Financial Management:

The Prompt Payment Act and DOD Problem Disbursements

AIMD-97-71: Published: May 23, 1997. Publicly Released: May 23, 1997.

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Pursuant to a congressional request, GAO reviewed whether the Prompt Payment Act of 1982 contributes significantly to Department of Defense (DOD) problem disbursements.

GAO found that: (1) DOD did not provide, and GAO did not find, any empirical evidence to support assertions that the Prompt Payment Act contributes to problem disbursements; (2) a 1995 Defense study, which identified several major contributing causes to DOD problem disbursements, did not cite either the Prompt Payment Act or DOD policies on making timely payments, as a cause; (3) the Prompt Payment Act does not require federal agencies to pay an invoice by the due date; (4) rather, it requires the government to pay interest if an invoice is not paid on time; (5) Defense Finance and Accounting Service (DFAS) policy statements and daily operating procedures emphasize timely payment to avoid interest penalties and DFAS management has established a 30-day goal for paying most invoices; (6) while some DFAS personnel told GAO that these policies create "pressure" to make timely payments, they stated that the policies do not result in payments being made inappropriately; (7) information provided by DFAS shows that it is generally able to make most payments in less than 30 days; (8) DOD officials expressed concern regarding provisions of the Prompt Payment Act that they believe result in higher than justified administrative costs; (9) one concern relates to the large number of small interest payments; (10) under the act, contractors are entitled to interest penalties of $1 or more; (11) almost 11,000, about one quarter, of all payments of DFAS Columbus Contract Entitlement Directorate interest penalty payments in fiscal year 1996 were for less than $5, but these payments accounted for only $28,701, less than one quarter of 1 percent of total interest paid; (12) another concern relates to new DFAS procedures for allocating interest payments to appropriation accounts; (13) DFAS and service officials said that these procedures increase the complexity and, accordingly, the cost of making interest payments; (14) previously, DFAS Columbus charged all interest costs to its own Defense Business Operations Fund account and recovered the amounts through DFAS billing rates; (15) this meant that all DFAS customers, and their respective appropriations, shared in the interest penalty payment, regardless of which invoices were not paid on time; (16) the DOD Comptroller was advised that this DFAS practice did not comply with the Prompt Payment Act requirement that agencies pay interest from the appropriation that funds the program that incurred the interest penalty; and (17) DOD recently established a number of separate accounts for the direct allocation of the interest charges by DFAS to the services' appropriations.

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