GovernmentExecutive.com

The failure of the Defense Department to pay its small business contractors on time has affected the day-to-day operations of some companies, according to a new report from the Government Accountability Office.

In reviewing fiscal 2004 data from nine of the Pentagon's 20 vendor payment facilities, GAO found that 14.5 percent of small business invoices were paid late, while overall only 10 percent of invoices were tardy.

Defense officials told GAO that the disparity was likely due to the department's cash management practices, which favor paying larger vendors first.

Pentagon officials reported significant improvements in reducing late payments through the commitment of additional resources, but underlying weakness in the system have yet to be resolved, the report (GAO-06-358) said.

GAO recommended that Defense beef up implementation of its Web-based tool to improve the exchange of payment data and documents, which is known as the Wide Area Work Flow. For instance, the system could be used to flag small business contractors and process payment documentation electronically, the report stated.

Most of the Pentagon's current payment process is paper-based, resulting in redundant data entry, missing documents and, ultimately, payment delays, GAO said.

But the WAWF initiative lacks performance metrics and Defense officials have not established a clear strategy to ensure that the system will be used effectively, the report stated.

Of 17 small businesses interviewed by GAO, 14 said late payments forced them to obtain a line of credit or use personal resources to finance day-to-day operations. Eleven of those 14 said the interest on the credit was greater than the rate used by the Pentagon to calculate interest for late payments.

Three of the small business contractors said their cash flow problem was so severe that they were worried about their ability to stay in business.

Under the Prompt Payment Act, the Defense Department is required to pay interest to contractors for untimely payments, but 10 contractors told GAO that they never received interest on late payments. In one case, after GAO asked Defense officials to research a contractor's claim for late payment interest, the department found it owed the contractor about $1,000 in interest.

Paul Brinkley, co-director of the Defense Department's Business Transformation Agency, concurred with GAO's recommendations and said the transfer of the WAWF system to his agency has provided a new opportunity to address the strategic direction of the system.

COMMENTS

• This is absolutely true and the DoD and its components have no plan to fix the problem. The delay in payment is because the people in the finance function are generally incompetent and unable to determine what policy is best for the nation! There is no real reason that payments are delayed. The DoD can retrieve payments made in error or excessive payments but they do not do that because it would take a reasonable financial control system that does not exist. Reasonable controls do not exist because the financial personnel do not think it is their job to establish them and most of the people have no idea what that would involve! I know several small businesses that will not bid on government contracts but look to serve as a subcontractor to big contractors. This is totally against the American principles of small business and creation of jobs. DoD people do not want to deal with several contracts because that involves more work on their part and better control systems than exist today. No one in the services cares about payments because payments are made by DFAS and the services believe that DFAS should handle the problem. However, DFAS simply should be a contract service to the services. But DFAS does not act that way and DFAS tries to set policy and procedures that the services should be setting. In line with government mentality, DFAS thinks every service should do things the same way and that they will not implement different processes and procedures for each service. If that is to be then DFAS should be held responsible and not the services. DoD is not interested in daily operating problems in finance and the system reflects this attitude of neglect from the highest levels of the organization. Taxpayer Posted May 23, 2006 7:16 AM