Pentagon late payments hurt small contractors

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.