Chapter 11
Calculating Due Dates
One of the major problems found by auditors regarding Prompt Payment operations is improper calculation of payment due dates. An incorrect due date may result in interest overpayment, underpayment, or nonpayment. Calculating the proper due date for payment of an invoice is difficult to do manually or by computer because many variables are involved, and the seemingly arcane rules are likely to be misinterpreted.
143. The payment system I use automatically calculates the due date for every invoice. Why do I need to know how the due date is calculated?
Computer systems rely on human input of information. It is possible, even likely, that the data input to your system is sometimes faulty. It is a good idea to manually check a batch of invoices from time to time to see if data input is accurate. That’s exactly what auditors do when they come into organizations to audit Prompt Payment performance.
Auditors have found financial systems that were improperly programmed, producing the wrong results for certain invoices. The incorrect programming may have been attributable to an insufficient understanding of the Prompt Payment rules. Reviewing your transactions, especially those that are not routine, might reveal such a shortfall.
Finally, when a vendor calls to question the amount of interest paid, or the nonpayment of interest, it is helpful to understand how the due date should be calculated so that you can explain the situation to the vendor. Simply saying, “The computer calculated the due date and interest” is not particularly satisfying to vendors who believe they have been underpaid.
144. How is the payment due date calculated?
Most vendor payments made by the government fall into the normal Net 30 category. But it is difficult to describe how to determine the payment due date for a Net 30 payment. Perhaps the best way to attack this question is to deal with all the possible exceptions first, then describe how to fix the due date for routine transactions. The exceptions include:
Specified due date
Discounts
Accelerated payments
Certain commodities.
145. How is the payment due date calculated when there is a specified due date?
This situation is the simplest of all. When the contract specifies a particular due date for a payment, that is the payment due date.1 Although this sort of contract provision is unusual, it does appear from time to time. For example, the contract may be for services that will be completed on December 15, and the vendor wants to receive the payment before the end of the calendar year to improve its cash position on the balance sheet. The vendor might be able to negotiate a payment date of December 28. In such a situation, if the contract calls for a December 28 payment date, then that is the due date for the invoice.
146. If the contract calls for a specific payment date, does that mean I must pay on that date, even if I don’t have proof of acceptance by that date?
A due date does not require payment by that date. Agencies must comply with all procedures to make a proper payment. If acceptance has not occurred, then payment should be held up until it does occur. The due date merely means that if payment is not made by that date, interest penalties will accrue.
147. How do I calculate the payment due date if a discount is offered?
This calculation is also easy. Simply add the discount period to the date the vendor put on the invoice.2 For example, if the invoice is dated August 12, and the terms are .5/10 Net 30, which signifies a ten-day discount period, add ten days to August 12 to arrive at a due date of August 22. To properly take this discount, payment would have to be made by August 22.
148. How do I calculate the due date when using accelerated payment methods?
Accelerated payment methods are an exception to the Prompt Payment general rule that says “Don’t pay early.” Accelerated payment is authorized for small payments (single invoices under $2,500), payments to small businesses (as defined in 48 CFR 19.001), and emergency payments related to disasters, release of hazardous substances, and military contingencies. In these cases, the payment may be made as early as possible after the contract, proper invoice, and receipt and acceptance documents have been matched.3
Accelerated payments retain the basic Prompt Payment prohibition against paying late, so the procedure for calculating a due date for routine Net 30 payments (discussed later in this chapter) is followed. Payments made later than the due date are subject to interest penalties.4
149. When are payments under Fast Payment contracts due?
Fast Payment contracts include a contract clause (“Fast Payment Procedure”) found at FAR 13.4. Payments subject to this clause are due within 15 days after the receipt of the invoice. Fast Payment invoices may be made without evidence of delivery or acceptance.5
150. What kinds of commodities have different due dates, and how are those dates calculated?
Three kinds of edible commodities are subject to different rules.6
Meat and meat food products, as defined in the Packers and Stockyard Act of 1921 (7 U.S.C. 182(3)), which includes edible fresh or frozen poultry meat, any perishable poultry meat food product, fresh eggs, any perishable egg product, and fresh or frozen fish, as defined in the Seafood Promotion Act of 1986 (16 U.S.C. 4003(3)). For this class of commodity, payment is to be made by the seventh day after delivery of the items.
Perishable agricultural commodities, as defined in the Perishable Agricultural Commodities Act of 1930 (7 U.S.C. 499a(4)). In this case, the payment due date is the tenth day after delivery of the items, unless otherwise specified in the contract.
Dairy products, as defined in the Dairy Production Stabilization Act of 1983 (7 U.S.C. 4502(e)), including milk, cheese, butter, yogurt, ice cream, edible fats or oils, and others. The payment due date is ten days after the agency receives a proper invoice.
151. If I placed an order with a vendor for meat and dairy products, do I pay seven days after delivery (according to the meat rule) or ten days after receiving a proper invoice (according to the dairy rule)?
This is called a mixed invoice because it contains commodities with different payment periods. You have two choices. Either pay the entire amount on the due date for the commodity with the earliest due date, if that is considered in the best interest of the agency, or make split payments by the due date applicable to each category.7
152. When I place an order for commodities with different payment periods, may I require the vendor to invoice separately for each category of goods?
No. The Prompt Payment rules prohibit agencies from requiring vendors to submit multiple invoices for payment of individual orders.8
153. If the payment date is not specified in the contract, discounts are not being taken, accelerated payment methods are not being used, and what I’m paying for doesn’t fit one of the food categories, how do I calculate the payment due date?
As previously mentioned, most payments made by agencies do not fit one of the listed exceptions, but calculating the due date for these routine invoices is anything but routine.
Such payments are due 30 days after the start of the payment period. The start of the payment period begins on the date of receipt of a proper invoice, except where no invoice is required—for example, for some recurring payments.9 The date of receipt of a proper invoice, however, is not necessarily the date the agency physically receives the invoice. This is where it starts to get complicated.
154. If the date of receipt of a proper invoice is not the date the agency receives the invoice, then what is it?
The Prompt Payment rules define the date of receipt as follows. “An invoice shall be deemed to be received:
(1) On the later of:
(i) For invoices that are mailed, the date a proper invoice is actually received by the designated agency office if the agency annotates the invoice with the date of receipt at the time of receipt. For invoices electronically transmitted, the date a readable transmission is received by the designated agency office, or the next business day if received after normal working hours; or
(ii) The seventh day after the date on which the property is actually delivered or performance of the services is actually completed; unless—
(A) The agency has actually accepted the property or services before the seventh day in which case the acceptance date shall substitute for the seventh day after the delivery date; or
(B) A longer acceptance period is specified in the contract, in which case the date of actual acceptance or the date on which such longer acceptance period ends shall substitute for the seventh day after the delivery date;
(2) On the date placed on the invoice by the contractor, when the agency fails to annotate the invoice with date of receipt of the invoice at the time of receipt (such invoice must be a proper invoice); or
(3) On the date of delivery, when the contract specifies that the delivery ticket may serve as an invoice.”10
155. Could you break down the process of determining the date of receipt?
Here’s how it works. For invoices that are electronically received or that were mailed and date-stamped by the agency, you would compare the date the invoice was received with the earlier of the actual and constructive acceptance dates to determine the date of receipt.
Start by taking the date of delivery of the goods (or completion of services), and we add seven days. This date is the constructive acceptance date. (Constructive acceptance is seven days after delivery unless the contract specifies otherwise.)
Compare the constructive acceptance date with the actual acceptance date, and take the earlier of those two.
Compare this earlier date with the date on which the invoice was date-stamped or electronically received, and take the later of those two dates. That is the date on which “a proper invoice is deemed to have been received.”
If the agency does not date-stamp a mailed invoice at the time of receipt, the vendor’s invoice date is considered the date of receipt of a proper invoice, acceptance notwithstanding.11
Alternatively, the contract may call for the delivery ticket to serve as an invoice. In that case, the date of delivery of the goods is the date of receipt of a proper invoice.12
Figure 11-1 should clarify the process.
Figure 11-1: Determining the Due Date for Net Payment
156. Could you show a few examples of how to determine the date of receipt?
Example 1:
An electronic invoice dated January 10 was received the same day (Figure 11-2). The goods were received January 7, and acceptance of the goods took place on January 12.
Determine the constructive acceptance date by adding seven days to the delivery date of the goods: January 7 + 7 days = January 14.
Compare the constructive acceptance date with the actual acceptance date, and take the earlier date: January 14 vs. January 12 = January 12.
Compare this earlier date (January 12) with the date of receipt of the electronic invoice (January 10), and take the later date: January 12 vs. January 10 = January 12.
Thus January 12 is the “date of receipt of a proper invoice”—and the start of the payment period. Finally, add the payment period of 30 days to January 12, and you get a payment due date of February 11.
Note that a 30-day payment period means 30 calendar days, not a month. This payment is due on February 11, exactly 30 days after January 12 (January has 31 days).
Figure 11-2: Determining Due Date for Net Payment - Example 1
Example 2:
A mailed invoice was dated June 7 (Figure 11-3). The invoice was received and date-stamped on June 9. The goods were received June 10, and acceptance of the goods occurred on June 20.
Create the constructive acceptance date: June 10 + 7 days = June 17.
Take the earlier of the constructive and actual acceptance dates: June 17 vs. June 20 = June 17.
Compare this date with the date on which the invoice was date- stamped, and take the later date: June 17 vs. June 9 = June 17.
For this invoice, the “date of receipt of a proper invoice” is June 17. Add the payment period of 30 days to determine the payment due date, July 17.
Note that in this example the government did not accept the goods within the seven days allowed, so the constructive acceptance date came into play as the controlling date.
Figure 11-3: Determining Due Date for Net Payment - Example 2
Example 3:
A mailed invoice was dated October 3 (Figure 11-4). The invoice was not date-stamped or annotated with the date of receipt. The goods were received on October 2 and were accepted on October 9.
In this example, the dates of constructive or actual acceptance are irrelevant. The government failed in its responsibility to annotate the invoice with the date of receipt at the time of receipt, and the rules state that the vendor’s invoice date is the “date of receipt of a proper invoice.” Therefore, this invoice will have a payment due date of November 2—30 days after October 3. If the designated agency office had properly handled the invoice and date-stamped it, perhaps on October 5, or whenever the office received it, the due date would have been November 8, 30 days after acceptance.
Figure 11-4: Determining Due Date for Net Payment - Example 3
157. In the last example, the vendor would never know that we didn’t date-stamp its invoice. Couldn’t we safely make the due date November 8?
While it is true that the vendor wouldn’t know the agency didn’t date-stamp the invoice, an auditor who picked this invoice as part of an audit sample would know. The law gives us rules to follow, and they should be followed, even if it means paying more interest than the agency would like.
158. What if I receive an improper invoice? How does that affect the due date?
When the designated agency office receives an invoice, it is required to review it as soon as practicable to determine whether it is a proper invoice. (The elements of a proper invoice are defined in Chapters 7 and 10. When an invoice is determined to be improper, the agency must return the invoice to the vendor as soon as possible, but not later than seven days after receipt, identifying all defects and requesting that the vendor submit a corrected invoice that is clearly marked as a corrected invoice. The payment period does not begin until a proper invoice has been received. Receiving an improper invoice does not start the Prompt Payment clock.
Note that the time limits to return a defective invoice for certain commodities are shorter than the seven days allowed for general goods and services. For meat, fish, and seafood products, the time limit is three days. For perishable agricultural products and dairy products, the time limit is five days.13
159. What if the agency takes more than seven days to return a defective invoice?
The rules say that the payment period will be reduced by the number of days the agency held the defective invoice in excess of seven days.14 Let’s say an agency returns a defective invoice 12 days after receipt. The payment period would still start upon receipt of a corrected, proper invoice from the vendor. But the 30-day payment period would be reduced by five days (12-7), so the due date would be 25 days after receipt of a proper invoice.
160. Let’s say we return an invoice after four days, and when we get the corrected invoice, we realize there were defects we did not identify the first time around. Do we get another seven days to return this defective invoice?
No. The agency is to identify all defects within seven days. In this example, the agency would have three days left to return the second invoice.
161. Can you define exactly when payment is deemed to have been made?
Payment occurs on the date of the check, or on the settlement date for EFT payments, which is the date on which the funds are available at the vendor’s financial institution.15
162. If the due date I calculate for discounts, certain commodities, or a net payment falls on a weekend or federal holiday, is it permissible to pay on the next business day?
In every instance, it is permissible to pay on the next business day when the calculated due date falls on a weekend or federal holiday. For discounts, paying on the next business day represents a discount properly taken. For all other due dates, payment may be made on the next business day without incurring interest penalties.16
163. My financial system doesn’t recognize weekends or federal holidays. If the due date falls on a weekend or holiday, and we pay the next business day, the system will automatically calculate an interest payment. Therefore, we routinely adjust the due date to the next business day. Is this a good practice?
It is not a good practice. Several organizations have been cited by auditors for doing just that.
Although you are given a grace period that allows you to make payment on the next business day, the due date does not change. Assume that a payment is due on Saturday, and a Monday holiday follows the weekend. You may pay on Tuesday without penalty.
But what if you don’t pay until Wednesday? If the due date is moved to Tuesday, one day of interest would be due. But the due date is actually Saturday, so four days of interest is due if the payment is made on Wednesday. Adjusting the due date in the system will result in an underpayment of interest whenever an invoice is paid late and the due date fell on a weekend or holiday.
Either you must modify your computer software to recognize weekends and holidays so that the grace period is considered or you will need to manually override the automatic interest generated by the system. You should not adjust the due dates.
164. There are a lot of variables to consider when calculating payment due dates. Can you provide additional examples I can calculate to ensure I fully understand the concepts?
Appendix 2, Payment Due Dates Self-Quiz, contains numerous examples you can calculate. The solutions appear in Appendix 4.
NOTES
1. Office of Management and Budget, § 1315.4(g)(1).
2. Ibid., § 1315.7(d).
3. Ibid., §§ 1315.5(a), (b), and (c).
4. Ibid.
5. Ibid., § 1315.6(a).
6. Ibid., § 1315.4(g)(2).
7. Ibid., § 1315.4(g)(3).
8. Ibid., § 1315.4(g)(3)(iv).
9. Ibid., § 1315.4(f).
10. Ibid., § 1315.4(b).
11. Ibid., § 1315.4(b)(2).
12. Ibid., § 1315.4(b)(3).
13. Ibid., § 1315.4(g)(4).
14. Ibid.
15. Ibid., §§ 1315.2(z) and (ee).
16. Ibid., § 1315.4(h).