September 13, 1982
Subject: Office of Management and Budget Circular A-125, "Prompt Payment"
The Office of Management and Budget (OMB) has issued Circular A-125, "Prompt Payment," as the policy guidelines on the implementation of the Prompt Payment Act. Refer to copies of the Act and implementing Circular enclosed.
The Prompt Payment Act is intended to correct undue delays in the normal payment of invoices submitted for reimbursement of expenditures under Federal contracts. Provisions of the Act and Circular require Federal agencies to pay interest penalties for late payments made under contracts issued on or after October 1, 1982, that are not advance funded. Grants are not included under the Act.
The Prompt Payment Act and Circular A-125 affect the University as a not-for-profit entity operating as a contractor (one of the definitions of a "business concern.") Although the provisions of the Act and Circular intend to cover cost reimbursement R& D procurements with educational institutions, the concepts in the Circular' s provisions appear to be modeled after fixed-price supply contracts with small business concerns. For example, vouchers may be paid after the product delivered is inspected and accepted and a receiving report is reviewed in the Federal paying office. We anticipate likely problems in receiving prompt payment under cost reimbursement research contracts where, by definition, there are no inspection and acceptance, or receiving reports. If these and nonapplicable requirements are not eliminated or directly addressed in contract provisions, Federal agencies may find this reason enough to contest or, in effect, attempt to nullify the University' s eligibility for coverage or receipt of the benefit of prompt payments under the Act. In order to assert the University' s eligibility and/or counter any agency resistance, campuses rest be prepared to transpose or adapt the "fixed price supply" eligibility concepts in Section 6 of the Circular into "cost-reimbursement R& D" terminology. (Refer to Guidance below).
It is our hope that instances where Circular A-125 would apply to University contracts will be few, as campuses continue to make more advance funding
In brief, in order for the University to be eligible for receipt of interest payments prescribed by the Act, certain prescribed payment standards set forth in the Circular must be met. The contract must contain certain provisions, one of which is the payment due date(s) and another is a stated inspection period following delivery, where necessary, for Federal acceptance of property or services, (see Section 6.a of the Circular). Another critical requirement is the need to meet the prescribed standard for a proper invoice, (see Section 6.b. of the Circular). In addition, agencies are responsible for preparing timely receiving reports, in order to document Government acceptance of contractor services, prior to payment.
When it becomes necessary to apply the provisions of Circular A-125 to contracts because the contract is ineligible for advance payment, the following guidance applies:
1. Payment provisions which must be included in the contract.
There are requirements for inclusion in the contract "payment due date(s)" and/or "separate payment dates for partial payment for partial execution or deliveries". Those requirements should be satisfied through negotiation by Contract and Grant Officers of the customary payment language for cost-reimbursement contracts requiring payment within thirty days after receipt of the University's invoice. We point this out as a point to specifically address during contract negotiation because we are not confident that the current Federal payment provisions now meet the requirements of A-125.
2. Inspection Period
The inclusion in the contract of a stated inspection period for Federal acceptance of contract services should be construed to apply to the submission and acceptance of interim and final technical reports. (See the suggested contract language under 3. below.)
3. Receiving Reports
Section 6.c. of the Circular prescribes the standards and procedures for preparation by agencies of a receiving report necessary for Federal acceptance of contract services. To adapt this and other fixed-price supply procurement concepts to the accustomed cost-reimbursement R& D practice, we suggest that Contract and Grant Officers negotiate the following or similar language in the payment provisions of the contract:
It is mutually agreed that the provisions of OMB Circular A-125, "Prompt Payment" apply to this contract. Reference to requirements in the Circular for receiving reports, an inspection period, and acceptance shall be construed for the purposes of this contract, as Government receipt of contractor' s interim progress report(s) and the final technical report deliverable under this contract, pursuant to paragraph _____. Receipt of such reports shall be evidence of progress made and shall be the basis for making a progress or final payment.
4. Proper Invoice
The standards prescribed for preparation of a proper invoice should pose no difficulty, since those standards are generally observed in the course of following the University' s normal invoicing procedures. The specific requirement for inclusion of the "description, price, and quantity of property and services actually delivered as rendered", in cost reimbursement research contracts should equate to the University' s normal practice of itemizing on each invoice, expenditures by major cost category of expense. To make this equivalent certain of acceptance by Federal agencies, include as an additional paragraph the following language (or equivalent) under the contract payment provision:
Reference to "description, price, and quantity of property and services actually delivered as rendered", shall be satisfied through Contractor' s submission of public vouchers which itemize reimbursable expenditures by major cost categories of expense.
5. Timeliness of Interim Progress and Final Technical Reports
A critical element in the University's eligibility to receive interest penalty income from Federal agencies is the need for timely submission of interim progress and final technical reports. Late submission of those reports may cause undue delay in the receipt of invoice payment and release of the 10% retention required under most cost reimbursement contracts.
The OMB guidelines instruct agencies to pay as close to the due date as possible, to avoid early payments as well as late payments. Interest penalties are to be paid by Federal agencies automatically. (Note the limitations on the accrual of interest payments in the last paragraph of section 9 of the Circular). When interest penalty income from Federal agencies is received by campuses, Accounting Officers should credit this income to a campus Other Sources Income Account to be used at the discretion of the Chancellor.
6. Advance Payment Provisions vs. A-125
The measure of benefits the University-stands to derive from Circular A-125 is unknown. That should be reason enough to provide increased incentives for C& G Officers to be persistent in negotiation of favorable advance payment provisions for all contracts, rather than settle for the limited benefits of Circular A-125. Moreover, when necessary, we advise using as a negotiating ploy with recalcitrant Federal agencies the implied "threat" of Circular A-125 (which we believe most Federal agencies will view unfavorably) in order to secure for the University advantageous advance payment provisions.
Please let us know of problems which may arise, especially if they appear to be more than isolated occurrences.
Refer: Willie Archie
Terms and Conditions of Contracts
Donald L. Alter
Assistant Chief Accountant
David F. Mears
University Contracts and Grants Coordinator
Enclosures (2) [not scanned]