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.

Prompt Payment Act Interest Rate Rises

The Department of Treasury, Bureau of Fiscal Service just announced the Prompt Payment Act interest rate for the second half of calendar year 2015. It will increase from 2.125 percent to 2.375 percent. This is the highest the rate has been since 2011 but no where near where it peaked in 1982 at 15.5 percent.

 This is the Treasury Rate that is used to compute FCCM (Facilities Capital Cost of Money). It's also used to calculate the Government's liability when they are late in paying contractors. An agency that has acquired property or service from a business concern and has failed to pay for the complete delivery of property or service by the required payment date (generally within 30 days) shall pay the business concern an interest penalty. Also, the Contract Disputes Act of 1978 and the Prompt Payment Act provide for the calculation of interest due on claims at the rate established by the Secretary of the Treasury.

The Secretary of the Treasury has the authority to specify the rate by which the interest shall be computed for interest payments under section 12 of the Contract Disputes Act of 1978 and under the Prompt Payment Act. Under the Prompt Payment Act, if an interest penalty is owed to a business concern, the penalty shall be paid regardless of whether the business concern requested payment of such penalty. Agencies must pay the interest penalty calculated with the interest rate, which is in effect at the time the agency accrues the obligation to pay a late payment interest penalty. The interest penalty shall be paid for the period beginning on the day after the required payment date and ending on the date on which payment is made.

Contractors who submit public vouchers or progress payments requests are entitled to interest if the Government doesn't pay them in a timely manner. Late payments don't happen often but when they do, the "paying office" usually adds the interest penalty automatically.

What is the Prompt Payment Act (PPA)?

The Prompt Payment Act (PPA) has been around for more than 30 years. It was enacted back in 1982 amid frequent and vociferous complaining by Government contractors (and vendors, in general) that the Government wasn't paying their bills on time and as a result, disrupted contractors cash flows causing financial hardships. GAO stepped in and determined that the contractors complaints were well founded. In fact, GAO found that the Government's delays in paying its vendors were not isolated incidences but occurred frequently and consistently.

The PPA requires that whenever an agency fails to pay for goods and services by the required payment date, that agency must automatically pay interest on the amount owed. This applies as well to interim payments under cost-reimbursable contracts if payment is not made within 30 days after receipt of a "proper" invoice.

A proper invoice is one that includes all of the information required by FAR 32.905(b). For cost-reimbursement contracts, a proper invoice for purposes of 32.905(b) includes all of the information required by the contract. Well, that's not too helpful so one has to go to the contract's billing instructions for that kind of detail.

The Government has only seven days to determine whether an invoice is "proper". If it takes more than seven days and the invoice/voucher is rejected, those additional days are taken away from the 30 days in which the Government must pay before accruing interest.

Back in the day, when invoices were paper, there were often disputes as to when the invoice/voucher was received. That is no longer an issue with the on-line payments systems such as iRAPT (formerly WAWF).

The interest penalty is paid automatically. Contractors do not need to make requests. However, if the payment office fails to pay interest within 10 days of paying a late invoice, the contractor can make a written request for a penalty in addition to the interest. The written request must be made within 40 days of the actual payment date.

Interest is not paid under some circumstances including:

1. When payment is delayed because of a dispute between the Government and the contractor over the amount of payment or other issues concerning compliance with the terms and conditions of the contract.
2. For progress payments
3. When amounts are withheld temporarily in accordance with the contract
4. When an electronic funds transfer is not timely through no fault of the Agency.
5. When the interest penalty is less than one dollar.

Although interest payments should be automatic, we are aware of a few cases where the Government did not add interest to delinquent payments. Once the contractors inquired concerning the interest, the Government paid up. It is important that contractors know their rights and monitor payments to ensure they receive interest, when warranted.