Bureau of Prisons Contract Payments (20-MAR-02, GAO-02-508R).	 
								 
GAO reviewed the Bureau of Prisons to determine whether they had 
made overpayments to contractors. During fiscal year 2001, the	 
Bureau of Prisons had 24 open construction contracts that totaled
approximately $1.9 billion. In addition to general disbursement  
controls, GAO found internal controls specific to construction	 
contracts where both the project representative and the 	 
contracting officer must approve each monthly progress payment	 
invoice. The contracting officer checks the invoice for 	 
completeness, accuracy, and compliance with contract terms.	 
Further, the contracting officer keeps a running record of funds 
available by contract. The final contract payment is made only	 
after all required work is verified as complete and all open	 
claims have been satisfied. GAO sampled 27 payments on five	 
construction contracts to determine if construction contract	 
payment controls were properly designed, in place, and operating 
to prevent or detect overpayments. GAO found that the internal	 
controls were in place and operating and construction contract	 
payment amounts were correct, or, if errors occurred, they were  
detected and corrected promptly as a normal part of the payment  
system. A few minor clerical errors were subsequently detected	 
and corrected by the Bureau of Prisons through its own routine	 
control procedures before GAO made its review. Based on the	 
controls in place and operating, the risk of undetected 	 
construction contractor overpayments at the Bureau of Prisons	 
does not appear to be significant.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-508R					        
    ACCNO:   A02914						        
  TITLE:     Bureau of Prisons Contract Payments		      
     DATE:   03/20/2002 
  SUBJECT:   Construction contracts				 
	     Internal controls					 
	     Overpayments					 
	     Contractor payments				 

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GAO-02-508R
     
GAO-02-508R Bureau of Prisons Contract Payments

United States General Accounting Office Washington, DC 20548

March 20, 2002 The Honorable Dan Burton Chairman Committee on Government
Reform House of Representatives

Subject: Bureau of Prisons Contract Payments You asked that we review
several agencies to determine whether they had made overpayments to
contractors. One of the agencies was the Department of Justice. In
consultations with your staff, we agreed to concentrate our work at the
department?s Bureau of Prisons because it administered large construction
contracts. During fiscal year 2001, the Bureau of Prisons had 24 open
construction contracts that totaled approximately $1.9 billion. As a first
step in determining whether the bureau was likely to have made overpayments
to construction contractors, we identified their internal controls. We then
tested how well the controls were working by reviewing a sample of
construction contract payments. Our work was conducted between August 2001
and December 2001 in accordance with generally accepted government auditing
standards. We also provided the Bureau of Prisons an opportunity to comment
on a draft of this letter. This letter describes the scope and results of
our work.

In order to assess the risk of construction contractor overpayments, we
asked Bureau of Prisons personnel what types of preventive and detective
controls were in place. Based on these inquiries, we determined that general
disbursement controls included

* segregating key disbursement responsibilities;

 using only original contractor invoices or, in limited circumstances,
certified copies as a basis for payment;

 performing automated input edit and processing checks; and

 mutilating invoices to prevent reprocessing. In addition, we found that
internal controls specific to construction contracts included the following:

 The project representative and the contracting officer must both approve
each monthly progress payment invoice. The contracting officer checks the
invoice for completeness, accuracy, and compliance with contract terms.

 The contracting officer keeps a running record in the contract file of
funds available for the contract.

GAO-02-508R Bureau of Prisons Contract Payments 2

 Final contract payment is not made until all required work is verified as
complete and all open claims have been satisfied.

We reviewed a sample of 27 payments on five different construction contracts
to assess whether the construction contract payment controls were properly
designed and whether they were in place and operating to prevent or detect
overpayments for the selected items. 1 The contracts totaled approximately
$186 million. The 27 payments selected for review totaled approximately $31
million, including the final payment for each of the five construction
contracts. For each payment selected, we reviewed the payment file and
obtained clarifications from Bureau of Prisons personnel when necessary.

For the payments that we reviewed, we found that the internal controls were
in place and operating and that construction contract payment amounts were
correct, or, that if errors occurred, they were detected and corrected
promptly as a normal part of the payment system. We found a few minor
clerical errors for three of the contracts we reviewed. The errors were
subsequently detected and corrected by the Bureau of Prisons through its own
routine detective control procedures before we made our review. For example,
in one contract, there was an overpayment of $3 on a payment of about $4
million. The error was rectified the following month by reducing the next
month?s payment by $3. In a second contract, the increase in retainage
(costs to be paid later in the contract) was $11,581 more than the contract
costs incurred during the same period. In the following payment period, this
error was corrected by reducing the retainage payment by $11,581.

The risk of undetected construction contractor overpayments at the Bureau of
Prisons does not appear to be significant based on the controls in place and
operating at the time we made our tests. Because of this, and as agreed with
your staff, we believe no further work relative to this request is warranted
at this time. In an oral response to a draft of this letter, the bureau
stated that it had no comments.

We are sending copies of this letter to the ranking minority member of the
House Committee on Government Reform and the Bureau of Prisons. Copies of
this letter are available to other interested parties. This letter will also
be available on GAO?s home page at http://www.gao.gov.

1 These contracts were selected because they had been closed in fiscal year
2001, allowing us to review the full activity of the contracts. They
included three construction contracts for two prisons and two related
contracts for monitoring and oversight. Because our sample was not
statistically based, our conclusions are drawn solely for the transactions
we reviewed and cannot be extrapolated to all construction contract
payments.

GAO-02-508R Bureau of Prisons Contract Payments 3 If you have any questions,
please contact me at (202) 512-9508 or by e-mail at

[email protected] or my Assistant Director, Mark P. Connelly, at (202)
512-8795 or by e-mail at [email protected]. Key contributors to this letter
were Don Campbell and Jack Warner.

Sincerely yours, Linda Calbom Director, Financial Management

and Assurance (190028)
*** End of document. ***