The Prompt Payment Rule & Federal Agency Commercial Card Programs
Finalized in 1999, the Prompt Payment rule was designed to ensure that federal agencies pay vendors in a timely manner. The rule, enacted due to the increased use of electronic payments in the government and the private sector, assesses interest charges against agencies that are late on their vendor payments. The rule also provides federal agencies with guidance on when to make payments for their government commercial purchasing card.
By comparing the early payment rebate escalators offered by commercial card program providers with the government’s Current Value of Funds (CVF) rate, federal agencies can maximize their theoretical savings. The CVF rate is the simple interest rate charged on overdue federal government receivables. In summary, if the early payment rebate escalator offered by the card provider is greater than the cost of funds based on the CVF rate, agencies should pay as early as possible. If the rebate escalator is less than the cost of funds, agencies should wait until the payment due date to make the payment.
Suppose a provider offers 0.015% (i.e., 1.5 basis points) more in rebate on spend per day of earlier payment, and the CVF rate is 6% – meaning the government earns 1.67 basis points [(6% / 360 days in a year) * 100] for each day it delays paying the card provider. In this scenario, and according to the Prompt Payment rule, the agency should wait until the payment due date to pay in order to allow the government to continue to earn higher interest on its funds. Assuming $10,000 in debt owed and a maximum early pay rebate offering of 1.06% from the provider, a federal agency could save $61 by waiting until the last possible day to pay, as opposed to just $56 by paying early. This is further illustrated in Figure 1 below.
Agencies have access to an online rebate spreadsheet that automatically calculates the savings to help determine when they should pay. Savings can be calculated by entering the amount of money owed to the card provider, the maximum rebate, and the daily rebate offered by the provider into the spreadsheet. Providers who want to be paid faster have the option to increase their rebate escalator based on average payment days to just above the CVF rate, which is calculated quarterly and is only adjusted if it changes by two percentage points from the prior quarter.
Payment date analysis can be beneficial to both government agencies and card providers. Government agencies can maximize savings by paying at the right time; and providers who want to be paid faster can impact payment timings via days payment rebate escalators.
For more information, please contact Brian Rutland, Analyst specializing in commercial payments, firstname.lastname@example.org
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