Small businesses wait for DOD dollars

GAO finds that late payments are more the rule than the exception

Small businesses received a record-breaking $79.6 billion in federal prime contracts in fiscal 2005, $10 billion more than the year before, former Small Business Administration Administrator Hector Barreto said in a June 21 announcement.

“This is excellent news for small businesses doing business with the federal government,” he said.

The small-business contracts represented 25.4 percent of federal prime contracting dollars in fiscal 2005, surpassing the overall government statutory goal of 23 percent for the third consecutive year, SBA said.

However, according to a new Government Accountability Office report, the Defense Department pays small-business contractors later on average than it pays all other contractors. Business industry experts say the delays in payment cause cash flow problems and purchasing headaches for small companies.

According to GAO statistics, DOD is late in paying small-business invoices 14.5 percent of the time, more often than all other types of invoices from nine DOD payment centers.

GAO attributed the delays to DOD’s reliance on paper payment documents. The department, however, has invested in a Web-based tool known as Wide Area Work Flow (WAWF). GAO recommended that DOD expand its use.

DOD has decreased the numbers of invoice errors and minimized delays in paying invoices when it uses WAWF. But not all DOD agencies have adopted the program. In seeking an answer to the late payments, DOD officials told GAO that the department’s cash management practices and its general priorities favor paying larger vendors first.

GAO interviewed 17 small-business owners who, according to DOD records, received multiple late payments in fiscal 2004. They said DOD’s late payments forced them to get lines of credit or to use their personal finances to pay for 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,” the GAO report states.

Some small-business owners reported that their credit lines cost them 2 percent to 4 percent more than the interest rate DOD uses to calculate late-payment penalties, further penalizing them.

Borrowing money is expensive, said Karen Kerrigan, president and chief executive officer of the Small Business and Entrepreneurship Council, an industry group based in Washington, D.C. Wrestling with cash flow problems can impair a company’s profitability and eventually crush its competitive edge, she said.

“Worrying about late payments and putting more company resources and time into payments collections detract from other critical business operations,” she added.

Kerrigan cited one council member who faced that problem and nearly went out of business because of it. The owner marshaled resources from business and political contacts to pressure DOD for a $300,000 payment that was six months late. DOD eventually paid the owner. “What a waste of time for this talented business owner,” Kerrigan added.

Rob Pence, president of Lakota Technical Solutions, said DOD pays his systems and computer engineering firm late on at least one invoice for every contract. DOD’s paper-based system is prone to errors and requires a business’ employees to follow the paperwork through the process. As a small-business owner, Pence doesn’t have the staff to do that. The paper-based system hurts businesses such as Lakota.

“It’s a cash flow issue,” Pence said. The company has to keep enough cash on hand to make purchases, and when DOD’s payments are late, business suffers. Lakota, based in Laurel, Md., supports the military’s battlefield information systems.

Kerrigan said Congress has been lax in its oversight. “Sometimes, sunlight is the best antiseptic, although exposure often does not lead to long-term changes,” she said.

Congress has urged DOD to speed payments to small businesses and expand its use of WAWF. The fiscal 2004 National Defense Authorization Act, for example, requires GAO to report on the timeliness of payments to small businesses, and the Prompt Payment Act, enacted in 1982, calls for paying interest on late payments. Agencies must pay 5.125 percent per year, according to the Treasury Department. But that percentage could change soon.

Small businesses often do not consider working with the government because of the payment patterns, Kerrigan said. “It’s like a death spiral for the business,” she added.

“If the small contractor is performing and delivering his or her goods and services on time, there is absolutely no reason why they should not be paid in a timely manner,” she said.

The Web can do it better

The Defense Department purchased Wide Area Work Flow (WAWF), an online application to aid in the electronic exchange of payments and related documents, to join its separate payment, accounting and financial systems. If managed effectively, the Government Accountability Office said, WAWF could reduce problems such as late payments to vendors and small businesses.

But a GAO report said DOD has failed to manage WAWF wisely and use it strategically. DOD does not have any way to measure whether employees are using the system and, if not, what the barriers are that keep it from being effective, according to GAO.

GAO recommended adding a flagging mechanism for small, disadvantaged businesses’ invoices so they can be paid on time.

To make WAWF more worthwhile, GAO also recommended:

  • Clarifying its management structure and outlining a clear strategy.

  • Defining the roles of the organizations integral to WAWF’s success.

  • Developing and using performance metrics.

  • Requiring all agencies to receive reports and payments electronically.

— Matthew Weigelt

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