The flow of federal stimulus money to public projects has caused many contractors with decreasing private sector backlogs to re-focus on government work. Despite the potential economic cushion of a federal contract, a growing number of companies performing government projects are raising concerns about the timeliness of payments or, in some instances, the threat of nonpayment.
Timely progress payments are crucial due to the demands placed on contractors and subcontractors to meet project deadlines and contractual obligations. Only a few delayed payments can drastically impair a contractor’s ability to maintain business operations.
Securing timely payment is challenging and depends, in part, on mastering federal statutory deadlines and requirements associated with the Miller Act and the Federal Prompt Payment Act (FPPA). Almost three decades ago, a national study found that government agencies were late in paying 30 percent of their bills, leading to the passage of the FPPA.
The FPPA requires federal agencies to pay for construction work on a timely basis, to pay interest penalties for late payments, and to take discounts only when payments are made by the discount date. Prime contractors, in turn, are required to pay subcontractors within seven days of receiving a payment, or they, too, must pay interest on the outstanding amount to the subcontractors.
The FPPA underwent substantial modification in 1988 as provisions were added to regulate the manner in which prime contractors paid subcontractors and suppliers.
Under the FPPA, payment is due on the date identified in the contract; if the contract fails to specify the date, payment is due 30 days after receipt of a proper invoice. A proper invoice is defined as an invoice containing the following “substantiating” documentation:
- contractor identity and invoice date;
- authorization for the delivery of property or services;
- description of the property or services, including price and quantity;
- shipping and payment terms;
- other documentation required by the contract;
- name, title, telephone number and mailing address of the responsible contract representative to whom
- payment should be sent;
- taxpayer identification number; and
- electronic funds transfer information necessary to effectuate payment.
Many times, including a request for payment for work associated with changes or contract modifications is denied as improper unless the request is accompanied by documentation of a properly executed change order. Because of this requirement, work for regular progress payments should be invoiced independently from change order work. Following receipt of a proper invoice, a contractor’s payment must be remitted by the government agency within 14 days.
In the private sector, many company owners have long offered discounts to their clients as an incentive to secure early payment in advance of other creditors. The FPPA empowers government contractors to use the same type of strategic tool to secure earlier payment by offering discounts off the invoice price. If accepted, the agency’s payment is due by the date prescribed in the discount provision.
If the government fails to render timely payment for goods or services duly provided under the contract, the FPPA requires the agency to pay an interest penalty to the contractor on the amount of the payment due. When an agency remits a late payment, it must simultaneously tender the interest penalty. The interest penalty is computed at a daily rate, and the interest is compounded every 30 days.
If the agency does not pay the appropriate interest penalty within 10 days of offering the late payment, the contractor must make a formal demand in writing. The demand for interest must be made within 40 days of the time the late payment was tendered. The demand should include both a copy of the invoice involved and a certification by the contractor that the principal amount has been received, and the date of the receipt.
Absent a material breach, a contractor’s sole redress for late payment by the government is the interest penalty. In the event certain subcontractors and suppliers remain unpaid, they typically can file a claim against the surety that bonds the project under the Miller Act. The Miller Act requires prime contractors to furnish a payment bond on federal contracts in excess of $100,000. The purpose of the bond is to protect qualifying subcontractors and suppliers from nonpayment. Subcontractors and suppliers may have additional claims against the prime contractor and, likewise, the prime contractor against the contracting authority.