The Prompt Payment Act requires agencies to pay interest on late payments. If the interest isn’t paid when due, the contractor is entitled to collect an additional interest penalty. A June 26, 2012 report by the Government Accountability Office looks at how much the Prompt Payment Act costs the Department of Defense.
According to GAO’s estimate, DOD paid late payment penalties totaling about $21 million in 2011. This number is comprised of $19 million in late-payment penalties reported on transactions processed by the Defense Finance and Accounting Service. GAO estimates that DOD paid about $2 million in late payment penalties on transactions processed outside of DFAS, which includes transactions handled by the U.S. Army Corps of Engineers and TRICARE. GAO estimates that DOD lost another $9 million by foregoing prompt payment discounts.
Several explanations were offered for the late payments:
- According to DOD, incomplete documentation causes about 57% of late payments. Many DOD components continue to mail documentation to DFAS.
- According to DOD, processing delays and backlog within DFAS cause about 23% of late payments.
- In some cases, late payments are the result of ambiguous language in the contract, either in the descriptions of items being purchased or confusing units of measure.
Obviously, reducing the amount that the government spends on late-payment penalties and foregone prompt payment discounts should be a priority.
Current Prompt Payment Act interest rates and a handy interest calculator are available from the Treasury Department.