flow purposes.

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