What Are the Interest Penalties Under 31 USC 3902?

The Prompt Payment Act, codified under 31 U.S.C. 3902, is a federal law requiring government agencies to make timely payments to businesses for goods or services. When an agency fails to meet its payment deadlines, the law mandates an interest penalty to compensate the contractor for the delay. The Act’s provisions automatically apply to federal government contracts, establishing a framework for when payments are due and the consequences of tardiness.

Conditions for Interest Entitlement

A business’s right to an interest penalty hinges on the submission of a “proper invoice.” For an invoice to be considered proper, it must include:

• The contractor’s name and address
• The invoice date and number
• The contract number or other authorization
• A description and quantity of the goods or services provided
• The amount payable and payment terms
• The name, title, and phone number of a person to notify about a defective invoice
• Electronic Funds Transfer (EFT) banking information if required by the agency

The standard payment term for most government contracts is 30 days. This period begins on the later of two dates: the date the designated agency office receives a proper invoice, or the date of formal acceptance of the goods or services. If the agency fails to mark an invoice with the date of receipt, the payment period starts on the date the invoice is dated.

Acceptance is a formal action by the government signifying that the delivered items conform to the contract. If the contract does not specify an acceptance period, it is constructively deemed to occur on the 7th day after the contractor delivers the supplies or performs the services. However, if actual acceptance occurs within that 7-day period, that date is used to determine the payment due date.

Calculating the Interest Penalty

The interest penalty is calculated using a simple interest formula, which is the principal amount owed multiplied by the applicable interest rate and the time period of the delay. The time component is the number of days the payment is late, beginning on the day after the payment due date and ending on the date the payment is made.

The interest rate is set by the Secretary of the Treasury and is not a commercial or market rate. This rate is determined twice a year and published in the Federal Register. For example, the rate for January 1, 2025, to June 30, 2025, was set at 4.625%. Agencies must use the rate that is in effect when the obligation to pay a late penalty is incurred.

To illustrate, consider a business that submitted a proper invoice for $10,000. The payment was due on May 1st but was not paid until May 31st, making it 30 days late. Assuming the Treasury’s interest rate is 4.625%, the calculation would be: $10,000 (Principal) x 0.04625 (Rate) x (30/365) (Time). This results in an interest penalty of approximately $37.99.

The Payment and Claim Procedure

Federal agencies are required to automatically include any owed interest penalty with the late principal payment. A business does not need to submit a separate invoice or claim to receive this interest.

If an agency makes a late payment but fails to include the interest penalty, the contractor may be entitled to an additional penalty. To claim this, the contractor must submit a written demand to the agency. This demand must be submitted no later than 40 days after the date on which the principal payment was made.