FAR 32.907—Interest penalties.
Plain-English Summary
FAR 32.907 explains when the Government must pay prompt payment interest penalties, when those penalties are automatic, and when a contractor must take extra steps to recover an additional penalty for failure to pay interest on time. It covers late payment interest, improperly taken prompt-payment discounts, the special rule for interim payments on cost-reimbursement service contracts, the conditions that trigger or block interest, how disputes over amount, compliance, or withheld amounts affect payment, and how interest is computed under the OMB prompt payment regulations at 5 CFR part 1315. It also addresses the contractor’s written demand requirements for an additional penalty, including what must be included, the 40-day deadline, and how postmark problems are handled. Finally, it makes clear that lack of available funds does not excuse the Government from paying interest. In practice, this section protects contractors from the cost of Government payment delays and gives contracting and payment offices a strict administrative framework for identifying, calculating, and paying interest without a contractor request in most cases.
Key Rules
Automatic late-payment interest
If the Government receives a proper invoice, has the required receiving report or other authorization, there is no disagreement over the payment, the invoice is final when applicable, and payment is made after the due date, the designated payment office must automatically pay interest. For interim payments on cost-reimbursement service contracts, interest is also due when payment is more than 30 days after receipt of a proper invoice.
Improper discount taken
If the Government incorrectly takes a prompt-payment discount, the payment office must automatically pay interest on the amount of the discount improperly taken. The interest runs from the first day after the discount period ends until the contractor is actually paid.
Additional penalty for unpaid interest
A contractor may receive an extra penalty only if the Government owes at least $1 in interest, the payment office fails to pay that interest within 10 days after the principal invoice amount is paid, and the contractor submits a timely written demand postmarked no later than 40 days after principal payment.
Strict demand content
The contractor’s written demand must specifically identify the invoice, request payment of the overdue interest and any additional penalty, attach a copy of the invoice, and state that the principal has been paid and when it was received. The Government may not require extra supporting data beyond these items.
Postmark and receipt rules
If the demand has no postmark or an illegible one, the payment office may date-stamp the demand when received on or before the 40th day after payment. If the office fails to date-stamp it, the Government may rely on the contractor’s date on the demand, so long as that date is no later than the 40th day after payment.
Disputes block interest
The Government does not owe interest penalties when the payment delay results from a disagreement over the amount due, contract compliance, or amounts properly withheld or retained under the contract. Those disputes are handled under the contract’s Disputes clause, including any interest that may be payable there.
Interest calculation follows OMB rules
The amount of interest penalty must be computed under the OMB prompt payment regulations in 5 CFR part 1315, not by ad hoc agency methods. This ensures a uniform calculation method across agencies.
No excuse for lack of funds
Temporary unavailability of funds does not relieve the agency of its obligation to pay interest penalties. The Government remains responsible for the cost of late payment even if funding is temporarily unavailable.
Responsibilities
Designated Billing Office
Receive and process proper invoices and related documentation needed to establish whether payment is due and whether the invoice is proper for prompt payment purposes.
Designated Payment Office
Automatically calculate and pay interest penalties when the regulatory conditions are met, pay interest on improperly taken discounts, pay any additional penalty when the contractor has made a valid written demand, and compute interest in accordance with 5 CFR part 1315.
Contracting Officer / Government Program Office
Ensure receiving reports or other authorizing documentation are processed, identify and resolve disputes over quantity, quality, compliance, or withheld amounts, and recognize when a payment delay is attributable to a dispute rather than a prompt-payment violation.
Contractor
Submit proper invoices, monitor payment timing, and if interest is not paid on time, submit a timely written demand that meets the content and deadline requirements. The contractor must also identify the invoice, attach the invoice copy, and state when principal payment was received.
Agency
Pay interest penalties even when funds are temporarily unavailable and maintain prompt-payment procedures that support automatic interest payment and proper dispute handling.
Practical Implications
Contractors should not assume they must request ordinary late-payment interest; in most qualifying cases, the Government must pay it automatically. The main exception is the extra penalty for failure to pay interest, which requires a timely, specific written demand.
Payment offices need controls to identify when an invoice is proper, when the due date has passed, and whether any dispute or withholding removes the obligation to pay interest. Missing one of these checks can lead to underpayment or improper interest charges.
Disputes over quantity, quality, compliance, or retained amounts are a common reason interest is not owed, so the record should clearly show whether the delay was administrative or dispute-driven.
Contractors seeking the additional penalty must watch the 40-day deadline closely and keep proof of mailing or other evidence of timely submission. A missing or illegible postmark can create avoidable disputes.
Temporary funding problems do not excuse late payment, so agencies cannot treat lack of available funds as a defense against interest liability.
Official Regulatory Text
(a) Late payment . The designated payment office will pay an interest penalty automatically, without request from the contractor, when all of the following conditions, if applicable, have been met: (1) The designated billing office received a proper invoice. (2) The Government processed a receiving report or other Government documentation authorizing payment, and there was no disagreement over quantity, quality, or contractor compliance with any contract requirement. (3) In the case of a final invoice, the payment amount is not subject to further contract settlement actions between the Government and the contractor. (4) The designated payment office paid the contractor after the due date. (5) In the case of interim payments on cost-reimbursement contracts for services, when payment is made more than 30 days after the designated billing office receives a proper invoice. (b) Improperly taken discount . The designated payment office will pay an interest penalty automatically, without request from the contractor, if the Government takes a discount for prompt payment improperly. The interest penalty is calculated on the amount of discount taken for the period beginning with the firstday after the end of the discount period through the date when the contractor is paid. (c) Failure to pay interest. (1) The designated payment office will pay a penalty amount, in addition to the interest penalty amount, only if- (i) The Government owes an interest penalty of $1 or more; (ii) The designated payment office does not pay the interest penalty within 10 days after the date the invoice amount is paid; and (iii) The contractor makes a written demand to the designated payment office for additional penalty payment in accordance with paragraph (c)(2) of this section, postmarked not later than 40 days after the date the invoice amount is paid. (2) (i) Contractors must support written demands for additional penalty payments with the following data. The Government must not request additional data. Contractors must- (A) Specifically assert that late payment interest is due under a specific invoice, and request payment of all overdue late payment interest penalty and such additional penalty as may be required; (B) Attach a copy of the invoice on which the unpaid late payment interest is due; and (C) State that payment of the principal has been received, including the date of receipt. (3) If there is no postmark or the postmark is illegible- (i) The designated payment office that receives the demand will annotate it with the date of receipt, provided the demand is received on or before the 40 thday after payment was made; or (ii) If the designated payment office fails to make the required annotation, the Government will determine the demand’s validity based on the date the contractor has placed on the demand; provided such date is no later than the 40 thday after payment was made. (d) Disagreements. (1) The payment office will not pay interest penalties if payment delays are due to disagreement between the Government and contractor concerning- (i) The payment amount; (ii) Contract compliance; or (iii) Amounts temporarily withheld or retained in accordance with the terms of the contract. (2) The Government and the contractor must resolve claims involving disputes, and any interest that may be payable in accordance with the Disputes clause. (e) Computation of interest penalties . The Government will compute interest penalties in accordance with OMB prompt payment regulations at 5 CFR Part 1315 . (f) Unavailability of funds . The temporary unavailability of funds to make a timely payment does not relieve an agency from the obligation to pay interest penalties.