Contract Management: Excess Payments and Underpayments Continue to Be a
Problem at DOD (Letter Report, 02/22/2001, GAO/GAO-01-309).

GAO reviewed the amount of excess payments and underpayments made by the
Department of Defense (DOD) to its contractors during fiscal year 1999.
The Defense Finance and Accounting Service (DFAS)--Columbus Center, Ohio
reports that contractors repaid $670 million in fiscal year 1999 and
closer to a billion dollars--$901 million--in fiscal year 2000. The
higher amount for fiscal year 2000 reflects the inclusion of repayments
made through offsets of other payments ($269 million) in addition to the
amount repaid by check ($632 million). Although small in relation to
total contract payments, these amounts represent a sizable amount of
cash in the hands of contractors beyond what is intended to finance and
pay for the goods and services DOD is purchasing. The 39 large
contractors covered by GAO's review returned excess payments totaling
$351 million in fiscal year 1999. Seventy-seven percent of these excess
payments stemmed from contract administration actions and 18 percent
stemmed from billing or payment errors. Large contractors reported
resolving $41 million in underpayments during fiscal year 1999.
Contractors attributed most underpayments to payment errors made by
DFAS--Columbus.

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

 REPORTNUM:  GAO-01-309
     TITLE:  Contract Management: Excess Payments and Underpayments
	     Continue to Be a Problem at DOD
      DATE:  02/22/2001
   SUBJECT:  Contract administration
	     Financial management
	     Overpayments
	     Contractor payments
	     Defense cost control
	     Underpayments
	     Internal controls
	     Debt collection

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GAO-01-309

A

Report to the Honorable Tom Harkin, U. S. Senate

February 2001 CONTRACT MANAGEMENT

Excess Payments and Underpayments Continue to Be a Problem at DOD

GAO- 01- 309

Lett er

February 22, 2001 The Honorable Tom Harkin United States Senate

Dear Senator Harkin: We have reported over the last several years that the
Department of Defense (DOD) annually overpaid its contractors by hundreds of
millions of dollars and that in some cases these excess payments were not
being promptly returned. In response, you requested that we look at the
scope of excess payments and underpayments. Specifically, this report
examines, for DOD contract payments, the following issues:

What is the amount of excess payments and what are the reasons they occur? ?
What is the amount of underpayments and what are the reasons they occur?

? How quickly are excess payments repaid and underpayments resolved? We
examined the amount of excess payments and underpayments by looking at the
amount of excess payments repaid during fiscal year 1999 and the amount of
underpayments resolved during fiscal year 1999. We also collected data on
the amount of excess payments and underpayments outstanding as of the time
data was collected from contractors (May 2000).

Our review focused on large contractor business segments, that is, business
entities receiving $125 million or more in contract payments in fiscal year
1999 from the Defense Finance and Accounting Service

(DFAS)- Columbus Center. 1 We collected information from 39 contractors,
including in our sample all 11 contractors receiving in excess of $1 billion
in payments in fiscal year 1999 and a random selection of the remaining
large contractors. 2 The 39 contractors in our sample received $30 billion
in 1 Business segments were defined using DOD “cage codes.”
These cage codes are used by DOD to track the business entities receiving
payments under DOD contracts. 2 Because we were assisted in the data
collection by the Defense Contract Audit Agency, the sample was stratified
by region in order to distribute the workload. We excluded a classified
entity and a Canadian entity from the population of large contractors we
sampled.

contract payments in fiscal year 1999, 42 percent of the $71 billion in
total contract payments reported for that year. The results cannot be
projected to the population of large contractors because the workload
required to gather the data limited the number of contractors that could be
examined. Appendix I identifies the 39 contractors covered by our sample. In
addition to the data on large contractors, we also examined DFAS- Columbus
data on the amount of contract payments returned by contractors (including
both large and small contractors) in fiscal years 1999 and 2000. We did not
independently verify the data reported by DFAS. Because of problems with the
reliability of DOD's contract payment data, it is not possible to determine
whether the amounts of excess payments reported by DFAS were complete and
accurate.

We were assisted in this review by the Defense Contract Audit Agency (DCAA).
DCAA collected data from the 39 contractors and selectively tested this data
against contractor records. We performed follow- up visits at 11 contractor
locations. We were solely responsible for the analysis of

the data and development of this report. Except as noted above, we performed
our work in accordance with generally accepted government auditing
standards.

Results in Brief DFAS- Columbus reports that contractors repaid $670 million
in fiscal year 1999 and closer to a billion dollars-$ 901 million- in fiscal
year 2000.

The higher amount for fiscal year 2000 reflects the inclusion of repayments
made through offsets of other payments ($ 269 million) in addition to the
amount repaid by check ($ 632 million). 3 Although small in relation to
total contract payments, these amounts represent a sizable amount of cash in
the hands of contractors beyond what is intended to finance and pay for the

goods and services DOD is purchasing. The 39 large contractors covered by
our review returned excess payments totaling $351 million in fiscal year
1999. Seventy- seven percent of these excess payments stemmed from contract
administration actions (such as finalizing the amount provided to cover
overhead costs) and 18 percent

stemmed from billing or payment errors. Most of the contract 3 Data on
payments returned through offsets was not available for fiscal year 1999 or
earlier years.

administration actions were associated with financing payments (progress
payments) provided to support contract implementation. Repayments became
necessary when, for example, physical progress did not keep pace with
progress payments or when there was a decrease in the number of items
purchased. Reported underpayments were less common than excess payments.
Large

contractors we reviewed reported resolving $41 million in underpayments
during fiscal year 1999. 4 Contractors attributed most underpayments to
payment errors made by DFAS- Columbus. DFAS errors frequently came about in
calculating how much had been paid through progress payments and how much
was due when the item was delivered.

Finally, in looking at how quickly payment issues were resolved, we found
that a substantial portion of excess payments- at least 39 percent of the
dollars owed- were not repaid within 30 days. In addition, about 72 percent
of underpayments took more than 30 days to resolve. It may be reasonable to
expect underpayments to take a longer time to resolve since they were
attributed to DFAS errors that still require reconciliation by the
contractor and the government. 5 Most excess payments, by contrast, were
attributed to contract adjustments that have usually been agreed to by both

the contractor and the government. Our recommendations focus on reducing
excess payments by periodically assessing the reasons excess payments occur
and encouraging contractors to refund excess payments promptly. DOD
generally agreed with our recommendations, saying that the amount of excess
payments caused by contract administration actions should be reduced but
that these payments were proper at the time of disbursement and the product
of routine

contract administration. 4 As discussed below, underpayments may not have
been fully identified. 5 For billing and payment errors, we measured the 30
days from the date that the payment was received by the contractor. For
contract administration actions, we measured the 30 days from the date of
the contract adjustment that implemented the contract administration action.

Background DFAS- Columbus pays contracts administered by the Defense
Contract Management Agency (DCMA). 6 This includes most contracts for
development and production of weapon systems (except shipbuilding
contracts). DFAS- Columbus paid $71 billion to contractors in fiscal year
1999 and $72 billion in fiscal year 2000.

These types of contracts often involve financing payments. Financing
payments cover the costs incurred, for example, in manufacturing an aircraft
or missile. These costs take the form of equipment, material, and labor
needed for production. Financing payments may be provided through progress
payments 7 that reimburse contractors for most- 75 percent for large
contractors- of the costs they incur. As items covered by the contract are
delivered, DFAS pays the remaining amount owed, deducting the progress
payments from the price of delivered items. The rate used to determine the
amount owed at delivery, known as the liquidation rate, 8 may be adjusted
when costs are higher or lower than projected. Under a

fixed- price contract, this adjustment permits the contractor to receive the
full amount due or, in the case of cost overruns, ensures that the
government does not pay more than the agreed price.

When the contractor submits a bill for delivery of some or all of the items
covered by a contract, DFAS recalculates the amount owed based on its
records of whether progress payments have been made against the

delivered items and what liquidation rate should be applied. The Prompt
Payment Act and the federal acquisition regulation require agencies to pay
invoices for delivered items within 30 days. If not paid in 30 days,
interest charges accrue. Requests for progress payments are not 6 DFAS-
Columbus pays other contracts beyond those administered by DCMA. This report
only covers payments made for DCMA- administered contracts and all
references to DFAS- Columbus in this report are specific to these payments.
7 Financing payments may also be performance- based with payments based on
the

accomplishment of particular events or milestones. Financing payments,
including both progress payments and milestone- based payments, typically
apply to production contracts. 8 If the progress payment rate is 75 percent,
the usual liquidation rate (the rate at which progress payments are
liquidated) would also be 75 percent. The contractor would receive the
remaining 25 percent on delivery of an item. However, an alternate rate of
say 85 percent could be approved if costs were higher than expected. In this
case, the contractor would receive a payment of 15 percent of the price
rather than 25 percent of the price on delivery.

subject to interest charges. However, DOD regulations set a target of 7 days
for paying progress payment requests. DFAS- Columbus relies on the
contracting officer for contract information necessary to make accurate and
timely payments. Contract provisions specify key information such as the
authorized progress payment rate,

liquidation rate, and price. The DCMA contracting officer also monitors
contract performance to ensure that amounts provided are commensurate with
progress on the system. Contract provisions also define the ceiling price
that is used to calculate payments when the price has not been negotiated
(known as an undefinitized contract). Contracting officials also determine
the indirect cost rate that is applied against direct costs, such as labor,
to cover overhead costs.

Excess Payments DFAS- Columbus reports that contractors repaid $670 million
in fiscal

Result From Contract year 1999. This amount considers only repayments made
through checks, not those made through offsets of other contract payments.
(Data on

Administration Actions payments returned through offsets was not available
for fiscal year 1999.)

DFAS- Columbus data for fiscal year 2000 indicates that contractors repaid
closer to a billion dollars-$ 632 million by check and $269 million through
offsets of other payments, for a total of $901 million. While these amounts
represent a small portion of the total amount paid to contractors, they
represent a substantial amount of cash in the hands of contractors beyond
what is intended to finance and pay for the goods and

services bought by DOD. Moreover, these funds are sometimes in the hands of
contractors for several years before it is recognized that excess payments
have occurred. The 39 contractors we reviewed reported that they repaid $351
million in fiscal year 1999, but many stated that they could not easily
identify amounts repaid through offsets of other payments. These contractors
also identified $40 million in excess payments that, at the time of the
contractor

review, had not yet been repaid. However, the reported amount of outstanding
payments does not fully capture the amounts already paid that may be
recognized as excess payments in the future. For example, the indirect rate
used to cover overhead costs may be estimated at the outset of the contract
but may turn out to be higher than the actual rate determined

later on. 9 When this occurs, the government will have paid the contractor
too much for indirect (overhead) costs and will be due a refund. At the time
of our review, neither the contractor nor DOD personnel would have
recognized the payments as excessive and reported these excess payments as
outstanding.

Reasons for Excess The large contractors we reviewed reported that 77
percent of the Payments

$351 million in excess payments were principally related to contract
administration actions. These actions include, for example, adjustments in
the amounts provided through progress payments to finance the production of
a system. A smaller portion of excess payments was related to contractor
billing errors and DFAS- Columbus payment errors. Figure 1 further
illustrates the sources of excess payments.

Figure 1: Sources of Excess Payments Percent of dollar value for excess
payments repaid in FY 1999

77

Contract administration 18

Billing and payment errors

5

Unspecified

9 Changes in the indirect cost rate would affect payments for contracts
where the contractor is reimbursed for costs or part of the price is based
on actual costs.

Billing and payment errors accounted for a larger share of repayment
actions. For the 1,153 repayment actions that make up the $351 million of
excess payments identified by contractors, 59 percent were attributed
tocontract administration actions and 26 percent to billing and payment
errors. No reason was specified for 15 percent of the repayment actions.

Contract Administration Actions As shown in figure 2, reimbursements of
progress payments were the source of more than three- fourths of the dollar
value of repayments attributed to contract administration actions.
Reimbursements of progress

payments occurred when physical progress was not commensurate with the
amount of financing payments or when there was a change in the schedule or
quantity of items to be delivered. The contracting officer is required to
monitor program progress and take prompt action when progress lags financing
payments. In these instances, costs may be higher than expected and the
contractor will receive less profit or even incur losses on the contract.
When the contracting officer adjusts the liquidation rate to recognize a lag
in progress, the new rate is applied to previous payments, resulting in a
refund due to the government.

Figure 2: Causes of Excess Payments Resulting From Contract Administration
Actions

Percent of dollars 35

33 30

24 25

20 20

16 15

10 4 5

2 1 0

pay rates

award audits financing or

change progress in

cost price Other

Progress lags Progress quantity schedule Other Change Definitized

Post- pricing pay indirect contract Percent of actions

35 33

30 25

21 20

14 15

10 11

10 6

5 5

0 quantity pay

rates contract

award audits Other

Progress financing pay- change

progress in cost Post- lags Other Change indirect Definitized pricing
Progress schedule price

or Progress pay adjustment Other contract administration action

As shown in figure 2, some types of contract administration actions
accounted for a substantial portion of the repayment actions but a small
share of the excess payment dollars. For example, changes in indirect cost
(overhead) rates accounted for 21 percent of actions but only 2 percent of
excess payment dollars. Similarly, actions definitizing contract prices
accounted for 14 percent of actions and 1 percent of excess payment dollars.
The examples below illustrate the types of contract administration issues
that result in excess payments.

? At one location, the DCMA contracting officer recognized that payments
needed to be adjusted because the contractor was incurring higher costs than
expected. However, prompt action was not taken and additional progress
payments were allowed before changing the liquidation rate 4 months later.
When the rate was changed and applied to prior payments, the contractor
reimbursed the government for $13 million. About 3 months later, the DCMA
contracting officer again identified a problem with the liquidation rate but
allowed progress payments to continue before getting a refund of over $25
million. ? In another case, the contractor relied on a time- phased plan for

allocating material costs to contracts. Based on a 1998 delivery schedule,
amounts were allocated to the contract and progress payments were made
beginning in February 1998. In September 1998,

the delivery schedule was extended to 1999. The contractor reallocated
material to other contracts and, in November 1998, refunded $10 million of
prior payments. ? In another case, progress payments were made to finance
the

production of items used in satellite launches. However, the Air Force
decided to defer delivery of these items and allowed the contractor to
transfer them to commercial customers. The contractor repaid $34 million in
financing costs for these items. When production resumes, the contractor
will again be eligible for progress payments. ? The Army expanded an
existing contract for production of helicopters

to include helicopters being purchased by the State Department. However, in
modifying the contract, the contracting officer did not identify the payment
office as the State Department. As a result, DFAS

paid the contractor $21 million in progress payments. Shortly afterward, the
problem was identified and the contractor quickly reimbursed DFAS for these
payments.

Excess Payments Also Result Contractors reported that $64 million in
contract repayments resulted from From Billing and Payment Errors

billing and payments errors, 10 as shown in table 1. Contractor billing
errors accounted for the larger dollar amount but a smaller number of
repayment actions.

Table 1: Excess Payments Due to Billing and Payment Errors Excess payments
resolved in FY 1999 Type of error Total (in millions of dollars) Number of
actions

Contractor billing $46. 5 98 DFAS payment 17. 1 198

Examples of contractor billing errors include the following cases. ? A
sizable repayment involved a contractor that billed twice for the same fees,
resulting in excess payments of $16 million between September 1997 and July
1999. This occurred when the contractor included award fees (profit) paid to
a partnering company in its own costs and then separately billed for these
same fees. The contractor did not detect the double billing until August
1999. The contractor refunded the excess payments 8 days later and took
steps to prevent such billing errors in the future. In response, the DCMA
office overseeing this contractor issued an alert to other offices about the
potential for double billing under

similar circumstances. ? A smaller error occurred in a case in which the
contractor overpaid its supplier by $1.3 million and charged that amount to
the government.

The contractor identified its error in October 1998 and repaid the
government 42 days later- time needed, according to the contractor, for
internal processing and approval.

10 We relied on the contractor's assessment of whether errors were due to
DFAS- Columbus payment errors or billing errors. We did not independently
verify each transaction. However, we did review a small number of
transactions with DFAS- Columbus officials and they agreed with the
contractor's classification for most of these transactions.

Pattern for Outstanding For most excess payments that were outstanding at
the time of the Excess Payments Differs

contractor reviews, the causes of the excess payments were not specified. 11
For those payments where a cause was identified, contractors attributed most
of the excess payments to DFAS errors, as shown in figure 3. Figure 3:
Reasons for Outstanding Excess Payments

100 Percent of actions

90 80 70 60

53 50 40

33 30 20

11 10

2 0

DFAS payment Bi lling error Contract change Unspecified

error Note: Numbers do not add to 100 percent due to rounding.

One very large payment for $29 million was outstanding at the time of the
contractor reviews. 12 The contractor attributed the problem to a DFAS
error, but we questioned whether this is the appropriate classification of
the payment. In this case, the contracting officer modified a contract for

11 The contractor did not specify a reason the excess payments occurred in
its response to DCAA. 12 Because this one large payment greatly affects the
proportion of dollars attributable to any reason category and because we did
not agree with the contractor's identification of the reason as a DFAS
error, we are not presenting reasons for excess payments by dollar amounts.

production of Air Force aircraft to add manufacturing support for the
foreign military sale of aircraft. In modifying the contract, the
contracting officer did not reference a DOD regulation requiring that, in
the case of foreign military sales, requests for progress payments allocate
the amount requested by purchasing country. Contracting officials stated
that the

clause was not referenced because they did not expect progress payments to
be requested for the manufacturing support portion of the contract-
manufacturing support was payable in increments of one- twelfth of the
annual amount. (Contracting officials stated that progress payments will be
expressly prohibited in a follow- on contract.) Although experienced in
foreign military sales, the contractor did not identify its progress payment

requests as related to foreign military sales. When no country is
identified, DFAS- Columbus allocates progress payments to the U. S. portion
of the contract. As a result, when the contractor submitted invoices for
final payment against the foreign military sales portion of the contract,

DFAS- Columbus did not deduct progress payments from the price; instead, it
paid the full amount for manufacturing support. The contractor notified DFAS
when the excess payments began, but payments had accumulated for 14 months
at the time of our review. Two months later, payments were reconciled and
the contractor repaid $29 million.

DCMA Does Not Analyze When a contractor submits a check to repay an excess
payment, Reasons for Excess DFAS- Columbus classifies it as either a payment
error or contract Payments

administration action. The results of DFAS's analysis is similar to our own-
it reports that 82 percent of the dollar value of excess payments in fiscal
year 1999 was due to contract administration actions. When an excess payment
is due to a payment error, it identifies the source of the

problem to prevent future recurrence. However, DFAS does not analyze the
causes for excess payments resulting from contract administration actions
because these excess payments involve actions outside its control, such as

contract price adjustments. DCMA does not analyze the data generated by DFAS
to understand the nature of excess payments caused by contract
administration actions. Such an analysis would be helpful in identifying
systemic problems that result in excess payments or in identifying problems
specific to a particular

contractor or contracting organization. Without such information,
substantial reductions in the amounts of excess payments are unlikely.
According to DCMA officials, they do not receive DFAS's data on excess
payments even though DFAS's data is a central source of information on

excess payments resulting from contract administration actions. For each
check DFAS receives, DFAS shows the refund amount, contractor's name,
contract number, and the general nature of the contracting action. For
example, a refund check may be associated with a change in the liquidation

rate. Thus, the DFAS data would indicate the excess payment was associated
with progress payments although the data would not indicate if the change is
resulting from delays in delivery schedules or higher than expected costs.
We believe that the DFAS data can be used as a tool for

initially identifying the types and locations of contract administration
actions that are generating excess payments and appropriately targeting
efforts to reduce excess payments.

Underpayments Contractors identified a smaller amount of underpayments
compared to Attributed to Payment

excess payments. Contractors covered by our review reported that they had
resolved underpayments totaling $41 million in fiscal year 1999, as Errors

shown in figure 4. Contractors also reported that $15 million in
underpayments were outstanding at the time of the review. While the dollar
impact of underpayments is smaller, compared to overpayments, the resolution
of these problem payments creates an administrative burden on DFAS,
contracting officers, and contractors. Furthermore, when the underpayment
occurs on an invoice for delivery of an item, the underpayment may be
subject to interest charges. DFAS- Columbus reports that it paid $24 million
in interest in fiscal year 1999 and $16 million in fiscal year 2000.

Figure 4: Scope of Underpayments

90 Dollars in millions Number of actions

700 80

600 70

500 60

50 400

$41 275 40

300 205

30 $15

200 20

10 100

0 0

Outstanding Resolved Outstanding Resolved Dollar amount Number of actions

DCMA and contractor officials stated contractors might not have fully
reported underpayments. If a contract adjustment results in recognizing that
the contractor is due additional monies (for example, a decrease in the

liquidation rate due to lower- than- expected costs), the contractor will
normally prepare an invoice for the amount owed. Officials said that because
the amount owed is paid through a separate invoice, contractors might not
have identified the payment as an underpayment. DCAA officials also stated
that some contract actions- such as pricing audits- only result in
identifying excess payments, not underpayments.

As a result, contractors attributed most underpayments to DFAS payment
errors- 93 percent of the dollar value of underpayments resolved in fiscal
year 1999. Three percent of underpayments resolved in fiscal year 1999 were
attributed to contractor billing errors. For underpayments outstanding at
the time of our review, contractors did not specify a cause for 39 percent
of the dollar value underpayments and attributed 61 percent to DFAS payment
errors. None of the outstanding underpayments were attributed to contractor
billing errors.

Many of the DFAS errors came about in determining how much was due when the
item was delivered and how much had been paid through

progress payments. For example, one contractor reported that DFAS deducted
progress payments for items in the contract that were not eligible for and
had not received progress payments. The contractor reported that an
underpayment for $123, 000 occurred in August 1998. Two months later, DFAS
completed its review and paid the contractor $123,000.

Discrepancies also occurred when DFAS and the contractor processed invoices
in different sequences. In preparing its invoice, the contractor may apply
outstanding progress payments to the first invoice and show the full amount,
without a deduction for progress payments, on later invoices.

However, DFAS may not process the invoices in the same sequence if, for
example, multiple invoices are submitted on the same day or within a few
days of each other. DFAS applies progress payments to invoices as they are

paid, until no progress payments remain. Some Excess

A substantial portion of excess payments was not repaid promptly. As
Payments and shown in table 2, for the 39 contractors we reviewed, 55
percent of the

dollar value of excess payments was repaid in 30 days or less while
Underpayments Are 39 percent was not. (Data to determine the time taken to
repay was not Not Resolved Promptly available for the remaining amount.)
Unless a formal demand for payment is made, there is no penalty or interest
charged to contractors for repayments taking more than 30 days.

Table 2: Time Involved in Resolving Excess Payments and Underpayments Excess
payments repaid in FY

Underpayments resolved in FY 1999 1999 Number of Percent

Percent Percent

Percent days of dollars a of cases of dollars of cases a

30 days or less 55 30 26 42 31- 60 days 13 12 44 15 61- 90 days 9 7 22 15
91- 180 days 12 7 517 181- 365 days 1 8 0 6 Over 1 year 4 9 1 4 Unknown 527
2 2

Tot al 100 100 100 100

a Does not total 100 percent due to rounding.

Because most excess payment dollars- 77 percent- stemmed from contract
administration actions, it is reasonable to expect repayment within 30 days
of the contract adjustment. These actions are normally implemented through
modifications to the contract that are usually agreed to by both the
contracting officer and the contractor. Thus, at the time the contract
modification is signed, there is recognition that a repayment will result
from the action and the amount owed is identified or can be readily
calculated. Yet, as shown in figure 5, a substantial portion of excess
payment dollars resulting from contract adjustments was not repaid in 30
days. 13 Figure 5: Time Taken to Repay Excess Payments Resulting From
Contract Administration Actions

100 Percent of dollars

90 80

65 70

60 50 40 30

19 20

12 10

4 0

30 days or l ess 31 - 60 days 61 and more days Unspeci fi ed

13 By comparison, for excess payments resulting from billing and payment
errors, 71 percent was not repaid in 30 days. At the end of 60 days, 58
percent had not been repaid. As discussed below, it is reasonable to expect
that billing and payment errors would take somewhat longer, on average, to
resolve.

Contractors had different policies for refunding excess payments. Some had
policies and procedures for identifying and refunding excess payments
promptly. Others waited for government action before refunding. Some

contractors would not refund excess payments if they also had unresolved
underpayments. And some contractors preferred to offset other payments
rather than issuing a check, a process that would take longer and is less
visible. In August 2000, in response to our recommendation, a revision to

the federal acquisition regulation was proposed requiring contractors to
notify the contracting officer if the contractor becomes aware of an
overpayment. 14 Our recommendation was intended to apply to excess payments
caused by contract administration actions as well as billing and payment
errors. However, the proposed regulation only applies to invoice payments
and not contract financing payments (i. e., progress payments).

DOD has the ability to demand payment within 30 days and to impose interest
charges if not repaid within this time. The federal acquisition regulation
directs that the responsible official (usually the contracting officer) act
promptly to determine the amount owed the government and DOD regulations
require that a demand for payment be made as soon as this amount has been
determined. Moreover, the federal acquisition regulation imposes interest
charges for debts not paid in 30 days. Yet, contracting officers do not
consistently issue demands for payment when

contract changes are negotiated even though, in most instances, the amount
owed is known or is calculable from the data used to determine the contract
change. For example, in one case, the contracting officer negotiated a price
reduction because certain engineering tasks were eliminated from the
contract. After negotiating for nearly a year, agreement was reached and a
contract modification signed reducing the contract price by $6.9 million.
However, the contracting officer did not issue a formal demand for payment.
The contractor did not refund the $6.9 million until January 1999, more than
a year later and 2 years after the scope of engineering tasks was reduced.
15 In the case of underpayments, we found that 72 percent of the dollar
value

of underpayments took more than 30 days to resolve. However, contractors
attributed most underpayments- 93 percent- to DFAS payment errors. In

14 DOD Contract Management: Greater Attention Needed to Identify and Recover
Overpayments (GAO/ NSIAD- 99- 131, July 19, 1999). 15 According to the
contractor, it did not refund the money promptly because the contract
modification was, inadvertently, not communicated to the accounting
department.

these cases, a problem would be identified at the time the contractor
received the payment and the process of reconciling identified discrepancies
would begin at this point. It would therefore seem reasonable to expect
resolution of payment errors to take longer than repayments arising from
contract administration actions. Twenty- six percent of the dollar value of
underpayments was resolved in 30 days and an additional 44 percent was
resolved in 31 to 60 days. Twenty- eight percent took more than 60 days to
resolve. Underpayments were therefore resolved more quickly than excess
payments- 58 percent of the dollar value of excess payments attributed to
billing and payment errors took more than 60 days to resolve.

Payments Outstanding at The time involved for resolving excess payments and
underpayments that

the Time of Our Review were outstanding at the time of our review differed
substantially from the Took Long Periods to time involved for cases resolved
in fiscal year 1999. As shown in table 3, Resolve

most excess payments and underpayments that were unresolved at the time of
our review had been unresolved for at least 6 months. Some had been
unresolved for several years.

Table 3: Amount of Time Taken to Resolve Outstanding Excess Payments and
Underpayments Outstanding excess payments Outstanding underpayments Number
of Percent

Percent Percent

Percent days of dollars of actions of dollars a of actions a

30 d ays o r l ess0 0 0 0 31- 90 d ays 0 2 0 0 91- 180 d ays 2 5 0 0 181-
365 days 9 34 53 46 Over 1 year 83 54 39 53 Unknown 6 5 7 0

Total 100 100 100 100

a Does not add to 100 percent due to rounding.

Several reasons were given for the lengthy times involved in these cases.
DFAS officials stated that the process for resolving payment discrepancies
could be labor- intensive and time- consuming, particularly for large
contracts covering several years with large numbers of payments. And

some contractors said they do not repay excess payments if underpayments had
also occurred. Conclusions The amount of excess payments repaid in fiscal
year 2000-$ 901 million-

is small compared to the total amount paid by DFAS- Columbus. Nonetheless,
it represents a substantial amount of financial resources paid to
contractors beyond what is intended to support the financing of

programs. Most of these excess payments were due to contract administration
actions, particularly adjustments in progress payments. These actions
largely fall under the purview of DCMA. However, DCMA does not review the
data generated by DFAS on reasons excess payments occurred. Such a review is
necessary if excess payments are to be reduced.

While a sizable portion of excess payments is repaid within 30 days, a
substantial portion is not. It is reasonable to expect that excess payments
resulting from contract administration actions should be repaid in this time

frame since the amount owed is identified in the contract change or can be
calculated from the data used to develop the contract adjustment. More
consistent application of requirements to issue demands for payment is
needed.

Recommendations for We recommend that the Secretary of Defense

Executive Action ? Require that DCMA endeavor to minimize excess payments by

(1) routinely analyzing DFAS data on the reasons for excess payments
relating to contract administration, (2) further investigating problem areas
identified by this data, and (3) identifying and implementing actions to
reduce the amount of excess payments caused by contract administration
actions. ? Require, when contract administration actions result in
recognition of an excess payment, that contracting officers compute the
amount owed

and demand payment of this amount at the time the contract is modified.
Agency Comments and

In written comments on a draft of this report, DOD partially concurred with
Our Evaluation

the first recommendation. Specifically, DOD stated that it partially
concurred with the need to routinely analyze DFAS data and identify problem
areas, stating that DCMA will conduct an initial review of excess

payment data generated by DFAS and determine whether routine receipt and
analysis of this data would be meaningful. DOD agreed that the amount of
excess payments caused by contract administration actions should be

reduced, and it specifically concurred with the need to identify and
implement actions to reduce these excess payments. DOD further commented
that contract actions at times necessitate recoupment of funds from
contractors in the normal course of contract performance and that these
payments were proper at the time they were paid to contractors.

DOD stated that it is misleading to call the funds recouped from contractors
excess payments and that they only become excess payments if contractors
delay in making repayment. We believe that if DCMA concludes that the DFAS
data does not give it sufficient information to justify routine receipt of
this data, it is imperative

that DCMA identify an alternate approach for identifying actions that will
reduce the amount of excess payments caused by contract administration
actions. We disagree with DOD's comments that only those amounts the
contractor delays in repaying are really excess payments. DOD seems to be
confusing the issue of whether a payment is proper (i. e., consistent with
contract terms) with whether the payment is the right amount to

accomplish its intended purpose (e. g., reimbursing the contractor for the
actual amount of indirect costs being incurred). Some recoupment of payments
will be necessary as a result of normal contract management, in part,
because it is not practical to gain perfect knowledge of the exact amount
needed to accomplish the intended purpose. We believe it is

essential that controls are in place and timely management oversight is
conducted so that the amount of payments recouped from contractors (i. e.,
excess payments) is kept to a minimum. The amount currently being recouped
is too high. Further, we understand that DOD is considering plans to
increase the progress payment rate from 75 percent to 80 percent (for large
contractors). Such an action would increase the amount of progress payments
going to contractors and would likely lead to an increase in excess payments
if no actions are taken to manage progress payments more effectively.

With regard to the second recommendation on demanding payment of amounts
owed, DOD agreed with the recommendation and stated that DCMA will improve
its guidance to contracting officers to ensure they issue demands for
payments with the execution of contract modifications.

DOD comments appear in appendix II. DOD also provided technical comments
that we have incorporated as appropriate.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we will not distribute this report until 30 days from
its date. At that time, we will send copies of this report to the
appropriate congressional committees; Donald H. Rumsfeld, Secretary of
Defense; and Mitchell E. Daniels Jr., Director, Office of Management and
Budget. GAO contacts and staff acknowledgments to this report are listed in
appendix III.

Sincerely yours, David E. Cooper, Director Acquisition and Sourcing
Management

Appendi Appendi xes x I

Contractors Reviewed Lockheed Martin Corp., Marietta, Ga. Primex
Technologies Co., St. Petersburg, Fla.. United Technologies Corp., West Palm
Beach, Fla. Northrop Grumman Corp., Melbourne, Fla. Lockheed Martin Corp.,
Orlando, Fla. Allison Engine Co. Inc., Indianapolis, Ind. Lockheed Martin
Tactical, Akron, Ohio Textron Systems Corp., Wilmington, Mass. Hughes Arabia
Limited, Malaz District, SAU Lockheed Martin Corp., Syracuse, N. Y. General
Dynamics Defense, Pittsfield, Mass. Sikorsky Aircraft Corp., Stratford,
Conn. Lockheed Martin Corp., Nashua, N. H. Raytheon Co., Marlborough, Mass.
Lockheed Martin Commercial, Littleton, Colo. Lockheed Martin Corp.,
Littleton, Colo. Oshkosh Truck Corp., Oshkosh, Wis. Raytheon Aircraft Co.,
Wichita, Kans. McDonnell Douglas Corp., St. Louis, Mo. DYN Corp/ Aerospace
Technology, Ft. Worth, Tex. Stewart & Stevenson Services, Sealy, Tex.
Alliant Techsystems Inc., Hopkins, Minn. Lockheed Martin Corp., Ft. Worth,
Tex. Raytheon Co., Tucson, Ariz. Science Applications Intl., San Diego,
Calif. Litton Systems Inc., Woodland Hills, Calif. Lockheed Martin Corp.,
Sunnyvale, Calif. Boeing Co., Seattle, Wash. McDonnell Douglas Corp.,
Huntington Beach, Calif. McDonnell Douglas Corp., Long Beach, Calif. Boeing
North American Inc., Downey, Calif. TRW Inc., Carson, Calif. Lockheed Martin
Corp., Baltimore, Md. Lockheed Martin Corp., Manassas, Va. Marconi Systems
Technologies, Rockville, Md. Boeing Sikorsky Comanche, Philadelphia, Pa.
Boeing Helicopters, Ridley Park, Pa. United Defense LP, York, Pa.

Appendi x II Comments From the Department of Defense

Now on p. 21. Now on p. 21.

Appendi x II I GAO Contacts and Staff Acknowledgments GAO Contacts Dave
Cooper (202) 512- 4841 Karen Zuckerstein (202) 512- 6785 Acknowledgments In
addition to those named above, Odilon Cuero, Jack Edwards,

Carlos Garcia, Paul Greeley, Noel Lance, Martin Lobo, Kenneth Roberts, and
Raffaele Roffo made key contributions to this report.

We would also like to acknowledge the contributions of Barry Turner, Defense
Contract Audit Agency, to this report.

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Page 1 GAO- 01- 309 Excess Payments and Underpayments

Contents Letter 3 Appendixes Appendix I: Contractors Reviewed 24

Appendix II: Comments From the Department of Defense 25 Appendix III: GAO
Contacts and Staff Acknowledgments 28

Tabl es Table 1: Excess Payments Due to Billing and Payment Errors 12 Table
2: Time Involved in Resolving Excess Payments and Underpayments 17

Table 3: Amount of Time Taken to Resolve Outstanding Excess Payments and
Underpayments 20

Figures Figure 1: Sources of Excess Payments 8 Figure 2: Causes of Excess
Payments Resulting From Contract Administration Actions 10

Figure 3: Reasons for Outstanding Excess Payments 13 Figure 4: Scope of
Underpayments 16 Figure 5: Time Taken to Repay Excess Payments Resulting
From Contract Administration Actions 18

Abbreviations

DCAA Defense Contract Audit Agency DCMA Defense Contract Management Agency
DFAS Defense Finance and Accounting Service DOD Department of Defense

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Appendix I

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Appendix II

Appendix II Comments From the Department of Defense

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Appendix II Comments From the Department of Defense

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Appendix III

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