Government pays its bills late. If agencies use different payment procedures, we need to identify those which are consistently slower than the others.

Finally, I welcome any legislative suggestions for facilitating timely payment.

Do we need a blanket requirement that all agencies must pay their bills within 30 days?

Should they be required to pay interest on late payments just as taxpayers are required to pay interest on late filing of tax returns? Are there particular problems small businesses are having which deserve special statutory changes?

Should there be an expedited procedure for the settlement of claims, especially small claims?

There are many questions we need answered and I believe we have with us today the key people for providing some answers.

We will hear first from the General Accounting Office. Their findings will be based on the first comprehensive study ever undertaken on the Government late payment problem.

GAO should be able to tell us the magnitude of the problem, some of the primary causes and which agencies pay late most frequently. We will then hear from the Office of Federal Procurement Policy, an agency recently created by Congress to provide some direction to the current mish-mash of current Government contracting policy.

OFPP is the agency that can require the implementation of any or all of the administrative measures that may be necessary to eliminate untimely payments.

Third, the Commission on Federal Paperwork has just released an excellent study on the burdensome paperwork associated with Federal procurement. The Commission will have some fascinating things to say and I am sure the whole commercial world will be listening.

Excessive paperwork is the most frequent reason cited by potential contractors for not dealing with the Federal Government. They either do not understand the requirements or do not have the necessary personnel to comply.

Finally, we will hear from the Government Printing Office on their new methods of payment. GPO can act as a model for other agencies having the late payment problem.

So our first witness this morning is Mr. Donald L. Scantlebury, Director, Financial and Management Studies Division, General Accounting Office.

You may proceed in any manner that you wish.

STATEMENT OF DONALD L. SCANTLEBURY, DIRECTOR, FINANCIAL AND MANAGEMENT STUDIES DIVISION, GENERAL ACCOUNTING OFFICE

Mr. SCANTLEBURY. Thank you, Mr. Chairman.

We are here today at your request to discuss the performance of Federal agencies in paying their bills.

With me today are Mr. James Wright, of our Financial and General Management Studies Division; and Mr. William Rigazio, of our New York regional office.

My testimony will summarize the interim results of our review of various aspects of Federal payment performance and contractor perceptions of that performance.

Since our review is not yet completed, the responsible agencies have not been given an opportunity to formally comment on our findings. It is our normal practice to give them an opportunity to comment. In the fiscal year ended June 30, 1976, the Federal Government purchased billions of dollars worth of goods and services of all kinds. These procurements were made by over 10,000 Federal buying offices, and payments to contractors were made by about 900 payment centers. Our review had its impetus in constituent complaints to Members of the Congress concerning the lack of timeliness with which Federal agencies paid their bills.

Our review was made on a government wide basis and was intended to determine the extent to which Federal agencies pay their bills in a timely manner and to identify any changes in policies or procedures that might be needed to improve the timeliness of payments. After the review had begun several Members of the Congress including you, sir, expressed interest in the area. We used questionnaires as well as structured data collection instruments to obtain information during our review.

SOME BASIC FACTS ABOUT FEDERAL PROCUREMENT

In fiscal year 1976 the Department of Defense bought about 47 billion dollars' worth or 72 percent of the total goods and services the Government purchased, and civil agencies bought about $18 billion or 28 percent. Large procurements account for a high percentage of total Federal buying. For example, in DOD, in 200,000 procurement actions of over $10,000 each accounted for only 2 percent of all actions, but represented 89 percent of DOD's total procurement dollars.

LEGAL AND ADMINISTRATIVE PROVISIONS GOVERNING PAYMENT

The basic provision governing Federal payments was established in 1823 (31 U.S.C. 529) and provides that payment shall not be made before the service is rendered, or the articles are delivered.

More recent legislation (10 U.S.C. 2307, 41 U.S.C. 255) has permitted payment in advance of these dates provided the contractor gives adequate security and the head of the contracting agency determines that advance payment is in the public interest.

Specific guidelines relating to payment are contained in the Federal Procurement Regulations (FPR), used by civil agencies, and the Armed Services Procurement Regulation (ASPR), applicable to the military services.

The regulations of individual agencies are based on either the FPR or ASPR and guidance provided by the Comptroller General.

Since its creation in August 1976, the Office of Federal Procurement Policy (OFPP) has been responsible for the administrative review of all Federal procurement activities.

Personnel at Federal payment centers make a determination that payment is due by matching essential contractor and Government documentation.

With some exceptions, this documentation consists of an invoice from the contractor, a contract or purchase order from the buying activity, and a receiving report form the receiving activity.

In the case of progress or cost reimbursable payments, the invoice and the receiving documents are replaced by a payment request showing costs incurred and/or the contractor's estimate of contract performance.

A comptroller general decision and guidance he has provided to executive branch agencies requires that a purchase order, vendor invoice and receiving report or their equivalent are on hand before a payment can be made.

Payment center personnel process a payment only after all the necessary documents have been received.

An exception has been made to the basic documentation requirements to expedite payment primarily for purchases of $10,000 or less. In essence this procedure eliminates the requirement that a receiving report be obtained before payment is made.

The primary role of the payment center is to determine that payment to a contractor is proper. Since each agency establishes its own payment system, there is no standard organization pattern for the centers. Some agencies have decentralized their operations while others have only one center for the entire agency. Military payment centers issue their own checks, while, in most cases, civilian agency checks are issued by a Treasury disbursing officer.

SCOPE OF REVIEW

At the 58 Federal payment centers we visited, we obtained detailed information concerning 3,263 contractor invoices involving 2,092 payments valued at approximately $32 million.

We selected the payment centers and the payments according to statistical sampling methodology designed to provide results which would be representative of payment practices governmentwide including the timing of payments.

At the 58 payment centers we also reviewed payment policies and procedures and attempted to identify the causes of untimely payments. In addition to collecting historical data on payments at the payment centers, we mailed a questionnaire to 1,169 firms that have conducted business with the Federal Government to obtain their perceptions and opinions on how well the Government pays its bills.

The contractors were selected statistically from a universe of about 68,000 Government contractors and usable questionnaires were received from 950 companies.

As with our selection of payments we believe that the contractor views obtained in our questionnaire survey are generally representative of those of the entire contractor community.

CONTRACTOR VIEWS OF FEDERAL PERFORMANCE

Concerning the results of our review, I would like to begin by giving you some of the major findings of our survey of contractors' views. First, and probably foremost, the large majority of Federal contractors seemed generally satisfied with the timeliness with which Federal agencies have paid them.

About 73 percent of the firms participating in our survey expressed a moderate to high degree of satisfaction with Federal agency payment performance.

About 16 percent, however, expressed dissatisfaction. Thus, although the overall results of the survey are encouraging, there is clearly a sizable number of contractors who believe they have not been paid promptly enough.

The contractors' level of satisfaction with Federal payment performance closely paralleled their actual payment experience.

For example, we asked them to estimate the percentage of Federal payments received within each of several time ranges.

Generally, the firms that reported less favorable experience also expressed the most dissatisfaction with overall Government payment performance.

In this regard, the dissatisfied firms indicated that 82 percent of their Federal payments were received more than 30 days after the invoice date while the satisfied firms said that only 41 percent of their Federal payments were received more than 30 days after the invoice date.

Although only 16 percent of the companies responding were dissatisfied with the payment performance of Federal agencies we found that firms with certain characteristics were more likely to be dissatisfied than others.

Companies that dealt with Federal agencies frequently were more dissatisfied than those who had infrequent dealings.

Likewise, companies that experienced significant administrative and cash flow problems due to late Federal payments were more dissatisfied than those that were not greatly affected by those problems.

The proportion of firms that were satisfied with Federal agency payment performance also varies among different sizes of firms. We divided the 950 firms participating in the survey into three size categories of large, medium, and small. The large category consisted of firms with reported annual sales of over $50 million, the medium category consisted of those with annual sales of between $1 and $50 million and the small category consisted of those with less than $1 million in annual sales. Our analyses indicated that a higher proportion of large firms were dissatisfied than were those in either of the other two categories.

For example, firms categorized as large were almost twice as likely to express dissatisfaction as were small firms.

Apart from being designed to elicit opinions as to how well the Government is doing in paying its bills, a major part of our questionnaire survey of contractors was concerned with obtaining information on the basis they used in assessing the timeliness of Federal payments.

The majority of the companies indicated that they ordinarily expect payment within 30 days of the invoice date.

In a related, but different question we asked when they consider payments from Federal agencies to be late.

Although 98 percent had indicated that they considered payment for goods to be due within 30 days from the invoice date, or sooner, only 69 percent had cited this same period as an appropriate basis for determining that a payment is late.

Twenty-seven percent of the firms said a payment is late when not paid within 60 days of the invoice date and the remaining 4 percent cited 90, 120, and even 150 days from the invoice date as a basis.

When asked to compare the timeliness of Federal payments to payments from commercial firms, 43 percent of the surveyed firms thought that commercial firms pay faster, 21 percent said commercial firms pay slower and 36 percent saw little difference.

RESULTS OF PAYMENT ANALYSIS

Mr. Chairman, with this overview of how the responding firms view the Federal Government as a bill payer, I would now like to discuss the results of our analysis relating to vendor invoices.

As I mentioned earlier, we reviewed the history of over 3,200 such invoices involving payment by 58 Federal payment centers.

To assess the timeliness of Federal payments, determination of a due date for the bill is a must. But, neither the Federal Procurement Regulations (FPR) nor the Armed Services Procurement Regulation (ASPR), nor most Federal contracts specify the date from which the payment period is to run.

For bills involving discounts, however, both the FPR and ASPR provide that the discount periods are to be computed from the date of delivery of goods and services, or the receipt of an invoice by the Government, whichever is later.

Based on the results of our questionnaire survey of vendors, it is apparent that most Federal contractors believe the invoice date should be used to determine when Federal payments are due and that such payments should be received within 30 days of the invoice date.

This is also the standard which prevails in commercial practice. Although specific payment terms are lacking for many Federal payments, a 30-day period for calculating due dates seems most widely recognized in those Federal contracts that specified a payment date and by Federal contractors.

Because at the time of our review there was no consensus, however, concerning the date on which the 30-day period should begin, and both the FPR and ASPR were silent on this point, we used different starting dates, together with a 30-day payment cycle, to measure the timeliness of payments covered in this review, the two primary ones being:

The date of the invoice; and the date of acceptance of the goods and services. Attachment 1 to my statement contains a table that shows the number and dollar amounts of the invoices paid within various time periods based on these two dates.

[Attachment 1 follows:]