Prompt Payment Act: Deadlines, Penalty Calculation, and Collection

Federal construction contractors who are paid late are entitled to interest penalties under the Prompt Payment Act, and for construction contracts those penalties run on a tighter schedule than most other federal work. Interest accrues automatically from the day after payment is due until the day the agency pays, at a rate the Treasury resets every six months. For January through June 2026, that rate is 4⅛% per year, and it compounds monthly on balances that stay unpaid.1Federal Register. Prompt Payment Interest Rate; Contract Disputes Act2Office of the Law Revision Counsel. 31 USC 3902 – Interest Penalties

The rules sit in 31 U.S.C. Chapter 39 and 5 CFR Part 1315, with the operative contract clause at FAR 52.232-27. A temporary lack of appropriated funds does not excuse the agency’s obligation to pay the penalty.3eCFR. 5 CFR Part 1315 – Prompt Payment

The Deadlines That Start the Clock

Construction contracts have their own payment windows, and they are shorter than the 30-day baseline that applies to most federal procurements.

The 14-day progress payment window is the one that catches people. A solicitation can extend it if the government needs longer to inspect the work, but the longer period has to be stated up front.

Subcontractor Pay-Through

Prime contractors on federal construction projects must pay their subcontractors within 7 days of receiving payment from the government. The FAR clause requires primes to include that 7-day flow-down in every subcontract, along with an interest penalty provision, so subcontractors carry the same right to interest against the prime that the prime holds against the government.4Acquisition.gov. 52.232-27 Prompt Payment for Construction Contracts When a prime submits its next progress payment request, it must certify that subcontractors and suppliers were paid from prior draws and that timely payments will follow from the current one.6Office of the Law Revision Counsel. 31 USC 3903 – Regulations

How the Penalty Is Calculated

The Bureau of the Fiscal Service publishes two formulas. For short delays, simple daily interest applies:

P × (r ÷ 360) × d

P is the invoice amount, r is the current Prompt Payment rate, and d is the number of days late.7Bureau of the Fiscal Service. Simple Daily Interest

Once a payment stays late longer than 30 days, interest compounds monthly. Unpaid interest at the end of a 30-day period is added to principal, and subsequent interest runs on the combined amount.8eCFR. 5 CFR Part 1315 – Prompt Payment – Section: 1315.10 The compounding formula is:

P × (1 + r/12)n × (1 + (r/360 × d)) − P

Here n is the number of full months late and d is the remaining days.9Bureau of the Fiscal Service. Monthly Compounding Interest Calculator A $500,000 invoice at 4.125% that is 45 days late would use one full month of compounding plus 15 additional days of simple interest on the compounded balance.

Accrual on any single late payment stops at one year, or when the contractor files a formal claim for the penalties under the Contract Disputes Act, whichever comes first.8eCFR. 5 CFR Part 1315 – Prompt Payment – Section: 1315.10 Letting a dispute sit past that point does not grow the penalty.

What Makes an Invoice “Proper”

The interest clock only starts when the agency receives a proper invoice. Under 5 CFR 1315.9, the invoice must include the vendor name, invoice date, contract number or other delivery authorization, vendor invoice number, description and price and quantity of the work, shipping and payment terms unless the contract already sets them, Taxpayer Identification Number, banking information for electronic funds transfer, a contact name and phone number where practicable, and any other documentation the contract specifically requires.10eCFR. 5 CFR 1315.9 – Required Documentation

A missing element gives the billing office grounds to reject the invoice. But the office cannot sit on a defective invoice. It must return it within 7 days of receipt with an explanation of what is wrong, and if it misses that 7-day rejection window, the payment due date is adjusted in the contractor’s favor.11Acquisition.gov. FAR Subpart 32.9 – Prompt Payment

When the Penalty Does Not Apply

Not every late payment triggers interest. The most important carve-out is a genuine dispute over the amount owed or the contractor’s compliance with contract requirements. If the agency withholds payment because it believes the work is defective or incomplete, interest does not accrue while that dispute is worked out.12Office of the Law Revision Counsel. 31 USC 3901 – Definitions and Application The Act is aimed at slow processing, not at forcing payment for work the government disputes.

Contract financing payments, such as advance payments and progress payments based on cost, are outside the interest rules, as are contracts where a different governmental authority (utility tariffs, for example) already sets payment terms and late fees.11Acquisition.gov. FAR Subpart 32.9 – Prompt Payment

Emergency procurements under the Stafford Act, military contingency operations, and hazardous substance releases are exempt from the standard 14- and 30-day schedules, so an agency can pay as soon as the paperwork is matched. Vendors on those contracts still earn interest if payment lands after the actual due date; the exemption bends the timing, not the penalty.13eCFR. 5 CFR Part 1315 – Prompt Payment – Section: 1315.1

How to Actually Collect

The agency is supposed to add the interest to the late payment on its own, without the contractor filing a request. In practice this happens unevenly, so tracking your own numbers matters.

The real leverage is the additional penalty available when the agency pays the invoice but leaves the interest out. If the government owes at least $1 in interest and fails to pay it within 10 days of paying the invoice, the contractor can demand an additional penalty on top of the original interest. The written demand must be postmarked within 40 days of the date the invoice was paid.14Acquisition.gov. 52.232-25 Prompt Payment Miss the 40-day window and the additional penalty is gone.

The demand should identify the invoice, request the overdue interest plus the additional penalty, and attach a copy of the invoice with confirmation that the principal was received. Certified mail or an electronic procurement portal produces the record you will need if the matter escalates into a formal claim.

The Right Cannot Be Waived

Contract language purporting to waive prompt payment interest on a federal project has no legal effect. The regulations state that interest penalties must be paid regardless of whether the vendor requested them.8eCFR. 5 CFR Part 1315 – Prompt Payment – Section: 1315.10 This is where federal rules part company with private construction contracts, where pay-if-paid and interest waiver clauses are ordinary negotiating items.

Projects Outside the Federal Act

State-funded, municipal, and private construction projects fall outside the federal Prompt Payment Act entirely. Most states have their own prompt payment statutes with different deadlines and often significantly higher interest rates, and retainage caps and release timelines vary by jurisdiction. On private state-law contracts, prompt payment rights are often negotiable, meaning a signed subcontract can weaken what the statute would otherwise provide. If your project is not federal, the rules in this article are not the ones that govern your payment; check the statute of the state where the work sits.