Request for Clarification of Method for Computation of Prompt Payment Discounts

An authorized certifying officer of the Department of Agriculture asked whether, in instances where trade-ins are involved, prompt payment discounts offered to the United States on its contracts with vendors should be computed on the gross contract price or on the net price. Vendors have recently questioned the Department about its method of computing prompt payment discounts when a trade-in is included. The Department currently uses the gross contract price in its computations. Vendors complained that the discount should be based on the net contract price. It is to the Government's advantage as vendee to compute the discount on the gross price and to the vendor's advantage to use the net price. Former GAO decisions have held that such computations should be based on the gross amount of the contract. Whether prompt payment discounts should continue to be based on the gross contract price is a question of contract interpretation. When a trade-in is involved, the vendor will seek to deduct the value of the trade-in from the gross contract price, before computing the discount, because the amount of the trade-in does not represent cash due. This method of computing prompt payment discounts is consistent both with generally accepted accounting principles and trade practice. The Government practice in computing prompt payment discounts varies. GAO advised that, where trade-ins are involved, these discounts should be computed on the basis of the net contract price. This holding is limited to instances in which contracts between the Government and the vendor do not specifically provide for the manner of computing the discounts.