Government Contracts Monitor
Prompt Payment Act & Contract Disputes Act Interest Rate Increased to 3.625%, Effective 1/1/19
January 31, 2019
The Treasury Department has announced that the Prompt Payment Act (“PPA”) interest rate increased to 3.625% per annum for the first half of 2019 – i.e., January 1, 2019 through June 30, 2019. This interest rate is used to calculate the interest penalty payable by the Government when it fails to timely pay contractors for goods and services, as well as interest due under the Contract Disputes Act (“CDA”). The interest rate for the last half of 2018 was set at 3-1/2 percent (3.50%), so this new rate reflects a one-eighth (0.125) percent interest rate increase, and is up a full one percent (1.0%) from the comparable period a year ago (1/1/18-6/30/18), when the rate was 2-5/8%. The new rate is the highest interest rate level in almost a decade – since the last half of 2009 (7/1/09-12/31/09), when the rate was 4.375%. In the interim, the rate fell to a low of 1-3/8% in the first half of 2013 (1/1/13-6/30/13), before starting to move back up.
Normally, we wait until the new rate is published in the Federal Register. However, the usual Federal Register publication process is running behind right now, due to the recent partial Government shutdown. In view of the applicability of Prompt Payment Act interest to delayed payments due to the shutdown, we wanted to go ahead with this notice now, so that contractors can check and ensure that the proper interest is being applied and added to any late payments.
In this regard, Prompt Payment Act interest is supposed to be added automatically to any late payments, and is calculated based upon the length of the period from the day the payment was due to the date payment actually is received by the contractor, using a standard 360-day year. Given the general use of Electronic Funds Transfers (ETFs) today, providing same day electronic payment, it is possible for the Government to now easily calculate the amount due with precision at the time of payment. Contractors should carefully review any late payments received to ensure that the applicable interest has been included. Please note that, if the period overlaps the end of 2018, then the interest for the days in 2018 should be calculated using the 3.5% rate then in effect, and only the days in 2019 should be calculated at the newly-increased first half of 2019 3.625% rate. While this interest will not fully offset and compensate the likely higher commercial interest rates contractors have been paying to fund continuing operations, such interest will at least help some. If, for any reason, the proper interest is not included with any payments, contractors should reach out to the payment office, and the cognizant contracting officer.
In contrast to Prompt Payment Act interest, which, as discussed above, kicks in automatically when a payment is late, interest under the Contract Disputes Act does not start running until the cognizant contracting officer receives a properly submitted claim under the Disputes Clause. This provides a further reason why contractors should quickly prepare and submit any claims they may have for recoverable increased costs arising out of the recent shutdown or for other reasons.
An updated list of the established interest rates for all periods since January 1, 1980, is available here. The Treasury Department provides a Calculator that can be used to calculate the interest payable on claims and late payments, which is accessible here.
Hopewell Darneille is responsible for the contents of this Article.
© Jackson Kelly PLLC 2019