Department of the Treasury

Extend payment terms beyond 30 days to save interest

In private industry, powerful customers sometimes unilaterally impose extended payment terms to improve their cash position, often to 60 or even 90 days. Currently, the Federal Acquisition Regulation (FAR), as well as the Prompt Payment Act of 1998, mandate paying contractors in 30 days. This limits our ability to better manage cash by negotiating extended terms. Given the enormous daily volume of Federal payments to contractors, an extension in payment terms of even a day would have a large impact. The interest cost associated with that money would be a real savings (even a day’s worth of interest on the payables volume of the federal government would seem to be tens of millions of dollars), and the extension itself would be a one time budgetary savings equal to the value of the extension. This seems like a shell game, but the accounting is real, and the impact is real, that is why companies do it. A large unilateral extension to 60 or 90 days could have a negative impact on the contractor base, especially smaller businesses, which in some cases need the immediate cash flow to sustain operations. A minimal extension of 1-10 days, however, or a phased extension where a day or two gets added each year, would seem relatively benign. This could be viewed as a positive sign of “running the government like a business.” In addition to, or in lieu of, the unilateral extension described, the law and policy should definitely be revised to allow government procurement professionals to negotiate longer payment terms during the acquisition process.

Tags

Voting

1 like
Active
Idea No. 13770