United States Government Accountability Office

GAO Report to Congressional Committees

DOD PAYMENTS TO 

SMALL BUSINESSES 

May 2006 

Implementation and 

Effective Utilization of 

Electronic Invoicing 

Could Further Reduce 

Late Payments 

 

GAO-06-358 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 2006

DOD PAYMENTS TO SMALL BUSINESSES

Implementation and Effective Utilization 

of Electronic Invoicing Could Further 

Reduce Late Payments 

Highlights of GAO-06-358, a report to 

congressional committees 

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 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.

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. 

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. 
Contents 

Letter 1

Results in Brief 4

Background 7

Small Business Invoices Paid Late More Often Than All Invoices 

Paid at Vendor Pay Locations 12

Long-standing Weaknesses in DOD’s Vendor Payment Processes 

Result in Late Payments to Contractors, Including Small 

Business Contractors 14

Late Payments May Create Financial Hardship for Some Small 

Business Contractors 20

Conclusion 24

Recommendations for Executive Action 25

Agency Comments and Our Evaluation 25

Appendix I Comments from the Department of Defense 28 

Appendix II Objectives, Scope, and Methodology 31 

Tables 

Table 1: Percentage of Invoices Paid Late by DFAS Location and 

Small versus All Business for Fiscal Year 2004 13

Table 2: Case Study Examples of Small Business Invoices Paid Late 

by DFAS 22

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 11

Page i GAO-06-358 DOD Payments to Small Business Contractors
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 

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Page ii GAO-06-358 DOD Payments to Small Business Contractors
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.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.2

 However, 

as we have reported in the past,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.4

 Specifically, we were asked 

DOD Payments to Small Business Contractors

 

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. 

Page 1 GAO-06-358 
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,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 

 

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. 

Page 2 GAO-06-358 DOD Payments to Small Business Contractors
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 

Page 3 GAO-06-358 DOD Payments to Small Business Contractors
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. 

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 smalldisadvantaged 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. 

Results in Brief 

Systemic weaknesses in DOD’s vendor payment processes result in late 

payments to contractors, including small business contractors. For 

Page 4 GAO-06-358 DOD Payments to Small Business Contractors
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),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 20017

 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 

 

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). 

Page 5 GAO-06-358 DOD Payments to Small Business Contractors
documentation electronically when contractors send their invoices 

directly to DOD vendor payment sites—which is often the case.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, 

 

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. 

Page 6 GAO-06-358 DOD Payments to Small Business Contractors
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. 

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.”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.10 Over the 

years, SBA has established and revised numerical definitions for all forprofit 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 

Background 

 

9

 15. U.S.C. § 632 (a) (1). 

10 Id. at § 632 (a) (3). 

Page 7 GAO-06-358 DOD Payments to Small Business Contractors
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 invoices11 and take discounts only when payments are made 

within the allowed discount period.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.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. 

 

11 31 U.S.C. § 3902. 

12 Id. at § 3904. 

13 5 C.F.R. § 1315.5 (b). 

Page 8 GAO-06-358 DOD Payments to Small Business Contractors
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.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.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.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 DFASColumbus. 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. 

 

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.) 

Page 9 GAO-06-358 DOD Payments to Small Business Contractors
• 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;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,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. 

 

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. 

Page 10 GAO-06-358 DOD Payments to Small Business Contractors
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 

As we have previously reported,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 

0

1

2

3

4

5

6

7

8

9

2001 2002 2003 2004 2005

Percentage

Source: GAO analysis of DFAS data.

DFAS commercial pay product lines

Vendor pay

Contract pay

 

19 GAO/AIMD-98-40. 

Page 11 GAO-06-358 DOD Payments to Small Business Contractors
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. 

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. 

Small Business 

Invoices Paid Late 

More Often Than All 

Invoices Paid at 

Vendor Pay Locations 

Page 12 GAO-06-358 DOD Payments to Small Business Contractors
Table 1: Percentage of Invoices Paid Late by DFAS Location and Small versus All 

Business for Fiscal Year 2004 

DFAS payment 

locations 

Percentage of 

small business 

invoices paid late

Percentage of 

all invoices 

paid late

Percentage 

difference

Vendor pay 

 Pensacolaa 63.69 24.97 38.72

 Dayton 17.63 12.87 4.76

 San Diego 10.11 9.62 0.49

 Norfolk 14.43 9.04 5.39

 Rock Island 9.24 8.92 0.32

 Charleston 15.19 7.98 7.21

 Limestone 10.83 7.24 3.59

 Orlando 10.06 5.35 4.71

 Pacific 9.00 4.69 4.31

Overall vendor pay 14.43 9.94 4.49

Contract pay 

 Columbus 1.72 1.78 (.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. 

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. 

Page 13 GAO-06-358 DOD Payments to Small Business Contractors
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 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 businesses20 by paying them as quickly as possible 

after invoices are received and before normal payment due dates 

established in the contract. 

DOD’s Cash Management 

Practices May 

Disadvantage Small 

Businesses 

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 

 

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. 

Page 14 GAO-06-358 DOD Payments to Small Business Contractors
has offered an early payment discount.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 timeconsuming 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 

 

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. 

Page 15 GAO-06-358 DOD Payments to Small Business Contractors
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 200122 that the 

Secretary of Defense shall require any claims for payment (e.g., invoices) 

under DOD contracts be submitted in electronic form.23 In January 2004, 

DOD updated the Defense Federal Acquisition Regulation Supplement 

(DFARS) to reflect the new electronic invoicing requirement.24 The 

January 2004 DFARS update outlines the electronic submission options25

 

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. 

Page 16 GAO-06-358 DOD Payments to Small Business Contractors
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 accounting26 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 

 

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. 

Page 17 GAO-06-358 DOD Payments to Small Business Contractors
$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 

Page 18 GAO-06-358 DOD Payments to Small Business Contractors
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 

payment27 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 

 

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. 

Page 19 GAO-06-358 DOD Payments to Small Business Contractors
regulations and policies do not clearly extend this requirement to 

receiving and acceptance officials.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. 

Although DOD is required by the Prompt Payment Act to pay interest 

penalties when certain bills are paid late,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. 

Late Payments May 

Create Financial 

Hardship for Some 

Small Business 

Contractors 

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 

 

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. 

Page 20 GAO-06-358 DOD Payments to Small Business Contractors
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).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. 

 

30 National Federation of Independent Businesses, National Small Business Poll: The Cash 

Flow Problem, vol. 1, no. 3 (2001). 

Page 21 GAO-06-358 DOD Payments to Small Business Contractors
Table 2: Case Study Examples of Small Business Invoices Paid Late by DFAS

Small business 

Number of late 

payments in 

fiscal year 

2004

Receivables > 30 

days as of the 

date of our 

fieldworka

Payment problems identified 

by small businesses 

Consistently 

received interest 

payments on 

overdue 

receivables 

Case study 1: 8(a), small 

disadvantaged business providing 

promotional and recruiting items for 

the Army 

5 $491,782 Invoices lost by DFAS, resulting 

in continual follow-up to receive 

payments 

Yes 

Case study 2: 8(a), small 

disadvantaged business providing 

environmental remediation services 

for the Navy 

17 $755,951 Cumbersome, inefficient process; 

current contractual documents 

not available in payment office 

No 

Case study 3: 8(a), small 

disadvantaged business providing 

construction services for the Air 

Force and the Navy 

63 $431,920 Invoices lost by DFAS, resulting 

in continual follow-up to receive 

payments 

Yes 

Cast study 4: 8(a), small 

disadvantaged business providing 

environmental engineering services 

for the Army and the Navy 

22 $570,899 Invoices lost by DFAS, resulting 

in continual follow-up to receive 

payments; poor customer support 

when trying to resolve issues 

No 

Case study 5: 8(a), small 

disadvantaged business providing 

general maintenance and 

construction services for the Army 

and the Navy 

23 $743,000 Invoices lost by DFAS, resulting 

in continual follow-up to receive 

payments 

Yes 

Case study 6: minority owned small 

business providing moving and 

storage services for the Army 

361 $286,760 Invoices lost by DFAS, resulting 

in continual follow-up to receive 

payments 

No 

Case study 7: small business 

providing computer software and 

equipment for the Army 

1 $600,000 Receiving unit failed to submit 

receiving report in a timely 

manner 

No 

Case study 8: minority owned, 8(a), 

small disadvantaged business 

providing facilities management 

services for the Army and the Navy 

2 $140,000 Invoices lost by DFAS, resulting 

in continual follow-up to receive 

payments; cumbersome, 

inefficient process. 

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. 

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 

Page 22 GAO-06-358 DOD Payments to Small Business Contractors
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.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, 

 

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). 

Page 23 GAO-06-358 DOD Payments to Small Business Contractors
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. 

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. 

Conclusion 

Page 24 GAO-06-358 DOD Payments to Small Business Contractors
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. 

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. 

Agency Comments 

and Our Evaluation 

Page 25 GAO-06-358 DOD Payments to Small Business Contractors
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. 

McCoy Williams 

Director, Financial Management and Assurance 

Page 26 GAO-06-358 DOD Payments to Small Business Contractors
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 

Page 27 GAO-06-358 DOD Payments to Small Business Contractors
Appendix I: Comments from the Department Appendix I: Comments from the Department of Defense 

of Defense 

Page 28 GAO-06-358 DOD Payments to Small Business Contractors
Appendix I: Comments from the Department 

of Defense 

Page 29 GAO-06-358 DOD Payments to Small Business Contractors
Appendix I: Comments from the Department 

of Defense 

Page 30 GAO-06-358 DOD Payments to Small Business Contractors
Appendix II: Objectives, Scope, and Appendix II: Objectives, Scope, and Methodology 

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 

Page 31 GAO-06-358 DOD Payments to Small Business Contractors
Appendix II: Objectives, Scope, and 

Methodology 

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 selfcertification 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, 

Page 32 GAO-06-358 DOD Payments to Small Business Contractors
Appendix II: Objectives, Scope, and 

Methodology 

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,1

 the Prompt 

Payment Act and regulations,2

 the Defense Federal Acquisition 

Regulations,3

 the Federal Acquisition Regulation,4 and DFAS desk policies. 

 

1

 15 U.S.C. §§ 631-657g. 

2

 31 U.S.C. ch. 39; 5 C.F.R. pt. 1315. 

3

 48 C.F.R. pt. 219 and subpt. 232.9. 

4

 Id. at pt. 32. 

Page 33 GAO-06-358 DOD Payments to Small Business Contractors
Appendix II: Objectives, Scope, and 

Methodology 

In conducting our work, we also referred to the internal control standards 

provided in Standards for Internal Control in the Federal Government.

5

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.

 

5

 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. 

(192151) Page 34 GAO-06-358 DOD Payments to Small Business Contractors
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