BOP Program Statement 2011.13 § 7

Any payment subject to the Prompt Payment Act that is paid after the payment due date, as well as

discounts taken in error, requires that interest be paid to the vendor automatically, without the

vendor requesting the interest payment (except as provided in Section 7.c.).

a. Interest Calculation. Late payment interest is calculated at the interest rate in effect on the

day after the due date. The interest rate is determined by the Secretary of the Treasury and

published semi-annually in the Federal Register.

Interest is computed from the day after the due date through the payment date. To determine the

number of days overdue, the check date, or settlement date for EFT, is considered the payment

date.

The two methods of calculating interest are simple interest and compound interest.

(1) Simple interest is used when the payment is late by 30 days or less. The formula for

calculating simple interest is:

Invoice x Number of x Interest Rate = Interest

Amount Days Overdue 360 Payable

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Example:

Due Date: July 31

Payment Date: August 24

Number of Days Overdue: 24 (Payment Date  Due Date)

Invoice Amount: $7,250.00

Interest Rate: 5 %

Interest Payable:

$7,250.00 x 24 x .055/360 = $26.58

(2) Compound interest is used when the payment is late by more than 30 days. The formula for

compound interest uses the same formula as simple interest; however, the interest is calculated in

30-day increments. The amount of interest that accrues in each 30 -day period is added to the

invoice amount before the next 30-day period is calculated.

Example:

Due Date: July 31

Payment Date: September 24

Number of Days Overdue: 55 (Payment Date  Due Date)

Invoice Amount: $8,500.00

Interest Rate: 5 %

Interest Payable:

$8,500.00 x 30 x .055/360 = $38.96

$8,500.00 + $38.96 = $8,538.96

$8,538.96 x 25 x .055/360 = $32.61

The total amount of compound interest paid on September 24 is $71.57 ($38.96 for the first 30-day

period plus $32.61 for the second 25-day period).

b. Interest Payment. The following requirements must be met when paying interest penalties:

■ A notice is forwarded to the vendor for each payment that includes interest stating:

 The amount of the interest penalty included in the payment.

 The rate by which the penalty was computed.

 The number of days used to calculate the penalty (the contract number and invoice number

are also included in the notice to help the vendor reconcile the payment).

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■ Interest must be calculated and paid whether or not the vendor requests it.

■ The interest is charged to the Cost Center that procured the item.

■ The amount of interest due on a late payment can only accrue for one year.

Temporary unavailability of funds to make a timely payment does not relieve an agency from

paying interest penalties.

c. Interest Not Due. Interest is not re quired to be paid under the following circumstances:

■ When payment is delayed because of a disagreement between a Federal agency and a vendor

over the amount of the payment or other issues concerning compliance with the terms of the

contract.

■ When payments are made in advance or solely for financing purposes.

■ For a period when amounts are withheld temporarily in accordance with the contract.

■ When payment is delayed or returned due to incorrect banking information supplied by the

vendor, it must be made within seven days of receipt of the correct information, otherwise

interest begins to accrue. In addition, vendors are contacted for correct banking information

within seven days after the agency is notified that it has incorrect banking information for the

vendor.

■ When the interest amount is less than $1.00.

■ When an EFT payment is not credited to the vendor’s account by the payment due date because

of the failure of the Federal Reserve or the vendor’s bank to do so.

d. Interest Due but Not Paid. When an interest penalty is owed to a vendor but not paid:

■ Interest penalties remaining unpaid for any 30-day period are added to the principal (original

interest amount due), and interest penalties thereafter accrue monthly on the total of the

principal plus the previously accrued interest.

■ When it is determined that a vendor was owed an interest penalty payment, but was not paid,

the accrued interest is determined. The vendor does not have to request the additional interest

penalty amount.

Example:

Invoice Amount: $15,000

Due Date: April 30

Date paid: June 13

Interest Rate: 7%

Overdue Days: 44

The vendor’s original late payment interest penalty should have been determined as follows:

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$15,000 x 30 x .07/360 = $87.50

$15,000 + $87.50 = $15,087.50

$15,087.50 x 14 x .07/360 = $41.07

The vendor was owed $15,128.57 on June 13, but was only paid $15,000; therefore, the new

principal is $128.57. On August 4, the vendor is paid for the interest. The amount due is now the

new principal plus 52 more days (June 14 to August 4) of interest, which has accrued as follows:

$128.57 x 30 x .07/360 = $.75

$128.57 + $.75 = $129.32

$129.32 x 22 x .07/360 = $.55

$129.32 + $.55 = $129.87

The amount paid on August 4 will be $129.87.