For the past two years, federal agencies have been required by law to pay their bills promptly.

But as far as the Office of Management and Budget is concerned, the Defense Department was paying some bills too quickly -- so fast, in fact, that in some cases it never receives the goods and services it has purchased.

The two agencies are squabbling over the issue, each contending that its way of doing things is the best way to save the government money. To resolve the matter, OMB officials say they are preparing regulations that would bar the Pentagon, in most cases, from paying its bills before it receives the products.

Under the Prompt Payment Act of 1982, and the regulations that implemented it, agencies are supposed to pay their bills as close to contractural due dates as possible, or within 30 days. Agencies whose payments are more than 45 days overdue must pay the contractor interest from the 30th day.

But OMB also instructed agencies not to pay their bills too fast, so the government wouldn't lose the interest it could earn while holding onto the funds for a short period of time.

For the past decade, DOD has selected certain contractors, many of them small businesses, to participate in a "fast payment" system, under which DOD got discounts in return for paying for its purchases in advance. In fiscal 1983, DOD paid contractors $1.2 billion under the system.

But last spring, DOD's inspector general released a critical audit that said the fast-payment system wasn't working properly. The audit said DOD had purchased more than $24 million worth of goods and services through the fast-payment system but had never received them. The auditors found that an additional $103 million worth of products could not be located and may never have been shipped.

The audit caught the eye of OMB Deputy Director Joseph R. Wright, who wrote William H. Taft IV, deputy secretary of defense, recommending that DOD abandon the system. Taft, however, took the position that the fast-payment system did work, and if it were halted, DOD might lose discounts and could be forced to pay interest penalties if it delayed the payments.

Taft said: "If 'fast payments' are prohibited, we anticipate adverse impacts on DOD that may very well offset any possible cash management gain." He provided no specific figures, however.

Taft added that DOD was only following procedures that the General Accounting Office had said were cost efficient when it reviewed them in a February 1980 audit.

"There can't be savings from doing the same thing two different ways," said John J. Lordan, OMB's deputy associate director for financial management. "It's clear that using fast payment is costing the federal government money because the Defense Department can't account for everything that it paid for."

Lordan believes that the GAO report is out of date and that if all factors were taken into account, DOD would not be able to project the savings that Taft cited. Still, OMB asked Comptroller General Charles A. Bowsher to take another look at the issue in September.

This week, Lordan said Bowsher's response was overdue and the matter was too important to ignore any longer. He said OMB would go ahead and issue preliminary rules.

John F. Simonette, associate director of GAO's accounting and financial management division, said that the GAO had drafted a reply for OMB but that it was still being "cleared by the hierarchy." Simonette, who has researched the issue, said DOD should have had better controls to ensure that the fast-payment system was working properly.

"We have not had a chance to look at the fast-payment procedures totally to see if they still need to use it at DOD," Simonette said. "DOD ought to pay their bills on time, and there would not be any need for fast pay. But, without studying it more carefully, we can't say that once and for all." Jim Jennings, a spokesman for the Small Business Administration, said that while a few businesses are concerned about the prospect of eliminating the fast-payment system, the agency as a whole isn't concerned. "It seems that small businesses benefit more from the Prompt Payment Act," he said.

A DOD spokesman said Taft was on vacation and could not be reached for comment.