DOD Payments to Small Business
Implementation and Effective Utilization of Electronic Invoicing Could Further Reduce Late Payments Gao ID: GAO-06-358 May 19, 2006The National Defense Authorization Act for Fiscal Year 2004 requires GAO to report on the timeliness of Department of Defense (DOD) payments made to small businesses. GAO's report focuses on (1) whether, at DOD payment centers for which data were available, small business invoices were more likely to be paid late; (2) whether systemic weaknesses in DOD payment processes result in late payments to contractors--including small business contractors; and (3) the impact of late payments on small businesses. To calculate timeliness rates, GAO used the data DOD was able to provide for 9 of its 20 vendor payment locations as well as its one contract pay location. GAO used a case study approach for the third objective because data limitations did not permit the use of statistically reliable sampling techniques for assessing the experiences of DOD small business contractors as a whole. Case study contractors were selected because they experienced a high frequency of late payments and may not be reflective of all small businesses.
DOD paid small business invoices late more often than all invoices paid at the nine locations for which data were available. Ten percent of all invoices at these locations were paid late--compared with 14.5 percent of small business invoices. According to DOD officials, the disparity may have occurred because DOD's cash management and prioritization practices tend to favor paying larger vendors first. Although DOD has reported significant improvements in its metrics related to late payments, these improvements have come through dedicating additional resources to the problem and not through addressing the underlying weaknesses that cause late payments. Resolving the payment timing disparity will involve improving the overall timeliness of DOD payments to contractors regardless of size. Systemic weaknesses in DOD's payment processes result in late payments to contractors, including small business contractors. DOD continues to process mostly paper payment documents, which can often result in redundant data entry; misplaced documents; higher than necessary transaction processing fees; and ultimately, payment delays. To its credit, DOD has invested in a Web-based tool, WAWF, that could facilitate the electronic exchange of payment data and documents, but the initiative lacks the requisite management focus and strategic direction needed to be successful. For example, the WAWF program lacks performance metrics and does not have a clear strategy for ensuring that WAWF will be effectively utilized. Finally, in many cases, the military services and defense agencies are not required to acknowledge receipt and acceptance electronically. Instead, they submit paper documents that must be matched with contractor invoices to complete the payment transaction, which can lead to payment delays. Disruptions of cash flow caused by late payments--depending on the extent and duration--can significantly affect the day-to-day operations of small businesses. To illustrate, GAO interviewed 17 small business owners that were paid late multiple times during fiscal year 2004. They provided the following perspectives: fourteen of the 17 said that because DOD paid late, they had to obtain a line of credit or use personal resources to finance day-to-day operations; eleven of the 14 that relied on a line of credit said that they paid 2 to 4 percent more for the credit than the rate used by DOD to calculate late payment interest; in 3 cases, contractors said that their cash flow problems were so significant that they were concerned about their ability to stay in operation. Although the Prompt Payment Act requires interest payments when certain bills are paid late, 10 contractors stated that they often did not receive interest on late payments. GAO could not substantiate these statements because DOD was unable to provide the information needed to do so. According to one contractor, after GAO asked DOD to research his claim, DOD determined that the contractor was entitled to interest of about $1,000.
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
May 2006:
DOD Payments To Small Businesses:
Implementation and Effective Utilization of Electronic Invoicing Could
Further Reduce Late Payments:
GAO-06-358:
GAO Highlights:
Highlights of GAO-06-358, a report to congressional committees.
Why GAO Did This Study:
The National Defense Authorization Act for Fiscal Year 2004 requires
GAO to report on the timeliness of Department of Defense (DOD) payments
made to small businesses. GAO‘s report focuses on (1) whether, at DOD
payment centers for which data were available, small business invoices
were more likely to be paid late; (2) whether systemic weaknesses in
DOD payment processes result in late payments to contractors”including
small business contractors; and (3) the impact of late payments on
small businesses. To calculate timeliness rates, GAO used the data DOD
was able to provide for 9 of its 20 vendor payment locations as well as
its one contract pay location. GAO used a case study approach for the
third objective because data limitations did not permit the use of
statistically reliable sampling techniques for assessing the
experiences of DOD small business contractors as a whole. Case study
contractors were selected because they experienced a high frequency of
late payments and may not be reflective of all small businesses.
What GAO Found:
DOD paid small business invoices late more often than all invoices paid
at the nine locations for which data were available. Ten percent of all
invoices at these locations were paid late”compared with 14.5 percent
of small business invoices. According to DOD officials, the disparity
may have occurred because DOD‘s cash management and prioritization
practices tend to favor paying larger vendors first. Although DOD has
reported significant improvements in its metrics related to late
payments, these improvements have come through dedicating additional
resources to the problem and not through addressing the underlying
weaknesses that cause late payments. Resolving the payment timing
disparity will involve improving the overall timeliness of DOD payments
to contractors regardless of size.
Systemic weaknesses in DOD‘s payment processes result in late payments
to contractors, including small business contractors. DOD continues to
process mostly paper payment documents, which can often result in
redundant data entry; misplaced documents; higher than necessary
transaction processing fees; and ultimately, payment delays. To its
credit, DOD has invested in a Web-based tool, WAWF, that could
facilitate the electronic exchange of payment data and documents, but
the initiative lacks the requisite management focus and strategic
direction needed to be successful. For example, the WAWF program lacks
performance metrics and does not have a clear strategy for ensuring
that WAWF will be effectively utilized. Finally, in many cases, the
military services and defense agencies are not required to acknowledge
receipt and acceptance electronically. Instead, they submit paper
documents that must be matched with contractor invoices to complete the
payment transaction, which can lead to payment delays.
Disruptions of cash flow caused by late payments”depending on the
extent and duration”can significantly affect the day-to-day operations
of small businesses. To illustrate, GAO interviewed 17 small business
owners that were paid late multiple times during fiscal year 2004. They
provided the following perspectives:
* Fourteen of the 17 said that because DOD paid late, they had to
obtain a line of credit or use personal resources to finance day-to-day
operations.
* Eleven of the 14 that relied on a line of credit said that they paid
2 to 4 percent more for the credit than the rate used by DOD to
calculate late payment interest.
* In 3 cases, contractors said that their cash flow problems were so
significant that they were concerned about their ability to stay in
operation.
Although the Prompt Payment Act requires interest payments when certain
bills are paid late, 10 contractors stated that they often did not
receive interest on late payments. GAO could not substantiate these
statements because DOD was unable to provide the information needed to
do so. According to one contractor, after GAO asked DOD to research his
claim, DOD determined that the contractor was entitled to interest of
about $1,000.
What GAO Recommends:
GAO makes five recommendations to strengthen the implementation of a
Web-based tool known as Wide Area Work Flow (WAWF), which could speed
the processing of payment documents and improve the timeliness of DOD
payments, including payments to small businesses. DOD concurred with
GAO‘s recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-358].
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact McCoy Williams at (202) 512-9095 or
williamsm1@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Small Business Invoices Paid Late More Often Than All Invoices Paid at
Vendor Pay Locations:
Long-standing Weaknesses in DOD's Vendor Payment Processes Result in
Late Payments to Contractors, Including Small Business Contractors:
Late Payments May Create Financial Hardship for Some Small Business
Contractors:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Comments from the Department of Defense:
Appendix II: Objectives, Scope, and Methodology:
Tables:
Table 1: Percentage of Invoices Paid Late by DFAS Location and Small
versus All Business for Fiscal Year 2004:
Table 2: Case Study Examples of Small Business Invoices Paid Late by
DFAS:
Figure:
Figure 1: Overdue Invoices on Hand as a Percentage of Total Invoices
Processed for DOD's Vendor Pay and Contract Pay Business Lines for
Fiscal Years 2001 through 2005:
Abbreviations:
BTA: Business Transformation Agency:
BUMED: Navy Bureau of Medicine and Surgery:
CCR: Central Contractor Registration database:
CVFR: current value of funds rate:
DCMA: Defense Contract Management Agency:
DFARS: Defense Federal Acquisition Regulation Supplement:
DFAS: Defense Finance and Accounting Service:
DISA: Defense Information Systems Agency:
DOD: Department of Defense:
EDI: electronic data interchange:
NFIB: National Federation of Independent Businesses:
OSBP: Office of Small Business Programs:
SBA: Small Business Administration:
WAWF: Wide Area Work Flow:
United States Government Accountability Office:
Washington, DC 20548:
May 19, 2006:
Congressional Committees:
Small businesses are an important player in the U.S. economy--employing
half of all private sector employees and generating 60 to 80 percent of
net new jobs annually over the past decade. As such, the federal
government's long-standing policy has been to maximize federal
procurement opportunities for small businesses.[Footnote 1] To ensure
that small businesses receive a share of federal procurement contract
dollars, the Congress has mandated that the Small Business
Administration (SBA) negotiate annual procurement goals with each
federal agency. In fiscal year 2004, the Department of Defense (DOD)
reported meeting its procurement goal--awarding prime contracts
totaling a reported $44.8 billion, or 23.1 percent of total contract
award dollars, to small business contractors.[Footnote 2] However, as
we have reported in the past,[Footnote 3] DOD's payment processes often
results in late payments to contractors--which for some small business
contractors could lead to financial hardship.
Concerned about the impact late payments have on small business
contractors, the Congress included in the National Defense
Authorization Act for Fiscal Year 2004 a requirement for us to report
on the timeliness of DOD payments to small business
contractors.[Footnote 4] Specifically, we were asked to provide
estimates of the total amount of contract payments made to small
businesses and the percentage of total contract payments to small
businesses that were not made in a timely manner. However, DOD was
unable to provide us with a complete population of transaction-level
payment data that would be needed to provide such estimates. Therefore,
as agreed with your offices, we (1) determined whether, at selected DOD
payment locations, small business invoices were more likely to be paid
late when compared with the payment of all invoices; (2) determined
whether systemic weaknesses in DOD payment processes result in late
payments to contractors--including small business contractors; and (3)
assessed the impact that late payments can have on small business
contractors.
DOD separates its payment of commercial invoices into two business
lines--(1) contract pay--which pays invoices for larger, more complex
contracts and (2) vendor pay--which processes payments for smaller,
less complex contracts, purchase orders, and other miscellaneous
payments. DOD's contract payment business line is managed and operated
through a single DOD location, whereas DOD's vendor payment business
line is managed and operated by 20 separate payment locations. For
fiscal year 2004, DOD reported total commercial payments subject to the
Prompt Payment Act, as amended,[Footnote 5] of $206 billion--of which
$119 billion were paid through DOD's contract pay business line and $87
billion were paid through its vendor pay business line. To determine
whether small business invoices were more likely to be paid late when
compared with the payment of all invoices, we requested transaction-
level detail for all DOD commercial payments subject to the Prompt
Payment Act and all interest penalties paid in fiscal year 2004. We
received all the payment data requested for DOD's contract payment
business line. However, DOD was able to provide us with data for only 9
of its 20 vendor payment locations. The $24 billion of payments
generated from these 9 vendor pay locations represented approximately
28 percent of the total $87 billion of vendor payments subject to the
Prompt Payment Act. According to DOD officials, they were unable to
provide us with payment data for the remaining 11 locations because
they could not reconcile the data with previously reported prompt
payment metrics--which is critical for ensuring that the data are
complete.
Using the payment data from the nine vendor pay locations and one
contract pay location, combined with data we obtained from the Central
Contractor Registration (CCR) database--which contains the most
comprehensive listing of small business contractors--we calculated the
extent to which small business invoices are paid late as compared with
all invoices. Specifically, we used the data from CCR to identify
invoice and interest payments associated with small business
contractors. However, payment data for the nine vendor pay sites did
not always contain complete identifier data that would allow us to
determine whether the transactions were associated with small
businesses; some sites contained fairly complete data and others were
missing identifiers for a large percentage of transactions. Because we
were not able to identify all small businesses, our calculations
compare the percentage of invoices paid late that were submitted by
known small businesses with the percentage of all invoices paid late.
To determine the percentages of invoices paid late, we divided the
number of invoices paid late by the total number of invoices paid
during the same period. To ensure that the DOD data we used to support
this report were sufficiently reliable for our analyses, we conducted
detailed reliability assessments of the data sets that we used. We
restricted these assessments, however, to the specific variables that
were pertinent to our analyses. We found that all the data sets used in
this report were sufficiently reliable for these analyses. See appendix
II for a further discussion of these calculations and limitations.
To determine the cause of late payments, we performed audit work at 6
of DOD's 20 vendor payment locations and DOD's 1 contract pay site,
which collectively represent $169 billion, or 82 percent of all
payments subject to the Prompt Payment Act. We selected vendor pay
sites based on, among other things, the amount of interest penalties
paid at each location--selecting sites that paid both high and low
amounts of interest. Using DOD payment and other data, we identified
small business contractors that were paid late multiple times during
fiscal year 2004 and documented the difficulties experienced by 17 of
these contractors. We selected our case study examples from the DOD
payment data provided and identified small business contractors that
DOD paid late most frequently. Of those small business contractors that
were paid late most frequently, 17 expressed a willingness to share
information on late payments with us. We relied on a case study
approach to achieve this objective, principally because, as noted
previously, DOD was unable to provide us with a complete universe of
small business contractors that were paid late--which would be needed
to perform statistically reliable sampling techniques that would allow
us to comment on the experiences of DOD small business contractors as a
whole. Our findings for this objective cannot be projected and may not
be representative of the experiences of all DOD small business
contractors. We requested comments on a draft of this report from the
Secretary of Defense or his designee. We received written comments from
the Deputy Under Secretary of Defense (Business Transformation), which
are reprinted in appendix I of this report. Our work was performed from
November 2004 through January 2006 in accordance with U.S. generally
accepted government auditing standards. Additional details on our scope
and methodology are included in appendix II.
Results in Brief:
In general, our analysis of DOD's fiscal year 2004 payment data for
nine DOD vendor pay locations showed that to varying degrees, small
business invoices were paid late more often than all invoices paid at
each of the nine vendor payment locations. Overall, at these nine
vendor pay locations, 10 percent of all invoices were paid late--
compared with 14.5 percent of small business invoices. According to DOD
vendor pay officials, the disparity between the payment of small
business invoices and all invoices may exist because DOD's cash
management practices place a lower priority on the payment of smaller,
less-complex invoices--like those typically submitted by small business
contractors. Further, these vendor payment sites lacked the demographic
information needed to implement DOD's policy which allows for the
payment of small-disadvantaged businesses early. Although many of the
same prioritization practices were used by DOD's contract pay site,
they did not result in a timing disparity because, for the most part,
DOD's contract pay site pays its bills on time--paying only 2 percent
of all invoices late. However, many of the efficiencies that are used
in DOD's contract pay business line cannot be cost effectively applied
to improve the timeliness of payments at DOD's vendor pay sites. For
example, the receipt and acceptance process used by the contract pay
business line is often performed by a government representative located
at the contractor's facility. While this speeds the payment process, it
is also more costly and, therefore, cannot be practically applied to
DOD's vendor pay product line. Given that DOD's vendor pay business
line presents the most significant challenge for DOD, with respect to
paying invoices on time, we focused specifically on DOD's vendor
payment processes and actions needed to improve the timeliness of
payments made through these processes.
Systemic weaknesses in DOD's vendor payment processes result in late
payments to contractors, including small business contractors. For
decades, we have reported that the leading cause of late payments at
DOD stems from delays in receiving the payment documents needed to
complete a payment transaction--including receiving and acceptance
documents. The delayed processing of these payment documents is caused,
in large part, by the paper-driven nature of DOD's vendor payment
process and DOD's nonintegrated payment, accounting, and logistics
systems. Although, DOD has reported significant improvements in its
metrics related to late payments, these improvements have come through
dedicating additional resources to the problem and not through
addressing the underlying weaknesses that cause late payments.
Recently, however, DOD invested in a Web-based tool known as Wide Area
Work Flow (WAWF),[Footnote 6] which, if implemented and utilized
effectively, could reduce the problems created by DOD's nonintegrated
financial systems by facilitating the electronic transmission of
payment documents and data. According to DOD, WAWF is intended to (1)
be a major component of the department's compliance with the electronic
invoicing requirements of the Floyd D. Spence National Defense
Authorization Act for Fiscal Year 2001[Footnote 7] and (2) contribute
to the department's goal of reducing interest charges for late payments
to vendors. However, DOD's WAWF program lacks the management
information and strategic direction needed to be successful.
Specifically, DOD lacks the metrics needed to know whether WAWF is
being utilized and, if not, what the barriers are to more effective
utilization. In addition, the program management of this initiative has
changed hands numerous times, has not clearly defined the roles and
responsibilities of the organizations that are integral to the
program's success, and does not have a written strategy for ensuring
that WAWF will be effectively utilized. Finally, while the electronic
invoicing provisions included in the National Defense Authorization Act
for Fiscal Year 2001 require contractors to submit invoices
electronically, there is no clear legal and regulatory requirement for
the military services and defense agencies to process receiving and
acceptance reports and other payment-related documentation
electronically when contractors send their invoices directly to DOD
vendor payment sites--which is often the case.[Footnote 8]
Disruptions of cash flow caused by late payments--depending on the
extent and duration--can impact the day-to-day operations of small
businesses. To obtain a perspective on the effect late payments can
have on small business contractors, we interviewed and, when available,
obtained payment documentation from 17 small business contractors that
were paid late multiple times during fiscal year 2004. According to 14
of the 17 contractors we spoke with, late payments from DOD created
cash flow problems, which ultimately led them to seek and obtain a line
of credit in order to finance their day-to-day operations. Further,
although DOD is required by the Prompt Payment Act to pay interest
penalty payments when certain bills are paid late, 10 of the
contractors we spoke with said they often did not receive interest on
payments they considered late. In an effort to substantiate the
contractors' assertions, we requested payment documentation from DOD--
including invoices, receiving reports, and other relevant payment
documents--for the 3 small business contractors that provided us with
information that they believed demonstrated that they were owed
interest. However, DOD was unable to provide us with the requested
documentation, and therefore, we were unable to confirm the
contractors' assertions. Nonetheless, according to one of the small
business owners, after we asked DOD to research the contractor's
claims, DOD determined that the contractor was entitled to interest
penalty payments of approximately $1,000--which, according to the
contractor, DOD later paid. Further, according to 11 of the small
business contractors we spoke with, when interest is received, it is
less than the small businesses' cost of capital. For example, using the
prompt payment rate of 4.25 percent, which was in effect as of June
2005, DOD paid interest of $199 to one small business contractor on an
$84,150 invoice paid 20 days past its due date. However, financing
$84,150--using the 7.250 percent interest rate available through the
contractor's line of credit--would cost the small business owner $340.
We are making five recommendations to improve the timeliness of DOD
payments, including payments to small business contractors.
Specifically, we are recommending that DOD (1) clarify its management
structure for WAWF and provide strategic direction for DOD and the
military services in their efforts to implement and effectively utilize
WAWF; (2) establish a strategic plan that defines the roles and
responsibilities of the various organizations that are integral to the
program's success; (3) develop performance metrics to measure the
success of the program; (4) consider incorporating, as part of the WAWF
application, a data element that would flag invoices submitted by small
disadvantaged business so that they could be paid early, in accordance
with DOD policy; and (5) require the military services and defense
agencies to process all DOD receiving and acceptance reports and other
supporting payment documentation electronically.
In written comments, which are reprinted in appendix I, DOD concurred
with our recommendations and affirmed its commitment to fully
implementing and effectively utilizing WAWF. DOD noted its plans to
provide clear direction and a strategic plan for WAWF, including
evaluating and revising existing WAWF metrics and considering, as part
of its next WAWF requirements review, a data element that would flag
invoices submitted by small disadvantaged businesses. DOD also stated
that, as part of its strategic plan, it would reemphasize the clear
requirement for the military services and defense agencies to process
all receiving and acceptance reports and other supporting payment
documents electronically.
Background:
The Small Business Act defines a small business concern as "one that is
independently owned and operated and which is not dominant in its field
of operation."[Footnote 9] The law also states that in determining what
constitutes a small business, with respect to size standards, the
definition will vary from industry to industry to reflect industry
differences accurately.[Footnote 10] Over the years, SBA has
established and revised numerical definitions for all for-profit
industries--which are matched to North American Industry Classification
System industries and referred to as SBA's size standards table. Size
standards in the table are almost always stated either as the number of
employees or average annual receipts of a business concern. In addition
to establishing eligibility for SBA programs, all federal agencies must
use SBA's size standards as criteria when awarding small business
contracts.
DOD plays a key role in the success of the federal government's small
business programs because it accounts for about two-thirds of all
federal procurements. The DOD Office of Small Business Programs (OSBP)
is responsible for DOD-wide small business policy and oversight to
ensure compliance by all military departments and defense agencies.
OSBP is not itself a procurement office but, instead, serves as a
liaison between the small business community and the DOD procurement
offices. OSBP is responsible for, among other things, advocating the
use of small, small disadvantaged, HUBZone, veteran owned, service-
disabled veteran-owned, and women-owned small businesses, and small
business participation in SBA's 8(a) business development set aside
program. This involves promoting small business prime and
subcontracting opportunities in accordance with federal laws,
regulations, and policies in an effort to meet statutory goals. OSPB is
not responsible for assisting small businesses in receiving timely
payments from DOD.
Prompt Payment Act Requirements:
The Prompt Payment Act requires federal agencies to pay interest on
overdue invoices[Footnote 11] and take discounts only when payments are
made within the allowed discount period.[Footnote 12] The Prompt
Payment Act implementing regulations also generally prohibit paying
invoices too early--specifying that agencies may not make payments more
than 7 days prior to the payment due date, except under certain
conditions. Agencies may use accelerated payment methods under certain
circumstances, including paying small business invoices as quickly as
possible once all required documentation is received at the designated
payment office.[Footnote 13] The Prompt Payment Act does not apply to
contract financing payments--or the authorized payment of monies prior
to the acceptance of goods and services--including advance payments,
progress payments, payments on performance-based contracts, or interim
payments.
In general, payments covered by the Prompt Payment Act are due, unless
otherwise specified, (1) on the date specified in the contract, (2) in
accordance with the discount terms that are offered and taken, (3) in
accordance with accelerated payment methods, or (4) 30 days after the
start of the payment period.[Footnote 14] If payments are not made
according to the above criteria, the government must pay interest
penalty payments, and if the interest penalty is not made, the
contractor may demand an additional penalty amount. These payments are
calculated from the day after payment was due until the day payment is
made.[Footnote 15] The rate used to calculate interest penalties is
established by the Secretary of the Treasury under the Contract
Disputes Act, 41 U.S.C. § 611. As of January 1, 2006, the rate was
5.125 percent.[Footnote 16] The rate is calculated quarterly based on a
12-month rolling average of the Treasury Tax and Loan rate.
DOD's Commercial Payment Process:
DOD's Defense Finance and Accounting Service (DFAS) has overall
responsibility for the payment of invoices related to goods and
services supplied by commercial vendors. These payments are made on
behalf of the military services and other defense agencies and are
referred to as commercial payments. As part of a reorganization effort
in April 2001, DFAS separated its commercial payment services into two
business lines--contract pay and vendor pay.
* DOD's contract pay business line is managed and operated out of DFAS-
Columbus. The contract pay business line processes invoices for formal,
long-term contract instruments that are typically administered by the
Defense Contract Management Agency (DCMA). These contracts tend to
cover complex, multiyear purchases with high dollar values, such as
major weapon systems. Payments for contracts administered by DCMA are
made from a single DFAS system--Mechanization of Contract
Administration Services.
* DOD's vendor pay business line is managed and operated by 20 separate
DFAS sites located throughout the world. The vendor pay product line
processes invoices for contracts not administered by DCMA, plus
miscellaneous non-contractual payments, such as for utilities,
uniforms/clothing, fuels, and food. Payments processed through the DOD
vendor pay business line are made from any one of 13 systems at the 20
vendor pay locations.
In general, DFAS makes both vendor and contract payments only after
matching the request for payment, or invoice, with (1) a signed
contract, purchase order, or other contractual document--to ensure that
the purchase of goods or services was authorized; (2) a receiving/
acceptance report--to ensure that the goods or services ordered have
been received and/or accepted;[Footnote 17] and (3) the official
accounting records--to ensure that funds have been obligated and are
available for use. Because of DOD's numerous nonintegrated automated
and manual systems, much of the data generated by these systems cannot
be electronically transferred from one system to another in order to
complete a payment transaction. Therefore, various data must be read,
interpreted, and manually entered from hard copy documents--or manually
verified and entered from electronic documents.
As we have reported in the past,[Footnote 18] DFAS management has
focused on reducing commercial payment backlogs since fiscal year 2000
and has reported significant improvements in these payment metrics in
recent years. However, many of these improvements have come from
dedicating additional resources to the problem and not from addressing
the underlying weaknesses or inefficiencies that cause late payments.
In addition, as shown in figure 1, DOD's vendor pay payment backlog
metrics continue to lag behind its contract pay metrics.
Figure 1: Overdue Invoices on Hand as a Percentage of Total Invoices
Processed for DOD's Vendor Pay and Contract Pay Business Lines for
Fiscal Years 2001 through 2005:
[See PDF for image]
[End of figure]
As we have previously reported,[Footnote 19] for the most part, both
DOD's vendor payment and contract payment processes are paper driven--
spanning numerous DOD and contractor organizations with nonintegrated
procurement, logistics, and accounting systems. However, inherent
differences in the type of payments made through DOD's vendor pay and
contract pay processes result in significant differences in the
timeliness of payments made through each of these processes.
Although the payment processes for DOD's vendor pay and contract pay
product lines require DOD to match key payment documents before an
invoice can be paid, there is one major difference in the processes
that allows DOD to pay invoices submitted through its contract pay
process in a more timely fashion. Specifically, as part of DOD's
contract pay process, the receipt and acceptance of goods and services
is often performed by a government representative located at the
contractor's facility--which is referred to as source acceptance. In
contrast, under the vendor pay process, receipt and acceptance is
usually performed after goods are received at their destination--which
is referred to as destination acceptance. Consequently, the vendor pay
process is more time consuming than DOD's contract pay process. It is
important to note that source acceptance, while more efficient, is also
more costly, and therefore it would not be practical to expand the use
of this practice to the vendor pay product line.
Small Business Invoices Paid Late More Often Than All Invoices Paid at
Vendor Pay Locations:
Our analysis of DOD's fiscal year 2004 payment data for nine DOD vendor
pay locations showed that to varying degrees, small business invoices
were paid late more often than all invoices paid at each of the nine
vendor payment locations. However, this disparity was not evident at
DOD's contract pay site, because efficiencies utilized by DOD's
contract pay business line result in more timely payments to
contractors--including small business contractors. As noted above,
these same efficiencies cannot be cost effectively applied to DOD
vendor pay business line. Table 1 shows the payment timing differences
for the nine vendor pay locations and for contract payments.
Table 1: Percentage of Invoices Paid Late by DFAS Location and Small
versus All Business for Fiscal Year 2004:
DFAS payment locations: Vendor pay;
Percentage of small business invoices paid late: [Empty].
DFAS payment locations: Pensacola[A];
Percentage of small business invoices paid late: 63.69;
Percentage of all invoices paid late: 24.97;
Percentage difference: 38.72.
DFAS payment locations: Dayton;
Percentage of small business invoices paid late: 17.63;
Percentage of all invoices paid late: 12.87;
Percentage difference: 4.76.
DFAS payment locations: San Diego;
Percentage of small business invoices paid late: 10.11;
Percentage of all invoices paid late: 9.62;
Percentage difference: 0.49.
DFAS payment locations: Norfolk;
Percentage of small business invoices paid late: 14.43;
Percentage of all invoices paid late: 9.04;
Percentage difference: 5.39.
DFAS payment locations: Rock Island;
Percentage of small business invoices paid late: 9.24;
Percentage of all invoices paid late: 8.92;
Percentage difference: 0.32.
DFAS payment locations: Charleston;
Percentage of small business invoices paid late: 15.19;
Percentage of all invoices paid late: 7.98;
Percentage difference: 7.21.
DFAS payment locations: Limestone;
Percentage of small business invoices paid late: 10.83;
Percentage of all invoices paid late: 7.24;
Percentage difference: 3.59.
DFAS payment locations: Orlando;
Percentage of small business invoices paid late: 10.06;
Percentage of all invoices paid late: 5.35;
Percentage difference: 4.71.
DFAS payment locations: Pacific;
Percentage of small business invoices paid late: 9.00;
Percentage of all invoices paid late: 4.69;
Percentage difference: 4.31.
DFAS payment locations: Overall vendor pay;
Percentage of small business invoices paid late: 14.43;
Percentage of all invoices paid late: 9.94;
Percentage difference: 4.49.
DFAS payment locations: Contract pay;
DFAS payment locations: Columbus;
Percentage of small business invoices paid late: 1.72;
Percentage of all invoices paid late: 1.78;
Percentage difference: (.06).
Source: GAO analysis of DOD payment data.
[A] According to DFAS officials, the high percentage of invoices paid
late by the Pensacola vendor pay site was because of disruptions caused
by hurricanes that affected the region in 2004.
[End of table]
As discussed later, resolving this disparity will require the
department to improve the overall timeliness of payments made through
DOD's vendor pay business line. Further, given that DOD's vendor pay
business line presents the most significant challenge for DOD, with
respect to paying invoices on time, we focused specifically on the
systemic weaknesses in DOD's vendor payment processes and actions
needed to improve the timeliness of payments made through these
processes.
Long-standing Weaknesses in DOD's Vendor Payment Processes Result in
Late Payments to Contractors, Including Small Business Contractors:
Long-standing weaknesses in DOD's vendor payment processes--including
DOD's lack of automated systems--result in late payments to
contractors, including small business contractors. For decades, we have
reported that the leading cause of DOD late payments stems from delays
caused by the receiving and acceptance process. The delayed processing
of these payment documents is caused, in large part, by the paper-
driven nature of DOD's vendor payment process and DOD's nonintegrated
payment, accounting, and logistics systems. As discussed previously,
small business invoices are paid late more often than all invoices paid
at selected vendor payment locations, which according to DOD officials,
may occur because of DOD's cash management and prioritization
practices. Resolving this disparity will require the department to
improve the overall timeliness of payments made through DOD's vendor
pay business line. To its credit, DOD has invested in Web-based
business tools that facilitate the electronic transmission of payment
documents and data. If implemented and used effectively, these tools
could improve the timeliness of DOD's vendor payments; however, DOD has
been slow to implement and use these tools.
DOD's Cash Management Practices May Disadvantage Small Businesses:
DOD vendor pay officials told us that they were unaware that small
business invoices were paid late more often than all invoices and were
uncertain as to the cause of the disparity. However, some officials
suggested that the difference may occur because DOD's cash management
practices inadvertently disadvantage small businesses by placing a
lower priority on the payment of smaller, less-complex invoices, like
those typically submitted by small business contractors. In addition,
none of the vendor pay sites we visited were following DOD's written
policy to assist small disadvantaged businesses[Footnote 20] by paying
them as quickly as possible after invoices are received and before
normal payment due dates established in the contract.
DOD's vendor pay sites prioritize the payment of invoices based on the
amount of the invoice, the payment due date, and whether the contractor
has offered an early payment discount.[Footnote 21] While these
priorities are based on sound cash management practices, they tend to
favor the payment of non-small business invoices first. In addition,
DOD's vendor pay sites prioritize their workload based on the overall
complexity of an invoice and the anticipated time it will take to
process the invoice. For example, large multimillion-dollar invoices
may contain over 100 lines of accounting--or separate funding sources
for each billable item. Each line of accounting must be matched with
the receiving report, contract terms, and accounting records to ensure
proper payment of the invoice--making it time-consuming to process
these invoices. These complex invoices are not typically associated
with small businesses. It is important to note that these same
practices are also used at DOD's contract pay site but did not result
in a timing disparity between the payment of small business and all
invoices.
Finally, it is DOD's written policy to assist small disadvantaged
businesses by paying them as quickly as possible after invoices are
received and before normal payment due dates established in the
contract. However, at the vendor pay sites we visited, the automated
systems used to process payments did not contain the demographic
information needed to identify small disadvantaged businesses and
prioritize the payment of their invoices. According to DOD vendor pay
officials, it was too costly to change the vendor payment system
requirements to accommodate the needed information. As a result, none
of the vendor pay sites we visited had implemented DOD's policy to pay
small disadvantaged businesses as quickly as possible after their
invoices are received.
Electronic Commerce Tools Could Improve the Timeliness of Payments Made
through DOD's Vendor Payment Process:
To its credit, DOD has invested in the Web-based tool know as WAWF,
which, if implemented and used effectively, could improve the overall
timeliness of payments made through DOD's vendor pay business line by
facilitating the electronic transmission of payment documents and data.
However, DOD's WAWF program lacks the management information and
strategic direction needed to be successful. Specifically, DOD lacks
the metrics needed to know whether WAWF is being utilized and, if not,
what the barriers are to more effective utilization. In addition, the
program management of this initiative has changed hands numerous times,
lacks the organizational authority to effect change across DOD, and
does not have a written strategy for ensuring that WAWF will be
effectively utilized. As a result, DOD's vendor payment sites continue
to process mostly paper payment documents, which can often result in
redundant data entry; misplaced documents; and ultimately, payment
delays.
Until recently, the computer-to-computer exchange of routine business
information, known as Electronic Data Interchange (EDI), was the
predominant electronic commerce technology available to both government
and industry. Using EDI technology, invoices and other payment
documents--traditionally conveyed in paper form--can be transmitted
electronically between computers without human intervention. However,
to implement EDI technology, data must be converted into a standard
data format before it is transmitted to the receiving system. Because
the cost of converting and transmitting business data was prohibitively
expensive for small and midsized companies, most small businesses
continued to convey paper documents by mail or facsimile (fax).
With the arrival of Web-based business tools, the electronic exchange
of data has become more cost-effective for many smaller businesses.
Accordingly, the Congress included a requirement in the Floyd D. Spence
National Defense Authorization Act for Fiscal Year 2001[Footnote 22]
that the Secretary of Defense shall require any claims for payment
(e.g., invoices) under DOD contracts be submitted in electronic
form.[Footnote 23] In January 2004, DOD updated the Defense Federal
Acquisition Regulation Supplement (DFARS) to reflect the new electronic
invoicing requirement.[Footnote 24] The January 2004 DFARS update
outlines the electronic submission options[Footnote 25] and provides
for exceptions to the regulation when (1) the contractor is unable to
submit a payment request in electronic form or (2) DOD is unable to
receive a payment request in electronic form.
DOD deployed the first version of WAWF in fiscal year 1999 with the
goal of eliminating paper from the payment process by enabling
authorized defense contractors and DOD personnel to create and transmit
electronic invoices and receiving reports and access contract-related
documents online. According to DOD officials, WAWF is intended to be a
major component of the department's compliance with the electronic
invoicing requirements of the fiscal year 2001 National Defense
Authorization Act and contribute to the department's goal of reducing
interest charges for late payments to vendors. Specifically, WAWF
provides DOD with the capability to automatically update its payment
systems to complete the payment transaction without human intervention-
-which could significantly improve the timeliness of payments. Under
DOD's current vendor payment process, these paper documents may arrive
at the DFAS payment office separately--typically by mail or by fax.
DFAS vendor payment technicians then process each document as it
arrives by manually keying it into the payment system.
WAWF, if fully implemented and utilized as planned, can eliminate paper
and redundant data entry; improve data accuracy; reduce the number of
lost or misplaced documents; and ultimately, result in more timely
payments to contractors. Further, this tool is available to all of
DOD's contractors at no cost and provides electronic confirmation that
the payment office has received payment documents and allows
contractors to track the status of their payments. WAWF, according to
DOD, also provides direct financial savings to the military services.
Because processing electronic invoices is less costly for DFAS than
processing paper invoices, the military service activities that use
WAWF will pay a reduced payment processing service fee. For example,
according to DOD, processing an electronic invoice for the U.S. Navy
Bureau of Medicine and Surgery (BUMED) costs $3.66 per line of
accounting[Footnote 26] whereas a paper invoice costs $19.08. By using
WAWF, BUMED estimated that it could reduce the amount it pays DFAS to
process its invoices and save about $2.78 million per year. Other
direct savings may be realized because of reductions in the amount of
prompt payment interest paid. According to DOD, when the Air Force Air
Education and Training Command implemented WAWF it realized a 45
percent decrease in the amount of interest penalties paid resulting
from late payments.
According to DOD, WAWF has produced promising results when it is
effectively utilized. However, the program lacks the strategic
direction and management information needed to ensure its success.
DOD's WAWF program has been managed by the Defense Information Systems
Agency (DISA) since it was placed in operation in fiscal year 1999 but
according to the current program manager, this position has changed
hands three times since fiscal year 2003--at times, with no one filling
the position. In October 2005, with the establishment of the Defense
Business Transformation Agency (BTA)--which is intended to advance DOD-
wide business transformation--ownership of the WAWF initiative was
transferred to BTA. However, as of the date of this report, although
ownership has been officially transferred to BTA, DISA, in effect,
continues to manage WAWF. Moreover, DISA's primary focus has been on
addressing technical issues that affect WAWF functionality--not on
ensuring that the application is effectively utilized by contractors or
the military services.
Although other DOD organizations, such as DFAS and DCMA, and the
military services have established implementation points of contact who
have initiated efforts to market WAWF and provide training, their focus
has been almost entirely on implementing WAWF in the contract pay
arena. Less emphasis has been placed on implementing WAWF in the vendor
pay business line. Further, DOD does not have a comprehensive written
strategy for how it intends to ensure that contractors routinely submit
their invoices electronically or that the military services submit
receiving and acceptance reports electronically. Because DOD's vendor
pay process relies almost exclusively on destination acceptance, it is
important that military service and defense agency receiving units
designate and train WAWF focal points who will be responsible for
receiving and accepting goods and services electronically. However,
military service and defense agency receiving units have been slow to
embrace WAWF as a means of performing receipt and acceptance
activities. As such, a comprehensive strategy for addressing this and
other challenges that may adversely affect WAWF utilization is
essential.
Although DOD has equipped 14 of its 20 vendor payment locations with
WAWF, DOD does not collect the management information needed to
effectively measure the success of this initiative. For example, the
WAWF program manager did not know the percentage of vendor pay invoices
received electronically or the percentage of vendor pay receiving/
acceptance documents received electronically, or to what extent the
military services had equipped and trained their receiving units to use
WAWF. DFAS officials at the vendor pay sites we visited also did not
keep track of these metrics but estimated that they receive, at most,
20 percent of their invoices electronically and even fewer receiving/
acceptance reports. Even with the small number of payment documents
processed through WAWF, vendor pay officials complained of the
application's slow processing speed--stating that they were not sure if
the application could handle a larger workload. As a result, these
officials said that they were reluctant to encourage the use of WAWF.
According to the WAWF program manager, the problems experienced by
these vendor pay locations have been resolved and were likely caused by
the latest application upgrade.
Finally, the legal and regulatory requirement for the military services
and defense agencies to process receiving and acceptance reports and
other supporting documentation electronically may not apply to the
majority of invoices submitted through DOD's vendor payment process.
Specifically, the electronic invoicing provisions included in the
National Defense Authorization Act for Fiscal Year 2001 states that DOD
officers or employees who receive an electronic invoice from a DOD
vendor, and who also must transmit the invoice to another DOD officer
or employee for payment processing, must transmit the claim and any
supporting documentation electronically (e.g., receiving reports).
However, most vendor pay contractors submit their invoices directly to
DFAS for payment[Footnote 27] and rely on the military service or
defense agency receiving unit to send receiving and acceptance
documents to DFAS. Thus, when a vendor pay contractor submits an
electronic invoice to DFAS, DOD does not require military service or
defense agency receiving units to acknowledge receipt and acceptance
electronically.
Although DOD policies encourage the electronic transmission of
receiving reports and other supporting documentation, DOD's
implementing regulations and policies do not clearly extend this
requirement to receiving and acceptance officials.[Footnote 28] While
requiring contractors to submit invoices electronically is a good first
step toward improving DOD's payment process, electronic invoicing alone
does not address DOD's biggest obstacle to paying its bills on time--
the timely submission of receipt and acceptance documents. As a result,
according to DOD vendor pay officials, they continue to receive most of
these documents by mail or fax, which can often result in redundant
data entry, misplaced documents, and ultimately, payment delays.
Late Payments May Create Financial Hardship for Some Small Business
Contractors:
Although DOD is required by the Prompt Payment Act to pay interest
penalties when certain bills are paid late,[Footnote 29] the amount of
interest received is less than small businesses' cost of capital and
may also affect cash flow. As a result, the disruption of cash flow
caused by late payments can have a significant impact on the day-to-day
operations of small businesses. Further, many of the small business
contractors we interviewed said that they often did not receive
interest on invoices that in their view, were paid late. In an effort
to substantiate the contractors' assertions, we requested documentation
from DFAS for late payments for the three small business contractors
that provided us with information they believed demonstrated that they
were owed interest. However, DFAS was unable to provide us with the
requested documentation, and therefore, we were unable to confirm the
contractors' assertions.
To obtain a perspective on the effect late payments have on small
business contractors, we interviewed 17 small business owners who,
according to DOD's records, were paid late multiple times during fiscal
year 2004. At these interviews, 14 of the 17 small business owners said
that because DOD pays its bills late, they have had to obtain lines of
credit or use their personal resources to finance day-to-day
operations. In three cases, contractors told us that their cash flow
problems became so significant that they were concerned about their
ability to continue in operation. Although DOD is required by the
Prompt Payment Act to pay interest penalty payments when certain bills
are paid late, the amount of interest received is less than these small
businesses' cost of capital. Eleven of the 14 small business owners who
had obtained a line of credit said that a line of credit cost them 2 to
4 percentage points more than the interest rate DOD uses to calculate
late payment penalties. For example, using the prompt payment rate of
4.25 percent, which was in effect as of June 2005, DFAS paid interest
of $199 to 1 small business contractor on an $84,150 invoice paid 20
days past its due date. However, financing $84,150--using the 7.250
percent interest rate available through the contractor's line of
credit--would cost the small business owner $340.
The difference between the prompt payment interest rate and interest
rates obtained by the small business owners we spoke with is consistent
with government statistics on lending rates. Over the 10-year period
between 1995 and 2004, the prompt payment interest rate was on average
5.8 percent, whereas the average prime lending rate--the interest rate
charged by major banks to their best or most creditworthy customers--
was 7.1 percent. Cash flow problems experienced by these DOD small
business contractors are also consistent with the findings of a survey
of small-business owners conducted by the Federal Reserve and the
National Federation of Independent Businesses (NFIB).[Footnote 30] The
results of the NFIB survey showed that outstanding receivables are the
primary reason small businesses experienced cash flow problems.
Table 2 provides an overview of the types of pay problems described by
8 of the 17 small business owners we interviewed. As discussed
previously, the problems described by these 8 small business
contractors may not be representative of all DOD small business
contractors. As shown in table 2, DOD records showed that 5 of the 8
were paid late more than 15 times and, according to 6 of the 8 small
business owners, they had outstanding invoice amounts totaling at least
$400,000 as of the date we interviewed them.
Table 2: Case Study Examples of Small Business Invoices Paid Late by
DFAS:
Small business: Case study 1: 8(a), small disadvantaged business
providing promotional and recruiting items for the Army;
Number of late payments in fiscal year 2004: 5;
Receivables > 30 days as of the date of our fieldwork[A]: $491,782;
Payment problems identified by small businesses: Invoices lost by DFAS,
resulting in continual follow-up to receive payments;
Consistently received interest payments on overdue receivables: Yes.
Small business: Case study 2: 8(a), small disadvantaged business
providing environmental remediation services for the Navy;
Number of late payments in fiscal year 2004: 17;
Receivables > 30 days as of the date of our fieldwork[A]: $755,951;
Payment problems identified by small businesses: Cumbersome,
inefficient process;
current contractual documents not available in payment office;
Consistently received interest payments on overdue receivables: No.
Small business: Case study 3: 8(a), small disadvantaged business
providing construction services for the Air Force and the Navy;
Number of late payments in fiscal year 2004: 63;
Receivables > 30 days as of the date of our fieldwork[A]: $431,920;
Payment problems identified by small businesses: Invoices lost by DFAS,
resulting in continual follow- up to receive payments;
Consistently received interest payments on overdue receivables: Yes.
Small business: Cast study 4: 8(a), small disadvantaged business
providing environmental engineering services for the Army and the Navy;
Number of late payments in fiscal year 2004: 22;
Receivables > 30 days as of the date of our fieldwork[A]: $570,899;
Payment problems identified by small businesses: Invoices lost by DFAS,
resulting in continual follow-up to receive payments;
poor customer support when trying to resolve issues;
Consistently received interest payments on overdue receivables: No.
Small business: Case study 5: 8(a), small disadvantaged business
providing general maintenance and construction services for the Army
and the Navy;
Number of late payments in fiscal year 2004: 23;
Receivables > 30 days as of the date of our fieldwork[A]: $743,000;
Payment problems identified by small businesses: Invoices lost by DFAS,
resulting in continual follow-up to receive payments;
Consistently received interest payments on overdue receivables: Yes.
Small business: Case study 6: minority owned small business providing
moving and storage services for the Army;
Number of late payments in fiscal year 2004: 361;
Receivables > 30 days as of the date of our fieldwork[A]: $286,760;
Payment problems identified by small businesses: Invoices lost by DFAS,
resulting in continual follow-up to receive payments;
Consistently received interest payments on overdue receivables: No.
Small business: Case study 7: small business providing computer
software and equipment for the Army;
Number of late payments in fiscal year 2004: 1;
Receivables > 30 days as of the date of our fieldwork[A]: $600,000;
Payment problems identified by small businesses: Receiving unit failed
to submit receiving report in a timely manner;
Consistently received interest payments on overdue receivables: No.
Small business: Case study 8: minority owned, 8(a), small disadvantaged
business providing facilities management services for the Army and the
Navy;
Number of late payments in fiscal year 2004: 2;
Receivables > 30 days as of the date of our fieldwork[A]: $140,000;
Payment problems identified by small businesses: Invoices lost by DFAS,
resulting in continual follow-up to receive payments;
cumbersome, inefficient process;
Consistently received interest payments on overdue receivables: No.
Source: GAO analysis of DOD and vendor data.
[A] We interviewed small business owners from June 2005 through
September 2005 and obtained outstanding balance information as of the
date of our interview.
[End of table]
Although DOD is required by the Prompt Payment Act to pay interest
penalty payments when certain bills are paid late, 10 of the 17 small
business owners we spoke with said that they did not receive interest
payments when they were paid late. For example, 1 contractor provided
us with information on 10 invoices totaling $755,951 that were
submitted during a 5-month period in 2005. Although, based on the
contractor's records, each invoice was paid from 7 to 125 days late,
according to the contractor, no interest was ever received. In an
effort to substantiate these assertions, we requested documentation
from DFAS for late payments that according to these contractors, should
have resulted in interest penalty payments. Specifically, we requested
a copy of the invoice and receiving and acceptance documents for 20
examples of late payments provided by 3 small business contractors for
which, according to the contractors, no interest was received. DFAS,
however, was unable to provide us with the documentation we requested.
Nonetheless, according to 1 of the small business owners, after we
asked DOD to research the contractor's assertions, DOD determined that
the contractor was entitled to interest penalty payments of
approximately $1,000--which, according to the contractor, DOD later
paid. According to DFAS officials, interest was not paid on these
invoices previously because DFAS entered the wrong invoice dates into
the payment system. As discussed later, the invoice date entered into
the payment system is used to establish payment due dates.
As shown in table 2, from the small business contractors' perspective,
the biggest challenge they face in getting paid is ensuring that DFAS
receives and acknowledges receipt of the invoices they submit. Nine of
the 17 small business owners we interviewed told us that they had to
submit their invoices to DFAS multiple times before DFAS acknowledged
receipt of the invoice. According to most of the contractors we spoke
with, they submitted their invoices by fax--often transmitting the same
invoice to DFAS multiple times before DFAS acknowledged receipt of the
invoice by date stamping it and subsequently processing it for payment.
This is significant in that DFAS establishes payment due dates based on
the date a proper invoice is received by the payment office.[Footnote
31] If days and weeks go by--as it was described to us--before
contractors' invoices are successfully received by the payment office,
it would explain why, from the contractors' perspective, they believed
that they were entitled to interest payments that they did not receive.
According to DFAS officials, because DFAS has no visibility over hard
copy invoices until they are entered into the payment system, the time
lag between the receipt of a hard copy invoice and its entry into the
payment system could lead contractors to believe that DFAS had lost
their invoice.
As discussed previously, WAWF, if implemented and used effectively,
would eliminate the problem of lost invoices and provide a mechanism by
which small business contractors could track the status of their
invoices online and possibly be paid earlier. However, most of the
small business owners we interviewed said that they had never heard of
WAWF, and only 4 of the 17 contractors we interviewed were using WAWF.
According to these 4 small business owners, using WAWF did resolve
payment delays related to lost invoices but did not resolve the problem
of late payments. Because DOD also requires acknowledgment of the
receipt and acceptance of goods and services--over which contractors
have little control--and the military service and defense agency
receiving units responsible for receipt and acceptance do not routinely
utilize WAWF, these contractors will likely continue to experience
payment delays.
Conclusion:
DOD has made significant progress in recent years in reducing its
reported backlog of overdue invoices and improving its overall metrics
related to late vendor payments. However, many of these improvements
have come from focusing additional resources on the problem and not
from addressing the underlying weaknesses that cause late payment.
Although DOD has embarked on a series of efforts over the last decade
to modernize its business systems--in an effort to address the
underlying weaknesses in its vendor payment processes that we
identified in our report--these efforts have been largely unsuccessful.
With advances in Web based technology, DOD now has the opportunity to
address some of these weaknesses and improve its ability to pay its
contractors on time--including small business contractors. However,
fully implementing and effectively utilizing WAWF will require
sustained leadership and a focused strategy aimed at ensuring the
successful implementation and utilization of available electronic
commerce tools.
Recommendations for Executive Action:
We recommend that the Secretary of Defense direct the Director of the
Defense Business Transformation Agency to take the following four
actions to clarify the management structure and policies over WAWF:
* Provide strategic direction for DFAS, DCMA, DISA, the military
services, and defense agencies in their efforts to fully implement and
effectively utilize WAWF.
* Establish a strategic plan that defines the roles and
responsibilities of the various organizations that are integral to the
success of the program and outlines a strategy for improving the
utilization of WAWF--including correcting WAWF functionality or
processing issues that may hamper effective utilization.
* Develop performance metrics that enable the department to measure the
success of the program--including comprehensive metrics on the volume
of invoices and receiving documents transmitted electronically.
* Consider incorporating, as part of the WAWF application, a data
element that would flag invoices submitted by small disadvantaged
business so that they may be paid more expeditiously, in accordance
with DOD policy.
To help ensure that the military services and defense agencies
effectively utilize WAWF we also recommend that the Secretary of
Defense take the following action:
* Establish a clear requirement that the military services and defense
agencies process all receiving and acceptance reports and other
supporting payment documentation electronically.
Agency Comments and Our Evaluation:
In written comments, which are reprinted in appendix I, DOD concurred
with our recommendations and noted that the recent transition of WAWF
to BTF will provide a renewed opportunity to address the strategic
direction and planning to ensure that this program is fully implemented
and effectively utilized. According to DOD, it plans to evaluate and
revisit existing WAWF metrics and consider including, as part of its
next WAWF requirements review, a data element that would flag invoices
submitted by small disadvantaged businesses. DOD also stated that, as
part of its strategic plan, it would reemphasize the clear requirement
for the military services and defense agencies to process all receiving
and acceptance reports and other supporting payment documents
electronically.
We are sending copies of this report to the Secretary of Defense,
interested congressional committees, and other interested parties. We
will make copies of the report available to others upon request. In
addition, the report is available at no charge on GAO's Web site at
http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-9095 or williamsm1@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report were Diane Handley, Assistant Director; Francine
DelVecchio; and Jamie Haynes.
Signed by:
McCoy Williams:
Director, Financial Management and Assurance:
List of Congressional Committees:
The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Ted Stevens:
Chairman:
The Honorable Daniel K. Inouye:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Duncan L. Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable C.W. Bill Young:
Chairman:
The Honorable John P. Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Comments from the Department of Defense:
Office Of The Under Secretary Of Defense:
3000 Defense Pentagon:
Washington. DC 20301.-3000:
Acquisition Technology And Logistics:
Mr. McCoy Williams:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, N.W. Washington, D.C. 20548:
Dear Mr. Williams:
This is the Department of Defense (DOD) response to the GAO Draft
Report 06-358, `DOD PAYMENTS TO SMALL BUSINESSES: Implementation and
Effective Utilization of Electronic Invoicing Could Further Reduce Late
Payments,' dated April 12, 2006 (GAO Code 192144). The Department
concurs with the two recommendations for executive action and our
responses are enclosed.
As noted in your report, Wide Area Workflow (WAWF) for electronic
transmission of receiving and acceptance reports and other related
payment documentation is currently used at various levels by the
military services and defense agencies with resulting cost avoidance.
WAWF customer representation is active through participation in the
Joint Requirements Board.
The Department has issued several memorandums directing WAWF usage. The
latest direction, dated August 18, 2004, was released as a joint
memorandum from the Offices of the Under Secretaries of Defense
(Comptroller) and (Acquisition Technology and Logistics). The recent
transition of this program to the Business Transformation Agency (BTA)
provides a renewed opportunity to address the strategic direction and
planning to fully implement and effectively utilize WAWF. This tool,
along with other related enterprise systems, will be assessed in the
context of an integrated approach designed to achieve the overall
capabilities required by DOD. Existing metrics for the identification
of problems and/or issues, as well as for the measurement of success of
the program, will be validated and expanded where necessary.
Your recommendation regarding the incorporation of a data element that
would flag invoices submitted by small disadvantaged business so that
they may be paid more expeditiously in accordance with DOD policy will
be taken into consideration as part of the next requirements review.
My point of contact for this matter is Ms. Cynthia Beck and she may be
contacted by email: cynthia.beck@bta.mil or by telephone at (703) 607-
1296.
Sincerely,
Signed by:
Paul A. Brinkley:
Deputy Under Secretary of Defense (Business Transformation):
Attachments: As stated:
(GAO-06-358)/Code 192144 DOD Payments to Small Business Contractors:
Recommendation A.1: The Secretary of Defense directs the Director of
the Defense Business Transformation Agency to clarify the management
structure and policies over WAWF that at a minimum:
* Provides strategic direction for DFAS, DCMA, DISH, the military
services, and defense agencies in their efforts to fully implement and
effectively utilize WAWF, * Establishes a strategic plan that defines
the roles and responsibilities of the various organizations that are
integral to the success of the program and outlines a strategy for
improving the utilization of WAWF - including correcting WAWF
functionality or processing issues that may hamper effective
utilization,
* Develops performance metrics that enable the Department to measure
the success of the program - including comprehensive metrics on the
volume of invoices and receiving documents transmitted electronically,
and:
* Considers incorporating, as part of the WAWF application, a data
element that would flag invoices submitted by small disadvantaged
business so that they may be paid more expeditiously in accordance with
DOD policy.
DOD Response: Concur. The Business Transformation Agency (BTA) recently
took over responsibility for the WAWF program and plans to address the
need to reestablish a clear direction and a strategic plan that will
focus the program. WAWF, along with other related enterprise systems,
will be assessed in the context of an integrated approach designed to
achieve the overall capabilities required by the Department.
A variety of metrics have captured historical WAWF usage. BTA will
validate the accuracy, completeness and utility of existing metrics and
revise as necessary to meet program direction. An additional data
element can be added to the WAWF application to identify small business
invoices. WAWF already receives Central Contractor Registry information
and could use a CageNendor comparison for setting such a flag. This
will be considered as part of the next requirements review.
Recommendation A.2: The Secretary of Defense establishes a clear
requirement that the military services and defense agencies process all
receiving and acceptance reports and other supporting payment
documentation electronically.
DOD Response: Concur. As an integral part of the strategic plan, the
Department of Defense will reemphasize the clear requirement for the
military services and defense agencies to process all receiving and
acceptance reports and other supporting payment documentation
electronically.
[End of section]
Appendix II: Objectives, Scope, and Methodology:
To determine whether small businesses were more likely to be paid late
than all businesses, we requested transaction-level detail for all DOD
commercial payments subject to the Prompt Payment Act and all interest
penalties paid in fiscal year 2004. For fiscal year 2004, DOD reported
total payments subject to the Prompt Payment Act of $206 billion--of
which $119 billion were paid through DOD's contract pay business line
and $87 billion were paid through its vendor pay product line. We
received all the payment data requested for DOD's contract payment
business line. However, DOD was able to provide payment data for only 9
of its 20 vendor payment locations. The payments generated from these 9
locations represent $24 billion, or approximately 28 percent, of the
total $87 billion in vendor payments that were subject to the Prompt
Payment Act.
Using the payment data from the nine vendor pay locations and one
contract pay location, combined with data we obtained from the Central
Contractor Registration (CCR) database--which contains the most
comprehensive listing of small business contractors--we calculated the
extent to which small businesses are paid late as compared with the
payment of all invoices. Specifically, we used the data from CCR to
identify invoice and interest payments associated with small business
contractors. However, payment data for the nine sites did not always
contain complete identifier data, which would allow us to determine
whether the transaction involved a small business; some sites contained
fairly complete data and others were missing identifiers for a large
percentage of transactions. Because we were not able to identify all
small businesses, our calculations compare invoices from known small
businesses to invoices from all companies. To determine the percentages
of invoices paid late, we divided the number of invoices paid late by
the total number of invoices paid during the same period.
To examine the potential impact of the missing identifier data on our
analyses, we calculated and compared late payment rates in a number of
ways: comparing invoices from known small businesses with invoices from
all businesses, comparing invoices from known small businesses with the
remaining invoices (excluding known small businesses), comparing
invoices from known small businesses with the remaining invoices after
designating the transactions with missing identifiers to be in
equivalent proportion to the known small and known non-small
businesses, and comparing invoices from known small businesses to the
known non-small businesses--after all transactions with missing
identifiers were removed. In all cases, the overall finding that small
business invoices were more likely to be paid late remained consistent.
This finding also remained relatively consistent between sites that had
more complete data and sites that did not. We also discussed with DFAS
officials the reasons why identifier information was missing. The
reasons included removal during the archive process and lack of a
requirement for that field in particular systems. We found no evidence
that the missing identifiers were caused by systematic differences in
how data on transactions from small versus non-small businesses are
maintained.
To ensure that the DOD data were sufficiently reliable for our
analyses, we conducted detailed reliability assessments of the data
sets that we used. We restricted these assessments, however, to the
specific variables that were pertinent to our analyses. We assessed the
reliability of the payment data obtained from DOD's payment systems by
ensuring that the transaction detail provided was consistent with
summary totals reported as part DOD's prompt payment metrics. We also
assessed the reliability of these data by performing nonstatistical
sampling. To accomplish this, individual transactions were selected on
a judgmental basis. Attributes from these transactions were compared to
the original, supporting documentation held at the respective DFAS
service center that processed the transaction. We reviewed attributes
such as dates, contract numbers, amounts, and ensured policies related
to the payment process were met prior to disbursement of funds. As part
of our data reliability assessment we also considered the risk that
contractors are misclassified (large versus small business) in the CCR
database. We believe the risk is small for two reasons. First, the
Small Business Administration (SBA) verifies the small business status
of contractors that are part of SBA's set aside program--which is the
primary means by which DOD meets its annual small business procurement
goals. Second, according to SBA, small business self-certification is
policed by other small business contractors--who have a vested interest
in the accuracy of the small business designation. We found that all
the data sets used for this report were sufficiently reliable for use
in our analyses.
To determine the cause of late payments, we performed audit work at six
DFAS vendor payment locations and the DFAS contract pay site, which
collectively represent $169 billion, or 82 percent of all payments
subject to the Prompt Payment Act. The payments generated from the six
vendor pay locations represent $50 billion, or approximately 58
percent, of the total vendor payments that were subject to the Prompt
Payment Act. At each of the DFAS service sites visited, we interviewed
officials who were responsible for processing vendor invoices for
payment; officials who prepared and submitted metrics related to the
overall timeliness of payments made; and officials who were responsible
for handling both large and small business contractor complaints and
inquiries. Additionally, we obtained documentation on and performed
walk-throughs of the vendor payment and contract payment processes.
We selected DFAS vendor pay sites for review based on the percentage of
interest penalty payments made compared to the total amount of payments
made subject to the Prompt Payment Act. Once this percentage was
determined, we chose DFAS vendor pay sites with both disproportionately
high and low percentages compared to the average percentage for all
sites. Sites with low percentages were selected because of their
relative proficiency in paying vendors in a timely manner and to
identify possible best practices used by these sites. Sites with high
percentages were chosen so that we could understand and document
problems associated with the payment process. Further, the site
selection criteria ensured that service-unique processes and locations
were included. The DFAS vendor pay sites we visited are as follows:
Columbus, Ohio; Dayton, Ohio; Norfolk, Virginia; Rock Island, Illinois;
San Diego, California; and Indianapolis, Indiana.
To gain an understanding of how DFAS and DISA coordinated, managed, and
implemented the WAWF program, we interviewed the DFAS WAWF focal point,
officials responsible for collecting electronic commerce metrics at
DFAS, and the WAWF program manager. We obtained and analyzed
memorandums, directives, briefings, and other documents related to the
WAWF program--including system requirements documentation describing
the functionality of the current version of WAWF, version 3.0.9.
To document the criteria governing payments to small business
contractors, we obtained and reviewed applicable policies, procedures,
and program guidance, including the Small Business Act,[Footnote 32]
the Prompt Payment Act and regulations,[Footnote 33] the Defense
Federal Acquisition Regulations,[Footnote 34] the Federal Acquisition
Regulation,[Footnote 35] and DFAS desk policies. In conducting our
work, we also referred to the internal control standards provided in
Standards for Internal Control in the Federal Government.[Footnote 36]
To assess the impact that late payments have on small business
contractors, we relied on a case study approach, principally because
DOD was unable to provide us with a complete universe of small business
contractors that were paid late, which would be needed to perform
sampling techniques that would allow us to comment on the experiences
of small business contractors as a whole. Therefore, using DOD payment
and other data, we identified small business contractors that were paid
late multiple times during fiscal year 2004 and documented the
difficulties experienced by 17 of these contractors. We selected our
case study examples from the DOD payment data provided by identifying
small business contractors that DOD paid late most frequently. Of those
small business contractors that were paid late most frequently, 17
expressed a willingness to share information on late payments with us.
Our findings for this objective cannot be projected and may not be
representative of the experiences of DOD small business contractors as
a whole. We interviewed each of these contractors from June 2005
through September 2005 and, when possible, obtained documentation
related to late payments, including accounts receivable aging reports
and copies of unpaid invoices. In addition, we attempted to corroborate
contractors' claims that they had not received interest payments to
which they believed they were entitled by requesting from DFAS
invoices, receiving reports, and any other payment documentation
related to these claims.
We briefed DFAS and DOD officials from the selected payment locations
on the details of our audit, including findings and their implications.
We conducted our fieldwork from November 2004 through January 2006 in
accordance with U.S. generally accepted government auditing standards.
We requested comments on a draft of this report from the Secretary of
Defense or his designee. We received written comments from the Deputy
Under Secretary of Defense (Business Transformation). These comments
are evaluated in the "Agency Comments and Our Evaluation" section of
this report and are reprinted in appendix I.
FOOTNOTES
[1] A small business concern is defined in accordance with the Small
Business Administration's definition, 13 C.F.R. pt. 121. Small
businesses may be eligible to participate in several programs--
including small disadvantaged, 8(a), HUBZone, veteran owned, service-
disabled veteran-owned, and women-owned small businesses. See 48 C.F.R.
§§ 19.000, 219.000.
[2] For fiscal years 2004 and 2005 DOD's procurement goal was to award
to small businesses 23 percent of its total contract awards. As of the
date of this report, DOD's fiscal year 2005 procurement statistics were
not available.
[3] GAO, Financial Management: DOD's Metrics Program Provides Focus for
Improving Performance, GAO-03-457 (Washington, D.C.: Mar. 28, 2003),
and Financial Management: Seven DOD Initiatives That Affect the
Contract Payment Process, GAO/AIMD-98-40 (Washington, D.C.: Jan. 30,
1998).
[4] Pub. L. No. 108-136, § 851, 117 Stat. 1392, 1556 (Nov. 24, 2003).
For the purpose of this report and as specified by the National Defense
Authorization Act of 2004, timeliness is defined in accordance with the
Prompt Payment Final Rule, 5 C.F.R. pt. 1315.
[5] 31 U.S.C. ch. 39. DOD also makes commercial payments that are not
subject to the Prompt Payment Act that include, among other things,
contract financing payments, progress payments, interim payments, and
advance payments.
[6] DOD also uses Electronic Data Interchange and Web Invoicing
applications to transmit payment documents and data electronically.
However, because WAWF provides greater visibility over the status of
payments and payment documents, it is DOD's stated goal that all
electronic invoicing be performed using WAWF.
[7] Pub. L. No. 106-398, § 1008, 114 Stat. 1654, 1654A-249 (Oct. 30,
2000).
[8] Invoices related to certain types of contracts, such as
construction contracts, must be certified by a DOD contracting
official, who then forwards the certified invoice to the appropriate
DOD vendor pay site for payment.
[9] 15. U.S.C. § 632 (a) (1).
[10] Id. at § 632 (a) (3).
[11] 31 U.S.C. § 3902.
[12] Id. at § 3904.
[13] 5 C.F.R. § 1315.5 (b).
[14] 5 C.F.R. § 1315.4 (g). The start of the payment period is the
later of (1) the receipt of the proper invoice by the designated
billing office or (2) the government's acceptance of supplies delivered
or services performed by the contractor.
[15] 31 U.S.C. § 3902 (b).
[16] 70 Fed. Reg. 76497, December 27, 2005. (See
www.publicdebt.treas.gov/opd/opdrmt2.htm.)
[17] The fast pay procedure allows payment under limited conditions to
a contractor prior to the government's verification that supplies have
been received and accepted. (48 C.F.R. subpt. 13.4). Among other
conditions, deliveries of supplies are to occur at locations where
there is both a geographical separation and a lack of adequate
communications facilities between government receiving and disbursing
activities that will make it impractical to make timely payment based
on evidence of government acceptance.
[18] GAO-03-457.
[19] GAO/AIMD-98-40.
[20] Defense Federal Acquisition Regulation Supplement, 48 C.F.R. §
232.903. Small disadvantaged businesses are a subset of the larger
population of small business contractors. The payment data provided by
DOD did not allow us to isolate and analyze payments made to small
disadvantaged businesses.
[21] Agencies may pay early if the discount terms result in an annual
interest rate equal to, or higher than, the Current Value of Funds Rate
(CVFR). Department of the Treasury, Treasury Financial Manual, vol. I,
pt. 6, § 8040.40. The CVFR is published quarterly by the Secretary of
the Treasury.
[22] Pub. L. No. 106-398, § 1008, 114 Stat. 1654, 1654A-249 (Oct. 30,
2000).
[23] Subsection 1008(c) authorized the Secretary to exempt any category
of invoices from this requirement if he determines that adherence to
the requirement would be "unduly burdensome." Through DOD's
implementing regulations, the Secretary has exempted invoices where
vendors are unable to submit invoices electronically, among other
categories. DFARS 232.7002(a).
[24] DFARS 252.232-7003.
[25] Although DFARS 252.232-7003 provides several electronic submission
options, DOD has designated WAWF as the preferred electronic invoicing
tool because it provides greater visibility over the status of payments
and payment documents.
[26] Invoices may contain multiple lines of accounting, or funding
sources. DFAS must match each line of accounting with the official
accounting records to ensure that funds are available.
[27] Invoices related to certain types of contracts, such as
construction contracts, must be certified by a DOD contracting
official, who then forwards the certified invoice to the appropriate
DOD vendor pay site for payment.
[28] DFARS 232.7002(b). While subsection 1008(c) of the National
Defense Authorization Act also authorized the Secretary to exempt
categories of transactions from the electronic transmission
requirement, DOD's implementing regulations currently allow for no such
exemptions.
[29] 31 U.S.C. § 3902.
[30] National Federation of Independent Businesses, National Small
Business Poll: The Cash Flow Problem, vol. 1, no. 3 (2001).
[31] The Prompt Payment Act provides that an invoice is deemed to be
received on the later of (1) the date a proper invoice is received by
an agency if the agency annotates the invoice with the date of receipt
or (2) the seventh day after the date on which goods are delivered or
services completed, unless acceptance occurs earlier or if a longer
acceptance period is specified in the contract. 5 C.F.R. § 1315.4 (b)
(1). If the agency fails to annotate an invoice with the date of
receipt of the invoice, the date placed on the invoice by the
contractor is used to determine the start date for the payment period.
Id. at § 1315.4 (b) (2). Further, agencies are required to return
improper invoices to the contractor within 7 days of receipt to
identify deficiencies in the invoice. 5 C.F.R. § 1315.4 (c).
[32] 15 U.S.C. §§ 631-657g.
[33] 31 U.S.C. ch. 39; 5 C.F.R. pt. 1315.
[34] 48 C.F.R. pt. 219 and subpt. 232.9.
[35] Id. at pt. 32.
[36] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). These standards
provide the overall framework for establishing and maintaining
effective internal control and for identifying and addressing areas of
greatest risk of fraud, waste, abuse, and mismanagement.
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