Chapter 1

Introduction to the Prompt Payment Act

Although the Prompt Payment Act has been in effect for more than 25 years, agencies continue to misapply many of its provisions, as evidenced by repeated audit reports documenting both failure to understand and implement the requirements of the act and a lack of adequate internal controls to ensure compliance.

Reasons vary. The rules are often arcane and difficult to apply in practice, and agencies are naturally reluctant to pay interest penalties that are due because such interest penalties directly reduce the program funds avail able to the agency.

This book is designed to serve as a guide for government personnel, including program managers, contracting personnel, entitlement and certifying officials in paying offices, and auditors responsible for reviewing payments for compliance with the law. It should also be useful to private sector vendors and contractors who receive payments from federal agencies for goods and services provided. Such vendors and contractors will be able to better understand their rights and entitlements under the Prompt Payment Act.

The book is designed as a reference, enabling the reader to find answers to specific questions. It is not designed to be read cover to cover. However, certain issues require several questions and answers to fully explore the topic. Care has been taken to group questions that are dependent on each other in a logical flow. The reader is cautioned to read the entire section devoted to the issue at hand to get a complete answer.

While the questions and answers have been thoroughly researched and are as accurate and current as possible, do not rely on this book as a legal reference. Consult both your agency internal regulations and your legal counsel about specific issues. Furthermore, Congress from time to time passes legislation that benefits a particular agency. Except where noted, the questions and answers within are based upon generic laws and rules. It is possible that your agency has specific statutory authority not covered in the book. While the Prompt Payment Act and the Final Rule implementing it have not changed recently, you should check to see if any changes have been made since the book was published. Also, because the Federal Acquisition Regulation is a major player in many of the procedures concerning Prompt Payment, changes to the FAR should also be researched.

Chapter 2

The History of the Act

The Prompt Payment Act, originally passed in 1982, was updated several times during its first years of existence. The Office of Management and Budget (OMB) published Circular A-125 to implement its requirements, supplanted by the Final Rule on Prompt Payment in 1999. This chapter documents the history of the Prompt Payment Act and its evolution.

1. Why did Congress pass the Prompt Payment Act?

Prior to enactment of the Prompt Payment Act, there was considerable dissatisfaction among government contractors about the timeliness of government payments. A 1978 report issued by the General Accounting Office (GAO; now called the Government Accountability Office) stated that 39 percent of all bills paid by the government were paid late. ¹ Con gress passed the Prompt Payment Act to force federal agencies to pay commercial vendors in accordance with contract provisions. Prior to the Prompt Payment Act, it was not unusual for agencies to routinely pay bills due in 30 days in 60, 90, or even 120 days instead.

2. Of the bills paid late by the government, how many of those late payments stemmed from contractor mistakes (incomplete invoices or not billing in accordance with contract provisions, for example) and how many were the government’s fault?

The report stated that 39 percent of all payments were late: 9 percent due to contractor error (e.g., incomplete invoices or not billing in accordance with contract provisions) and 30 percent due to government error. ²

3. Before the Prompt Payment Act, weren’t there regulations in place that required timely payment? Why was a law needed?

The existing regulations weren’t working. When the House Committee on Government Operations reported the original Prompt Payment Act to the full House, the committee said that the purpose of the act was “to accomplish what administrative rules and regulations have failed to do—provide incentives for the Federal Government to pay its bills on time.” ³

4 Why didn’t the government simply pay interest to contractors when payments were made late?

A firmly established principle, called the “no-interest rule,” has been consistently recognized and applied for more than 150 years. This rule was derived from the concept of sovereign immunity and states that the United States is not liable for interest unless expressly authorized in the relevant statute or by contract. The rule does not permit the payment of interest on equitable grounds, and it applies even where the government has unreasonably delayed payment. An attorney general opinion in 1860 stated, “Justice and equity will not give [the claimant] one cent more than he is entitled to by law.” ⁴

Until 1971, GAO held that interest could be paid only if supported by statutory authority. In 51 Comp. Gen. 251 (1971), GAO recognized that the government could become liable for interest by contract even without express statutory authority. ⁵

Thus, the United States can be liable for interest if expressly provided for by statute, or if provided for in a contract. Absent authority from either source, however, interest may not be paid.

Two statutes now govern the payments of interest to contractors: the Contract Disputes Act, which covers interest on claims, and the Prompt Payment Act, which covers interest on delayed payments.

5. What was the impact of the government’s not paying its bills on time?

There were three major effects.

 vendors that were continually receiving late payments factored thetime value of money—the opportunity cost of interest lost, or the interest rate paid to borrow money to finance operations—into their subsequent bids to provide goods or services. This drove up the cost of procurement.

 Second, the practice of not paying on time stifled competition. Many small vendors that were unable to finance operations awaiting payment simply dropped out of the marketplace. This reduced competition also tended to drive up prices.

 Third, the government was losing a lot of opportunities to take discounts that vendors were offering. Slow payments also led many contractors to stop offering discounts because the discounts didn’t seem to influence the agencies to pay any faster. Further, some agencies were paying bills late, within 60 or 90 days, and taking the discounts anyway. These agencies had no right to take the discounts, but most contractors, rather than complaining, just stopped offering them for future contracts. ⁶

6. Is the practice of paying early addressed in the Prompt Payment Act?

Yes. Early payments were another reason Congress passed the legislation. While many payments were made late, there were also a significant number of payments made early, often long before they were due.

7. Why is it a problem when the government makes early payments?

When payments are made early, the U.S. Treasury must borrow the money to finance the payment earlier than if it had been paid on time. This represented a real cost to the Treasury; it owed more interest than it would have if it had made payments on time.

8. If it costs the Treasury money when the government pays early, doesn’t the Treasury save money when agencies pay late?

Late payments saved the Treasury some money in interest, but, as already discussed, these late payments were causing serious problems by stifling competition and increasing the cost of procurement.

9. Did GAO recommend that Congress pass payment legislation?

In its 1978 report, GAO made a number of recommendations for up the payment process and improving cash management. It believed that if its recommendations were implemented, relatively few contractors would be paid late and an interest charge might not be necessary. Bills had already been introduced to require agencies to pay interest, but they had never been passed, partly due to opposition by OMB’s Office of Federal Procurement Policy.

10. Were GAO’s 1978 recommendations implemented?

Despite GAO’s recommendations, and OMB’s support of them, agencies’ performance didn’t improve very much over the next few years.

11. When did Congress pass the Prompt Payment Act?

The original law was enacted in 1982 as Public Law 97-177. Congress passed a substantial amendment in 1988 (Public Law 100-496). Most recently, Congress included cost-reimbursement contracts under the act with the passage of Public Law 106-398 in 2000.

12. Where can I find these laws that make up the Prompt Payment Act?

The act and its amendments are codified at 31 U.S.C. 3901-3907.

13. Will this U.S.C. citation give me all the information I need to properly implement the Prompt Payment Act?

Unfortunately, no. When Congress passed the Prompt Payment Act, it laid out many of the specific requirements but also tasked OMB to write implementing instructions. OMB published Circular A-125. Later, in 1999, OMB published the Prompt Payment Final Rule, codified at 5 CFR 1315.

14. Which reference should I use as guidance to implement the Prompt Payment Act?

The Final Rule (5 CFR 1315) is a good starting point. It incorporates all the requirements in the Prompt Payment Act and adds necessary details to successfully implement the law. The Final Rule (see Appendix 1) is binding on both the government and commercial vendors. Also refer to Federal Acquisition Regulation (FAR) requirements and your agency regulations.

15. Can you summarize the major provisions of the Prompt Payment Act?

The concept is really quite simple. The act says:

1. Don’t pay late—if you do, youwill pay interest.

2. Don’t take discounts you are not entitled to. If you do, youwill pay interest.

3. Don’t pay early.

NOTES

1. General Accounting Office, The Federal Government’s Bill Payment Performance Is Good but Should Be Better, FGMSD-78-16, February 24, 1978, 3.

2. Ibid., 5.

3. HR Res. 461, 97^th Cong., 2^nd sess. (May 11, 1982).

4. Government Accountability Office,Principles of Federal Appropriations Law, Volume III (GAO/OGC-94-33), Chapter 12, 12-214.

5. Ibid., 216.

6. General Accounting Office, 7.