Prompt Payment Act & Contract Disputes Act Interest Rate Decreased to 2.125%, Effective 1/1/20
January 2, 2020
The Treasury Department has announced that the Prompt Payment Act (“PPA”) and Contract Disputes Act (“CDA”) interest rate is decreasing to 2.125% per annum for the first half of 2020 – i.e., January 1, 2020 through June 30, 2020. 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 last half of 2019 was set at 2-5/8 percent (2.625%), so this new rate reflects a one-half percent (0.50%) interest rate decrease. Taken together with the one percent (1.0%) decrease for the last half of 2019, this brings the rate down a total of one and one-half percent (1.5%) since the 3.625% rate established one year ago for the first half of 2019. This decrease reduces the rate to its lowest level since the first half of 2016.
In this regard, Prompt Payment Act interest is supposed to be added automatically to any late Government payments, regardless as to whether the affected business concern requests payment of interest. The interest amount due is calculated based upon the length of the period starting with the day after the payment was due, continuing through to the date payment actually is made, using a standard 360-day year. Given the general use of Electronic Funds Transfers (ETFs), providing same day electronic payment, it is possible for the Government to easily calculate the amount due with precision at the time of payment. Contractors should carefully review any late payments received to ensure that the correct applicable interest has been included. Please note that, if the period overlaps the last half of 2019, then the interest for the days in such six-month period should be calculated using the 2.625% rate then in effect, and only the days since January 1, 2020 should be calculated at the newly-decreased first half of 2020 2.125% 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 and bring such to the attention of the cognizant payments office and the responsible Contracting Officer.
In contrast to Prompt Payment Act interest, which 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 starting of the clock on interest running provides a further reason why contractors should quickly prepare and submit any claims they may have for recoverable increased costs.
For a list of the established interest rates for all periods since January 1, 1980, see https://www.fiscal.treasury.gov/fsservices/gov/pmt/promptPayment/rates.htm. The Treasury Department provides a Calculator that can be used to calculate the interest payable on claims and late payments, which is accessible here.
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