DOD Procurement: Millions in Contract Payment Errors Not Detected and
Resolved Promptly (Letter Report, 10/06/95, GAO/NSIAD-96-8).
The 374 business units--representing 82 large defense contractors and 57
small contractors--that responded to GAO's request for data as of July
1994 reported about $231.5 million in outstanding overpayments and about
$625.9 million in underpayments. The evidence suggests and contractors
reported that they followed up to collect underpayments and usually
notified the Defense Department of overpayments. Contractors did not,
however, always return overpayments unless told to do so. The Defense
Finance and Accounting Service Center in Columbus, Ohio, cannot readily
detect payment discrepancies because of significant errors in its
automated payment records. Despite these errors, Center personnel pay
contractors' invoices as if the payment data were correct. The Center
did not properly pursue recovery after overpayments were reported by
contractors or identified through contract reconciliation. The Center's
delay in collecting overpayments has been long and costly. For the $84.2
million in overpayments that it reviewed, GAO estimates that recovery
delays cost the government about $10.6 million in interest. Even after a
public accounting firm completed contract reconciliations to identify
the amounts owed the government, the Center did not recover overpayments
promptly.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-96-8
TITLE: DOD Procurement: Millions in Contract Payment Errors Not
Detected and Resolved Promptly
DATE: 10/06/95
SUBJECT: Overpayments
Underpayments
Department of Defense contractors
Accounting errors
Federal agency accounting systems
Data integrity
Defense cost control
Accounting procedures
Financial management
Refunds to government
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Cover
================================================================ COVER
Report to Congressional Requesters
October 1995
DOD PROCUREMENT - MILLIONS IN
CONTRACT PAYMENT ERRORS NOT
DETECTED AND RESOLVED PROMPTLY
GAO/NSIAD-96-8
DOD Procurement
(705074)
Abbreviations
=============================================================== ABBREV
DFAS - Defense Finance and Accounting Service
DOD - Department of Defense
FAR - Federal Acquisition Regulation
Letter
=============================================================== LETTER
B-256249
October 6, 1995
The Honorable John Glenn
Ranking Minority Member
Committee on Governmental Affairs
United States Senate
The Honorable William V. Roth, Jr.
The Honorable Charles E. Grassley
The Honorable Barbara Boxer
United States Senate
In response to your request, we surveyed a group of large and small
defense contractors to identify the amount of outstanding Department
of Defense (DOD) overpayments and underpayments identified in
contractors' records. We also reviewed selected overpayments to
these contractors to determine whether DOD was detecting and
recovering contract overpayments promptly. Our review focused on the
actions taken to recover overpayments at the Defense Finance and
Accounting Service (DFAS) Center in Columbus, Ohio, which in June
1995, made payments on about 373,500 defense contracts. The total
value of these contracts is about $602 billion.
BACKGROUND
------------------------------------------------------------ Letter :1
Sound financial management operations are critical to ensuring that
DOD effectively manages its contracts and that funds are disbursed
properly. DOD has recognized that it has serious, long-standing
problems in correctly disbursing billions of dollars in payments and
providing reliable financial information. In January 1991, DOD
created DFAS to strengthen DOD's financial management operations by
standardizing, consolidating, and streamlining finance and accounting
policies, procedures, and systems. But efforts to improve financial
management through DFAS have yet to be successful, and much remains
to be done to improve its performance. We have reported on a number
of issues related to DOD's financial management problems. A list of
our recent products is included at the end of this report.
A dramatic indicator that sound financial management operations are
not in place is when contractors are returning overpayments to the
paying office and that office is not aware that overpayments were
made. In 1994 we reported on such contract overpayments being
returned to the DFAS Columbus Center.\1
Our examination of $392 million of the $751 million in checks
processed by the DFAS Columbus Center during a 6-month period in 1993
disclosed that about $305 million, or about 78 percent, represented
overpayments by the government. The overpayments principally
occurred because DOD paid invoices without recovering previous
progress payments or because it made duplicate payments.
Underscoring our concern about such overpayments is the fact that the
majority of the overpayments we examined were detected by
contractors, rather than by DFAS.
Our August 1994 report identified unresolved payment discrepancies,
both overpayments and underpayments, at nine contractor locations and
raised questions as to whether such discrepancies were widespread.\2
As a result of that report, you requested that we obtain data on
payment discrepancies from selected large and small contractors. The
methodology used to conduct the data request and analyze the
contractors' responses is explained in appendix I, and a copy of the
data request is shown in appendix II.
--------------------
\1 DOD Procurement: Millions in Overpayments Returned by DOD
Contractors (GAO/NSIAD-94-106, Mar. 14, 1994).
\2 DOD Procurement: Overpayments and Underpayments at Selected
Contractors Show Major Problem (GAO/NSIAD-94-245, Aug. 5, 1994).
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
The 374 business units (representing 82 large defense contractors and
57 small contractors) that responded to our request for data as of
July 1994 reported about $231.5 million in outstanding overpayments
and about $625.9 million in underpayments. The evidence suggests and
contractors reported that they followed up to collect underpayments
and usually notified DOD of overpayments. However, contractors did
not always return overpayments unless instructed to do so.
The DFAS Columbus Center cannot readily detect payment discrepancies
because of significant errors in its automated payment records.
Despite these errors, Center personnel, in accordance with payment
procedures, pay contractor invoices as if the payment data were
correct. With significant errors in the automated payment records,
incorrect payments are likely to continue.
The Center did not properly pursue recovery after overpayments were
reported by contractors or identified through contract
reconciliation. On the basis of our research of $84.2 million in
overpayments, the Center's delay in collecting overpayments was long
and costly. For those overpayments, we estimate that recovery delays
cost the government about $10.6 million in interest. Even after a
public accounting firm completed contract reconciliations to identify
the amounts owed the government, the Center did not recover
overpayments promptly.
In response to our August 1994 recommendation that DOD mobilize
resources to identify, verify, and correct payment discrepancies, DOD
advised us in May 1995 that various actions were underway or planned
to reduce payment discrepancies and to use contractor records to
facilitate reconciliations. Also, on July 31, 1995, DFAS requested
the Columbus Center to undertake a new effort to identify and resolve
payment discrepancies.
CONTRACTORS REPORT SIGNIFICANT
PAYMENT DISCREPANCIES
------------------------------------------------------------ Letter :3
In response to our data request, 374 business units of large and
small contractors reported overpayments and underpayments using their
accounting records. The business units responding to our request
reported payment discrepancies of $857.4 million--overpayments of
$231.5 million and underpayments of $625.9 million.
Our analysis of the responses from selected business units showed
that (1) the reported information had been drawn from their
accounting records and (2) most of the units applied some judgments
to extract data from their accounting records. The judgments applied
in compiling the information varied among the contractors. For
instance, some contractors did not report what they considered to be
low-dollar invoices, such as amounts less than $10,000 or $50,000.
Some contractors did not report unpaid (as opposed to partially paid)
invoices and vouchers over 30 days old as underpayments. One
contractor that reported $15 million in overpayments as outstanding
on July 31, 1994, did not include a $7.1 million overpayment that it
included in a liability account. The overall effect of the anomalies
we identified in the contractors' responses was that the reported
overpayments and underpayments were less than the amounts recorded in
the contractors' accounts.
Both overpayments and underpayments result in unnecessary costs to
the government. Overpayments increase the government's interest
costs because funds are needlessly disbursed. Contractors are not
assessed interest on overpayments until 30 days after a demand for
repayment is made. For underpayments, the Prompt Payment Act
requires DOD to pay an interest penalty for an invoice payment made
after the due date or 30 days after the presentation of a valid
invoice. The Center's late payment penalties reported for fiscal
year 1994 were about $5 million.
Many contractors notified the government of payment errors but did
not always return overpayments until instructed to do so. Table 1
shows that 343 of the 374 business units (92 percent) reported having
a policy or practice of notifying the government paying office and/or
government contracting officers when payment errors are encountered.
Because of the poor state of DOD's accounting records and control
systems, overpayments might never be recovered if contractors do not
report them.
Table 1
Reported Policy or Practice for
Notifying DOD of Errors
Number of
business
Policy units
-------------------------------------------------------- ------------
Written notification or telephone contact with paying 303
office
Notification of government contracting 40
officer instead of paying office
Other, such as sending refund or correcting error on 20
next invoice
None or non-applicable 6
Did not respond 5
----------------------------------------------------------------------
ERRORS IN AUTOMATED PAYMENT
RECORDS CAUSE PAYMENT
DISCREPANCIES
------------------------------------------------------------ Letter :4
Our review of selected payment discrepancies showed that errors in
the automated payment records cause payment errors. Center
personnel, in accordance with payment procedures, pay contractor
invoices as if the payment information in the system were correct,
even though the information in the system is known to have a high
error rate. A March 15, 1994, audit report by the DOD Inspector
General reported obligation errors in 23 percent of the contracts
examined and accounting data errors in 39 percent of the contracts
examined.\3
For overpayments, the most frequent cause of error (45 percent)
identified by Columbus Center analysis is the incorrect recovery
(liquidation) of progress payments. Progress payments are recovered
in accordance with contract financing provisions when paying invoices
for delivered items. Correct liquidation requires accurate records
of the progress payments made regarding the delivered items. If the
automated payment records are in error, the invoice will likely be
paid in error unless adequate research is performed before making the
payment. Research results in the avoidance of some overpayments.
But research is effective only if proper underlying records are kept,
and it is time-consuming and costly.
In addition to being time-consuming and costly, research could delay
payments beyond the time provisions of the Prompt Payment Act, and
the Center would then have to pay the contractor late payment
interest. Balancing the need for doing necessary research to make an
accurate payment, with the cost of late payment interest is difficult
for Center personnel. The Center accounts for the cost of interest
on late payments but neither accounts for nor reports on the
government's cost of money to finance contract overpayments.
The cost to the government of poor record-keeping and inadequate
research can be significant. For example, a $7.7-million overpayment
was made to a contractor because the Center's records of progress
payments had been incorrectly recorded. The error was discovered
with research after the contractor notified the Center that it had
been overpaid. The overpayment, outstanding for over 2 years and
costing the government about $820,000 in interest, could have been
avoided if proper records had been kept and adequate research had
been done before the contractor was paid.
In another case, a $7.5-million overpayment was outstanding for 8
years and might not have been recovered if the contractor had not
notified DFAS of the overpayment. The records in this case were so
error prone that contractor assistance appeared essential to
recovering the overpayment. In this case, research was either not
done or was totally ineffective. Researching can be a good control
technique when used on large and complex contracts, but it is not a
substitute for good record-keeping.
--------------------
\3 Funds Control Over Contract Payments at the Defense Finance and
Accounting Service--Columbus Center (94-054 Mar. 15, 1994), DOD,
Office of Inspector General.
DFAS DID NOT PROMPTLY RECOVER
MILLIONS IN OVERPAYMENTS
------------------------------------------------------------ Letter :5
The Federal Acquisition Regulation (FAR) provides for the prompt
recovery of contract debt originating from overpayments. The FAR
requires that a demand letter be issued as soon as the amount due the
government is computed. The regulation also requires that the
responsible official establish a control record for tracking the
efforts to determine and collect the debt. If not recovered
promptly, contract debts increase the government's cost of funds and
unnecessarily expose the government to losses because some debts
become uncollectible. The Columbus Center did not comply with the
FAR. It did not collect overpayments promptly when contractors and
auditors reported them.
OVERPAYMENTS REPORTED BY
CONTRACTORS NOT RECOVERED
PROMPTLY
---------------------------------------------------------- Letter :5.1
The Columbus Center did not promptly recover identified overpayments
because it did not (1) follow the Center's policy of requesting
contractors to immediately return identified overpayments pending a
reconciliation and (2) record and track actions on reported
overpayments. To evaluate the Center's recovery actions, we
researched overpayments of about $84.2 million on eight contracts for
which contractors had reported large overpayments. Data on these
contract overpayments are shown in table 2 and discussed in more
detail in appendix III.
Table 2
Data on Selected Contract Overpayments
Estimated
Overpaym days Estimated
Contract number and ent outstandin interest
contractor amount g\a cost\b
------------------------------------ -------- ---------- ----------
F33657-89-C-0082 $35,299, 63-283 $1,410,339
Hughes Missile 784
DAAB07-92-C-G004 20,180,2 26-225 943,621
ITT Aerospace/Communications 09
N00039-90-C-0165 1,701,53 82 31,490
ITT Aerospace/Communications 0
N00024-88-C-5670 7,693,08 794 820,304
ITT Gilfillan 1
F19628-84-C-0151 5,254,77 \741 878,806
Litton Systems 1
DAAJ09-90-C-0352 5,872,24 143-1,173 1,695,925
McDonnell Douglas Aerospace 0
DAAE07-84-C-A001 7,505,66 2,837 4,805,843
Textron Lycoming 8
DAAE07-86-C-A050 667,130 unknown unknown
Textron Lycoming
======================================================================
Total $84,174, $10,586,32
413 8
----------------------------------------------------------------------
\a Because overpayments on some contracts occurred on several
different dates and overpayments were recovered on several different
dates, we show the least number of days and the most number of days
an overpayment was outstanding.
\b To estimate the government's interest cost, we used the period
that overpayments were outstanding and the current prompt payment
interest rate established by the Secretary of the Treasury.
Although the Center has had a written policy since November 5, 1993,
to ask contractors to return overpayments immediately, contractor
relations personnel told us they were not aware of the policy and
were not asking contractors to return overpayments. For the
overpayments we examined, the contractors were not asked to
immediately return the overpayments after reporting them to
contractor relations personnel at the Center. None of the
overpayments we examined became uncollectible because of these
delays; however, the delays were costly because the overpayments were
outstanding for extended periods. We estimate that delays in
recovering the $84.2 million in overpayments cost the government
about $10.6 million in interest. Our search for records of actions
taken to recover the selected overpayments showed that generally the
Center had incomplete records of notifications by contractors and no
record to show what collection actions, if any, were taken.
OVERPAYMENTS IDENTIFIED BY
CONTRACT RECONCILIATION NOT
RECOVERED PROMPTLY
---------------------------------------------------------- Letter :5.2
In addition to being notified by contractors, the Center also
identifies payment discrepancies by auditing or reconciling
contracts. As of December 1994, the Center had identified 14,840
contracts that required review or reconciliation. About 4,000
contracts were determined to require complete reconciliation. These
reviews and reconciliations will be completed by either Center
personnel or a public accounting firm hired for that purpose.
Reconciliations completed by the firm are returned to the Center for
action--for example, the issuance of demand letters for the amount
due the government.
A cumulative report of the firm's activities from October 1990
through April 1995 showed the following:
-- About 4,723 contracts had been reconciled by the firm.
-- About $76 billion in accounting adjustments were needed to
correct payments that had been made from wrong accounts.
-- About $314 million had been identified as owed to the
government.
-- About $94 million had been identified as owed by the government
to contractors.
-- Demand letters had been issued to contractors for about $152
million based on the firm's reconciliations, with about $80
million collected, and about $17 million disputed and classified
as in-process.
-- About $19 million may not be collectable for one or more
reasons, including $8 million due from contractors involved in
bankruptcy.
As of May 1995 the accounting firm classified $178 million of the
reported $314 million due the government as "in-process." The Center
did not have debt records or other documents to show what specific
collection actions, if any, had been taken to collect the $178
million. Based on our expressed concern about the status of the $178
million classified as in-process, Center officials agreed to research
this matter. After researching individual contract payment files and
accounts receivable files, the Center issued demand letters for $23
million that had been outstanding for over 60 days and identified
other disposition actions. In June 1995, Center officials told us
they could not determine what collection action, if any, had been
taken on about $75 million of the $178 million. The Center continued
research and reported at the end of August that it had determined the
status of all but $11 million.
We reviewed the collection actions on all audits completed by the
public accounting firm during an 18-month period ending March 31,
1995, to determine whether the Center was promptly collecting
identified overpayments. In total, 160 completed audits identified
$82.1 million as being owed to the government. Records showed that
the Center had issued demand letters for $36.8 million of the $82.1
million. The demand letters, on average, were sent about 3 to 4
months after the Center was informed of the overpayments and, in one
case, was not sent until more than a year after notification. For
the remaining $45.3 million, the Center had either no record of
demand letters issued ($33.1 million) or were considering whether to
accept the results of the audit ($12.2 million). Some of the audits
not yet accepted had been under consideration for extended periods.
Center personnel researched the $45.3 million identified as owed the
government for which we were unable to find collection records.
Through this additional research, the Center was able to initially
identify collection actions for about $15.8 million of the $45.3
million--leaving $29.5 million owed the government for which the
Center could identify no collection action.
According to officials, the Center does not have statistical
information on the results of audits and reconciliations performed by
Center personnel. However, in those few cases where the Center had
reconciled the contracts for overpayments that we examined, the
Center did not take prompt collection actions.
Delays in recovering identified overpayments compound the problem and
suggest management as well as systems and records shortcomings.
ACTIONS TO IDENTIFY AND RESOLVE
PAYMENT DISCREPANCIES
------------------------------------------------------------ Letter :6
In our August 1994 report we stated that DOD does not have an
effective system to identify and resolve payment discrepancies and
expeditiously recover amounts owed the government. We recommended
that DOD develop a comprehensive plan to mobilize resources to
identify and correct payment discrepancies. We reported that such
action was necessary to reduce (1) the cost to the government, (2)
future payment discrepancies, and (3) the incidence of uncollectable
overpayments.
Both DOD and DFAS Columbus Center officials have said that they are
taking significant steps to resolve specific problems identified in
our reports. For example, Center officials advised us of corrective
actions being taken to improve the detection and collection process,
including
-- changes to ensure that the Center's policy of asking contractors
to immediately return overpayments is implemented, including an
August 1995 pilot installation of telephone and computer
equipment to establish a historical record, by contract, of
payment problems identified by customers;
-- changes to prevent overpayments that occur because of incorrect
progress payment liquidations, including both procedural and
systems changes that are expected to improve payment research
and progress payment records;
-- changes in monitoring and reporting practices to ensure that all
reconciliations that identify amounts owed the government are
resolved promptly; and
-- increases in the resources directed toward reducing the backlog
of contracts requiring reconciliation by December 1995.
Also, after discussing the results in this report with DOD and DFAS
officials, DFAS, on July 31, 1995, directed the Columbus Center to
begin surveying contractors to identify and resolve payment
discrepancies. Also, the on-site personnel from the Defense Contract
Management Command and the Defense Contract Audit Agency will
continue to assist in the identification and resolution of payment
problems.
In addition to resolving specific payment problems, DOD stated it is
implementing systemic solutions to prevent the types of payment
problems identified in our reports. DOD said that it is making
coordinated improvements in its contract writing, contract
management, contract payment, and accounting systems to ensure that
all payments are computed, issued, and accounted for properly.
Although the actions reported by DOD and DFAS appear to be a positive
step toward addressing contract payment discrepancies, we remain
concerned about DOD's ability to eliminate contract payment
discrepancies, make coordinated improvements in all aspects of
contract payment processes, and incorporate leading-edge business
practices. We have ongoing and planned work to further evaluate
DOD's plans for improving financial management operations and will
periodically monitor DOD's progress in eliminating contract payment
discrepancies.
AGENCY COMMENTS
------------------------------------------------------------ Letter :7
In commenting on a draft of this report, DOD said that it generally
concurred with the report and offered a clarification regarding
actions by the Defense Contract Management Command and the Defense
Contract Audit Agency. The clarification has been incorporated.
DOD's comments are reprinted in their entirety in appendix IV.
---------------------------------------------------------- Letter :7.1
As agreed with your offices, we plan no further distribution of this
report until 30 days from its issue date unless you publicly announce
its contents earlier. At that time, we will send copies to the
Secretary of Defense; the Director, Office of Management and Budget;
and other interested congressional committees. Copies will also be
made available to others upon request.
Please contact me at (202) 512-4587 if you or your staff have any
questions concerning this report. Major contributors to this report
are listed in appendix V.
David E. Cooper
Director, Acquisition Policy, Technology,
and Competitiveness Issues
SCOPE AND METHODOLOGY
=========================================================== Appendix I
We requested business units of 204 large and small contractors to
provide information on the status of their open accounts receivable
with the Department of Defense (DOD) as of July 1994. The large
contractors were 96 of the top 100 defense contractors as measured by
DOD contract award data published by DOD's Directorate for
Information Operations and Reports.\1
According to published DOD data, the top 100 contractors received
about 62 percent of the DOD prime contracts awarded in fiscal year
1993. The 108 small contractors included the contractors classified
as small businesses that had the largest amounts of contract awards
as reported by the Federal Procurement Data Center.\2
We used mailing addresses identified in a Federal Procurement Data
System listing that was extracted from government contract awards.
This listing contained 1,287 addresses for these 204 contractors.
Since we were unable to determine which of these addresses were
appropriate for contacting the accounts receivable sections for
business units that had DOD contracts, we mailed data requests to all
available addresses. For example, we sent data requests to six
addresses in Orlando, Florida, for the same contractor because we did
not know which addresses maintained the accounts receivable data.
Also, we were unable to determine whether all business units with DOD
contracts were included in these addresses.
Each data request asked the recipient to return the request form if
the recipient did not maintain accounts receivable for the business
unit and to provide the address for that business unit's accounts
receivable section. We mailed an additional 75 data requests to
addresses identified. We also sent follow-up reminders to addresses
that did not respond to the initial mailing.
Using this approach, we received 374 data responses, which included
responses from at least one business unit of 139 contractors--82
large contractors and 57 small contractors. However, we did not
receive responses from all business units of these contractors. This
report presents the data obtained from the 374 business units and
cannot be projected or generalized to about 26,000 business units
paid by the DFAS Columbus Center.
As shown in table I.1, business units of large contractors accounted
for $223.6 million (97 percent) of the $231.5 million reported
overpayments and $611.5 million (98 percent) of the $625.9 million
reported underpayments.
Table I.1
Amount of Overpayments and Underpayments
Reported by 374 Business Units
Overpaymen Underpayme
Reporting business unit t nt Total
---------------------------------- ---------- ---------- ==========
Large contractors $223,613,7 $611,463,8 $835,077,5
45 42 87
Small contractors 7,890,931 14,470,671 22,361,602
======================================================================
Total $231,504,6 $625,934,5 $857,439,1
76 13 89
----------------------------------------------------------------------
As shown in table I.2, 134 (43 percent) of the 315 large contractor
business units reported overpayments of more than $1,000 and 14 (24
percent) of the small contractor business units reported overpayments
of more than $1,000. These 148 business units accounted for more
than 99 percent of the $231.5 million in overpayments reported.
Table I.2
Number of Business Units Reporting
Overpayments
Total Total Number
Reported amount of overpaymen Number overpaymen of
overpayment t of units t units
---------------------------- ---------- -------- ---------- ------
0 to $1,000 $3,132 181 $0 45
More than $1,000 223,610,61 134 7,890,931 14
3
======================================================================
Total $223,613,7 315 $7,890,931 59
45
----------------------------------------------------------------------
As shown in Table I.3, 185 (59 percent) large contractor business
units reported underpayments of more than $1,000, and 25 (42 percent)
of the small business units reported underpayments of more than
$1,000. These 210 business units accounted for more than 99 percent
of the $611.5 million in underpayments reported.
Table I.3
Number of Business Units Reporting
Underpayments
Total Total Number
Reported amount of underpayme Number underpayme of
underpayment nt of units nt units
---------------------------- ---------- -------- ---------- ------
0 to $1,000 $512 130 $460 34
More than $1,000 611,463,33 185 14,470,211 25
0
Total $611,463,8 315 $14,470,67 59
42 1
----------------------------------------------------------------------
The reported data may be affected by erroneous contractor records or
by contractors' misstatement of facts in their responses. We visited
12 business units to verify that the payment data reported in
response to our data request was extracted from the business units'
accounting records. These 12 units reported $83.6 million of
overpayments (36 percent of the reported total), and $62.3 million of
underpayments (10 percent of the reported total). The business units
visited were selected based on geographic dispersion and the amount
of reported payment discrepancies, including reports of "zero"
payment discrepancies. We also had telephone discussions with
contractor officials at a number of other business units to help
ensure complete responses to our data request.
We also researched overpayments on eight contracts presented in
detail in appendix III. We examined the actions taken at the
Columbus Center to resolve these overpayments. We collected
information on underpayments, but we did not review the resolution of
underpayments. We conducted our research of selected overpayments at
the Columbus Center and used all available contract records. We also
interviewed payment personnel, contractor relations personnel, and
supervisors (including division chiefs and directors) at the Center.
We also obtained information and contract records from DOD
contracting officers and discussed payment issues with them. Data
obtained from contractors and contracting officers were compared with
the Columbus Center records.
In addition, we reviewed laws and regulations pertaining to the
administration and management of contracts and contract payments,
including those related to collection of contract debts. We also
discussed payment errors with the Defense Logistics Agency, the
Defense Contract Management Command, and the Defense Finance and
Accounting Service (DFAS) officials.
We conducted our review between August 1994 and June 1995 in
accordance with generally accepted government auditing standards.
(See figure in printed edition.)Appendix II
--------------------
\1 Four contractors were not mailed data requests because addresses
were not in the Federal Procurement Data System.
\2 Of the 120 contractors in this category, 12 were not mailed data
requests because addresses were not in the Federal Procurement Data
System, 4 other small contractors were excluded because they were
included in the top 100 large contractor listing, and 4 were included
in the survey because their names were similar to other contractor
business units searched in the Federal Procurement Data System.
REPORTING FORMAT FOR INFORMATION
REQUESTED BY THE U.S. GENERAL
ACCOUNTING OFFICE
=========================================================== Appendix I
(See figure in printed edition.)
EXAMPLES OF SELECTED OVERPAYMENTS
========================================================= Appendix III
We reviewed over $84 million in overpayments on eight contracts to
determine why the overpayments were made and to evaluate the efforts
of the DFAS Center in Columbus, Ohio, to recover the overpayments.
Most of the overpayments were outstanding more than 180 days, and one
was outstanding about 7 years. Overpayments occurred mostly because
prior progress payments were not properly considered when paying
invoices. In general, the root of the problems could be traced to
errors in the government's payment record.
For each example, we attempted to identify the dates the overpayments
occurred, the reason they occurred, the date the Center was notified
of them by the contractor, and the date the money was recovered.
Where these dates could not be clearly determined, we estimated the
dates using available records and/or interviews with the government
and contractor personnel involved.
1. Contract F33657-89-C-0082 with Hughes Missile Systems, Tucson,
Arizona
The DFAS Center overpaid this contract by about $24.7 million in
January 1994 because an invoice was paid without fully liquidating
progress payments. The contractor notified the Center of the
overpayment in April 1994, about 3 months after the invoice was paid
incorrectly. The Center and contractor agreed to eliminate the $24.7
million overpayment by a setoff to other contractual debts rather
than by a cash collection. To collect by contract setoff, the Center
did not pay $24.7 million of other payment requests. The recovery by
setoff was completed in October 1994, about 10 months after the
overpayment was made, and 6 months after the Center was notified.
Shortly after recovering the $24.7 million overpayment, the Center
again overpaid this contract by $10.5 million because invoices were
paid out of the sequence expected by the contractor. The
out-of-sequence payment, in turn, caused an overpayment because the
Center did not adequately research the payments before responding to
the contractor's refund request. The Center recovered this
overpayment in about 60 days by another setoff.
The overpayments and the delay in recovering the overpayment after
they were identified cost the government about $1.4 million. Our
review indicated that reliance on inaccurate payment records without
further research was a primary cause of overpayments. The Center is
researching the underlying cause of errors in the payment records. A
recently completed reconciliation of this contract's payment records
showed
68 errors. The errors included 44 payments from the wrong funds,
6 overpayments, 3 duplicate payments, and 2 underpayments. In
addition, the records contained six posting errors and three
extension errors. Any of these errors could cause additional payment
errors.
2. Contract DAAB07-92-C-G004 with ITT Aerospace, Fort Wayne, Indiana
The DFAS Center overpaid about $20 million on this contract because
progress payments were not liquidated at the contract rate. The
incorrect liquidation began in September 1993 and continued at least
through April 1994. The contractor advised the government
contracting officer and Center contract relations personnel of the
overpayments in November 1993. At that time, the overpayments
totaled about $4.5 million. We found no record of any Center action
to recover the overpayments identified in the November 1993
notification. In a January 1994 letter, the contractor requested a
meeting with Center officials to resolve the continuing overpayment
problem on this contract. By then, the overpayments had increased to
$18.9 million, but again no action was taken to recover the
overpayments. In March 1994, the Center began a limited scope
examination to verify the overpayment amount that had increased to
$19 million according to the contractor. Finally, in May 1994, the
contractor asked the Center to issue a demand letter for the
overpayment, which the contractor reported as $19.5 million.
The Center issued a demand letter for about $18 million in June 1994
and recovered that amount in July 1994. The contractor returned an
additional $2.1 million in October 1994.
3. Contract N00039-90-C-0165 with ITT Aerospace, Fort Wayne, Indiana
The Center overpaid this contract by about $1.7 million because it
did not liquidate progress payments at the contract level on invoices
between May 1993 and July 1994. The contractor notified the
cognizant government contracting officer in August 1994 of the
overpayments. The contracting officer issued a demand letter for the
$1.7 million overpayment in September 1994, and the contractor
returned the overpayment the following month. The Center apparently
was not aware of the payment errors until after receipt of the
contractor's check.
4. Contract N00024-88-C-5670 with ITT Gilfillan, Van Nuys,
California
This contractor was overpaid about $7.7 million on a December 1992
invoice because progress payments were incorrectly liquidated. The
incorrect liquidation resulted from posting errors to the automated
payment system. Rather than demanding return of the overpayment, the
Center decided to recover the overpayment by contract setoff. When
we examined the payment records in March 1995, over 2 years after the
overpayment, the contractor still owed the government about $4.5
million. The recovery by setoff was approved by the reconciliation
clerk, reconciliation supervisor, division chief, and associate
director without research to determine whether the amount could be
promptly recovered through setoff. After we questioned the wisdom of
this, the Center issued a demand letter for about $4.5 million. The
final collection was made in April 1995--over 2 years after the
Center made the overpayment.
5. Contract F19628-84-C-0151 with Litton Systems, College Park,
Maryland
This contract was overpaid because invoices were paid at estimated
prices until the prices were definitized in March 1993, about 8 years
after deliveries started. The contract prices were definitized at
less than the estimated prices used by the Center to pay the
contract. Both the contracting officer and the contractor should
have known that the contract was overpaid as soon as the price was
definitized. The contractor began discussing the amount of
overpayment with the contracting officer in August 1993. In October
1993, the contractor provided the Center with the results of its
reconciliation showing the contract overpayment to be about $5.2
million. From October 1993 until at least June 1994, the contractor
and Center personnel exchanged letters and telephone calls concerning
the exact amount of the overpayment.
When we reviewed the contract records in February 1995, we questioned
the wisdom of continuing to leave the reported overpayment of $5.2
million outstanding for over 16 months while efforts were underway to
research a disputed difference of about $63,000. In March 1995, the
Center issued a demand letter for the $5.2 million the contractor
agreed was overpaid. The contractor returned the $5.2 million 30
days after receiving the demand letter. The disputed amount will
ultimately be demanded, if sufficient records are available to
support the claim.
6. Contract DAAJ09-90-C-0352 with McDonnell Douglas Aerospace,
Huntington Beach, California
This contractor notified the DFAS Center in November 1992 of
overpayments on the contract caused by not properly liquidating
progress payments. The Center has no record of efforts to recover
the overpayments identified in this notification or subsequent
notifications by the contractor of continuing overpayments on this
contract. The contractor determined the amount of overpayment was
about $5.8 million and refunded that amount to the Center in March
1994. The Center's initial review of payment records for this
contract found no overpayments, and the Center returned the $5.8
million refund to the contractor in August 1994. The return of this
refund was specifically approved by the reconciliation clerk,
reconciliation supervisor, and the division chief. The contractor's
disagreement with this action resulted in the government contracting
officer requesting the Center to reconcile the contract. The
Center's reconciliation identified an error in posting progress
payments that caused the overpayment. The Center issued a demand
letter for $5.8 million in November 1994. The Center received the
contractor's refund check in December 1994, over 2 years after the
overpayment.
7. Contract DAAE07-84-C-A001 with Textron Lycoming, Stratford,
Connecticut
According to this contractor, it notified the Center in November 1993
of a $7.5 million overpayment on a completed contract. The
overpayment resulted from both duplicate payments and incorrect
liquidation of progress payments. The Center had no record of this
notification and no record of efforts to recover the amount
identified in this notification. The contractor again notified the
Center in June 1994 of the overpayment. A record of this
notification was in the Center's contract file. Shortly after we
visited the company in December 1994 to verify reported data, the
company returned $7.5 million as a refund of the overpayment on this
contract. The contractor had retained most of this amount for about
8 years--since the last shipment on the contract in January 1987.
A November 1994 reconciliation disclosed that the payment records on
this contract contained 125 errors. Most of the errors, 67 of 125,
were contract payments made from the wrong fund control citations.
In addition, there were 22 underpayments, 10 invoice payments with
incorrectly liquidated progress payments, 13 overpayments, and
3 duplicate payments. The remaining errors were erroneous postings
of contract entries, such as cash collections or modifications.
Using these payment records without adequate research is the likely
cause of the overpayment.
8. Contract DAAE07-86-C-A050 with Textron Lycoming,
Stratford,Connecticut
The contractor reported an overpayment of $667,130 as of July 1994
that was subsequently resolved, according to the contractor, by
contract setoff in August 1994. While the contractor believes this
contract is settled, the government agencies involved have been
unable to reach agreement on the payment status of the contract. In
December 1994, the funding station (U.S. Army Tank-Automotive and
Armaments Command) believed the contract was overpaid by $10 million
and requested the Columbus Center to take immediate action to collect
money due from the contractor. However, as of May 1995, the Center's
automated payment records showed the contract to be underpaid by
about $2.7 million. While this contract had been in and out of
reconciliation during the prior 4 years by the public accounting firm
employed by the Center, the reconciliation results had been
inconclusive. In late May 1995, the Center and government funding
station personnel initiated meetings to resolve differences in their
contract records and to reach agreement on the payment status of the
contract.
According to a September 10, 1994, Audit Report of Errors prepared by
the public accounting firm, the firm's reconciliation disclosed that
the payment records on this contract contained 1,123 errors. Most of
the errors, 885 of 1,123, were contract payments made from the wrong
fund control citations. The remaining errors identified during
reconciliation included 197 posting errors.
(See figure in printed edition.)Appendix IV
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================= Appendix III
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
David Childress
DALLAS REGIONAL OFFICE
Jeffrey L. Knott
Joe D. Quicksall
Seth D. Taylor
James W. Turkett
RELATED GAO PRODUCTS
============================================================ Chapter 0
DOD Infrastructure: DOD's Planned Finance and Accounting Structure
Is Not Well Justified (GAO/NSIAD-95-127, Sept. 18, 1995).
Financial Management: Challenges Confronting DOD's' Reform
Initiatives (GAO/T-AIMD-95-146, May 23, 1995).
Financial Management: Challenges Confronting DOD's Reform
Initiatives (GAO/T-AIMD-95-143, May 16, 1995).
Defense Infrastructure: Enhancing Performance Through Better
Business Practices (GAO/T-NSIAD/AIMD-95-126, Mar. 23, 1995).
DOD Procurement: Overpayments and Underpayments at Selected
Contractors Show Major Problem (GAO/NSIAD-94-245, Aug. 5, 1994).
Defense Business Operations Fund: Improved Pricing Practices and
Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,
June 22, 1994).
Financial Management: DOD's Efforts to Improve Operations of the
Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, Mar. 24,
1994).
DOD Procurement: Millions in Overpayments Returned by DOD
Contractors (GAO/NSIAD-94-106, Mar. 14, 1994).
Financial Management: Status of the Defense Business Operations Fund
(GAO/AIMD-94-80, Mar. 9, 1994).
Financial Management: Strong Leadership Needed to Improve Army's
Financial Accountability (GAO/AIMD-94-12, Dec. 22, 1993).
Letter to the Deputy Secretary of Defense (GAO/AIMD-94-7R, Oct. 12,
1993).
Financial Management: DOD Has Not Responded Effectively to Serious,
Long-standing Problems (GAO/T-AIMD-93-1, July 1, 1993).
Financial Management: Opportunities to Strengthen Management of the
Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993).
Financial Management: Navy Records Contain Billions of Dollars in
Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993).
Military Bases: Analysis of DOD's Recommendations and Selection
Process for Closures and Realignments (GAO/NSIAD-93-173, Apr. 15,
1993).
Financial Audit: Examination of Army's Financial Statements for
Fiscal Year 1991 (GAO/AFMD-92-83, Aug. 7, 1992).
Financial Management: Immediate Actions Needed to Improve Army
Financial Operations and Controls (GAO/AFMD-92-82, Aug. 7, 1992).
Financial Management: Defense Business Operations Fund
Implementation Status (GAO/T-AFMD-92-8, Apr. 30, 1992).
Financial Audit: Aggressive Actions Needed for Air Force to Meet
Objectives of the CFO Act (GAO/AFMD-92-12, Feb. 19, 1992).
Financial Audit: Status of Air Force Actions to Correct Deficiencies
in Financial Management Systems (GAO/AFMD-91-55, May 16, 1991).
Defense's Planned Implementation of the $77 Billion Defense Business
Operations Fund (GAO/T-AFMD-91-5, Apr. 30, 1991).
Financial Audit: Financial Reporting and Internal Controls at the
Air Logistics Centers (GAO/AFMD-91-34, Apr. 5, 1991).
Financial Audit: Financial Reporting and Internal Controls at the
Air Force Systems Command (GAO/AFMD-91-22, Jan. 23, 1991).
Financial Audit: Air Force Does Not Effectively Account for Billions
of Dollars of Resources (GAO/AFMD-90-23, Feb. 23, 1990).
*** End of document. ***