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entitled 'DOD Payments to Small Businesses: Implementation and 
Effective Utilization of Electronic Invoicing Could Further Reduce Late 
Payments' which was released on May 19, 2006. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

May 2006: 

DOD Payments To Small Businesses: 

Implementation and Effective Utilization of Electronic Invoicing Could 
Further Reduce Late Payments: 

GAO-06-358: 

GAO Highlights: 

Highlights of GAO-06-358, a report to congressional committees.

Why GAO Did This Study: 

The National Defense Authorization Act for Fiscal Year 2004 requires 
GAO to report on the timeliness of Department of Defense (DOD) payments 
made to small businesses. GAO’s report focuses on (1) whether, at DOD 
payment centers for which data were available, small business invoices 
were more likely to be paid late; (2) whether systemic weaknesses in 
DOD payment processes result in late payments to contractors—including 
small business contractors; and (3) the impact of late payments on 
small businesses. To calculate timeliness rates, GAO used the data DOD 
was able to provide for 9 of its 20 vendor payment locations as well as 
its one contract pay location. GAO used a case study approach for the 
third objective because data limitations did not permit the use of 
statistically reliable sampling techniques for assessing the 
experiences of DOD small business contractors as a whole. Case study 
contractors were selected because they experienced a high frequency of 
late payments and may not be reflective of all small businesses. 

What GAO Found: 

DOD paid small business invoices late more often than all invoices paid 
at the nine locations for which data were available. Ten percent of all 
invoices at these locations were paid late—compared with 14.5 percent 
of small business invoices.  According to DOD officials, the disparity 
may have occurred because DOD’s cash management and prioritization 
practices tend to favor paying larger vendors first.  Although DOD has 
reported significant improvements in its metrics related to late 
payments, these improvements have come through dedicating additional 
resources to the problem and not through addressing the underlying 
weaknesses that cause late payments. Resolving the payment timing 
disparity will involve improving the overall timeliness of DOD payments 
to contractors regardless of size.

Systemic weaknesses in DOD’s payment processes result in late payments 
to contractors, including small business contractors. DOD continues to 
process mostly paper payment documents, which can often result in 
redundant data entry; misplaced documents; higher than necessary 
transaction processing fees; and ultimately, payment delays. To its 
credit, DOD has invested in a Web-based tool, WAWF, that could 
facilitate the electronic exchange of payment data and documents, but 
the initiative lacks the requisite management focus and strategic 
direction needed to be successful. For example, the WAWF program lacks 
performance metrics and does not have a clear strategy for ensuring 
that WAWF will be effectively utilized. Finally, in many cases, the 
military services and defense agencies are not required to acknowledge 
receipt and acceptance electronically.  Instead, they submit paper 
documents that must be matched with contractor invoices to complete the 
payment transaction, which can lead to payment delays.

Disruptions of cash flow caused by late payments—depending on the 
extent and duration—can significantly affect the day-to-day operations 
of small businesses. To illustrate, GAO interviewed 17 small business 
owners that were paid late multiple times during fiscal year 2004. They 
provided the following perspectives: 
* Fourteen of the 17 said that because DOD paid late, they had to 
obtain a line of credit or use personal resources to finance day-to-day 
operations.
* Eleven of the 14 that relied on a line of credit said that they paid 
2 to 4 percent more for the credit than the rate used by DOD to 
calculate late payment interest.
* In 3 cases, contractors said that their cash flow problems were so 
significant that they were concerned about their ability to stay in 
operation.   
Although the Prompt Payment Act requires interest payments when certain 
bills are paid late, 10 contractors stated that they often did not 
receive interest on late payments. GAO could not substantiate these 
statements because DOD was unable to provide the information needed to 
do so. According to one contractor, after GAO asked DOD to research his 
claim, DOD determined that the contractor was entitled to interest of 
about $1,000.

What GAO Recommends: 

GAO makes five recommendations to strengthen the implementation of a 
Web-based tool known as Wide Area Work Flow (WAWF), which could speed 
the processing of payment documents and improve the timeliness of DOD 
payments, including payments to small businesses. DOD concurred with 
GAO’s recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-358].

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact McCoy Williams at (202) 512-9095 or 
williamsm1@gao.gov.

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Small Business Invoices Paid Late More Often Than All Invoices Paid at 
Vendor Pay Locations: 

Long-standing Weaknesses in DOD's Vendor Payment Processes Result in 
Late Payments to Contractors, Including Small Business Contractors: 

Late Payments May Create Financial Hardship for Some Small Business 
Contractors: 

Conclusion: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Comments from the Department of Defense: 

Appendix II: Objectives, Scope, and Methodology: 

Tables: 

Table 1: Percentage of Invoices Paid Late by DFAS Location and Small 
versus All Business for Fiscal Year 2004: 

Table 2: Case Study Examples of Small Business Invoices Paid Late by 
DFAS: 

Figure: 

Figure 1: Overdue Invoices on Hand as a Percentage of Total Invoices 
Processed for DOD's Vendor Pay and Contract Pay Business Lines for 
Fiscal Years 2001 through 2005: 

Abbreviations: 

BTA: Business Transformation Agency: 
BUMED: Navy Bureau of Medicine and Surgery: 
CCR: Central Contractor Registration database: 
CVFR: current value of funds rate: 
DCMA: Defense Contract Management Agency: 
DFARS: Defense Federal Acquisition Regulation Supplement: 
DFAS: Defense Finance and Accounting Service: 
DISA: Defense Information Systems Agency: 
DOD: Department of Defense: 
EDI: electronic data interchange: 
NFIB: National Federation of Independent Businesses: 
OSBP: Office of Small Business Programs: 
SBA: Small Business Administration: 
WAWF: Wide Area Work Flow: 

United States Government Accountability Office: 

Washington, DC 20548: 

May 19, 2006: 

Congressional Committees: 

Small businesses are an important player in the U.S. economy--employing 
half of all private sector employees and generating 60 to 80 percent of 
net new jobs annually over the past decade. As such, the federal 
government's long-standing policy has been to maximize federal 
procurement opportunities for small businesses.[Footnote 1] To ensure 
that small businesses receive a share of federal procurement contract 
dollars, the Congress has mandated that the Small Business 
Administration (SBA) negotiate annual procurement goals with each 
federal agency. In fiscal year 2004, the Department of Defense (DOD) 
reported meeting its procurement goal--awarding prime contracts 
totaling a reported $44.8 billion, or 23.1 percent of total contract 
award dollars, to small business contractors.[Footnote 2] However, as 
we have reported in the past,[Footnote 3] DOD's payment processes often 
results in late payments to contractors--which for some small business 
contractors could lead to financial hardship. 

Concerned about the impact late payments have on small business 
contractors, the Congress included in the National Defense 
Authorization Act for Fiscal Year 2004 a requirement for us to report 
on the timeliness of DOD payments to small business 
contractors.[Footnote 4] Specifically, we were asked to provide 
estimates of the total amount of contract payments made to small 
businesses and the percentage of total contract payments to small 
businesses that were not made in a timely manner. However, DOD was 
unable to provide us with a complete population of transaction-level 
payment data that would be needed to provide such estimates. Therefore, 
as agreed with your offices, we (1) determined whether, at selected DOD 
payment locations, small business invoices were more likely to be paid 
late when compared with the payment of all invoices; (2) determined 
whether systemic weaknesses in DOD payment processes result in late 
payments to contractors--including small business contractors; and (3) 
assessed the impact that late payments can have on small business 
contractors. 

DOD separates its payment of commercial invoices into two business 
lines--(1) contract pay--which pays invoices for larger, more complex 
contracts and (2) vendor pay--which processes payments for smaller, 
less complex contracts, purchase orders, and other miscellaneous 
payments. DOD's contract payment business line is managed and operated 
through a single DOD location, whereas DOD's vendor payment business 
line is managed and operated by 20 separate payment locations. For 
fiscal year 2004, DOD reported total commercial payments subject to the 
Prompt Payment Act, as amended,[Footnote 5] of $206 billion--of which 
$119 billion were paid through DOD's contract pay business line and $87 
billion were paid through its vendor pay business line. To determine 
whether small business invoices were more likely to be paid late when 
compared with the payment of all invoices, we requested transaction- 
level detail for all DOD commercial payments subject to the Prompt 
Payment Act and all interest penalties paid in fiscal year 2004. We 
received all the payment data requested for DOD's contract payment 
business line. However, DOD was able to provide us with data for only 9 
of its 20 vendor payment locations. The $24 billion of payments 
generated from these 9 vendor pay locations represented approximately 
28 percent of the total $87 billion of vendor payments subject to the 
Prompt Payment Act. According to DOD officials, they were unable to 
provide us with payment data for the remaining 11 locations because 
they could not reconcile the data with previously reported prompt 
payment metrics--which is critical for ensuring that the data are 
complete. 

Using the payment data from the nine vendor pay locations and one 
contract pay location, combined with data we obtained from the Central 
Contractor Registration (CCR) database--which contains the most 
comprehensive listing of small business contractors--we calculated the 
extent to which small business invoices are paid late as compared with 
all invoices. Specifically, we used the data from CCR to identify 
invoice and interest payments associated with small business 
contractors. However, payment data for the nine vendor pay sites did 
not always contain complete identifier data that would allow us to 
determine whether the transactions were associated with small 
businesses; some sites contained fairly complete data and others were 
missing identifiers for a large percentage of transactions. Because we 
were not able to identify all small businesses, our calculations 
compare the percentage of invoices paid late that were submitted by 
known small businesses with the percentage of all invoices paid late. 
To determine the percentages of invoices paid late, we divided the 
number of invoices paid late by the total number of invoices paid 
during the same period. To ensure that the DOD data we used to support 
this report were sufficiently reliable for our analyses, we conducted 
detailed reliability assessments of the data sets that we used. We 
restricted these assessments, however, to the specific variables that 
were pertinent to our analyses. We found that all the data sets used in 
this report were sufficiently reliable for these analyses. See appendix 
II for a further discussion of these calculations and limitations. 

To determine the cause of late payments, we performed audit work at 6 
of DOD's 20 vendor payment locations and DOD's 1 contract pay site, 
which collectively represent $169 billion, or 82 percent of all 
payments subject to the Prompt Payment Act. We selected vendor pay 
sites based on, among other things, the amount of interest penalties 
paid at each location--selecting sites that paid both high and low 
amounts of interest. Using DOD payment and other data, we identified 
small business contractors that were paid late multiple times during 
fiscal year 2004 and documented the difficulties experienced by 17 of 
these contractors. We selected our case study examples from the DOD 
payment data provided and identified small business contractors that 
DOD paid late most frequently. Of those small business contractors that 
were paid late most frequently, 17 expressed a willingness to share 
information on late payments with us. We relied on a case study 
approach to achieve this objective, principally because, as noted 
previously, DOD was unable to provide us with a complete universe of 
small business contractors that were paid late--which would be needed 
to perform statistically reliable sampling techniques that would allow 
us to comment on the experiences of DOD small business contractors as a 
whole. Our findings for this objective cannot be projected and may not 
be representative of the experiences of all DOD small business 
contractors. We requested comments on a draft of this report from the 
Secretary of Defense or his designee. We received written comments from 
the Deputy Under Secretary of Defense (Business Transformation), which 
are reprinted in appendix I of this report. Our work was performed from 
November 2004 through January 2006 in accordance with U.S. generally 
accepted government auditing standards. Additional details on our scope 
and methodology are included in appendix II. 

Results in Brief: 

In general, our analysis of DOD's fiscal year 2004 payment data for 
nine DOD vendor pay locations showed that to varying degrees, small 
business invoices were paid late more often than all invoices paid at 
each of the nine vendor payment locations. Overall, at these nine 
vendor pay locations, 10 percent of all invoices were paid late-- 
compared with 14.5 percent of small business invoices. According to DOD 
vendor pay officials, the disparity between the payment of small 
business invoices and all invoices may exist because DOD's cash 
management practices place a lower priority on the payment of smaller, 
less-complex invoices--like those typically submitted by small business 
contractors. Further, these vendor payment sites lacked the demographic 
information needed to implement DOD's policy which allows for the 
payment of small-disadvantaged businesses early. Although many of the 
same prioritization practices were used by DOD's contract pay site, 
they did not result in a timing disparity because, for the most part, 
DOD's contract pay site pays its bills on time--paying only 2 percent 
of all invoices late. However, many of the efficiencies that are used 
in DOD's contract pay business line cannot be cost effectively applied 
to improve the timeliness of payments at DOD's vendor pay sites. For 
example, the receipt and acceptance process used by the contract pay 
business line is often performed by a government representative located 
at the contractor's facility. While this speeds the payment process, it 
is also more costly and, therefore, cannot be practically applied to 
DOD's vendor pay product line. Given that DOD's vendor pay business 
line presents the most significant challenge for DOD, with respect to 
paying invoices on time, we focused specifically on DOD's vendor 
payment processes and actions needed to improve the timeliness of 
payments made through these processes. 

Systemic weaknesses in DOD's vendor payment processes result in late 
payments to contractors, including small business contractors. For 
decades, we have reported that the leading cause of late payments at 
DOD stems from delays in receiving the payment documents needed to 
complete a payment transaction--including receiving and acceptance 
documents. The delayed processing of these payment documents is caused, 
in large part, by the paper-driven nature of DOD's vendor payment 
process and DOD's nonintegrated payment, accounting, and logistics 
systems. Although, DOD has reported significant improvements in its 
metrics related to late payments, these improvements have come through 
dedicating additional resources to the problem and not through 
addressing the underlying weaknesses that cause late payments. 
Recently, however, DOD invested in a Web-based tool known as Wide Area 
Work Flow (WAWF),[Footnote 6] which, if implemented and utilized 
effectively, could reduce the problems created by DOD's nonintegrated 
financial systems by facilitating the electronic transmission of 
payment documents and data. According to DOD, WAWF is intended to (1) 
be a major component of the department's compliance with the electronic 
invoicing requirements of the Floyd D. Spence National Defense 
Authorization Act for Fiscal Year 2001[Footnote 7] and (2) contribute 
to the department's goal of reducing interest charges for late payments 
to vendors. However, DOD's WAWF program lacks the management 
information and strategic direction needed to be successful. 
Specifically, DOD lacks the metrics needed to know whether WAWF is 
being utilized and, if not, what the barriers are to more effective 
utilization. In addition, the program management of this initiative has 
changed hands numerous times, has not clearly defined the roles and 
responsibilities of the organizations that are integral to the 
program's success, and does not have a written strategy for ensuring 
that WAWF will be effectively utilized. Finally, while the electronic 
invoicing provisions included in the National Defense Authorization Act 
for Fiscal Year 2001 require contractors to submit invoices 
electronically, there is no clear legal and regulatory requirement for 
the military services and defense agencies to process receiving and 
acceptance reports and other payment-related documentation 
electronically when contractors send their invoices directly to DOD 
vendor payment sites--which is often the case.[Footnote 8] 

Disruptions of cash flow caused by late payments--depending on the 
extent and duration--can impact the day-to-day operations of small 
businesses. To obtain a perspective on the effect late payments can 
have on small business contractors, we interviewed and, when available, 
obtained payment documentation from 17 small business contractors that 
were paid late multiple times during fiscal year 2004. According to 14 
of the 17 contractors we spoke with, late payments from DOD created 
cash flow problems, which ultimately led them to seek and obtain a line 
of credit in order to finance their day-to-day operations. Further, 
although DOD is required by the Prompt Payment Act to pay interest 
penalty payments when certain bills are paid late, 10 of the 
contractors we spoke with said they often did not receive interest on 
payments they considered late. In an effort to substantiate the 
contractors' assertions, we requested payment documentation from DOD-- 
including invoices, receiving reports, and other relevant payment 
documents--for the 3 small business contractors that provided us with 
information that they believed demonstrated that they were owed 
interest. However, DOD was unable to provide us with the requested 
documentation, and therefore, we were unable to confirm the 
contractors' assertions. Nonetheless, according to one of the small 
business owners, after we asked DOD to research the contractor's 
claims, DOD determined that the contractor was entitled to interest 
penalty payments of approximately $1,000--which, according to the 
contractor, DOD later paid. Further, according to 11 of the small 
business contractors we spoke with, when interest is received, it is 
less than the small businesses' cost of capital. For example, using the 
prompt payment rate of 4.25 percent, which was in effect as of June 
2005, DOD paid interest of $199 to one small business contractor on an 
$84,150 invoice paid 20 days past its due date. However, financing 
$84,150--using the 7.250 percent interest rate available through the 
contractor's line of credit--would cost the small business owner $340. 

We are making five recommendations to improve the timeliness of DOD 
payments, including payments to small business contractors. 
Specifically, we are recommending that DOD (1) clarify its management 
structure for WAWF and provide strategic direction for DOD and the 
military services in their efforts to implement and effectively utilize 
WAWF; (2) establish a strategic plan that defines the roles and 
responsibilities of the various organizations that are integral to the 
program's success; (3) develop performance metrics to measure the 
success of the program; (4) consider incorporating, as part of the WAWF 
application, a data element that would flag invoices submitted by small 
disadvantaged business so that they could be paid early, in accordance 
with DOD policy; and (5) require the military services and defense 
agencies to process all DOD receiving and acceptance reports and other 
supporting payment documentation electronically. 

In written comments, which are reprinted in appendix I, DOD concurred 
with our recommendations and affirmed its commitment to fully 
implementing and effectively utilizing WAWF. DOD noted its plans to 
provide clear direction and a strategic plan for WAWF, including 
evaluating and revising existing WAWF metrics and considering, as part 
of its next WAWF requirements review, a data element that would flag 
invoices submitted by small disadvantaged businesses. DOD also stated 
that, as part of its strategic plan, it would reemphasize the clear 
requirement for the military services and defense agencies to process 
all receiving and acceptance reports and other supporting payment 
documents electronically. 

Background: 

The Small Business Act defines a small business concern as "one that is 
independently owned and operated and which is not dominant in its field 
of operation."[Footnote 9] The law also states that in determining what 
constitutes a small business, with respect to size standards, the 
definition will vary from industry to industry to reflect industry 
differences accurately.[Footnote 10] Over the years, SBA has 
established and revised numerical definitions for all for-profit 
industries--which are matched to North American Industry Classification 
System industries and referred to as SBA's size standards table. Size 
standards in the table are almost always stated either as the number of 
employees or average annual receipts of a business concern. In addition 
to establishing eligibility for SBA programs, all federal agencies must 
use SBA's size standards as criteria when awarding small business 
contracts. 

DOD plays a key role in the success of the federal government's small 
business programs because it accounts for about two-thirds of all 
federal procurements. The DOD Office of Small Business Programs (OSBP) 
is responsible for DOD-wide small business policy and oversight to 
ensure compliance by all military departments and defense agencies. 
OSBP is not itself a procurement office but, instead, serves as a 
liaison between the small business community and the DOD procurement 
offices. OSBP is responsible for, among other things, advocating the 
use of small, small disadvantaged, HUBZone, veteran owned, service- 
disabled veteran-owned, and women-owned small businesses, and small 
business participation in SBA's 8(a) business development set aside 
program. This involves promoting small business prime and 
subcontracting opportunities in accordance with federal laws, 
regulations, and policies in an effort to meet statutory goals. OSPB is 
not responsible for assisting small businesses in receiving timely 
payments from DOD. 

Prompt Payment Act Requirements: 

The Prompt Payment Act requires federal agencies to pay interest on 
overdue invoices[Footnote 11] and take discounts only when payments are 
made within the allowed discount period.[Footnote 12] The Prompt 
Payment Act implementing regulations also generally prohibit paying 
invoices too early--specifying that agencies may not make payments more 
than 7 days prior to the payment due date, except under certain 
conditions. Agencies may use accelerated payment methods under certain 
circumstances, including paying small business invoices as quickly as 
possible once all required documentation is received at the designated 
payment office.[Footnote 13] The Prompt Payment Act does not apply to 
contract financing payments--or the authorized payment of monies prior 
to the acceptance of goods and services--including advance payments, 
progress payments, payments on performance-based contracts, or interim 
payments. 

In general, payments covered by the Prompt Payment Act are due, unless 
otherwise specified, (1) on the date specified in the contract, (2) in 
accordance with the discount terms that are offered and taken, (3) in 
accordance with accelerated payment methods, or (4) 30 days after the 
start of the payment period.[Footnote 14] If payments are not made 
according to the above criteria, the government must pay interest 
penalty payments, and if the interest penalty is not made, the 
contractor may demand an additional penalty amount. These payments are 
calculated from the day after payment was due until the day payment is 
made.[Footnote 15] The rate used to calculate interest penalties is 
established by the Secretary of the Treasury under the Contract 
Disputes Act, 41 U.S.C. § 611. As of January 1, 2006, the rate was 
5.125 percent.[Footnote 16] The rate is calculated quarterly based on a 
12-month rolling average of the Treasury Tax and Loan rate. 

DOD's Commercial Payment Process: 

DOD's Defense Finance and Accounting Service (DFAS) has overall 
responsibility for the payment of invoices related to goods and 
services supplied by commercial vendors. These payments are made on 
behalf of the military services and other defense agencies and are 
referred to as commercial payments. As part of a reorganization effort 
in April 2001, DFAS separated its commercial payment services into two 
business lines--contract pay and vendor pay. 

* DOD's contract pay business line is managed and operated out of DFAS- 
Columbus. The contract pay business line processes invoices for formal, 
long-term contract instruments that are typically administered by the 
Defense Contract Management Agency (DCMA). These contracts tend to 
cover complex, multiyear purchases with high dollar values, such as 
major weapon systems. Payments for contracts administered by DCMA are 
made from a single DFAS system--Mechanization of Contract 
Administration Services. 

* DOD's vendor pay business line is managed and operated by 20 separate 
DFAS sites located throughout the world. The vendor pay product line 
processes invoices for contracts not administered by DCMA, plus 
miscellaneous non-contractual payments, such as for utilities, 
uniforms/clothing, fuels, and food. Payments processed through the DOD 
vendor pay business line are made from any one of 13 systems at the 20 
vendor pay locations. 

In general, DFAS makes both vendor and contract payments only after 
matching the request for payment, or invoice, with (1) a signed 
contract, purchase order, or other contractual document--to ensure that 
the purchase of goods or services was authorized; (2) a receiving/ 
acceptance report--to ensure that the goods or services ordered have 
been received and/or accepted;[Footnote 17] and (3) the official 
accounting records--to ensure that funds have been obligated and are 
available for use. Because of DOD's numerous nonintegrated automated 
and manual systems, much of the data generated by these systems cannot 
be electronically transferred from one system to another in order to 
complete a payment transaction. Therefore, various data must be read, 
interpreted, and manually entered from hard copy documents--or manually 
verified and entered from electronic documents. 

As we have reported in the past,[Footnote 18] DFAS management has 
focused on reducing commercial payment backlogs since fiscal year 2000 
and has reported significant improvements in these payment metrics in 
recent years. However, many of these improvements have come from 
dedicating additional resources to the problem and not from addressing 
the underlying weaknesses or inefficiencies that cause late payments. 
In addition, as shown in figure 1, DOD's vendor pay payment backlog 
metrics continue to lag behind its contract pay metrics. 

Figure 1: Overdue Invoices on Hand as a Percentage of Total Invoices 
Processed for DOD's Vendor Pay and Contract Pay Business Lines for 
Fiscal Years 2001 through 2005: 

[See PDF for image] 

[End of figure] 

As we have previously reported,[Footnote 19] for the most part, both 
DOD's vendor payment and contract payment processes are paper driven-- 
spanning numerous DOD and contractor organizations with nonintegrated 
procurement, logistics, and accounting systems. However, inherent 
differences in the type of payments made through DOD's vendor pay and 
contract pay processes result in significant differences in the 
timeliness of payments made through each of these processes. 

Although the payment processes for DOD's vendor pay and contract pay 
product lines require DOD to match key payment documents before an 
invoice can be paid, there is one major difference in the processes 
that allows DOD to pay invoices submitted through its contract pay 
process in a more timely fashion. Specifically, as part of DOD's 
contract pay process, the receipt and acceptance of goods and services 
is often performed by a government representative located at the 
contractor's facility--which is referred to as source acceptance. In 
contrast, under the vendor pay process, receipt and acceptance is 
usually performed after goods are received at their destination--which 
is referred to as destination acceptance. Consequently, the vendor pay 
process is more time consuming than DOD's contract pay process. It is 
important to note that source acceptance, while more efficient, is also 
more costly, and therefore it would not be practical to expand the use 
of this practice to the vendor pay product line. 

Small Business Invoices Paid Late More Often Than All Invoices Paid at 
Vendor Pay Locations: 

Our analysis of DOD's fiscal year 2004 payment data for nine DOD vendor 
pay locations showed that to varying degrees, small business invoices 
were paid late more often than all invoices paid at each of the nine 
vendor payment locations. However, this disparity was not evident at 
DOD's contract pay site, because efficiencies utilized by DOD's 
contract pay business line result in more timely payments to 
contractors--including small business contractors. As noted above, 
these same efficiencies cannot be cost effectively applied to DOD 
vendor pay business line. Table 1 shows the payment timing differences 
for the nine vendor pay locations and for contract payments. 

Table 1: Percentage of Invoices Paid Late by DFAS Location and Small 
versus All Business for Fiscal Year 2004: 

DFAS payment locations: Vendor pay; 
Percentage of small business invoices paid late: [Empty]. 

DFAS payment locations: Pensacola[A]; 
Percentage of small business invoices paid late: 63.69; 
Percentage of all invoices paid late: 24.97; 
Percentage difference: 38.72. 

DFAS payment locations: Dayton; 
Percentage of small business invoices paid late: 17.63; 
Percentage of all invoices paid late: 12.87; 
Percentage difference: 4.76. 

DFAS payment locations: San Diego; 
Percentage of small business invoices paid late: 10.11; 
Percentage of all invoices paid late: 9.62; 
Percentage difference: 0.49. 

DFAS payment locations: Norfolk; 
Percentage of small business invoices paid late: 14.43; 
Percentage of all invoices paid late: 9.04; 
Percentage difference: 5.39. 

DFAS payment locations: Rock Island; 
Percentage of small business invoices paid late: 9.24; 
Percentage of all invoices paid late: 8.92; 
Percentage difference: 0.32. 

DFAS payment locations: Charleston; 
Percentage of small business invoices paid late: 15.19; 
Percentage of all invoices paid late: 7.98; 
Percentage difference: 7.21. 

DFAS payment locations: Limestone; 
Percentage of small business invoices paid late: 10.83; 
Percentage of all invoices paid late: 7.24; 
Percentage difference: 3.59. 

DFAS payment locations: Orlando; 
Percentage of small business invoices paid late: 10.06; 
Percentage of all invoices paid late: 5.35; 
Percentage difference: 4.71. 

DFAS payment locations: Pacific; 
Percentage of small business invoices paid late: 9.00; 
Percentage of all invoices paid late: 4.69; 
Percentage difference: 4.31. 

DFAS payment locations: Overall vendor pay; 
Percentage of small business invoices paid late: 14.43; 
Percentage of all invoices paid late: 9.94; 
Percentage difference: 4.49. 

DFAS payment locations: Contract pay; 

DFAS payment locations: Columbus; 
Percentage of small business invoices paid late: 1.72; 
Percentage of all invoices paid late: 1.78; 
Percentage difference: (.06). 

Source: GAO analysis of DOD payment data. 

[A] According to DFAS officials, the high percentage of invoices paid 
late by the Pensacola vendor pay site was because of disruptions caused 
by hurricanes that affected the region in 2004. 

[End of table] 

As discussed later, resolving this disparity will require the 
department to improve the overall timeliness of payments made through 
DOD's vendor pay business line. Further, given that DOD's vendor pay 
business line presents the most significant challenge for DOD, with 
respect to paying invoices on time, we focused specifically on the 
systemic weaknesses in DOD's vendor payment processes and actions 
needed to improve the timeliness of payments made through these 
processes. 

Long-standing Weaknesses in DOD's Vendor Payment Processes Result in 
Late Payments to Contractors, Including Small Business Contractors: 

Long-standing weaknesses in DOD's vendor payment processes--including 
DOD's lack of automated systems--result in late payments to 
contractors, including small business contractors. For decades, we have 
reported that the leading cause of DOD late payments stems from delays 
caused by the receiving and acceptance process. The delayed processing 
of these payment documents is caused, in large part, by the paper- 
driven nature of DOD's vendor payment process and DOD's nonintegrated 
payment, accounting, and logistics systems. As discussed previously, 
small business invoices are paid late more often than all invoices paid 
at selected vendor payment locations, which according to DOD officials, 
may occur because of DOD's cash management and prioritization 
practices. Resolving this disparity will require the department to 
improve the overall timeliness of payments made through DOD's vendor 
pay business line. To its credit, DOD has invested in Web-based 
business tools that facilitate the electronic transmission of payment 
documents and data. If implemented and used effectively, these tools 
could improve the timeliness of DOD's vendor payments; however, DOD has 
been slow to implement and use these tools. 

DOD's Cash Management Practices May Disadvantage Small Businesses: 

DOD vendor pay officials told us that they were unaware that small 
business invoices were paid late more often than all invoices and were 
uncertain as to the cause of the disparity. However, some officials 
suggested that the difference may occur because DOD's cash management 
practices inadvertently disadvantage small businesses by placing a 
lower priority on the payment of smaller, less-complex invoices, like 
those typically submitted by small business contractors. In addition, 
none of the vendor pay sites we visited were following DOD's written 
policy to assist small disadvantaged businesses[Footnote 20] by paying 
them as quickly as possible after invoices are received and before 
normal payment due dates established in the contract. 

DOD's vendor pay sites prioritize the payment of invoices based on the 
amount of the invoice, the payment due date, and whether the contractor 
has offered an early payment discount.[Footnote 21] While these 
priorities are based on sound cash management practices, they tend to 
favor the payment of non-small business invoices first. In addition, 
DOD's vendor pay sites prioritize their workload based on the overall 
complexity of an invoice and the anticipated time it will take to 
process the invoice. For example, large multimillion-dollar invoices 
may contain over 100 lines of accounting--or separate funding sources 
for each billable item. Each line of accounting must be matched with 
the receiving report, contract terms, and accounting records to ensure 
proper payment of the invoice--making it time-consuming to process 
these invoices. These complex invoices are not typically associated 
with small businesses. It is important to note that these same 
practices are also used at DOD's contract pay site but did not result 
in a timing disparity between the payment of small business and all 
invoices. 

Finally, it is DOD's written policy to assist small disadvantaged 
businesses by paying them as quickly as possible after invoices are 
received and before normal payment due dates established in the 
contract. However, at the vendor pay sites we visited, the automated 
systems used to process payments did not contain the demographic 
information needed to identify small disadvantaged businesses and 
prioritize the payment of their invoices. According to DOD vendor pay 
officials, it was too costly to change the vendor payment system 
requirements to accommodate the needed information. As a result, none 
of the vendor pay sites we visited had implemented DOD's policy to pay 
small disadvantaged businesses as quickly as possible after their 
invoices are received. 

Electronic Commerce Tools Could Improve the Timeliness of Payments Made 
through DOD's Vendor Payment Process: 

To its credit, DOD has invested in the Web-based tool know as WAWF, 
which, if implemented and used effectively, could improve the overall 
timeliness of payments made through DOD's vendor pay business line by 
facilitating the electronic transmission of payment documents and data. 
However, DOD's WAWF program lacks the management information and 
strategic direction needed to be successful. Specifically, DOD lacks 
the metrics needed to know whether WAWF is being utilized and, if not, 
what the barriers are to more effective utilization. In addition, the 
program management of this initiative has changed hands numerous times, 
lacks the organizational authority to effect change across DOD, and 
does not have a written strategy for ensuring that WAWF will be 
effectively utilized. As a result, DOD's vendor payment sites continue 
to process mostly paper payment documents, which can often result in 
redundant data entry; misplaced documents; and ultimately, payment 
delays. 

Until recently, the computer-to-computer exchange of routine business 
information, known as Electronic Data Interchange (EDI), was the 
predominant electronic commerce technology available to both government 
and industry. Using EDI technology, invoices and other payment 
documents--traditionally conveyed in paper form--can be transmitted 
electronically between computers without human intervention. However, 
to implement EDI technology, data must be converted into a standard 
data format before it is transmitted to the receiving system. Because 
the cost of converting and transmitting business data was prohibitively 
expensive for small and midsized companies, most small businesses 
continued to convey paper documents by mail or facsimile (fax). 

With the arrival of Web-based business tools, the electronic exchange 
of data has become more cost-effective for many smaller businesses. 
Accordingly, the Congress included a requirement in the Floyd D. Spence 
National Defense Authorization Act for Fiscal Year 2001[Footnote 22] 
that the Secretary of Defense shall require any claims for payment 
(e.g., invoices) under DOD contracts be submitted in electronic 
form.[Footnote 23] In January 2004, DOD updated the Defense Federal 
Acquisition Regulation Supplement (DFARS) to reflect the new electronic 
invoicing requirement.[Footnote 24] The January 2004 DFARS update 
outlines the electronic submission options[Footnote 25] and provides 
for exceptions to the regulation when (1) the contractor is unable to 
submit a payment request in electronic form or (2) DOD is unable to 
receive a payment request in electronic form. 

DOD deployed the first version of WAWF in fiscal year 1999 with the 
goal of eliminating paper from the payment process by enabling 
authorized defense contractors and DOD personnel to create and transmit 
electronic invoices and receiving reports and access contract-related 
documents online. According to DOD officials, WAWF is intended to be a 
major component of the department's compliance with the electronic 
invoicing requirements of the fiscal year 2001 National Defense 
Authorization Act and contribute to the department's goal of reducing 
interest charges for late payments to vendors. Specifically, WAWF 
provides DOD with the capability to automatically update its payment 
systems to complete the payment transaction without human intervention-
-which could significantly improve the timeliness of payments. Under 
DOD's current vendor payment process, these paper documents may arrive 
at the DFAS payment office separately--typically by mail or by fax. 
DFAS vendor payment technicians then process each document as it 
arrives by manually keying it into the payment system. 

WAWF, if fully implemented and utilized as planned, can eliminate paper 
and redundant data entry; improve data accuracy; reduce the number of 
lost or misplaced documents; and ultimately, result in more timely 
payments to contractors. Further, this tool is available to all of 
DOD's contractors at no cost and provides electronic confirmation that 
the payment office has received payment documents and allows 
contractors to track the status of their payments. WAWF, according to 
DOD, also provides direct financial savings to the military services. 
Because processing electronic invoices is less costly for DFAS than 
processing paper invoices, the military service activities that use 
WAWF will pay a reduced payment processing service fee. For example, 
according to DOD, processing an electronic invoice for the U.S. Navy 
Bureau of Medicine and Surgery (BUMED) costs $3.66 per line of 
accounting[Footnote 26] whereas a paper invoice costs $19.08. By using 
WAWF, BUMED estimated that it could reduce the amount it pays DFAS to 
process its invoices and save about $2.78 million per year. Other 
direct savings may be realized because of reductions in the amount of 
prompt payment interest paid. According to DOD, when the Air Force Air 
Education and Training Command implemented WAWF it realized a 45 
percent decrease in the amount of interest penalties paid resulting 
from late payments. 

According to DOD, WAWF has produced promising results when it is 
effectively utilized. However, the program lacks the strategic 
direction and management information needed to ensure its success. 
DOD's WAWF program has been managed by the Defense Information Systems 
Agency (DISA) since it was placed in operation in fiscal year 1999 but 
according to the current program manager, this position has changed 
hands three times since fiscal year 2003--at times, with no one filling 
the position. In October 2005, with the establishment of the Defense 
Business Transformation Agency (BTA)--which is intended to advance DOD- 
wide business transformation--ownership of the WAWF initiative was 
transferred to BTA. However, as of the date of this report, although 
ownership has been officially transferred to BTA, DISA, in effect, 
continues to manage WAWF. Moreover, DISA's primary focus has been on 
addressing technical issues that affect WAWF functionality--not on 
ensuring that the application is effectively utilized by contractors or 
the military services. 

Although other DOD organizations, such as DFAS and DCMA, and the 
military services have established implementation points of contact who 
have initiated efforts to market WAWF and provide training, their focus 
has been almost entirely on implementing WAWF in the contract pay 
arena. Less emphasis has been placed on implementing WAWF in the vendor 
pay business line. Further, DOD does not have a comprehensive written 
strategy for how it intends to ensure that contractors routinely submit 
their invoices electronically or that the military services submit 
receiving and acceptance reports electronically. Because DOD's vendor 
pay process relies almost exclusively on destination acceptance, it is 
important that military service and defense agency receiving units 
designate and train WAWF focal points who will be responsible for 
receiving and accepting goods and services electronically. However, 
military service and defense agency receiving units have been slow to 
embrace WAWF as a means of performing receipt and acceptance 
activities. As such, a comprehensive strategy for addressing this and 
other challenges that may adversely affect WAWF utilization is 
essential. 

Although DOD has equipped 14 of its 20 vendor payment locations with 
WAWF, DOD does not collect the management information needed to 
effectively measure the success of this initiative. For example, the 
WAWF program manager did not know the percentage of vendor pay invoices 
received electronically or the percentage of vendor pay receiving/ 
acceptance documents received electronically, or to what extent the 
military services had equipped and trained their receiving units to use 
WAWF. DFAS officials at the vendor pay sites we visited also did not 
keep track of these metrics but estimated that they receive, at most, 
20 percent of their invoices electronically and even fewer receiving/ 
acceptance reports. Even with the small number of payment documents 
processed through WAWF, vendor pay officials complained of the 
application's slow processing speed--stating that they were not sure if 
the application could handle a larger workload. As a result, these 
officials said that they were reluctant to encourage the use of WAWF. 
According to the WAWF program manager, the problems experienced by 
these vendor pay locations have been resolved and were likely caused by 
the latest application upgrade. 

Finally, the legal and regulatory requirement for the military services 
and defense agencies to process receiving and acceptance reports and 
other supporting documentation electronically may not apply to the 
majority of invoices submitted through DOD's vendor payment process. 
Specifically, the electronic invoicing provisions included in the 
National Defense Authorization Act for Fiscal Year 2001 states that DOD 
officers or employees who receive an electronic invoice from a DOD 
vendor, and who also must transmit the invoice to another DOD officer 
or employee for payment processing, must transmit the claim and any 
supporting documentation electronically (e.g., receiving reports). 
However, most vendor pay contractors submit their invoices directly to 
DFAS for payment[Footnote 27] and rely on the military service or 
defense agency receiving unit to send receiving and acceptance 
documents to DFAS. Thus, when a vendor pay contractor submits an 
electronic invoice to DFAS, DOD does not require military service or 
defense agency receiving units to acknowledge receipt and acceptance 
electronically. 

Although DOD policies encourage the electronic transmission of 
receiving reports and other supporting documentation, DOD's 
implementing regulations and policies do not clearly extend this 
requirement to receiving and acceptance officials.[Footnote 28] While 
requiring contractors to submit invoices electronically is a good first 
step toward improving DOD's payment process, electronic invoicing alone 
does not address DOD's biggest obstacle to paying its bills on time-- 
the timely submission of receipt and acceptance documents. As a result, 
according to DOD vendor pay officials, they continue to receive most of 
these documents by mail or fax, which can often result in redundant 
data entry, misplaced documents, and ultimately, payment delays. 

Late Payments May Create Financial Hardship for Some Small Business 
Contractors: 

Although DOD is required by the Prompt Payment Act to pay interest 
penalties when certain bills are paid late,[Footnote 29] the amount of 
interest received is less than small businesses' cost of capital and 
may also affect cash flow. As a result, the disruption of cash flow 
caused by late payments can have a significant impact on the day-to-day 
operations of small businesses. Further, many of the small business 
contractors we interviewed said that they often did not receive 
interest on invoices that in their view, were paid late. In an effort 
to substantiate the contractors' assertions, we requested documentation 
from DFAS for late payments for the three small business contractors 
that provided us with information they believed demonstrated that they 
were owed interest. However, DFAS was unable to provide us with the 
requested documentation, and therefore, we were unable to confirm the 
contractors' assertions. 

To obtain a perspective on the effect late payments have on small 
business contractors, we interviewed 17 small business owners who, 
according to DOD's records, were paid late multiple times during fiscal 
year 2004. At these interviews, 14 of the 17 small business owners said 
that because DOD pays its bills late, they have had to obtain lines of 
credit or use their personal resources to finance day-to-day 
operations. In three cases, contractors told us that their cash flow 
problems became so significant that they were concerned about their 
ability to continue in operation. Although DOD is required by the 
Prompt Payment Act to pay interest penalty payments when certain bills 
are paid late, the amount of interest received is less than these small 
businesses' cost of capital. Eleven of the 14 small business owners who 
had obtained a line of credit said that a line of credit cost them 2 to 
4 percentage points more than the interest rate DOD uses to calculate 
late payment penalties. For example, using the prompt payment rate of 
4.25 percent, which was in effect as of June 2005, DFAS paid interest 
of $199 to 1 small business contractor on an $84,150 invoice paid 20 
days past its due date. However, financing $84,150--using the 7.250 
percent interest rate available through the contractor's line of 
credit--would cost the small business owner $340. 

The difference between the prompt payment interest rate and interest 
rates obtained by the small business owners we spoke with is consistent 
with government statistics on lending rates. Over the 10-year period 
between 1995 and 2004, the prompt payment interest rate was on average 
5.8 percent, whereas the average prime lending rate--the interest rate 
charged by major banks to their best or most creditworthy customers-- 
was 7.1 percent. Cash flow problems experienced by these DOD small 
business contractors are also consistent with the findings of a survey 
of small-business owners conducted by the Federal Reserve and the 
National Federation of Independent Businesses (NFIB).[Footnote 30] The 
results of the NFIB survey showed that outstanding receivables are the 
primary reason small businesses experienced cash flow problems. 

Table 2 provides an overview of the types of pay problems described by 
8 of the 17 small business owners we interviewed. As discussed 
previously, the problems described by these 8 small business 
contractors may not be representative of all DOD small business 
contractors. As shown in table 2, DOD records showed that 5 of the 8 
were paid late more than 15 times and, according to 6 of the 8 small 
business owners, they had outstanding invoice amounts totaling at least 
$400,000 as of the date we interviewed them. 

Table 2: Case Study Examples of Small Business Invoices Paid Late by 
DFAS: 

Small business: Case study 1: 8(a), small disadvantaged business 
providing promotional and recruiting items for the Army; 
Number of late payments in fiscal year 2004: 5; 
Receivables > 30 days as of the date of our fieldwork[A]: $491,782; 
Payment problems identified by small businesses: Invoices lost by DFAS, 
resulting in continual follow-up to receive payments; 
Consistently received interest payments on overdue receivables: Yes. 

Small business: Case study 2: 8(a), small disadvantaged business 
providing environmental remediation services for the Navy; 
Number of late payments in fiscal year 2004: 17; 
Receivables > 30 days as of the date of our fieldwork[A]: $755,951; 
Payment problems identified by small businesses: Cumbersome, 
inefficient process; 
current contractual documents not available in payment office; 
Consistently received interest payments on overdue receivables: No. 

Small business: Case study 3: 8(a), small disadvantaged business 
providing construction services for the Air Force and the Navy; 
Number of late payments in fiscal year 2004: 63; 
Receivables > 30 days as of the date of our fieldwork[A]: $431,920; 
Payment problems identified by small businesses: Invoices lost by DFAS, 
resulting in continual follow- up to receive payments; 
Consistently received interest payments on overdue receivables: Yes. 

Small business: Cast study 4: 8(a), small disadvantaged business 
providing environmental engineering services for the Army and the Navy; 
Number of late payments in fiscal year 2004: 22; 
Receivables > 30 days as of the date of our fieldwork[A]: $570,899; 
Payment problems identified by small businesses: Invoices lost by DFAS, 
resulting in continual follow-up to receive payments; 
poor customer support when trying to resolve issues; 
Consistently received interest payments on overdue receivables: No. 

Small business: Case study 5: 8(a), small disadvantaged business 
providing general maintenance and construction services for the Army 
and the Navy; 
Number of late payments in fiscal year 2004: 23; 
Receivables > 30 days as of the date of our fieldwork[A]: $743,000; 
Payment problems identified by small businesses: Invoices lost by DFAS, 
resulting in continual follow-up to receive payments; 
Consistently received interest payments on overdue receivables: Yes. 

Small business: Case study 6: minority owned small business providing 
moving and storage services for the Army; 
Number of late payments in fiscal year 2004: 361; 
Receivables > 30 days as of the date of our fieldwork[A]: $286,760; 
Payment problems identified by small businesses: Invoices lost by DFAS, 
resulting in continual follow-up to receive payments; 
Consistently received interest payments on overdue receivables: No. 

Small business: Case study 7: small business providing computer 
software and equipment for the Army; 
Number of late payments in fiscal year 2004: 1; 
Receivables > 30 days as of the date of our fieldwork[A]: $600,000; 
Payment problems identified by small businesses: Receiving unit failed 
to submit receiving report in a timely manner; 
Consistently received interest payments on overdue receivables: No. 

Small business: Case study 8: minority owned, 8(a), small disadvantaged 
business providing facilities management services for the Army and the 
Navy; 
Number of late payments in fiscal year 2004: 2; 
Receivables > 30 days as of the date of our fieldwork[A]: $140,000; 
Payment problems identified by small businesses: Invoices lost by DFAS, 
resulting in continual follow-up to receive payments; 
cumbersome, inefficient process; 
Consistently received interest payments on overdue receivables: No. 

Source: GAO analysis of DOD and vendor data. 

[A] We interviewed small business owners from June 2005 through 
September 2005 and obtained outstanding balance information as of the 
date of our interview. 

[End of table] 

Although DOD is required by the Prompt Payment Act to pay interest 
penalty payments when certain bills are paid late, 10 of the 17 small 
business owners we spoke with said that they did not receive interest 
payments when they were paid late. For example, 1 contractor provided 
us with information on 10 invoices totaling $755,951 that were 
submitted during a 5-month period in 2005. Although, based on the 
contractor's records, each invoice was paid from 7 to 125 days late, 
according to the contractor, no interest was ever received. In an 
effort to substantiate these assertions, we requested documentation 
from DFAS for late payments that according to these contractors, should 
have resulted in interest penalty payments. Specifically, we requested 
a copy of the invoice and receiving and acceptance documents for 20 
examples of late payments provided by 3 small business contractors for 
which, according to the contractors, no interest was received. DFAS, 
however, was unable to provide us with the documentation we requested. 
Nonetheless, according to 1 of the small business owners, after we 
asked DOD to research the contractor's assertions, DOD determined that 
the contractor was entitled to interest penalty payments of 
approximately $1,000--which, according to the contractor, DOD later 
paid. According to DFAS officials, interest was not paid on these 
invoices previously because DFAS entered the wrong invoice dates into 
the payment system. As discussed later, the invoice date entered into 
the payment system is used to establish payment due dates. 

As shown in table 2, from the small business contractors' perspective, 
the biggest challenge they face in getting paid is ensuring that DFAS 
receives and acknowledges receipt of the invoices they submit. Nine of 
the 17 small business owners we interviewed told us that they had to 
submit their invoices to DFAS multiple times before DFAS acknowledged 
receipt of the invoice. According to most of the contractors we spoke 
with, they submitted their invoices by fax--often transmitting the same 
invoice to DFAS multiple times before DFAS acknowledged receipt of the 
invoice by date stamping it and subsequently processing it for payment. 
This is significant in that DFAS establishes payment due dates based on 
the date a proper invoice is received by the payment office.[Footnote 
31] If days and weeks go by--as it was described to us--before 
contractors' invoices are successfully received by the payment office, 
it would explain why, from the contractors' perspective, they believed 
that they were entitled to interest payments that they did not receive. 
According to DFAS officials, because DFAS has no visibility over hard 
copy invoices until they are entered into the payment system, the time 
lag between the receipt of a hard copy invoice and its entry into the 
payment system could lead contractors to believe that DFAS had lost 
their invoice. 

As discussed previously, WAWF, if implemented and used effectively, 
would eliminate the problem of lost invoices and provide a mechanism by 
which small business contractors could track the status of their 
invoices online and possibly be paid earlier. However, most of the 
small business owners we interviewed said that they had never heard of 
WAWF, and only 4 of the 17 contractors we interviewed were using WAWF. 
According to these 4 small business owners, using WAWF did resolve 
payment delays related to lost invoices but did not resolve the problem 
of late payments. Because DOD also requires acknowledgment of the 
receipt and acceptance of goods and services--over which contractors 
have little control--and the military service and defense agency 
receiving units responsible for receipt and acceptance do not routinely 
utilize WAWF, these contractors will likely continue to experience 
payment delays. 

Conclusion: 

DOD has made significant progress in recent years in reducing its 
reported backlog of overdue invoices and improving its overall metrics 
related to late vendor payments. However, many of these improvements 
have come from focusing additional resources on the problem and not 
from addressing the underlying weaknesses that cause late payment. 
Although DOD has embarked on a series of efforts over the last decade 
to modernize its business systems--in an effort to address the 
underlying weaknesses in its vendor payment processes that we 
identified in our report--these efforts have been largely unsuccessful. 
With advances in Web based technology, DOD now has the opportunity to 
address some of these weaknesses and improve its ability to pay its 
contractors on time--including small business contractors. However, 
fully implementing and effectively utilizing WAWF will require 
sustained leadership and a focused strategy aimed at ensuring the 
successful implementation and utilization of available electronic 
commerce tools. 

Recommendations for Executive Action: 

We recommend that the Secretary of Defense direct the Director of the 
Defense Business Transformation Agency to take the following four 
actions to clarify the management structure and policies over WAWF: 

* Provide strategic direction for DFAS, DCMA, DISA, the military 
services, and defense agencies in their efforts to fully implement and 
effectively utilize WAWF. 

* Establish a strategic plan that defines the roles and 
responsibilities of the various organizations that are integral to the 
success of the program and outlines a strategy for improving the 
utilization of WAWF--including correcting WAWF functionality or 
processing issues that may hamper effective utilization. 

* Develop performance metrics that enable the department to measure the 
success of the program--including comprehensive metrics on the volume 
of invoices and receiving documents transmitted electronically. 

* Consider incorporating, as part of the WAWF application, a data 
element that would flag invoices submitted by small disadvantaged 
business so that they may be paid more expeditiously, in accordance 
with DOD policy. 

To help ensure that the military services and defense agencies 
effectively utilize WAWF we also recommend that the Secretary of 
Defense take the following action: 

* Establish a clear requirement that the military services and defense 
agencies process all receiving and acceptance reports and other 
supporting payment documentation electronically. 

Agency Comments and Our Evaluation: 

In written comments, which are reprinted in appendix I, DOD concurred 
with our recommendations and noted that the recent transition of WAWF 
to BTF will provide a renewed opportunity to address the strategic 
direction and planning to ensure that this program is fully implemented 
and effectively utilized. According to DOD, it plans to evaluate and 
revisit existing WAWF metrics and consider including, as part of its 
next WAWF requirements review, a data element that would flag invoices 
submitted by small disadvantaged businesses. DOD also stated that, as 
part of its strategic plan, it would reemphasize the clear requirement 
for the military services and defense agencies to process all receiving 
and acceptance reports and other supporting payment documents 
electronically. 

We are sending copies of this report to the Secretary of Defense, 
interested congressional committees, and other interested parties. We 
will make copies of the report available to others upon request. In 
addition, the report is available at no charge on GAO's Web site at 
http://www.gao.gov. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-9095 or williamsm1@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major contributions 
to this report were Diane Handley, Assistant Director; Francine 
DelVecchio; and Jamie Haynes. 

Signed by: 

McCoy Williams: 
Director, Financial Management and Assurance: 

List of Congressional Committees: 

The Honorable John Warner: 
Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Ted Stevens: 
Chairman: 
The Honorable Daniel K. Inouye: 
Ranking Minority Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Duncan L. Hunter: 
Chairman: 
The Honorable Ike Skelton: 
Ranking Minority Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable C.W. Bill Young: 
Chairman: 
The Honorable John P. Murtha: 
Ranking Minority Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Appendix I: Comments from the Department of Defense: 

Office Of The Under Secretary Of Defense: 
3000 Defense Pentagon: 
Washington. DC 20301.-3000: 

Acquisition Technology And Logistics: 

Mr. McCoy Williams: 

Director, Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, N.W. Washington, D.C. 20548: 

Dear Mr. Williams: 

This is the Department of Defense (DOD) response to the GAO Draft 
Report 06-358, `DOD PAYMENTS TO SMALL BUSINESSES: Implementation and 
Effective Utilization of Electronic Invoicing Could Further Reduce Late 
Payments,' dated April 12, 2006 (GAO Code 192144). The Department 
concurs with the two recommendations for executive action and our 
responses are enclosed. 

As noted in your report, Wide Area Workflow (WAWF) for electronic 
transmission of receiving and acceptance reports and other related 
payment documentation is currently used at various levels by the 
military services and defense agencies with resulting cost avoidance. 
WAWF customer representation is active through participation in the 
Joint Requirements Board. 

The Department has issued several memorandums directing WAWF usage. The 
latest direction, dated August 18, 2004, was released as a joint 
memorandum from the Offices of the Under Secretaries of Defense 
(Comptroller) and (Acquisition Technology and Logistics). The recent 
transition of this program to the Business Transformation Agency (BTA) 
provides a renewed opportunity to address the strategic direction and 
planning to fully implement and effectively utilize WAWF. This tool, 
along with other related enterprise systems, will be assessed in the 
context of an integrated approach designed to achieve the overall 
capabilities required by DOD. Existing metrics for the identification 
of problems and/or issues, as well as for the measurement of success of 
the program, will be validated and expanded where necessary. 

Your recommendation regarding the incorporation of a data element that 
would flag invoices submitted by small disadvantaged business so that 
they may be paid more expeditiously in accordance with DOD policy will 
be taken into consideration as part of the next requirements review. 

My point of contact for this matter is Ms. Cynthia Beck and she may be 
contacted by email: cynthia.beck@bta.mil or by telephone at (703) 607- 
1296. 

Sincerely, 

Signed by: 

Paul A. Brinkley: 
Deputy Under Secretary of Defense (Business Transformation): 

Attachments: As stated: 

(GAO-06-358)/Code 192144 DOD Payments to Small Business Contractors: 

Recommendation A.1: The Secretary of Defense directs the Director of 
the Defense Business Transformation Agency to clarify the management 
structure and policies over WAWF that at a minimum: 

* Provides strategic direction for DFAS, DCMA, DISH, the military 
services, and defense agencies in their efforts to fully implement and 
effectively utilize WAWF, * Establishes a strategic plan that defines 
the roles and responsibilities of the various organizations that are 
integral to the success of the program and outlines a strategy for 
improving the utilization of WAWF - including correcting WAWF 
functionality or processing issues that may hamper effective 
utilization, 

* Develops performance metrics that enable the Department to measure 
the success of the program - including comprehensive metrics on the 
volume of invoices and receiving documents transmitted electronically, 
and: 

* Considers incorporating, as part of the WAWF application, a data 
element that would flag invoices submitted by small disadvantaged 
business so that they may be paid more expeditiously in accordance with 
DOD policy. 

DOD Response: Concur. The Business Transformation Agency (BTA) recently 
took over responsibility for the WAWF program and plans to address the 
need to reestablish a clear direction and a strategic plan that will 
focus the program. WAWF, along with other related enterprise systems, 
will be assessed in the context of an integrated approach designed to 
achieve the overall capabilities required by the Department. 

A variety of metrics have captured historical WAWF usage. BTA will 
validate the accuracy, completeness and utility of existing metrics and 
revise as necessary to meet program direction. An additional data 
element can be added to the WAWF application to identify small business 
invoices. WAWF already receives Central Contractor Registry information 
and could use a CageNendor comparison for setting such a flag. This 
will be considered as part of the next requirements review. 

Recommendation A.2: The Secretary of Defense establishes a clear 
requirement that the military services and defense agencies process all 
receiving and acceptance reports and other supporting payment 
documentation electronically. 

DOD Response: Concur. As an integral part of the strategic plan, the 
Department of Defense will reemphasize the clear requirement for the 
military services and defense agencies to process all receiving and 
acceptance reports and other supporting payment documentation 
electronically. 

[End of section] 

Appendix II: Objectives, Scope, and Methodology: 

To determine whether small businesses were more likely to be paid late 
than all businesses, we requested transaction-level detail for all DOD 
commercial payments subject to the Prompt Payment Act and all interest 
penalties paid in fiscal year 2004. For fiscal year 2004, DOD reported 
total payments subject to the Prompt Payment Act of $206 billion--of 
which $119 billion were paid through DOD's contract pay business line 
and $87 billion were paid through its vendor pay product line. We 
received all the payment data requested for DOD's contract payment 
business line. However, DOD was able to provide payment data for only 9 
of its 20 vendor payment locations. The payments generated from these 9 
locations represent $24 billion, or approximately 28 percent, of the 
total $87 billion in vendor payments that were subject to the Prompt 
Payment Act. 

Using the payment data from the nine vendor pay locations and one 
contract pay location, combined with data we obtained from the Central 
Contractor Registration (CCR) database--which contains the most 
comprehensive listing of small business contractors--we calculated the 
extent to which small businesses are paid late as compared with the 
payment of all invoices. Specifically, we used the data from CCR to 
identify invoice and interest payments associated with small business 
contractors. However, payment data for the nine sites did not always 
contain complete identifier data, which would allow us to determine 
whether the transaction involved a small business; some sites contained 
fairly complete data and others were missing identifiers for a large 
percentage of transactions. Because we were not able to identify all 
small businesses, our calculations compare invoices from known small 
businesses to invoices from all companies. To determine the percentages 
of invoices paid late, we divided the number of invoices paid late by 
the total number of invoices paid during the same period. 

To examine the potential impact of the missing identifier data on our 
analyses, we calculated and compared late payment rates in a number of 
ways: comparing invoices from known small businesses with invoices from 
all businesses, comparing invoices from known small businesses with the 
remaining invoices (excluding known small businesses), comparing 
invoices from known small businesses with the remaining invoices after 
designating the transactions with missing identifiers to be in 
equivalent proportion to the known small and known non-small 
businesses, and comparing invoices from known small businesses to the 
known non-small businesses--after all transactions with missing 
identifiers were removed. In all cases, the overall finding that small 
business invoices were more likely to be paid late remained consistent. 
This finding also remained relatively consistent between sites that had 
more complete data and sites that did not. We also discussed with DFAS 
officials the reasons why identifier information was missing. The 
reasons included removal during the archive process and lack of a 
requirement for that field in particular systems. We found no evidence 
that the missing identifiers were caused by systematic differences in 
how data on transactions from small versus non-small businesses are 
maintained. 

To ensure that the DOD data were sufficiently reliable for our 
analyses, we conducted detailed reliability assessments of the data 
sets that we used. We restricted these assessments, however, to the 
specific variables that were pertinent to our analyses. We assessed the 
reliability of the payment data obtained from DOD's payment systems by 
ensuring that the transaction detail provided was consistent with 
summary totals reported as part DOD's prompt payment metrics. We also 
assessed the reliability of these data by performing nonstatistical 
sampling. To accomplish this, individual transactions were selected on 
a judgmental basis. Attributes from these transactions were compared to 
the original, supporting documentation held at the respective DFAS 
service center that processed the transaction. We reviewed attributes 
such as dates, contract numbers, amounts, and ensured policies related 
to the payment process were met prior to disbursement of funds. As part 
of our data reliability assessment we also considered the risk that 
contractors are misclassified (large versus small business) in the CCR 
database. We believe the risk is small for two reasons. First, the 
Small Business Administration (SBA) verifies the small business status 
of contractors that are part of SBA's set aside program--which is the 
primary means by which DOD meets its annual small business procurement 
goals. Second, according to SBA, small business self-certification is 
policed by other small business contractors--who have a vested interest 
in the accuracy of the small business designation. We found that all 
the data sets used for this report were sufficiently reliable for use 
in our analyses. 

To determine the cause of late payments, we performed audit work at six 
DFAS vendor payment locations and the DFAS contract pay site, which 
collectively represent $169 billion, or 82 percent of all payments 
subject to the Prompt Payment Act. The payments generated from the six 
vendor pay locations represent $50 billion, or approximately 58 
percent, of the total vendor payments that were subject to the Prompt 
Payment Act. At each of the DFAS service sites visited, we interviewed 
officials who were responsible for processing vendor invoices for 
payment; officials who prepared and submitted metrics related to the 
overall timeliness of payments made; and officials who were responsible 
for handling both large and small business contractor complaints and 
inquiries. Additionally, we obtained documentation on and performed 
walk-throughs of the vendor payment and contract payment processes. 

We selected DFAS vendor pay sites for review based on the percentage of 
interest penalty payments made compared to the total amount of payments 
made subject to the Prompt Payment Act. Once this percentage was 
determined, we chose DFAS vendor pay sites with both disproportionately 
high and low percentages compared to the average percentage for all 
sites. Sites with low percentages were selected because of their 
relative proficiency in paying vendors in a timely manner and to 
identify possible best practices used by these sites. Sites with high 
percentages were chosen so that we could understand and document 
problems associated with the payment process. Further, the site 
selection criteria ensured that service-unique processes and locations 
were included. The DFAS vendor pay sites we visited are as follows: 
Columbus, Ohio; Dayton, Ohio; Norfolk, Virginia; Rock Island, Illinois; 
San Diego, California; and Indianapolis, Indiana. 

To gain an understanding of how DFAS and DISA coordinated, managed, and 
implemented the WAWF program, we interviewed the DFAS WAWF focal point, 
officials responsible for collecting electronic commerce metrics at 
DFAS, and the WAWF program manager. We obtained and analyzed 
memorandums, directives, briefings, and other documents related to the 
WAWF program--including system requirements documentation describing 
the functionality of the current version of WAWF, version 3.0.9. 

To document the criteria governing payments to small business 
contractors, we obtained and reviewed applicable policies, procedures, 
and program guidance, including the Small Business Act,[Footnote 32] 
the Prompt Payment Act and regulations,[Footnote 33] the Defense 
Federal Acquisition Regulations,[Footnote 34] the Federal Acquisition 
Regulation,[Footnote 35] and DFAS desk policies. In conducting our 
work, we also referred to the internal control standards provided in 
Standards for Internal Control in the Federal Government.[Footnote 36] 

To assess the impact that late payments have on small business 
contractors, we relied on a case study approach, principally because 
DOD was unable to provide us with a complete universe of small business 
contractors that were paid late, which would be needed to perform 
sampling techniques that would allow us to comment on the experiences 
of small business contractors as a whole. Therefore, using DOD payment 
and other data, we identified small business contractors that were paid 
late multiple times during fiscal year 2004 and documented the 
difficulties experienced by 17 of these contractors. We selected our 
case study examples from the DOD payment data provided by identifying 
small business contractors that DOD paid late most frequently. Of those 
small business contractors that were paid late most frequently, 17 
expressed a willingness to share information on late payments with us. 
Our findings for this objective cannot be projected and may not be 
representative of the experiences of DOD small business contractors as 
a whole. We interviewed each of these contractors from June 2005 
through September 2005 and, when possible, obtained documentation 
related to late payments, including accounts receivable aging reports 
and copies of unpaid invoices. In addition, we attempted to corroborate 
contractors' claims that they had not received interest payments to 
which they believed they were entitled by requesting from DFAS 
invoices, receiving reports, and any other payment documentation 
related to these claims. 

We briefed DFAS and DOD officials from the selected payment locations 
on the details of our audit, including findings and their implications. 
We conducted our fieldwork from November 2004 through January 2006 in 
accordance with U.S. generally accepted government auditing standards. 
We requested comments on a draft of this report from the Secretary of 
Defense or his designee. We received written comments from the Deputy 
Under Secretary of Defense (Business Transformation). These comments 
are evaluated in the "Agency Comments and Our Evaluation" section of 
this report and are reprinted in appendix I. 

FOOTNOTES 

[1] A small business concern is defined in accordance with the Small 
Business Administration's definition, 13 C.F.R. pt. 121. Small 
businesses may be eligible to participate in several programs-- 
including small disadvantaged, 8(a), HUBZone, veteran owned, service- 
disabled veteran-owned, and women-owned small businesses. See 48 C.F.R. 
§§ 19.000, 219.000. 

[2] For fiscal years 2004 and 2005 DOD's procurement goal was to award 
to small businesses 23 percent of its total contract awards. As of the 
date of this report, DOD's fiscal year 2005 procurement statistics were 
not available. 

[3] GAO, Financial Management: DOD's Metrics Program Provides Focus for 
Improving Performance, GAO-03-457 (Washington, D.C.: Mar. 28, 2003), 
and Financial Management: Seven DOD Initiatives That Affect the 
Contract Payment Process, GAO/AIMD-98-40 (Washington, D.C.: Jan. 30, 
1998). 

[4] Pub. L. No. 108-136, § 851, 117 Stat. 1392, 1556 (Nov. 24, 2003). 
For the purpose of this report and as specified by the National Defense 
Authorization Act of 2004, timeliness is defined in accordance with the 
Prompt Payment Final Rule, 5 C.F.R. pt. 1315. 

[5] 31 U.S.C. ch. 39. DOD also makes commercial payments that are not 
subject to the Prompt Payment Act that include, among other things, 
contract financing payments, progress payments, interim payments, and 
advance payments. 

[6] DOD also uses Electronic Data Interchange and Web Invoicing 
applications to transmit payment documents and data electronically. 
However, because WAWF provides greater visibility over the status of 
payments and payment documents, it is DOD's stated goal that all 
electronic invoicing be performed using WAWF. 

[7] Pub. L. No. 106-398, § 1008, 114 Stat. 1654, 1654A-249 (Oct. 30, 
2000). 

[8] Invoices related to certain types of contracts, such as 
construction contracts, must be certified by a DOD contracting 
official, who then forwards the certified invoice to the appropriate 
DOD vendor pay site for payment. 

[9] 15. U.S.C. § 632 (a) (1). 

[10] Id. at § 632 (a) (3). 

[11] 31 U.S.C. § 3902. 

[12] Id. at § 3904. 

[13] 5 C.F.R. § 1315.5 (b). 

[14] 5 C.F.R. § 1315.4 (g). The start of the payment period is the 
later of (1) the receipt of the proper invoice by the designated 
billing office or (2) the government's acceptance of supplies delivered 
or services performed by the contractor. 

[15] 31 U.S.C. § 3902 (b). 

[16] 70 Fed. Reg. 76497, December 27, 2005. (See 
www.publicdebt.treas.gov/opd/opdrmt2.htm.) 

[17] The fast pay procedure allows payment under limited conditions to 
a contractor prior to the government's verification that supplies have 
been received and accepted. (48 C.F.R. subpt. 13.4). Among other 
conditions, deliveries of supplies are to occur at locations where 
there is both a geographical separation and a lack of adequate 
communications facilities between government receiving and disbursing 
activities that will make it impractical to make timely payment based 
on evidence of government acceptance. 

[18] GAO-03-457. 

[19] GAO/AIMD-98-40. 

[20] Defense Federal Acquisition Regulation Supplement, 48 C.F.R. § 
232.903. Small disadvantaged businesses are a subset of the larger 
population of small business contractors. The payment data provided by 
DOD did not allow us to isolate and analyze payments made to small 
disadvantaged businesses. 

[21] Agencies may pay early if the discount terms result in an annual 
interest rate equal to, or higher than, the Current Value of Funds Rate 
(CVFR). Department of the Treasury, Treasury Financial Manual, vol. I, 
pt. 6, § 8040.40. The CVFR is published quarterly by the Secretary of 
the Treasury. 

[22] Pub. L. No. 106-398, § 1008, 114 Stat. 1654, 1654A-249 (Oct. 30, 
2000). 

[23] Subsection 1008(c) authorized the Secretary to exempt any category 
of invoices from this requirement if he determines that adherence to 
the requirement would be "unduly burdensome." Through DOD's 
implementing regulations, the Secretary has exempted invoices where 
vendors are unable to submit invoices electronically, among other 
categories. DFARS 232.7002(a). 

[24] DFARS 252.232-7003. 

[25] Although DFARS 252.232-7003 provides several electronic submission 
options, DOD has designated WAWF as the preferred electronic invoicing 
tool because it provides greater visibility over the status of payments 
and payment documents. 

[26] Invoices may contain multiple lines of accounting, or funding 
sources. DFAS must match each line of accounting with the official 
accounting records to ensure that funds are available. 

[27] Invoices related to certain types of contracts, such as 
construction contracts, must be certified by a DOD contracting 
official, who then forwards the certified invoice to the appropriate 
DOD vendor pay site for payment. 

[28] DFARS 232.7002(b). While subsection 1008(c) of the National 
Defense Authorization Act also authorized the Secretary to exempt 
categories of transactions from the electronic transmission 
requirement, DOD's implementing regulations currently allow for no such 
exemptions. 

[29] 31 U.S.C. § 3902. 

[30] National Federation of Independent Businesses, National Small 
Business Poll: The Cash Flow Problem, vol. 1, no. 3 (2001). 

[31] The Prompt Payment Act provides that an invoice is deemed to be 
received on the later of (1) the date a proper invoice is received by 
an agency if the agency annotates the invoice with the date of receipt 
or (2) the seventh day after the date on which goods are delivered or 
services completed, unless acceptance occurs earlier or if a longer 
acceptance period is specified in the contract. 5 C.F.R. § 1315.4 (b) 
(1). If the agency fails to annotate an invoice with the date of 
receipt of the invoice, the date placed on the invoice by the 
contractor is used to determine the start date for the payment period. 
Id. at § 1315.4 (b) (2). Further, agencies are required to return 
improper invoices to the contractor within 7 days of receipt to 
identify deficiencies in the invoice. 5 C.F.R. § 1315.4 (c). 

[32] 15 U.S.C. §§ 631-657g. 

[33] 31 U.S.C. ch. 39; 5 C.F.R. pt. 1315. 

[34] 48 C.F.R. pt. 219 and subpt. 232.9. 

[35] Id. at pt. 32. 

[36] GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). These standards 
provide the overall framework for establishing and maintaining 
effective internal control and for identifying and addressing areas of 
greatest risk of fraud, waste, abuse, and mismanagement. 

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