Prompt Payment Act

The Prompt Payment Act (31 U.S.C. 3901-3907) requires federal agencies to pay contractors within specified timeframes after receiving a proper invoice, generally 30 days for most payments, and to automatically pay interest penalties on late payments at the Treasury-published rate, without requiring the contractor to request them.

What is the Prompt Payment Act?

Enacted in 1982 and significantly strengthened in 1988, the Prompt Payment Act addresses the chronic problem of slow government payments that had plagued contractors, particularly small businesses, with cash flow problems caused by agencies taking 60, 90, or even 120 days to pay invoices. The Act establishes strict payment deadlines and automatic interest penalties to incentivize timely payment without requiring contractors to navigate claims processes to recover interest on late payments.

The standard payment period under the Act is 30 days after the later of: (1) the date the agency receives a proper invoice, or (2) the date the agency accepts the supplies or services. For construction contracts, the standard payment period is 14 days. For payments to small businesses under accelerated payment policy (OMB M-11-32), agencies are encouraged to pay within 15 days when possible. Interest begins accruing automatically on day 31 (or day 15 for construction) at the Treasury prompt payment rate, which is published quarterly.

A "proper invoice" is the key concept. The Prompt Payment Act payment clock starts only when the government receives a proper invoice, one that includes all required information specified in the contract (contractor name, address, invoice number, invoice date, contract number, CLIN number, description of goods/services, quantity, unit price, amount, payment terms, and any other contract-required elements). If an invoice is improper, the agency must notify the contractor of the deficiency within 7 days (for DoD) or the number of days specified in the contract, and the payment clock does not start until the corrected invoice is received.

For subcontractors, FAR 52.232-27 (Prompt Payment for Construction Contracts) and FAR 52.232-5 (Payments under Fixed-Price Construction Contracts) require prime contractors to pay subcontractors within 7 days of receiving payment from the government. This "pay when paid" flow-down protects subcontractors from prime contractors' withholding government payment receipts.

Why the Prompt Payment Act Matters for Government Contractors

Understanding Prompt Payment Act requirements helps contractors manage cash flow expectations, identify when interest is owed, and ensure invoices are proper on submission. The most common Prompt Payment Act issue for contractors is submitting improper invoices that restart the payment clock, invoice deficiencies that could have been avoided with better invoice preparation discipline. For small businesses where cash flow is critical, consistent proper invoice submission and monitoring of payment timing (to identify when interest begins accruing) directly affects working capital management.

Example

A $3.4M IT services contractor submits its monthly invoice on July 1 for services rendered in June. The agency receives the invoice on July 3 and accepts the services on July 5 (the later date). The 30-day payment period begins July 5; payment is due no later than August 4. The agency issues the ACH payment on August 7, 3 days late. The agency is required to automatically add interest at the quarterly Treasury prompt payment rate (currently approximately 5-6% annually) for 3 days on the invoice amount. For a $285,000 invoice at 5.5% annual interest, the 3-day interest penalty is approximately $129. The agency includes this interest automatically in the payment without requiring the contractor to submit a separate interest claim.

Frequently Asked Questions

Do I need to request prompt payment interest or does it come automatically?

Interest is paid automatically without the contractor needing to request it, this is one of the Prompt Payment Act's most significant protections. The paying office is required to calculate and include the interest in the payment when it issues a late payment. If the government fails to include prompt payment interest in a late payment, the contractor may submit a claim for the interest as a separate invoice. Note that the contractor must be in compliance with the contract, a payment withheld legitimately due to a contractor performance deficiency is not subject to prompt payment interest.

What information must a proper invoice include?

FAR 52.232-25 (Prompt Payment) specifies the minimum required invoice elements: contractor name, address, and invoice date; contract number and task or delivery order number; contract line item number and description; quantity, unit price, and extended amount; name, title, phone number, and mailing address for the person to notify in case of a deficient invoice; and any other information specifically required by the contract. Some agencies require additional elements, electronic invoice submission through Wide Area Workflow (WAWF), specific codes for the contracting activity, or separate line items for travel and ODCs. Always check the contract's payment clause (Section I) for agency-specific requirements.

What is the "accelerated payment" policy for small businesses?

OMB Memorandum M-11-32 (2011) directed agencies to accelerate payments to small business contractors to within 15 days of receiving a proper invoice, when doing so is practicable and in the government's interest. This policy (reiterated in OMB M-16-10 and FAR 52.232-40) does not change the contractual obligation to pay within 30 days but encourages earlier payment as a cash flow benefit to small businesses. Agencies with accelerated payment policies typically implement them through internal procedures rather than contract modifications. Small businesses should inquire about accelerated payment availability when working with new contracting offices.

Does Prompt Payment Act interest apply to progress payments and milestone payments?

Yes. Progress payments and milestone payments are subject to the Prompt Payment Act's payment timing requirements and interest penalty provisions. The 30-day clock begins when the agency receives a proper progress payment or milestone invoice. If the milestone has been achieved as documented in the invoice, the clock runs from that date. Disputes about whether a milestone has been achieved or whether a progress payment properly reflects percentage completion may delay the payment clock's start, but the government must notify the contractor of the specific deficiency within 7 days (DoD) to preserve its right to delay payment without interest accrual.