Prompt Payment Act — Federal Payment Deadlines & Interest Penalties

The Prompt Payment Act (31 U.S.C. §§ 3901–3907) requires the federal government to pay its bills on time — and to pay interest penalties when it doesn't. Specifically, federal agencies must pay contractors within 30 days of receiving a proper invoice (or within 7 days for perishable agricultural commodity payments), and must pay interest at the Treasury's current rate on any late payment. Before the Act, the federal government was a notoriously slow payer — some agencies took 60, 90, or even 120+ days to pay contractors, effectively forcing businesses (especially small businesses) to provide interest-free financing to the government. The Act flipped the incentive: now, late payments automatically trigger interest penalties charged to the responsible agency's budget, giving financial officers a concrete reason to process invoices quickly. The Act also requires prime contractors to flow prompt payment requirements down to subcontractors — paying them within 7 days of receiving payment from the government.

Current Law (2026)

Legal Authority

• 31 U.S.C. § 3902 — Interest penalties (requires agencies to pay interest on amounts owed under contracts when payment is not made by the required payment date; interest accrues from the day after the payment due date through the payment date)
• 31 U.S.C. § 3903 — Regulations (OMB must prescribe regulations specifying required payment dates, interest penalty calculations, and related procedures)
• 31 U.S.C. § 3904 — Limitations on discount payments (agencies must take prompt payment discounts only when they can pay by the discount date; taking a discount after the deadline costs the government more than paying full price on time)
• 31 U.S.C. § 3905 — Payment provisions relating to construction contracts (special rules for progress payments, retainage, and final payment on construction contracts; prime contractors must pay subcontractors within 7 days of receiving government payment)

How It Works

When a contractor submits a proper invoice — one that includes all required information including contract number, description of services, quantity, unit price, and payment terms — the agency's 30-day payment clock starts on the later of the date the agency receives the invoice or the date the agency accepts the goods or services. If the agency determines the invoice is improper, it must return it within 7 days with an explanation of the deficiency, and the clock restarts when a corrected invoice arrives. If the government doesn't pay within the required period, interest penalties accrue automatically — the contractor doesn't need to request them. The interest rate is set semiannually by Treasury based on the government's short-term borrowing rate, accruing from the day after the due date through the payment date. Penalties are charged to the paying agency's operating budget, not a central fund — creating a direct financial incentive for each agency to process payments promptly.

Construction contracts carry special rules: agencies make progress payments as work is completed and may retain (hold back) up to 10% of each payment until the project is complete satisfactorily, with the retained amount due within 30 days of completion (and interest on late retainage). Prime contractors receiving government payments must pay their subcontractors within 7 days and owe interest on late subcontractor payments at the same rate the government would pay — a flow-down requirement that prevents primes from float-financing projects on the backs of small subs. The Act also governs early payment discounts: agencies may take a contractor's offered discount (e.g., "2/10 net 30") only when they can actually pay by the discount date; taking a discount and then paying late means the agency gets neither the savings nor timely payment. The 7-day accelerated payment deadline for perishable agricultural commodity invoices and the subcontractor flow-down requirements are particularly important for small businesses, which often lack cash reserves to absorb extended payment delays.

How It Affects You

If you're a government contractor waiting on payment, the most important practical point is that interest runs automatically — you don't have to request it, file a claim, or prove damages. If your payment arrives late, check whether the agency included the interest penalty in the payment. If not, you can submit a supplemental invoice for the interest amount, calculated from the day after the due date through the payment date, at the Treasury's current semiannual rate (published at fiscal.treasury.gov — typically 4–6% in recent years). Before any of that matters, make sure you're submitting a proper invoice — one that includes your contract number, line item descriptions, quantities, unit prices, total amount, and any other required information. An improper invoice gets returned within 7 days and resets the clock. Agencies cannot drag out payment by claiming invoices are improper without telling you specifically what's missing. If your agency routinely pays late and isn't calculating interest correctly, file a complaint with the agency's Office of Inspector General or raise it through the Contracting Officer — chronic late payment is a budget management failure, and the interest penalty is supposed to create an internal incentive to fix it.

If you're a subcontractor or sub-tier contractor on a federal prime contract, your payment rights flow through the prime's Prompt Payment Act obligations — specifically the 7-day flow-down requirement at 48 CFR 52.232-27 (construction) and 52.232-25 (non-construction). When the government pays the prime, the prime must pay you within 7 days for your portion. If the prime is late, you're entitled to interest at the government rate, just as the government would owe the prime. The practical catch: you usually don't know exactly when the government paid the prime, which makes it harder to enforce your 7-day right. Build your subcontract to require the prime to notify you within 24 hours of receiving government payment — that creates a clear record. If you're routinely being paid in 30–45 days instead of 7, document the pattern and raise it with the contracting officer. Subcontractor payment disputes on federal contracts can also be pursued through the Contract Disputes Act (41 U.S.C. § 7101+), though subcontractors typically lack direct privity with the government and must work through the prime.

If you're a small business owner working with the federal government, the Prompt Payment Act's protections are among the most valuable payment tools you have. For meat, dairy, and perishable agricultural commodity contracts, the accelerated 7-day payment deadline applies — the government can't stretch those payments to 30 days. For all other contracts, the 30-day rule means you can plan your cash flow with certainty: if your invoice is proper and accepted, payment arrives within a month or you're entitled to interest. In practice, many agencies have moved to electronic invoicing systems (like IPP — Invoice Processing Platform, at ipp.gov) that track invoice receipt, acceptance, and payment due dates automatically. Register your business on IPP and use it for all federal payments — it gives you real-time visibility into where your invoice is in the payment process and makes interest calculations straightforward. The SBA's Office of Government Contracting (sba.gov/federal-contracting) can also help if you're facing systemic payment problems with a specific agency.

If you're a federal contracting officer or finance officer, late payments are a direct hit to your agency's operating budget — the interest penalties come out of your accounts, not a central fund. The 7-day improper invoice return rule matters: if an invoice has a deficiency, you must return it within 7 days with a specific written explanation, or the clock keeps running as if the invoice were proper. Once you accept the goods or services, the 30-day clock starts and you lose the ability to hold payment for minor disputes. Construction contracts add a layer: retainage (up to 10%) must be paid within 30 days of substantial completion, and those retained amounts also earn interest if you're late. OMB's implementing regulations at 5 CFR Part 1315 and the FAR clauses at 48 CFR 32.9 define your obligations and procedures — your agency's Prompt Payment training should cover the interest calculation methodology and the required payment system certifications.

State Variations

The Prompt Payment Act applies to federal procurement only:

• Most states have enacted their own prompt payment laws governing state and local government payments to contractors
• State payment deadlines vary (typically 30–45 days) and interest rates vary
• State prompt payment laws may cover different types of payments (construction, goods, services)
• Some states extend prompt payment requirements to payments between private parties

Implementing Regulations

• 5 CFR Part 1315 — Prompt Payment — the OMB implementing regulations establishing the operational rules for the Prompt Payment Act across all executive branch agencies. Part 1315 converts the Act's general obligation to pay vendors promptly into specific numerical standards, formulas, and procedures that contracting officers, accounts payable staff, and auditors apply daily. Key provisions:

  • § 1315.4 — Payment due date: agencies must pay the later of (a) 30 days after receipt of a proper invoice, or (b) 30 days after government acceptance of the goods or services; acceptance is the trigger when the vendor submits an invoice before delivery is complete. A "proper invoice" includes all required information — contractor name and address, invoice date, contract number, description of supplies or services, unit price, total amount due, and any payment terms; an improper invoice restarts the 30-day clock from the date a corrected proper invoice is received
  • § 1315.5 — Early payment discounts: agencies may pay earlier than the due date to take a vendor-offered discount (e.g., "2/10 net 30" = 2% discount if paid within 10 days); § 1315.17 provides the formula for determining whether the discount is worth taking — comparing the daily equivalent discount rate to the Treasury's Current Value of Funds Rate; if the discount exceeds Treasury's rate, early payment is financially beneficial to the government
  • § 1315.8 — Special payment situations: specific standards apply to (a) construction contract progress payments — payment due within 14 days of approval of a proper progress payment request (faster than the standard 30-day period, reflecting construction cash-flow intensity); (b) real property lease payments — due on the first workday of each month; (c) utility payments — due within 30 days of invoice or on the contract payment date; (d) medical/dental care (Medicare, TRICARE) — 30 days for clean electronic claims, 30 days for paper claims
  • §§ 1315.10–1315.11 — Interest penalty and additional penalty: interest begins the day after the payment due date and runs through the payment date, at the Treasury's Current Value of Funds Rate (published quarterly); agencies must automatically include the interest penalty with the late payment — the vendor does not need to request it. If an agency owes $1.00 or more in interest but fails to include it with the late payment, the vendor is entitled to an additional penalty equal to the lesser of the unpaid interest or 2% of the invoice amount; this provision creates strong incentive for agency accounts payable systems to calculate and include interest automatically
  • § 1315.12 — Purchase card micro-purchases: individual purchase card invoices under $2,500 may be paid at any time but must be paid no later than 30 days after receipt; agencies are not required to match invoices to receiving reports at this threshold
  • § 1315.20 — Cost-reimbursement contract interim payments: added by the National Defense Authorization Act FY2001 (§ 1010); requires payment of interest penalties for late interim payments on cost-reimbursement contracts — extending prompt payment protections to the research and development contractor community

  The interest penalty system is the most practically significant provision for government contractors monitoring receivables. When agencies are slow — during continuing resolutions, government shutdowns, or fiscal year-end processing backlogs — interest accrues automatically on every late payment. Contractors that track payment dates and compare them to invoice submission dates can identify interest owed; uncollected interest penalties are recoverable under the Contract Disputes Act if not paid with the late payment. For agency CFO offices, the additional penalty provision (§ 1315.11) creates audit exposure when payment systems fail to include interest — inspectors general routinely sample late payments to verify interest was included.

  Recent rulemakings: 64 FR 52586 (1999) — original codification. 67 FR 79516 (2002) — incorporated NDAA § 1010 cost-reimbursement provisions.

• 48 CFR 32.9 — FAR Subpart 32.9 — Prompt payment (contract clauses implementing prompt payment requirements — invoice processing, payment timing, interest calculation, prime contractor flow-down to subcontractors)

• 48 CFR 52.232-25 — Prompt payment clause (standard contract clause specifying payment terms, interest rates, and dispute procedures for federal contracts)

Pending Legislation

No standalone Prompt Payment Act reform bills have been introduced in the 119th Congress. Payment terms and contractor cash flow issues appear in broader acquisition reform legislation — see Federal Procurement & Contracting.

Recent Developments

Federal payment performance has improved significantly since the Act's enactment, but late payments still occur — particularly for complex invoices, construction retainage, and payments processed through legacy financial systems. The government-wide push for electronic invoicing (e-invoicing) and automated payment processing has reduced payment cycle times. OMB has periodically updated the Prompt Payment regulations to address new payment methods and technologies. The expansion of government purchase cards (credit cards) for small purchases has effectively eliminated the prompt payment problem for micro-purchases, as payment is immediate at the point of sale.