Page 14 - Final_AS-REP Citi 2012 v5

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S ec t i on I I : T ran s portat i on S p end Managemen t Cha l l enge s i n t he Gov ernmen t S ec tor
Transportation Management in the Federal Government
| Best Practices Report: 2012
12
PROMP T PAYMEN T I N T ERE S T
The Prompt Payment rule ensures federal agencies pay vendors in
a timely manner. If not, interest penalties may be assessed for late
payments. This regulation dictates that the payment period should
begin when a proper invoice is received or seven days after the shipment
is executed. Agencies have seven days to correct an improper invoice.
Proper invoices are to be paid within 30 days, unless other acceptable
payment terms are noted in the contract.
There are two main concerns with Prompt Payment that lead most
to think it’s not a sound or competitive process: the interest rate and
the fact that it’s self-assessed.
The Prompt Payment interest rate, which was most recently updated
on July 1, 2012, stands at 1.750 percent. This is well below a carrier’s
weighted average cost of capital (WACC), which frequently ranges from
7 to 12 percent while many smaller carriers are significantly above that
range. Combine that with thin margins estimated at 4 to 5 percent for
U.S.-based trucking companies and it’s easy to see the emerging discon-
nect. Carriers feel the interest rate isn’t compensatory and fear it can
cause significant harm if an agency frequently pays beyond terms. This
additional cost is inevitably factored in the higher rates the government
pays for transportation services.
Second, under the Prompt Payment rule, the payment period does not
begin until the date the invoice is received, audited and approved by the
designated agency office, giving agencies leeway in case the invoice is
delivered incorrectly. However, this reasoning has been mentioned by at
least one carrier as a possible way for agencies to avoid assessing interest
at the appropriate start date. The agencies are supposed to self-assess but
the carriers typically have to request the interest payment. In an envi-
ronment where carriers are hungry for liquidity these small percentages
add up fast. A delayed payment can quickly erode the carrier’s margin
and over the course of just a few months change that profit to a loss
for the carrier.