Budgeting and Forecasting

Extension of Federal Prompt-Pay Requirements to State and Local Governments

In 1982, the Federal Prompt Pay Act was passed in an effort to improve the federal government's bill-paying record. Federal legislation requiring payments to vendors on a timely basis was part of a management improvement effort intended to serve as an incentive for more vendors to do business with a federal government. In 1988, there was a proposal to modify the federal law to extend federal prompt-pay requirements to federally assisted state and local government grant and contract programs, but it did not pass because of a final-hour firestorm of criticism.

The timely payment of bills is an important financial management practice that can save governments money. By carefully timing payments so there are neither late nor early payments, a government can take advantage of discounts, avoid penalties, and maximize investment return on short-term investments. Furthermore, prompt bill paying reduces vendor costs which, in turn, reduces state and local procurement costs.

State and local governments have ample incentives to pay their bills on a timely basis if a contractor's performance is satisfactory and the work is complete and acceptable. Governments want to be reliable business partners, so they can retain vendors and reduce the cost of goods and services. Political accountability is also a factor in the prompt payment of bills.

State and local prompt-pay laws are relatively new and still evolving. According to the U.S. Office of Management and Budget, since the passage of the Federal Prompt Pay Act, 27 states have passed new prompt-pay laws and, in addition to this dramatic increase in new laws, states are also amending their existing prompt-pay statutes to strengthen language, increase interest penalties and eliminate loopholes.

The Government Finance Officers Association encourages state and local government efforts to improve government bill-paying performance and policy, regardless of the source of financing, and opposes federal regulation of the procurement practices of state and local governments as an unnecessary federal mandate.

  • Publication date: June 1989