Federal Prompt Payment Act

Waiting for payment in construction is the rule rather than the exception. Payments often come late, and sometimes they don’t come at all. Payment security on federal projects is afforded by the Miller Act, but a surety bond claim is often the last resort. Additionally, the federal Prompt Payment Act provides some added muscle to encourage participants to make timely payments before the situation deteriorates so far that a bond claim must be used by the party waiting for payment.

This article covers the US Prompt Payment Act, which applies only to construction projects funded by the federal government. Visit our main Prompt Payment page for an overview on the topic, including state laws that set payment deadlines for public and private projects.

Contract Provisions Required By The Federal Prompt Payment Act

This article will discuss some of the specific provisions that the federal Prompt Payment Act requires in contracts and subcontracts on government projects.

The Prompt Payment Act covers a lot of bases, so let’s break it down into more consumable sections.

The following is a summary of provisions that must be present in contracts for federal projects.

Making a Proper Payment Request

A proper invoice (from contractor to the government contracting officer) must include:

  • Name and address of the contractor
  • Invoice date and invoice number
  • Contract number or other authorization for work/ services performed (including order number and line item number)
  • Description of work/ services performed
  • Delivery and payment terms
  • Name and address of Contractor official to whom payment is to be sent (must be the same as that in the contract or in a proper notice of assignment)
  • Name, title, phone number, and mailing address of person to notify in the event of a defective invoice.
  • For progress payments, substantiation of the amounts requested and certification
  • Taxpayer Identification Number (TIN), if required elsewhere in this contract
  • Electronic funds transfer (EFT) banking information, if required elsewhere in the contract
  • Any other information or documentation required by the contract

When Payment is Due to Contractors

Progress Payments:
Progress payments must be made within 14 days after the designated billing office receives a proper payment request from the contractor. If the billing office fails to put date of receipt, the payment is due by the 14th day after the date of the Contractor’s payment request (provided the designated billing office receives a proper payment request and there is no disagreement over quantity, quality, or Contractor compliance with contract requirements).

Withheld Payments:
Payment of any amounts retained by the Contracting Officer under fixed-price contracts must be made as specified in the contract or, if not specified, 30 days after approval by the Contracting Officer for release to the Contractor.

When Payment is Due to Subcontractors

The contractor must pass payment down the chain within 7 days of receipt from the government.

Flow Down Provisions

Any payment clauses or interest penalty clauses that exist in a subcontractor’s contract must also be inserted into contracts they enter with another subcontractor. The same clauses must also be inserted into any contracts between any second-tier subcontractor and a party they contract with as well.

Interest Penalty

Interest penalties differ depending on whether they are being paid by the government to the contractor or the contractor to the subcontractor.

Government to Contractor Interest Penalty

The designated payment office will pay an interest penalty (to the Contractor) automatically, without request, if payment is not made by the due date and, if:

  • The designated billing office received a proper invoice.
  • The Government processed a receiving report or other documentation authorizing payment (and there was no disagreement over delivery, compliance with the contract, or requested progress payment amount).
  • When there’s a final invoice for any balance of funds due to the Contractor for work/ services performed, the amount was not subject to further contract settlement actions between Government and Contractor.

When the due date falls on a weekend or legal holiday, the payment office may make payment on the next working day without incurring an interest penalty.

Contractor to Subcontractor Interest Penalty

A contractor must pay the subcontractor an interest penalty for each payment not made in accordance with the payment clause of their contract. An interest penalty accrues from the day after payment should have been made until payment is actually made.

Computing Interest Penalty

The government will compute the interest penalty in accordance with the Office of Management and Budget prompt payment regulations at 5 CFR Part 1315. The interest rate may be obtained by calling the Department of Treasury’s Financial Management Service (FMS) Prompt Payment help line at 1-800-266-9667.

When the Clock Starts

To compute an interest penalty, Government acceptance/ approval is assumed on the 7th day after the Contractor has completed the work or services under the contract. If actual acceptance/ approval occurs within that period, the Government will use the actual date of acceptance or approval.

Constructive acceptance/ approval requirements do not apply if there is a disagreement over project delivery or compliance with the contract. These requirements also do not compel Government officials to accept work or services, approve Contractor estimates, perform contract administration functions, or make payment prior to fulfilling their responsibilities.

If delays are due to disagreement between the government and the contractor over amounts or other issues involving contract compliance, or on amounts temporarily withheld or retained under the terms of the contract, prompt payment regulations do not require the government to pay interest penalties. The Government and the contractor shall resolve claims involving disputes, and any interest that may be payable in accordance with FAR 52.233-1.

Additional Interest Penalty

Additional interest penalties will be due to the contractor if the government fails to pay an interest penalty of $1 or more within 10 days following the payment of the invoice amount. The contractor must make a written demand to the payment office in order to enforce an additional interest penalty.

Retainage Permitted

A contractor is free to include a retainage agreement in a subcontract. Where a retainage clause is present, the contractor may retain the specified percentage of each progress payment in accordance with the terms and conditions of the agreement. No interest penalty will apply to properly retained amounts.

Withholding Permitted

A contractor or subcontractor may determine that part or all of a subcontractor’s request for payment may be withheld in accordance with the subcontract agreement.

Withholding Requirements

Withholding payment in accordance with the contract will not be subject to a late payment penalty as long as proper written notice is given to the subcontractor and the awarding authority.

Proper Notice

A subcontractor must be notified as soon as possible that funds will be withheld. The notice must come prior to the due date for the payment and must include:

(1) the amount to be withheld

(2) specific causes for withholding under the terms of the subcontract

(3) actions the subcontractor may take to remedy the situation and receive payment of the withheld amounts.

A copy of this notice must also be given to the contracting officer for the awarding authority.

Obtaining Withheld Payment

The subcontractor must be paid as soon as possible following the correction of the performance deficiency. Payment must be made within 7 days of the correction or within 7 days after the contractor recovers those funds from the government. A failure to make payment during this time period will result in late payment interest penalties.

Notice to Contracting Officer

Notice must be given to the government’s contracting officer when there has been:

(1) a subsequent reduction of a payment application

(2) a previously withheld amount has been paid to the subcontractor.

If a previously withheld amount has been paid, notice to the contracting officer must include the amounts that were withheld and the dates that withholding began and ended.

Interest to Government

A party withholding funds is obligated to pay interest to the government on the withheld amount of payments. Interest accrues from the 8th day after receiving the funds from the government until the subcontractor’s performance deficiency is corrected or when any subsequent payment is reduced.

Subcontractor’s Deficient Performance

If a contractor receives written notice that a first-tier subcontractor has deficiently performed and that the contractor would be liable for that deficiency, the contractor may withhold payment (in an amount allowed under the contract) without penalty. Notice must be given to the first-tier subcontractor as soon as possible.

The notice must come prior to the due date for the payment and must include:

(1) the amount to be withheld

(2) specific causes for withholding under the terms of the subcontract

(3) actions the subcontractor may take to remedy the situation and receive payment of the withheld amounts.

The contractor must release payment within 7 days of notice that the deficiency has been corrected. Late payment will be subject to interest penalty.

Contractor’s Request for Payment – Exclude Withheld Amounts

The contractor may not request payment of withheld or retained amounts from the government until the contractor has determined and certified to the government’s contracting officer that the subcontractor is now entitled to the payment.

Takeaway

Whew – are we clear on all of that??

To recap: without a mechanism pushing payments down the chain, subcontractors and suppliers would have to wait in limbo. That’s what makes the Prompt Payment Act so important- a schedule must be adhered to, and failure results in penalties.

However, because there are so many parties in play and numerous potential pitfalls, prompt payment provisions are tough to navigate. When properly adhered to, the Prompt Payment Act gives protection to everyone on the construction payment chain.

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Prompt Payment: Specifics Under the Federal Prompt Payment Act
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The federal Prompt Payment Act encourages participants to make timely payments on construction projects but its provisions can be tough to navigate
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