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Potential Consequences of Delayed Payments to Contractors Under New Government Policies
In a significant shift to the contractor payment system, federal agencies may soon face the financial repercussions of late payments to government contractors, a concern amplified by recent executive action from President Donald Trump.
On February 26, President Trump enacted an executive order mandating that agencies collaborate with the Department of Government Efficiency to establish centralized technological infrastructures. The aim is to better document all payments related to government contracts and grants, including justifications for each transaction, thereby enhancing oversight and accountability in government contracting.
However, since the announcement, the Professional Services Council (PSC), a key trade association representing federal contractors, has indicated a noticeable slowdown, and in some cases, a complete halt, in payment disbursements. This situation not only adversely affects the contractors but also places agencies at risk of accruing interest on overdue invoices as stipulated by the Prompt Payment Act.
The current interest rate applicable under the Prompt Payment Act for the first half of 2025 is set at 4.625%. This could become a considerable liability for federal agencies if delayed payments persist.
“The situation is evolving, and it appears that the halting of payments, combined with the overhaul aimed at creating a centralized payment system, might have unforeseen negative consequences,” noted Stephanie Sanok Kostro, PSC’s executive vice president for policy, during a press roundtable on March 27.
This issue also extends to contractors engaged with the U.S. Agency for International Development (USAID), an agency that faces potential elimination under Trump’s plans. A federal court ruling in March mandated the administration to disperse nearly $2 billion in foreign assistance contracts, highlighting the urgency of addressing these financial discrepancies.
David Dixon, a partner specializing in government contracts at Pillsbury law firm, emphasized the fundamental principle of contracts, stating, “If the government fails to pay for services rendered, it constitutes a breach of contract.” He pointed out that there are existing systems in place to monitor contract expenditures, such as the Federal Procurement Data System and usaspending.gov.
Dixon highlighted that it is uncommon for the government to fall behind on payments, noting, “While there are few instances of delayed payments historically, the current situation reflects a trend since the Trump administration took office. Contractors are facing significant delays, some waiting for payments on invoices from as far back as November, leading to layoffs in some businesses predominantly reliant on federal contracts.”
Challenges remain regarding how the Trump administration will handle a potential influx of breach of contract claims and whether there might be repercussions for contractors who pursue such claims.
PSC’s President and CEO David Berteau expressed concerns that ongoing payment delays could prompt companies to reconsider partnerships with the government or increase their charges to offset the heightened risk. “Traditionally, the premise of government contracts has involved a risk-reward assessment, where government invoices have been viewed as nearly equivalent to cash,” he said. “Historically, the U.S. government has met its financial obligations, reducing perceived risk. However, if the government begins to default on its invoices, this could fundamentally alter the risk-reward calculus for contractors.”
Dixon echoed this viewpoint, observing, “I see many reputable companies adversely affected by the administration’s decisions. It raises the question of necessity behind these actions—I’m uncertain about the internal justifications. Nevertheless, it’s crucial for the government to be mindful that companies may choose against entering into contracts in the future.”
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