Financial Management: Seven DOD Initiatives That Affect the Contract
Payment Process (Letter Report, 01/30/98, GAO/AIMD-98-40).

Pursuant to a congressional request, GAO reported on seven technological
initiatives that the Department of Defense (DOD) identified as key
elements of its efforts to improve the contract payment process,
focusing on DOD's goal of adopting the best business practices of the
private sector.

GAO noted that: (1) the descriptive information presented in GAO's
letter highlights several areas of concern that could prevent DOD from
meeting its goal of a paperless contracting process by the year 2000;
(2) for example, even if DOD successfully meets the current schedule, as
of September 30, 1997, three of the four long-term initiatives are not
scheduled for completion until the end of fiscal year 2001; (3) in
addition, the initiatives may not eliminate the weaknesses in the
contract payment processing; (4) as GAO previously reported, although
DOD has numerous initiatives under way to help resolve its disbursement
and accounting problems, it has not performed the in-depth analysis
necessary to fully determine the underlying causes of these problems and
therefore identify the most effective solutions and rank specific
reforms; (5) as a result, as with its other initiatives, the extent to
which these seven technology initiatives discussed in GAO's letter will
resolve DOD's long-standing disbursement problems is unclear; (6) even
in a highly automated and paperless environment, proper payments can
only be made by ensuring that accurate and complete data are available
in the systems; and (7) for example, for some types of payments, unless
provided with information that identifies the cost of work accomplished
with the appropriate funding source, the new systems and databases will
not have the information necessary to ensure that proper payments are
made.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-98-40
     TITLE:  Financial Management: Seven DOD Initiatives That Affect the 
             Contract Payment Process
      DATE:  01/30/98
   SUBJECT:  Electronic data interchange
             Financial management
             Contractor payments
             Department of Defense contractors
             Internal controls
             Federal agency reorganization
             Federal agency accounting systems
             Accounting procedures
             Electronic forms
IDENTIFIER:  DOD Defense Procurement Payment System
             DFAS Mechanization of Contract Administration Services 
             System
             DOD Standard Procurement System
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Governmental
Affairs, U.S.  Senate

January 1998

FINANCIAL MANAGEMENT - SEVEN DOD
INITIATIVES THAT AFFECT THE
CONTRACT PAYMENT PROCESS

GAO/AIMD-98-40

Technological Initiatives

(918891)


Abbreviations
=============================================================== ABBREV

  AMS - American Management Systems, Inc. 
  DCMC - Defense Contract Management Command
  DFAS - Defense Finance and Accounting Service
  DLA - Defense Logistics Agency
  DOD - Department of Defense
  DPPS - Defense Procurement Payment System
  EC - Electronic Commerce
  EDA - Electronic Document Access
  EDI - Electronic Data Interchange
  EDM - Electronic Document Management
  MOCAS - Mechanization of Contract Administration Services
  NIPRNET - Non-Classified Interactive Processor Router Network
  NULO - negative unliquidated obligation
  OMB - Office of Management and Budget
  SDW - Shared Data Warehouse
  SPS - Standard Procurement System

Letter
=============================================================== LETTER


B-274829

January 30, 1998

The Honorable John Glenn
Ranking Minority Member
Committee on Governmental Affairs
United States Senate

Dear Senator Glenn: 

This letter is in response to your request that we provide
information on seven technological initiatives that the Department of
Defense (DOD) has identified as key elements of its efforts to
improve the contract payment process.  DOD has long recognized
weaknesses in its contract payment process and has hundreds of
efforts under way to improve its contract payment and other
disbursement processes.  In his November 1997 Defense Reform
Initiative Report, the Secretary of Defense stated that the
department must adopt and adapt the lessons of the private sector if
America's armed forces are to maintain their competitive edge in the
rapidly changing global security arena.  In adopting the best
business practices of the private sector, the Secretary established a
goal that by January 1, 2000, all aspects of the contracting process
for major weapons systems will be paper free.  The seven technology
initiatives described in this report are intended, in part, to help
meet this goal. 

As of August 1997, DOD reported that its contract payment center in
Columbus, Ohio, was administering about 382,000 contracts with a
total value of $857 billion.  For fiscal year 1997, the Columbus
center processed about 1.2 million payments totaling about $69
billion.  As of September 30, 1997, DOD had at least $22.7 billion\1
in disbursing problems.\2 As part of our 1997 high-risk series, we
identified defense contract management, which includes contract
payment, as one of 25 high-risk areas in the federal government.\3


--------------------
\1 This figure includes in-transit transactions.  As we previously
reported, DOD has removed this category of problem disbursements from
its problem disbursement totals.  See DOD Problem Disbursements
(GAO/AIMD-97-36R, Feb.  2, 1997). 

\2 We have previously reported that DOD's problem disbursement
reporting has not been accurate.  See Financial Management:  Improved
Reporting Needed for DOD Problem Disbursements (GAO/AIMD-97-59, May
1, 1997). 

\3 High-Risk Series:  Defense Contract Management (GAO/HR-97-4, Feb. 
1997). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The descriptive information presented in this letter highlights
several areas of concern that could prevent DOD from meeting its goal
of a paperless contracting process by the year 2000.  For example,
even if DOD successfully meets the current schedule, as of September
30, 1997, three of the four long-term initiatives are not scheduled
for completion until the end of fiscal year 2001.\4 In addition, the
initiatives may not eliminate the weaknesses in the contract payment
processing.  As we have previously reported, although DOD has
numerous initiatives under way to help resolve its disbursement and
accounting problems, it has not performed the in-depth analysis
necessary to fully determine the underlying causes of these problems
and therefore identify the most effective solutions and rank specific
reforms.\5 As a result, as with its other initiatives, the extent to
which these seven technology initiatives discussed in this letter
will resolve DOD's long-standing disbursement problems is unclear. 
Even in a highly automated and paperless environment, proper payments
can only be made by ensuring that accurate and complete data are
available in the systems.  For example, for some types of payments,
unless provided with information that identifies the cost of work
accomplished with the appropriate funding source, the new systems and
databases will not have the information necessary to ensure that
proper payments are made. 


--------------------
\4 In commenting on a draft of this report, DFAS officials said that
one of these three systems will not be completed until April 2002. 

\5 Financial Management:  Improved Management Needed for DOD
Disbursement Process Reforms (GAO/AIMD-97-45, Mar.  31, 1997). 


   OBJECTIVE, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :2

As you requested, the objective of this report is to provide a
general description of three short-term\6 DOD technology initiatives,
which affect the current payment process, and four long-term
initiatives, which are expected to change the way DOD currently does
business.  Although some of the initiatives include planned
improvements to both contract and vendor payment processes, we
focused on the contract payment process in this report.  This report
is limited to descriptive information on each of the initiatives and
therefore does not address specific implementation or execution
issues. 

We reviewed the Joint Financial Management Improvement Program's
Framework for Federal Financial Management Systems and the Office of
Management and Budget's (OMB) Circular A-127 to determine federal
financial systems requirements.  To determine the current DOD
contract payment process, we reviewed DOD documents that discussed
how DOD is organized, identified the various activities involved in
the process, and collected data on the number and dollar value of
contracts.  We also reviewed DOD reports that addressed problems
inherent in the contract payment process.  To accumulate information
on the seven initiatives, we reviewed DOD documents that (1)
identified how the planned initiatives would streamline and improve
DOD's payment processes and (2) discussed the status and
interrelationship of the initiatives.  Given the overall assignment
objectives and the descriptive nature of our report, we did not
verify the data in the DOD reports. 

In addition, we interviewed headquarters and field office officials,
including the program managers for each of these initiatives, to
determine the current DOD contract payment process and obtain updated
information on each initiative.  We performed our work at DOD
headquarters, Pentagon, Virginia; Defense Finance and Accounting
Service (DFAS) headquarters, Arlington, Virginia; DFAS centers,
Columbus, Ohio, and Indianapolis, Indiana; and Defense Logistics
Agency (DLA) headquarters, Fort Belvoir, Virginia. 

We performed our work from October 1996 through December 1997 in
accordance with generally accepted government auditing standards. 

We requested comments on a draft of this report from the Secretary of
Defense or his designee.  On January 20, 1998, DOD officials provided
oral comments, which are discussed in the "Agency Comments and Our
Evaluation" section of this report.  Additional technical comments
have been addressed as appropriate throughout the report. 


--------------------
\6 We use the term "short-term" initiatives to describe those
initiatives that are currently being developed and are in use to some
degree.  "Long-term" initiatives refer to four of DOD's major target
initiatives that are being planned or are under development to
provide fully integrated computer systems. 


   BACKGROUND
------------------------------------------------------------ Letter :3

The following sections describe DOD's current contract payment
process, the controls necessary to ensure accurate contract payment,
and DOD's long-standing problems with matching disbursements to
corresponding obligations. 


      DOD'S CURRENT CONTRACT
      PAYMENT PROCESS
---------------------------------------------------------- Letter :3.1

Over time, DOD's contract payment and accounting procedures have
evolved into the complex, inefficient processes that exist today. 
These processes span numerous DOD and contractor organizations
operating incompatible procurement, logistics, and accounting
systems.  Currently, much of the data are shared using hard copy
documents that must be manually entered into numerous systems or
electronic data that still must be manually verified and entered into
the system.  Figure 1 illustrates the current paper flow for the
contract payment process. 

   Figure 1:  DOD's Current
   Contract Payment Process

   (See figure in printed
   edition.)

\a These activities are also performed by other DOD components. 

DOD has numerous nonintegrated automated and manual systems that
contain contract data.  There are 150 accounting systems, 76
procurement writing systems, numerous logistics systems, and 1
contract administration and payment system--Mechanization of Contract
Administration Services (MOCAS).  Although only 5 percent of DOD's
contractor and vendor invoices are processed and paid through MOCAS,
these payments represent approximately 44 percent of the dollars paid
by the department to contractors and vendors for fiscal year 1997. 
The remaining 95 percent of the invoices are primarily for vendor
payments that are made by other disbursing offices. 

Because of DOD's numerous nonintegrated computer systems, much of the
data generated by procurement, logistics, and accounting systems
cannot be electronically transferred among these systems, and
therefore must be read, interpreted, and manually entered from hard
copy documents.  This duplicative manual entry of accounting data
into the various systems is prone to keypunch errors, errors caused
when data entry personnel are required to interpret sometimes
illegible contracts, and inconsistencies among data in the systems. 

In January 1991, DOD established the Defense Finance and Accounting
Service to assume responsibility for DOD finance and accounting. 
DFAS' center in Columbus, Ohio, pays contracts administered by the
Defense Contract Management Command (DCMC) of the Defense Logistics
Agency.  DCMC has post-award contract responsibility, which includes
overseeing contractor progress, inspecting and accepting items,
receiving and entering contractor delivery data, administering
progress payments, negotiating contractor indirect costs,
administering contract modifications, and negotiating final
settlement proposals. 

DFAS-Columbus uses MOCAS to compute contractor payments, while DCMC
uses this system to maintain contract administration and payment data
on its contracts.  DFAS-Columbus makes two basic types of contract
payments--delivery payments and financing payments.  About two-thirds
of all payments are delivery payments for goods and services; the
balance are financing payments.  Delivery payments are made upon
receipt of products or services.  Financing payments, such as
progress payments, are made as contractors incur costs and submit
billings. 

The numerous parties involved in DOD's contract payment process may
increase the opportunity to introduce errors.  DOD has 1,400 separate
buying activities, up to 64,000 receiving locations, over 25,000
contractors, and 44 accounting offices,\7

all funneling information to MOCAS.  In addition, although MOCAS
provides the accounting data used to control obligations and payments
on these contracts, it does not maintain the official accounting
records for the contracts.  Instead, the official accounting records
are kept at the 44 accounting offices located throughout the country. 
MOCAS records may differ from accounting office records because
contract information, such as modifications, may not have been sent
to or properly processed by both locations. 

To help alleviate this problem, DOD recently completed implementation
of a direct input initiative started in October 1994.  As of June 30,
1997, administrative contracting officers at all DCMC sites were able
to input contract information, including modifications, directly to
MOCAS from their remote locations.  However, direct input of contract
modification information by the administrative contracting officers
is intended to be a temporary initiative and is expected to
eventually be replaced by some of the other technological initiatives
discussed in this report. 

Before making payments, DFAS-Columbus requires the matching of a
number of key documents (such as the contract, the receiving report,
and the invoice for delivery payments).  However, problems often
arise after payments have been made when the accounting offices,
which maintain the official accounting records, cannot reconcile
their obligation records to the payment information generated by
MOCAS.  DOD has instituted a prevalidation policy, which requires
that before making a payment, DFAS-Columbus validate that sufficient
funds are available from the appropriate obligation at the accounting
offices.  Prevalidation of payments made by MOCAS is required for
expenditures of $3 million or more for contracts dated prior to
fiscal year 1997, and $2,500 or more for contracts dated 1997 and
later. 


--------------------
\7 DOD is in the process of consolidating its accounting offices,
which at one time numbered over 300.  As of November 20, 1997, there
were 22 small accounting offices (which will be closed during fiscal
year 1998), 17 operating locations, and 5 accounting centers. 


      CONCEPT OF CONTRACT PAYMENT
      FINANCIAL CONTROL
---------------------------------------------------------- Letter :3.2

The financial management systems policy stated in OMB Circular A-127
requires that each agency establish and maintain a single, integrated
financial management system.  Having a single, integrated financial
management system does not mean having only one software application
covering all financial management system needs.  Rather, a single,
integrated financial management system is a unified set of financial
systems and financial portions of mixed systems encompassing the
software, hardware, personnel, processes (manual and automated),
procedures, controls, and data necessary to carry out financial
management functions, manage financial operations of the agency, and
report on the agency's financial status to central agencies,
Congress, and the public.  Unified means that the systems are planned
for and managed together, operated in an integrated fashion, and
linked together electronically in an efficient and effective manner
to provide the agencywide financial system support necessary to carry
out the agency's mission and support the agency's financial
management needs. 

Figure 2 illustrates how, in the ideal environment, DOD could use
integrated systems that share data among the procurement, logistics,
and accounting functions to ensure financial control over the money
spent for goods and services.  For example, when a military service's
requiring activity determines that goods or services are needed, such
as a tank or aircraft, the system would make that information
available to both the military service's buying activity and the DFAS
accounting office.  When the contract is issued, the military service
buying activity, in turn, would provide that information through the
system to the DLA receiving activity to expect the item as well as to
the DFAS accounting office to obligate funds in the accounting
systems.  Throughout the procurement process, DLA contract
administration personnel would monitor the contractor's progress to
ensure that the contractor is meeting all cost and delivery
requirements.  As construction of the tank or aircraft progresses, or
at final delivery, the contractor would submit bills to the
contractor payment personnel.  All contract-related data would be
available to authorized users in an integrated financial management
system. 

   Figure 2:  Financial Control
   Over Contract Payments

   (See figure in printed
   edition.)

\a These activities are also performed by other DOD components. 


      DOD'S LONG-STANDING
      DISBURSEMENT PROBLEMS
---------------------------------------------------------- Letter :3.3

DOD has acknowledged its long-standing problems with properly
matching its disbursements to specific obligations.  As of September
30, 1997, DOD had at least $22.7 billion in problem disbursements.\8
Its disbursement problems fall into three basic categories. 

Unmatched disbursements - Disbursements and collections that have
been received by the accounting office, attempted to be matched to an
obligation, but have not been matched because an obligation was not
identified in the accounting system. 

Negative unliquidated obligations (NULOs) - Disbursements that have
been received and posted to specific obligations by the accounting
office but recorded disbursements exceed recorded obligations--more
funds have been paid out than were recorded as obligated. 

Aged in-transits - Disbursements and collections that have been
reported to the Treasury but either have not been received by the
accounting station or have been received but not processed or posted
by the accounting office.  DFAS considers in-transits to be aged if
they have not been processed within 120 days, depending on the source
of the transaction and the service processing the transaction. 

As noted previously, much of the inefficiency and errors associated
with DOD's contract payment process can be attributed to the lack of
integrated computer systems that electronically link procurement,
logistics, and accounting.  Because the process is highly dependent
on manual data entry, the information needed to make contract
payments is plagued with timeliness and accuracy problems.  The
reliance on paper documents, which must be mailed to the proper
location and stored for future reference, also adds to DOD's payment
difficulties.  For example, we previously reported that DFAS-Columbus
files about 25,000 loose contract documents per week.\9

DOD has hundreds of efforts under way to help resolve disbursement
and accounting problems, including the seven technology initiatives
discussed in this report.  However, as we have previously reported,
DOD has not performed the in-depth analysis necessary to fully
determine the underlying causes of its disbursement and accounting
problems and therefore identify the most effective solutions and rank
specific reforms.\10


--------------------
\8 See footnotes 1 and 2. 

\9 Contract Management:  Fixing DOD's Payment Problems Is Imperative
(GAO/NSIAD-97-37, Apr.  10, 1997). 

\10 Financial Management:  Improved Management Needed for DOD
Disbursement Process Reforms (GAO/AIMD-97-45, Mar.  31, 1997). 


   SHORT-TERM INITIATIVES
------------------------------------------------------------ Letter :4

The three short-term technology initiatives--electronic document
management, electronic document access, and electronic data
interchange--are intended to move DOD's contract payment processes
toward a paperless environment and reduce dependence on manual data
entry.  Although none of the initiatives significantly change the
existing contract payment process, all are directed at providing more
accurate and timely information or improving the processing of data
at DFAS-Columbus.  The lack of timely information and DFAS-Columbus'
reliance on cumbersome paper processes have been cited as
contributing factors to problem disbursements. 


      ELECTRONIC DOCUMENT
      MANAGEMENT
---------------------------------------------------------- Letter :4.1

Electronic Document Management (EDM) is a technology initiative
intended to convert paper copies of DOD contract payment documents to
electronic images.  The paper documents are received by
DFAS-Columbus\11 from DOD's logistics and procurement communities and
contractors.  EDM's objectives are to reduce DFAS-Columbus' reliance
on paper, increase its processing efficiency, and, as a result,
reduce its operating costs.  As we stated in our April 1997
report,\12 DFAS-Columbus' paper-dependent workflow has frequently led
to misrouted and misplaced paper documents.  This condition delays
payments and further increases processing costs. 

As shown in figure 3, contracts, modifications, receiving reports,
and invoices, which are received as paper documents, are scanned by
DFAS-Columbus employees and stored as electronic images for
DFAS-Columbus use. 

   Figure 3:  Electronic Document
   Management

   (See figure in printed
   edition.)

\a These activities are also performed by other DOD components. 

EDM has three basic components:  document imaging, electronic
foldering, and workflow processing.  All paper documents received by
DFAS-Columbus, such as contracts, invoices, and receiving reports,
will be scanned and converted to electronic images--similar to
photographs--and stored in an EDM database at DFAS-Columbus.  Once
stored, these images can be retrieved and viewed by DFAS-Columbus
personnel.  Because this initiative was implemented for DFAS-Columbus
as a way of relieving its dependence on paper documents, the
technology needed to view the scanned documents is only available at
DFAS-Columbus for its EDM database. 

Since these electronic images are essentially "pictures" of the
original paper documents, the data entry personnel can only view
these documents, the same way they would look at a piece of paper. 
Thus, the data entry personnel must still view these "images" on
their computers to obtain the data needed to process the payment and
then manually enter those data into MOCAS. 

The electronic foldering component allows contract, invoice, and
other related documents to be associated together for quick
electronic retrieval.  For example, the system would be able to
associate all documents for a particular contract by a unique
contract number and then retrieve all documents relating to that
contract, eliminating the need for multiple manual searches. 

The workflow processing component helps to manage workload
distribution by (1) automatically directing the electronic document
to the appropriate processing technician and (2) tracking the
progress of each document through the contract administration and
payment process.  This component, along with the foldering component,
is expected to significantly reduce the time spent on manual voucher
processing, which is necessary when MOCAS is unable to complete an
automated verification of certain payment data.  In 1997,
approximately 45 percent of all invoices had to be processed
manually.  As we reported in April 1997, manual processing can cost
up to seven times more than an automated payment.  This increased
cost is due to the time spent by DFAS-Columbus employees manually
retrieving, verifying, and matching payment data to various records
(invoices, purchase orders, receiving documents, DFAS-Columbus
obligation records, or accounting office records) for these payments. 
Reductions in time are expected to result from employees being able
to locate the needed documents more readily.  These documents, once
entered into the EDM database, will always be available for viewing,
thus mitigating the problems associated with lost and misplaced
documents within DFAS-Columbus.  In addition, EDM also allows
multiple employees at DFAS-Columbus to concurrently view a single
electronic document. 

DOD's 1996 Chief Financial Officer Financial Management Status Report
and Five Year Plan states that the objective of EDM is to reduce
operating costs.  This affects DFAS-Columbus in a number of ways,
such as, reducing the volume of paper; eliminating the need for paper
storage; reducing document handling, copying, and manual retrieval;
and reducing personnel requirements. 

Electronic Data Systems is developing EDM under a 5-year contract
awarded in September 1994.  EDM is being implemented at DFAS-Columbus
for contract pay in one of its 11 operating divisions.  Initial
operational testing is expected to be completed in March 1998. 
According to the DFAS program manager for EDM, as of September 30,
1997, the program development and implementation is expected to be
completed by the end of fiscal year 1999 at a cost of approximately
$115 million.  The $115 million reportedly includes EDM development
and deployment costs for both contract and vendor pay processes, as
well as for garnishment of wages.  According to an EDM official, the
DFAS-Columbus contract pay portion is expected to cost $33 million. 


--------------------
\11 Although EDM is also being developed and implemented at other
DFAS centers and operating locations for vendor pay and garnishments
of wages, we concentrated our efforts on EDM's deployment at
DFAS-Columbus' contract payment facility. 

\12 GAO/NSIAD-97-37, April 10, 1997. 


      ELECTRONIC DOCUMENT ACCESS
---------------------------------------------------------- Letter :4.2

In contrast to EDM, which begins with paper documents that are then
captured as electronic images, the Electronic Document Access (EDA)
initiative is designed to eliminate the original paper documents and
capture these documents as electronic images from the beginning. 
Documents, such as contracts and contract modifications, are
originally captured as a print file, similar to saving a word
processing file on disk, and then converted to an electronic image
for storage in the EDA database.  These documents can then be
accessed and viewed by authorized accounting, procurement, and
logistics personnel on DOD's computer network, the Non-Classified
Interactive Processor Router Network (NIPRNET).  This accessibility
contrasts with documents scanned using EDM technology, which are only
available to DFAS-Columbus personnel. 

EDA is being developed under the EDM program as an alternative to
having DOD activities produce paper documents.  EDM officials
indicated that the expanded use of EDA by DOD will eventually reduce
the need for the imaging component of EDM.  EDA is expected to
significantly reduce the amount of time spent mailing and
distributing paper contracts and contract modifications.\13 It is
also expected to eliminate both document loss and delays that can
result from mailing and the need to store paper documents. 

However, an EDM official stated that some imaging capability will
always be needed since only contracts, contract modifications,
government bills of lading, and payment vouchers are being captured
and stored in the EDA database.  For example, invoices and
correspondence are not being captured and stored in the EDA database. 
As illustrated in figure 4, the electronic images of contract
documents available via EDA can be retrieved and viewed by
DFAS-Columbus personnel and other users of DOD's NIPRNET, but the
needed data on the document still must be manually entered into the
appropriate systems. 

   Figure 4:  Electronic Document
   Access

   (See figure in printed
   edition.)

\a These activities are also performed by other DOD components. 

EDA is currently being used on a limited basis by DOD to view
contracts, modifications, and other documents via NIPRNET and is
beginning to reduce the amount of paper documents being exchanged. 
DFAS-Columbus is currently working with the military services and DLA
to expand the EDA database by putting more of their documents on the
system.  We were told that over 100,000 contracts, representing all
Services and DLA, have been loaded into the EDA database as of
December 1997.  DFAS has reached an agreement with each of the
Services and with DLA to use EDA exclusively for contracts issued by
some of the largest contract writing systems.  Thus, as shown in
figure 4, EDA will eliminate the need to mail paper contracts to many
DOD locations.  By accessing the contract from EDA, these locations
will avoid not only the potential problems involved in mail delays
and losses but the contract they see via EDA will be a clear
original, not a photocopy, which can be difficult or impossible to
read. 

According to the DFAS program manager for EDA, as of September 30,
1997, EDA is expected to cost about $2.7 million and is scheduled for
completion in December 1998.  EDA began in April 1996 and is funded
as part of EDM. 


--------------------
\13 In addition to contracts and contract modifications, EDA also
provides electronic access to government bills of lading and payment
vouchers. 


      ELECTRONIC DATA INTERCHANGE
---------------------------------------------------------- Letter :4.3

Electronic Data Interchange (EDI)\14 is the computer-to-computer
exchange of routine business information using standardized data
formats.  For nearly three decades, EDI has been popular among large
companies because it saves money that otherwise would be spent
processing paper and rekeying data.  DOD, realizing that EDI
technology could save the department millions of dollars annually,
initiated the EDI program in May 1988 to create paperless business
processes for exchanging information between DOD activities and
industry.  As part of this DOD initiative, DFAS initiated this
program in October 1994 and established an electronic commerce
program office in March 1995 to support its procurement and payment
processes. 

Various DOD activities are working together to ensure that the EDI
initiative will work on their individual systems.  However, the
development and implementation of EDI is made more difficult because
of the hundreds of nonstandard, nonintegrated computer systems
involved.  To implement EDI, each system's data must be individually
converted to a standard format to be transmitted.  In addition, the
transmitted data must then be converted from the standard format to
the format used by the receiving system. 

For example, DOD is using EDI to support its procurement processes. 
DOD has approximately 76 nonstandard procurement systems generating
contractual documents and has begun working with 9 of the largest
systems to convert their data for electronic transmission.  Once
converted, this information will be sent, via EDI, to one or more of
the approximately 150 accounting systems, MOCAS, and various other
contractor and DOD systems where the transmitted information must
then be converted into a form useable by them. 

As illustrated in figure 5, the existing contractor payment processes
related to the dissemination of contract and payment data between the
procurement, accounting, and payment systems will become largely
automated for those systems that will use EDI technology to transmit
and receive data.  However, because DOD's systems were not developed
with the EDI standard format, the use of EDI will require a
conversion\15 process for DOD's numerous nonstandard systems.  Using
conversion and EDI technology, invoices, and receiving
reports--traditionally conveyed in paper form--can be transmitted
electronically between computers without human intervention. 

   Figure 5:  Electronic Data
   Interchange

   (See figure in printed
   edition.)

\a These activities are also performed by other DOD components. 

As systems increasingly implement the EDI standard formats, the
extensive conversion process required for today's many nonstandard
systems will be reduced and efficiency improved.  Where EDI is used,
it will eliminate duplicative manual input--the source of many of the
errors in the current process of getting information into the
procurement, accounting, and contract payment systems. 

As of September 30, 1997, approximately 80 DOD contractors were
approved to use EDI to transmit invoices to MOCAS; however, only
about 50 contractors were actually transmitting invoices using EDI at
that time.  In addition to invoices, some contract data are also
being transmitted through EDI.  Two of the nine largest procurement
systems are currently electronically transmitting contract data to
MOCAS.  Six of the remaining seven systems are scheduled to be using
EDI to transmit contract data to MOCAS by the end of 1998.  The
remaining program is scheduled to transmit contract data using EDI in
1999.  These nine procurement systems account for approximately 90
percent of all contract actions. 

Even when the procurement systems are on-line, not all data can be
converted and transmitted using EDI.  Presently, about 15 to 20
percent of all DOD contracts contain one or more nonstandard clauses
that cannot be transmitted using EDI.  For example, a nonstandard
contract clause could say that contractor employees will only be paid
local mileage for trips that exceed 50 miles.  Until the nonstandard
clause issue is resolved, DFAS-Columbus personnel will need to review
a paper copy of the entire contract or view the contract via EDA
and/or EDM.  DOD is currently working to standardize the nonstandard
clauses, and expects to have this issue resolved by June 30, 1998. 

In addition, EDI is not yet being used to transmit receiving report
information.  Traditionally, a contractor prepares the receiving
report and submits it to a DOD official for verification of the
receipt of the items purchased.  The receiving report is then sent to
MOCAS.  DFAS is currently working with some contractors to convert
receiving report data to the EDI standard.  This capability is
expected to be fully operational by the middle of 1998. 

According to the EDI program manager, as of September 30, 1997, DFAS
plans to spend $47.1 million to develop and implement EDI for its
centers and accounting offices over the 5-year period beginning in
fiscal year 1995 and ending in fiscal year 1999. 



--------------------
\14 EDI is one initiative included in Electronic Commerce (EC).  EC,
which is the electronic exchange of the information needed to do
business, embraces many technologies, including electronic mail,
computer bulletin boards, and electronic funds transfer. 

\15 The process of "conversion" enables systems using different,
nonstandard EDI formats to do business.  As used in this report,
conversion is the mapping from one system's nonstandard EDI format to
a standard format, and then from the standard format to another
system's nonstandard format. 


      SCHEDULE AND COSTS OF
      SHORT-TERM INITIATIVES
---------------------------------------------------------- Letter :4.4

As shown in figure 6, DOD plans to spend about $80 million from
fiscal years 1995 through 1999 developing and implementing the three
short-term initiatives.  This estimate includes contractor,
personnel, and training costs. 

   Figure 6:  Schedule and Costs
   of Short-term Initiatives as of
   September 30, 1997

   (See figure in printed
   edition.)

(1) Approximately $2.7 million cost is included in EDM. 


   LONG-TERM INITIATIVES
------------------------------------------------------------ Letter :5

The four long-term initiatives--Standard Procurement System, Defense
Procurement Payment System, Shared Data Warehouse, and DFAS Corporate
Database--are aimed at moving DOD's contract payment process toward
an integrated system using standard data, where a single copy of the
official records is available to all users.  The short-term
initiatives discussed previously will all play a role, to some
degree, in DOD's long-term contract payment strategy.  The scanning
and image storage features of EDM will be used as part of the future
payment system.  However, because they are still in the process of
analyzing contractors' proposals, DOD officials are uncertain if they
will use EDM's foldering and workflow processing features.  As
currently envisioned, EDA will be used in conjunction with DOD's
planned Standard Procurement System to produce a "picture" of the
contract for all authorized users to view as necessary.  Finally, EDI
will be used by all the long-term initiatives as the vehicle to
transmit and transfer data among the systems and databases. 

As illustrated in figure 7, DOD plans to significantly change its
contract payment process to conform to its vision of the future
system.  The lines in the figure indicate the numerous paper
documents whose data must be electronically transmitted for the
contract payment process to be paper free, such as contracts,
contract modifications, receiving reports, and invoices.  While these
initiatives move DOD closer to a paper free environment, they will
not allow DOD to meet the Secretary of Defense's recently established
goal of a paper-free contracting process by the year 2000, since
three of the four long-term initiatives are not scheduled for
completion until the end of fiscal year 2001.\16

   Figure 7:  DOD's Future
   Contract Payment Process

   (See figure in printed
   edition.)

\a These activities are also performed by other DOD components. 


--------------------
\16 See footnote 4. 


      STANDARD PROCUREMENT SYSTEM
---------------------------------------------------------- Letter :5.1

The objective of the Standard Procurement System (SPS) is to
establish a fully functional automated procurement information
system, which will be used to prepare procurement contracts and be
used by contracting officials for contract administration.  SPS is
planned to replace DOD's manual procurement systems and about 76
unique automated procurement systems that are used to prepare
contracts.  These systems had been developed over the years to meet
individual mission needs using nonstandard processes and data and
could not communicate well with each other or with MOCAS.  Although
some of these systems were able to transmit limited contract
information to MOCAS electronically, hard copy paper contracts still
had to be mailed to DFAS-Columbus before contract data, which is
necessary to make a payment, could be entered into the system.  As
described in the background section of this report, the reliance on
paper documents, such as contracts and contract modifications, and
repetitive manual data input are major causes of disbursing problems. 

SPS will also be the system used by contracting officials to monitor
and administer contracts.  Currently, contracting officials have to
rely on MOCAS to provide them the information they need to accurately
account for the contracts.  However, MOCAS is usually not provided
with information that identifies the cost of the work accomplished
with a specific funding source.  Therefore, DOD is unable to ensure
that payments are being made from the appropriate funding source. 
Accurate payments can only be made if accurate and complete data are
available--regardless of which system is used. 

DOD officials stated that this technology initiative is expected to
standardize procurement business practices and data elements
throughout the department and provide benefits to the procurement and
accounting communities by providing timely, accurate, and integrated
contract information.  Using SPS, the goal is that required contract
and contract payment data will only be entered once--at the source of
the information and be stored in the Shared Data Warehouse (another
initiative described later in this report) for use by the entire
procurement community.  This is intended to result in more efficient
management of contracts, standard contract business practices and
processes, and less data entry and paper handling--a key factor in
contract payment errors.  SPS is planned to improve the procurement
community's ability to manage contracts from pre-award through
contract closeout. 

The SPS program started in January 1994.  The procurement software is
a version of American Management Systems, Inc.  (AMS) commercial
software that is being tailored for DOD.  The AMS contract was
awarded in April 1997.  SPS began deployment (installation, training,
and deployment assistance) in May 1997.  As of September 30, 1997,
SPS was available to 2,535 users out of a planned total of 43,826. 
According to the program manager for SPS, as of September 30, 1997,
the program development and implementation is expected to be
completed by September 30, 2001, at a cost of about $295 million,
including $20 million for the Shared Data Warehouse. 


      DEFENSE PROCUREMENT PAYMENT
      SYSTEM
---------------------------------------------------------- Letter :5.2

The Defense Procurement Payment System (DPPS) is intended to be the
single standard DOD system for calculating contractor payments\17 and
generating accounting records.  The system, as designed, will replace
the contract payment functions currently in MOCAS.  It is expected to
standardize and improve contract payment processes by computing
timely and accurate payments and making the disbursement data
available to DOD entities responsible for procurement, logistics, and
accounting. 

DPPS is expected to improve payment process efficiencies by (1)
providing a single system that DFAS can use to validate funds
availability, (2) reducing DFAS' reliance on hard copy documents, and
(3) eliminating manual reconciliations.  DPPS will operate in an
on-line, real-time environment--providing up-to-date contract and
payment information.  To calculate and schedule payments, DPPS will
rely on the DFAS Corporate Database (another initiative described
later in this report) for the needed contract and receiving report
information.  Contract payment information generated by DPPS will
also be stored in the DFAS Corporate Database.  Contract payment
information needed by contracting officers to administer the
contracts will be duplicated from the DFAS Corporate Database into
the Shared Data Warehouse for their use. 

The DPPS program started in September 1995.  DFAS plans to award a
contract for DPPS by April 1998.  DFAS also plans to procure a
commercial off-the-shelf software package to compute entitlements and
support the DPPS accounting functions.  According to the DFAS program
manager for DPPS, as of September 30, 1997, full DPPS deployment is
expected by August 31, 2001, and the total program cost is reported
to be $46 million.  In commenting on a draft of this report, a DFAS
official said that the program costs have been recalculated and as of
December 31, 1997, they were estimated to be $114 million, and the
system is expected to be completed by April 15, 2002. 


--------------------
\17 DPPS will also be DOD's standard procurement payment system for
calculating vendor payments, grants, and other entitlements. 


      SHARED DATA WAREHOUSE
---------------------------------------------------------- Letter :5.3

The Shared Data Warehouse (SDW) is a DOD initiative that is intended
to be the single database containing the official procurement records
needed to support contract placement and contract administration
functions in SPS.  Although DOD officials agree that the information
produced in the accounting and procurement communities must be shared
with each other, they have not finalized their plans on how or to
what extent they will do this.  SDW is designed to support the
complete contract cycle, from initial concept and contract award
through contract closeout. 

All contract information and contract modification information
created in SPS will be stored in the SDW database.  Original
receiving report information will also be electronically entered into
SDW from the existing logistics systems.  Contract payment
information generated by DPPS, which is originally stored in the DFAS
Corporate Database, will be duplicated in SDW for use by the
contracting officers to administer contracts.  In addition, some
procurement information, such as contracts, contract modifications,
and receiving reports, which are stored in SDW and are needed by DFAS
to compute contract payments, will also be duplicated and stored in
the DFAS Corporate Database.  Although SDW and the DFAS Corporate
Database will contain duplicate information, it is likely that some
information will not be shared.  For example, some nonfinancial
information, such as special shipping instructions and dates, would
not be needed for contract payment and may only be stored in SDW. 

The SDW database is intended to significantly improve efficiency,
reduce accounting errors, and support the payment process.  SDW is
expected to provide improved data integrity and accuracy and allow
for a single point of data entry and for storage of procurement data,
therefore reducing the need for manual re-keying of procurement data
into multiple, nonstandard systems. 

According to the deputy program manager for SPS, as of September 30,
1997, SDW is to be completed by the end of fiscal year 2001 at a cost
of $20 million, and is funded and developed as part of SPS.  The SDW
contract was awarded to Boeing Information Services and DLA's System
Development Center.  They are currently developing the prototype
database and completed their initial testing by loading a limited
amount of contract data from MOCAS as of October 1997.  An SDW
official said that the test had been successful and, as new
information is loaded into MOCAS, these data are duplicated into SDW
for future use.  The SDW program manager expects the procurement
community to begin using the SDW information for decision-making by
early fall of 1998.  In addition to loading the information from
MOCAS, they are also working to accept contracts and modifications,
receiving reports, and other data directly from the procurement and
logistics systems. 


      DFAS CORPORATE DATABASE
---------------------------------------------------------- Letter :5.4

The DFAS Corporate Database, as conceptualized, will be a single DFAS
database that will be utilized by all DFAS systems.  This shared
database will contain all DOD financial information required by DFAS
systems and will be the central point for all shared data within
DFAS.  This database will also contain all the data needed for DPPS
to calculate contractor payments.  For example, the database will
include contracts, contract modifications, and receiving report
information duplicated from SDW.  Contract payment information,
created by DPPS, will also be stored in the DFAS Corporate Database,
for use by other DFAS payment and accounting systems.\18

The DFAS Corporate Database will be used as a principal source of
contract and contract payment information for all of DFAS.  While SDW
is intended to serve the needs of DLA's procurement community, the
DFAS Corporate Database will be used by authorized DFAS system users
to support the contract payment and accounting process. 

The DFAS Corporate Database is intended to significantly improve
efficiency, reduce accounting errors, and support the payment and
accounting process.  It is expected to improve data integrity and
accuracy and serve as a single point of DFAS data entry and storage
for procurement data, therefore reducing the need for manual
re-keying of data into multiple, nonstandard systems.  Although DFAS
has not established a firm date, DFAS officials stated that this
database will eventually be used as the official accounting records,
shifting this responsibility from the accounting offices. 

The DFAS Corporate Database program office was established in June
1997.  Preliminary planning, design, and prototyping activities are
currently taking place.  The target implementation date for those
aspects of the DFAS Corporate Database needed to support DPPS is May
1998.  According to the DFAS Corporate Database program manager, the
initial cost to establish the program office and design, prototype,
and test the shared database structure is estimated to be about
$300,000 as of September 30, 1997.  The costs of accessing the
corporate database will be paid by the users. 


--------------------
\18 The DFAS Corporate Database will also support many other systems,
including civilian and military pay, transportation, travel, and
disbursing. 


      SCHEDULE AND COSTS OF
      LONG-TERM INITIATIVES
---------------------------------------------------------- Letter :5.5

As shown in figure 8, DOD expects to spend about $341 million
developing and deploying the four long-term initiatives during fiscal
years 1994 through 2001.  In commenting on a draft of this report, a
DFAS official said that the DPPS program costs have been
recalculated, and as of December 31, 1997, they were estimated to be
$114 million, and the program is expected to be completed by April
15, 2002.  With this change, DOD now estimates the total program
costs for these four initiatives to be $409 million.\19

   Figure 8:  Schedule and Costs
   of Long-term Initiatives as of
   September 30, 1997

   (See figure in printed
   edition.)

(1) As of December 31, 1997, program costs were estimated at $114
million.  DPPS is expected to be completed by April 15, 2002. 

(2) Approximately $20 million cost is included in SPS. 

(3) Initial DFAS costs are $300,000. 


--------------------
\19 In commenting on a draft of this report, DFAS officials stated
that these costs can be expected to change. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :6

In commenting on a draft of this letter, Department of Defense
officials generally concurred with our description of how these seven
DOD initiatives affect the contract payment process.  They provided
us with some suggested technical changes, which we incorporated
throughout the report as appropriate. 

However, DOD officials were concerned that the report seemed to
contrast the short-term initiatives with the long-term initiatives. 
DOD stated that the short-term and the long-term initiatives are
designed to work in tandem.  DOD officials added that the short-term
initiatives support the department's achievement of the Secretary of
Defense's goal of achieving a paper-free contracting process by the
year 2000.  DOD officials also stated that the long-term initiatives
will bring the department greater benefits over the long haul, but
that the long-term initiatives will take longer to implement and
their schedule and cost definitely carry an element of greater risk
and more uncertainty. 

Our report describes the short-term and long-term initiatives
separately and is not intended to contrast these efforts.  Also, at
the time of our review, DOD had not yet fully defined how these
independently managed initiatives will work in tandem.  To the extent
that relationships between initiatives were identified by DOD during
our review, those relationships are incorporated in this report.  In
commenting on the draft, DOD provided no further clarification or
documentation of those relationships. 

As discussed in the report, regarding the capability of the
short-term initiatives to achieve the Secretary's broader goal of
having all aspects of the contracting process for major weapons
systems paper free, EDM is only accessible to DFAS-Columbus; EDA does
not capture all documents, such as the invoice; and the EDI schedule
is only for implementation at DFAS centers and accounting offices. 

We agree with DOD that the long-term initiatives will take longer to
implement and carry a greater risk and uncertainty.  It is,
therefore, important that as DOD continues its efforts to improve
technology it understands and documents the problems in all aspects
of the contracting process for major weapons systems and addresses
the needs of procurement, logistics, and accounting functions. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this letter to the Chairman of the Senate
Committee on Governmental Affairs; the Chairmen and Ranking Minority
Members of the Senate Committee on Armed Services, the House
Committee on National Security, the House Committee on Government
Reform and Oversight and its Subcommittee on Government Management,
Information and Technology; and the Director of the Office of
Management and Budget.  We are also sending copies of this report to
the Secretary of Defense, the Acting Director, Defense Finance and
Accounting Service, and the Director, Defense Logistics Agency. 
Copies will be made available to others upon request. 

Please contact me at (202) 512-9095 if you or your staff have any
questions about this letter.  Janett P.  Smith, Roger Corrado,
William Bricking, and Jean Lee were major contributors to this
report. 

Sincerely yours,

Lisa G.  Jacobson
Director, Defense Audits

*** End of document. ***