Your accounts receivable report shows $487,000 outstanding from three federal contracts. The oldest invoice is 67 days past due. The contracting officer’s response to your third follow-up email: ‘It’s in the payment queue.’ Your line of credit charges 9.5% interest on the bridge financing keeping your payroll funded. The government owes you interest on those late payments. You have never claimed it.
Ninety percent of small government contractors we work with have never filed a Prompt Payment Act interest claim. Not because they were paid on time. Because nobody told them the right existed, or they assumed pursuing it would damage the relationship with their contracting officer. The money sits uncollected.
The Prompt Payment Act [31 USC 3901-3907] requires federal agencies to pay contractors within 30 days of receiving a proper invoice and to pay interest automatically when they miss that deadline. The Act applies to every federal contract, including fixed-price, cost-reimbursement, and time-and-materials. Interest accrues from the day after the payment due date until the government issues payment. The rate resets every six months, tied to the Treasury’s Current Value of Funds rate. The payment timelines, interest calculations, invoice requirements, and accounting entries below show contractors how to track and collect what they are owed.
Prompt Payment Act Payment Timelines
Federal agencies must pay proper invoices within specific timeframes depending on the contract type. The standard deadline is 30 calendar days from receipt of a proper invoice [FAR 32.905]. Construction contracts receive a 14-day payment window [FAR 52.232-27]. Meat and fish contracts require payment within 7 days of delivery. Perishable agricultural commodities, dairy products, and edible fats receive 10-day terms. Architect-engineer contracts follow the standard 30-day rule [FAR 52.232-26].
The clock starts when the designated billing office receives a proper invoice, not when the contractor sends it. A proper invoice mailed Monday arrives Thursday. The 30-day clock starts Thursday. Electronic invoicing through WAWF (Wide Area Workflow) or IPP (Invoice Processing Platform) timestamps receipt automatically, eliminating delivery ambiguity.
Acceptance periods add time. When the contract specifies an acceptance period for delivered goods or services, the payment due date becomes 30 days after the later of (a) receipt of a proper invoice or (b) government acceptance of the deliverable. Constructive acceptance occurs 7 days after delivery unless the contract specifies otherwise. A contract with a 10-day acceptance period and a proper invoice received on delivery day gives the government up to 40 days from invoice receipt before interest accrues.
What Makes an Invoice ‘Proper’ Under FAR 32.905
The Prompt Payment Act clock starts only when the government receives a proper invoice. An improper invoice stops the clock entirely. The agency returns it within 7 days, and the payment timeline resets to zero when the corrected invoice arrives [FAR 32.905(b)]. One missing element on the invoice costs the contractor a minimum 37-day delay.
FAR 32.905(b) defines the required elements of a proper invoice. Every invoice must include: the contractor’s name and address, the invoice date and invoice number, the contract number (and order number if applicable), a description of the supplies delivered or services performed, the quantity, unit price, and extended price, shipping and payment terms, the name and address of the designated payment office, and the name, title, and phone number of a person to contact about the invoice.
Cost-reimbursement invoices carry additional requirements. The voucher must include the incurred costs broken down by cost element (labor, materials, subcontracts, other direct costs, indirect costs), supported by the contractor’s DCAA-compliant accounting system records. Missing cost breakdowns or unsupported indirect rate applications trigger invoice rejections on cost-type contracts.
Common Invoice Errors Killing the Payment Clock
Five invoice deficiencies account for the majority of proper invoice rejections and payment delays. Wrong contract number (a single transposed digit resets the clock). Missing CLIN references (the invoice total matches but CLIN-level detail is absent). Incorrect indirect rates applied (using an old provisional rate instead of the current approved rate). Missing receiving reports (the invoice arrives before the contracting officer’s representative signs the receiving report). Tax identification number mismatch between the invoice and System for Award Management registration.
Each rejection restarts the 30-day clock from the date the corrected invoice arrives. A contractor who submits three invoices with errors before getting it right waits 90+ days without interest protection on any of them. The chart of accounts setup should include a receivables aging report flagging invoices approaching 30 days without payment.
Calculating Prompt Payment Act Interest
The Prompt Payment Act interest rate equals the Treasury Department’s Current Value of Funds rate published semiannually in the Federal Register [31 USC 3902(a)]. For the first half of 2026, the rate stands at 4.0%. The rate applies as simple interest, not compound, calculated on the unpaid invoice amount from the day after the payment due date through the payment date.
The formula: Invoice Amount x (Interest Rate / 360) x Number of Days Late. A $100,000 invoice paid 45 days late at 4.0%: $100,000 x (0.04 / 360) x 45 = $500.00. Small amounts on individual invoices. Significant amounts across a year’s worth of delayed payments on multiple contracts.
The additional penalty under FAR 32.907 does not apply when the interest amount is under $1.00. The government must pay interest automatically without the contractor requesting it [FAR 32.906]. In practice, ‘automatically’ often means the contractor must identify the late payment and submit the interest calculation. The payment office processes it as a separate transaction. Contractors who do not track payment dates against invoice dates forfeit the interest by default.
Prompt Payment Act Rights for Subcontractors
The Prompt Payment Act’s flow-down provisions protect subcontractors through FAR 52.232-25(c). Prime contractors must pay subcontractors for satisfactory performance within 7 days of receiving payment from the government. If the prime pays late, the subcontractor is owed interest at the same Treasury rate.
This creates a two-tier enforcement structure. The government pays the prime within 30 days (or owes interest). The prime pays the subcontractor within 7 days of receiving government payment (or owes interest). A subcontractor’s invoice arrives on day 1. The government pays the prime on day 35 (5 days late, interest owed to prime). The prime pays the subcontractor on day 50 (8 days after receiving payment, interest owed to subcontractor).
Subcontractors on federal contracts should track two dates: when the prime received government payment (request this information from the prime) and when the subcontractor received payment from the prime. The 7-day window is aggressive. Many primes exceed it routinely. The interest obligation is real, though subcontractors rarely pursue it for relationship reasons.
Accounting for Prompt Payment Act Interest
Record interest receivable when a payment exceeds its due date. The journal entry: debit Interest Receivable (current asset), credit Interest Income (other revenue). When the interest payment arrives, debit Cash, credit Interest Receivable. Code interest income to a dedicated account separate from contract revenue. Prompt Payment Act interest is not contract revenue and does not flow through indirect rate calculations.
Track every invoice with three dates: date submitted, date the government received it (WAWF confirmation), and date payment was received. The gap between the 30-day due date and actual payment date drives the interest calculation. A spreadsheet or QuickBooks memorized report comparing received date plus 30 to payment date flags every late payment automatically.
Cash flow impact on small contractors is the real cost of late government payments. A firm with $2 million in annual federal billings and an average payment delay of 15 days beyond the 30-day window carries approximately $82,000 in permanently outstanding receivables. At a 9% line of credit rate, the carrying cost reaches $7,400 annually. The Prompt Payment Act interest (at 4.0%) recovers roughly half. The other half is a hidden cost of doing government business.
Why Contractors Leave Interest Money Unclaimed
Three patterns explain why most small contractors never collect Prompt Payment Act interest they are owed. Understanding these patterns matters because the money is often substantial in aggregate.
- Relationship protection. Contractors fear that claiming interest will antagonize the contracting officer and harm future contract opportunities. Claiming interest is a statutory entitlement under the contract, not a discretionary favor, but the perception persists. Claiming a statutory right does not create an adversarial relationship, but not claiming it creates a pattern the government has no incentive to correct.
- Tracking gaps. Without a system comparing invoice receipt dates to payment dates, contractors never identify which payments were late. The payment arrives, accounting records it, and nobody checks whether it arrived within 30 days. By the time someone reviews, the documentation window has passed.
- Small individual amounts. Interest on a single late payment might total $200. Contractors dismiss it. Across 50 invoices per year with an average 10-day delay, that dismissal costs $10,000 annually. The aggregate matters.
Build interest tracking into the standard invoicing workflow. When the payment posts to the bank, compare the deposit date against the invoice due date. If the payment crossed the 30-day line, calculate the interest and submit the claim. Processing time: 15 minutes per claim. Annual recovery for a typical small GovCon firm with $3 million in billings: $2,000 to $8,000.
| Contract Type | Payment Deadline | Interest Trigger | Applicable FAR Clause |
|---|---|---|---|
| Standard (FFP, CPFF, T&M) | 30 days from proper invoice | Day 31 | FAR 52.232-25 |
| Construction | 14 days from proper invoice | Day 15 | FAR 52.232-27 |
| Architect-Engineer | 30 days from proper invoice | Day 31 | FAR 52.232-26 |
| Meat and fish | 7 days from delivery | Day 8 | FAR 52.232-25 |
| Perishable ag, dairy, edible fats | 10 days from delivery/invoice | Day 11 | FAR 52.232-25 |
| Progress payments | 30 days from proper invoice | Day 31 | FAR 52.232-25 |
Frequently Asked Questions
When does the Prompt Payment Act clock start?
The payment clock starts on the date the designated billing office receives a proper invoice [FAR 32.905]. For electronic submissions through WAWF or IPP, the timestamp confirms receipt. For mailed invoices, the clock starts on the delivery date, not the mailing date. An improper invoice resets the clock entirely upon resubmission.
How is the Prompt Payment Act interest rate determined?
The Treasury Department publishes the Current Value of Funds rate semiannually in the Federal Register [31 USC 3902(a)]. The rate applies as simple interest on the unpaid amount from the day after the due date through the payment date. For the first half of 2026, the rate is 4.0%. The additional penalty under FAR 32.907 does not apply for amounts under $1.00.
Does a contractor have to request interest on late payments?
FAR 32.906 requires agencies to pay interest automatically without a contractor request. In practice, many payment offices do not self-identify late payments. Contractors should track invoice due dates against payment receipt dates and submit interest calculations to the payment office when payments arrive late. Interest is a statutory entitlement, not a discretionary request.
What makes a government invoice ‘proper’ under FAR?
FAR 32.905(b) lists required elements: contractor name and address, invoice date and number, contract and order number, description of goods or services, quantities, unit and extended prices, payment terms, designated payment office, and a contact person. Cost-reimbursement invoices must also include cost breakdowns by element with supported indirect rates.
How does the Prompt Payment Act apply to subcontractors?
Prime contractors must pay subcontractors within 7 days of receiving government payment [FAR 52.232-25(c)]. If the prime exceeds 7 days, the subcontractor is owed interest at the same Treasury rate. Subcontractors should request notification of when the prime received government payment to track the 7-day window and document late payments.
Does Prompt Payment Act interest count as contract revenue?
No. Interest penalties are other income, not contract revenue. Record interest in a dedicated income account separate from contract billings. Prompt Payment Act interest does not flow through indirect rate pools, does not affect the incurred cost submission’s claimed costs, and does not change the contract’s funded value or ceiling.
Key Takeaways
- The Prompt Payment Act requires agencies to pay proper invoices within 30 days (14 days for construction) and pay interest automatically when they miss. The interest rate ties to the Treasury’s semiannual Current Value of Funds rate, currently 4.0%. Most small contractors never claim the interest they are owed, leaving $2,000 to $8,000 annually on the table.
- A ‘proper invoice’ under FAR 32.905 requires 10 specific elements. One missing element resets the 30-day clock entirely. The five most common deficiencies: wrong contract number, missing CLIN detail, incorrect indirect rates, absent receiving reports, and TIN mismatches. Fix invoice templates once. Prevent recurring rejections permanently.
- Subcontractors receive a 7-day payment window after the prime receives government payment [FAR 52.232-25(c)]. Track both the government-to-prime payment date and the prime-to-sub payment date. The 7-day window is tighter than most primes observe.
- Record interest receivable the day a payment crosses the 30-day threshold. Code Prompt Payment Act interest to an other-income account, not contract revenue. The interest does not affect indirect rate calculations or the incurred cost submission.
Late government payments are a cost of doing federal business. The Prompt Payment Act shifts part of that cost back to the government through mandatory interest. The contractors who track it collect it. The contractors who ignore it subsidize the agency’s slow payment process with their own working capital. Run the Compliance Readiness Check to evaluate whether your invoicing process captures all required elements. Billing the government and not tracking payment timing? Book a discovery call with our CPA-managed team.
