By: Hopewell Darneille
The Treasury Department has announced that the Prompt Payment Act (“PPA”) interest rate decreased to 2.625% per annum for the last half of 2019 – i.e., July 1, 2019, through December 31, 2019. This interest rate is used to calculate the interest penalty paid 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 first half of 2019 was set at 3-5/8 percent (3.625%). The new rate, therefore, reflects a full one (1.00) percent interest rate decrease – the sharpest drop in 10 years – and returns the rate to the same level of the first half of 2018.
Normally, we wait until the new rate is published in the Federal Register to issue this info. However, the Fiscal Service is running behind as to the usual Federal Register publication process. We, therefore, 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 late period overlaps the first half of 2019, then the interest for the days in such six-month period should be calculated using the 3.625% rate then in effect, and only the days starting July 1, 2019, should be calculated at the newly-decreased second half of 2019 2.625% rate. While this interest will not fully offset and compensate the likely higher commercial interest rates contractors have been paying, 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.
For an updated list of the established interest rates for all periods since January 1, 1980, see https://www.fiscal.treasury.gov/files/prompt-payment/PromptPayInterestRateHistory.pdf. 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