Until late last night when one payment was made to a USAID contractor after the judge had to reinforce the temporary restraining order from February 13th, USAID had withheld payments on all contractor invoices for work performed months before January 20, 2025. They had also ceased disbursing funds for grants through letters of credit.
The judge clearly agreed that USAID should begin making payments immediately. But this begs the question that many of us in this industry have not ever had to ask before: when is it acceptable for the USG to suspend payments to its contractors?
In his declaration to the court on February 18, Peter Marocco – Deputy Administrator of USAID – said that “USAID paused foreign aid payments in order to facilitate a targeted, case-by-case review of foreign assistance programs. The case-by-case review remains ongoing.” Further, he claimed that the USAID legacy payment system’s “deficiencies and inability to provide complete information led to serious questions about waste, fraud, abuse, and even illegal payments. The lack of sufficiently effective controls of an integrated payments review process has led to significant payment delays in some cases and has placed certain USAID programs at risk of catastrophic failure… To correct these deficiencies, USAID is in the process of adopting a comprehensive review process for assuring payment integrity and determining that payments under existing contracts and grants are not subject to fraud or other bases for termination.”
But is pausing payments in order to review programs or to fix your own system that you’ve deemed deficient compliant with standard contract terms, as outlined in the Federal Acquisition Regulations (FAR)?
Quite simply: no.
The government may suspend payments for several reasons. Such reasons may include substantial evidence of fraud, unsatisfactory performance, contract violations, or disputes over work. USAID’s and Mr. Marocco’s reasoning for the payment freeze did not include any of these reasons. While they indicated their own system is inadequate for detecting fraud, waste, and abuse, that does not mean that they have found evidence of fraud, waste, or abuse in the contractors’ incurred costs.
So if no such issues are present, then payments are due in accordance with the FAR clause found in the majority of USAID cost-reimbursable services contracts - the Prompt Payment Act (FAR 52.232-25). This clause states that – if there is no disagreement regarding the quality, quantity, or contractor compliance with the contract – payment is due on “the later of the following two events:
(A) The 30th day after the designated billing office receives a proper invoice from the Contractor...
(B) The 30th day after Government acceptance of supplies delivered or services performed…”
In the case of the USAID contractor invoices in question, we are well past the 30-day mark of receipt of a proper invoice and past the 30-day mark of acceptance of the services performed. Further, when payment is late, USAID must also pay interest to contractors, also per the Prompt Payment clause.
To be clear, even in cases where no evidence of fraud, unsatisfactory performance, contract violations, or disputes over work exist, the government is still within its right to question invoiced costs and to audit contractor records. In fact, this would be the appropriate channel through which the government could uncover “substantial evidence” of fraud, if the contractor were not forthcoming about finding it themselves (which they must do per the regulations). But short of taking such steps, the government would have no such claims for freezing payments, since they would be lacking evidence. An invoice which outlines itemized costs incurred is not sufficient to claim fraud. Any such evidence of fraudulent contractor payment claims would be identified after auditing the contractor’s records.
FAR 52.215-2 “Audit and Records – Negotiation” allows the government – namely the contracting officer – to access the contractor’s “books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or in any other form” for up to 3 years after the contract ends. Under cost reimbursable contracts – which comprise the bulk of USAID contracts – this access allows the contracting officer the right to examine and audit all of these records and other “evidence sufficient to reflect properly all costs claimed to have been incurred or anticipated to be incurred directly or indirectly in performance” of the contract. You’ve probably seen headlines in the past reporting that a named contractor must repay millions of dollars back to the government. It is through this right to audit a contractor’s records that those repayment requirements are identified.
This right is further amplified for cost reimbursement contracts under FAR 52.216-7 “Allowable Cost and Payment” which states that at any time before final payment under the contract, the contracting officer may have the contractor’s invoices audited, and that they may reduce payments by amounts found by the contracting officer that do not constitute allowable costs (i.e. costs the USG is willing to pay for) or for prior overpayments or underpayments.
So what does all of this actually look like when put into practice? Upon receipt of an invoice, the government may question any itemized cost. In so doing, they can demand that the contractor cough up all documentation the contracting officer requires to support that cost and justify it as allowable. This could include documents such as proof of payment (receipts) and/or memos explaining why the cost is allowable as per the regulations and contract. If the contracting officer finds the contractor’s justification or documentation insufficient, they may deem the cost unallowable. At this point, the contracting officer would deduct that amount (and any applicable indirect costs or fee) from the payment they make against that invoice.
The USAID funding freeze, justified by claims of internal system deficiencies and a need for program review, raises serious questions about the government's adherence to established contracting regulations. While the government retains the right to scrutinize contractor invoices and conduct audits to ensure proper use of funds, the wholesale suspension of payments without evidence of fraud, unsatisfactory performance, or contract violations appears to contradict the Prompt Payment Act and related FAR clauses. This action not only jeopardizes the operations of USAID contractors, particularly smaller businesses, but also undermines the effective implementation of foreign aid programs and the safeguarding of taxpayer dollars.
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