The Prompt Payment Act Answer Book

The Prompt Payment Act

Answer Book

William G.Arnold

8230 Leesburg Pike, Suite 800

Vienna, VA 22182

(703) 790-9595

Fax: (703) 790-1371

www.managementconcepts.com

Copyright © 2009 by Management Concepts, Inc.

All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by an information storage and retrieval system, without permission in writing from the publisher, except for brief quotations in review articles.

Printed in the United States of America

Library of Congress Cataloging-in-Publication Data

Arnold, William G.

   The Prompt Payment Act answer book / William G. Arnold.

      p. cm.

   ISBN 978-1-56726-243-8

1. Government purchasing—United States. 2. Administrative agencies— United States. 3. Payment—United States. I. Title.

JK1673.A79 2009

352.5’3—dc22

2009024497

10        9        8        7        6        5        4        3        2        1

To the men and women of the United States Armed Forces, past and present.

About the Author

William G. Arnold worked with the Department of Defense for 34 years, over 25 of which he spent in financial management. He was a budget officer prior to and during the mplementation of the Prompt Payment Act of 1982 and has been continuously involved with it during its evolution. He has also held positions as director of resource management, director of disbursing, and entitlements director with the Air Force and Defense Finance and Accounting Service. During his time as disbursing officer and entitlements director, Mr. Arnold disbursed or entitled over $400 billion in payments, all of it subject to the Prompt Payment Act.

Mr. Arnold holds a Master of Arts degree in financial management from Central Michigan University. For many years he taught undergraduate classes in economics and finance at Park College.

Mr. Arnold is currently an instructor with Management Concepts. Course topics include the Prompt Payment Act, voucher examination, an appropriations law seminar, appropriations law for business operations, budget execution, performance budgeting, and enhanced defense financial management.

He is a certified defense financial manager with acquisition specialty (CDFM-A) from the American Society of Military Comptrollers, and in 1984 he was awarded the designation of certified cost analyst (CCA) by the Institute of Cost Analysis.

Mr. Arnold is the author ofPerformance Budgeting: What Works, What Doesn’t, published in 2008 by Management Concepts.

Contents

Preface

Chapter 1: Introduction to the Prompt Payment Act

Chapter 2: The History of the Act

Chapter 3: The Final Rule (5 CFR 1315)

Chapter 4: Applicability

Agencies Included

Transaction Types Included

Payees Included

Chapter 5: Definitions

Chapter 6: Responsibilities of Agencies

Chapter 7: Standards for Prompt Payment

Chapter 8: Accelerated Payments and Fast Payment

Chapter 9: Discounts and Rebates

Chapter 10: Documentation

Chapter 11: Calculating Due Dates

Chapter 12: Late Payment Interest Penalties and Additional Penalties

Chapter 13: Special Situations

Governmentwide Commercial Purchase Cards

Commodity Credit Corporation

Construction Contracts

Grants and Assistance

Chapter 14: Inquiries

Appendix 1: The Prompt Payment Act Final Rule (5 CFR 1315)

Appendix 2: Self-Quiz: Payment Due Dates

Appendix 3: Self-Quiz: Interest Calculations

Appendix 4: Solutions to Payment Due Dates Self-Quiz

Appendix 5: Solutions to Interest Calculations Self-Quiz

Appendix 6:Treasury Financial Manual Bulletin: Current Value of Funds Rate

Appendix 7: Prompt Payment Act Interest Rates

Renegotiation Board Interest Rate, Prompt Payment Act Interest Rate, and Contract Dispute Act Interest Rate

Index

Preface

Many, if not most, federal agencies are not in compliance with the Prompt Payment Act, despite the fact the act has changed little during its more than 25 years of existence. I teach many sessions of a course on the Prompt Payment Act each year, and while I find that agencies are generally in compliance with most of the Prompt Payment provisions, some requirements are inevitably overlooked.

Auditors have taken note of these deficiencies, and Prompt Payment Act noncompliance is a frequent finding in both financial and performance audits. Though the basic rules are simple, there are numerous exceptions that financial payment systems are often unable to deal with. In addition, the rules themselves can be difficult to properly interpret and apply.

This book breaks down the Prompt Payment rules into their most basic parts, explains them in easily understandable language, and provides examples that can be emulated in everyday operations. It is presented in a question-and-answer format, allowing the reader to quickly find the answer to a specific question, while grouping the material in such a way as to allow for a complete treatment of each topic.

Because the number of people I can reach through my classes is limited, I wrote this book to provide a wide range of practitioners the information they need to get and stay in compliance with the Prompt Payment Act. It should be of interest to program managers and officials, entitlement and certifying officers, auditors responsible for reviewing payment operations, and vendors—who may not be completely aware of their entitlements.

William G. Arnold

Heath, Ohio

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