Prompt Payment

Background

The Prompt Payment final rule (5 CFR Part 1315) requires Executive departments and agencies to pay commercial obligations within certain time periods and to pay interest penalties when payments are late. On June 17, 1998, the Office of Management and Budget (OMB) requested comment on proposed revisions to the OMB Circular A-125, "Prompt Payment". The Circular was revised to reflect the increased use of electronic commerce in the Federal government and the private sector and to reflect the requirements of the Debt Collection Improvement Act (DCIA) of 1996 . Comments were received from 21 entities, including 15 Federal agencies, 5 vendors, and one university. After considering the comments received, OMB issued final revisions to Circular A-125 on September 29, 1999.

The Renegotiation Board Rate, established for interest payments under the Contract Disputes Act of 1978, is used to calculate interest on overdue Federal Government payments under the Prompt Payment Act, as amended (OMB Circular A-125). Interest is computed from the day after the due date through the payment date, at the rate in effect on the day payment becomes overdue. Interest remaining unpaid for any 30-day period will be added to the principal, and interest thereafter will accrue monthly on the total of principal and previously accrued interest. This rate is also used to calculate interest when a contract dispute is settled in favor of, or against, the Federal Government.

The Renegotiation Board Rate is based on private commercial rates of interest for new loans maturing in approximately five years. The rate is determined every six months, applicable for the periods beginning January 1 and July 1, and is published in the Federal Register about the first of January and July each year.

Proper Invoice

The Prompt Payment rule reflects the requirements of the DCIA, which requires that most Federal payments, with the exception of tax refunds, be made by electronic funds transfer (EFT) beginning on January 2, 1999. The final rule requires agencies to collect EFT information and a Taxpayer Identification Number (TIN) as part of a proper invoice. Late interest penalties do not apply if the vendor has failed to submit this information.

Accelerated Payments

The Prompt Payment rule expands the options for making early payments if doing so is in the best interest of the government and promotes electronic payments. Agencies may accelerate payments for invoices under $2,500, payments to small businesses, payments related to emergencies, disasters, and military deployments. Agencies may also make payment within 15 days of receipt of a proper invoice, but without evidence that goods or services were received, in certain circumstances.

Payment of Purchase Card Invoices

The Prompt Payment rule provides guidance to Federal agencies on when to make payments for the Government-wide commercial purchase card. The rule instructs agencies to determine credit card payment dates based on an analysis of the total costs and total benefits to the Federal government as a whole. When calculating cost and benefits, agencies are expected to include the cost to the government of paying early, which includes the interest the government would have earned, at the Current Value of Funds rate. for each day that payment was not made. A spreadsheet which calculates when an agency should pay a credit card invoice can be obtained by visiting the Prompt Pay Web site at http://www.fms.treas.gov/prompt/rebate.html.

Calculation of Interest

The final rule includes formulas for the calculation of simple and compound interest. Additional information on the calculation of interest can be obtained at http://www.fms.treas.gov/prompt/ppinterest.html.


   Last Updated:  March 14, 2014