GAO examines contractor overpayments (Part 1 of 2)
Contents
•What types of companies were being studied?
• What did GAO find? A brief review…
The U.S General Accounting Office (GAO) has released "Contract Management: Excess Payments and Underpayments Continue to Be a Problem at DoD" (GAO-01-309). For several years, GAO has reported that the Department of Defense (DoD) annually overpaid its contractors by hundreds of millions of dollars. In some cases, these excess payments were not being promptly returned. In response to a congressional request, GAO has examined the scope of excess payments and underpayments.
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?
GAO examined the amount of excess payments and underpayments by looking at the amount of excess payments repaid during fiscal year (FY) 1999 and the amount of underpayments resolved during FY99. GAO also collected data on the amount of excess payments and underpayments outstanding as of May 2000, the time data were collected from contractors.
What types of companies were studied?
This review focused on large contractor business segments, that is, business entities receiving $125 million or more in contract payments in FY99 from the Defense Finance and Accounting Service (DFAS)—Columbus Center. Business segments were defined using DoD "cage codes," which are used by DoD to track the business entities receiving payments under DoD contracts.
GAO collected information from 39 contractors, including all 11 contractors receiving in excess of $1 billion in payments in FY99 and a random selection of the remaining large contractors. The 39 contractors included in this study received $30 billion in contract payments in FY99.
In addition to large contractors, GAO also examined DFAS-Columbus data on the amount of contract payments returned by all – both small and large – contractors in FY99 and FY00. GAO did not independently verify DFAS data. 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.
GAO was assisted in this review by the Defense Contract Audit Agency (DCAA). DCAA collected data from the 39 contractors and selectively tested these data against contractor records. GAO performed follow-up visits at 11 contractor locations. GAO is solely responsible for the analysis of the data and development of this report.
What did GAO find? A brief review…
In FY99, DFAS-Columbus reports that contractors repaid $670 million; in FY00, this rose to $901 million. The higher amount for FY00 reflects the inclusion of repayments made through offsets of other payments ($269 million) in addition to the amount repaid by check ($632 million). Data on payments returned through offsets was not available for FY99 or earlier years. 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 this review returned excess payments totaling $351 million in FY99. Almost 80% of these excess payments stemmed from contract administration actions (such as finalizing the amount provided to cover overhead costs); 18 percent stemmed from billing or payment errors. Most contract 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 reviewed reported resolving $41 million in underpayments during FY99. Please note that underpayments may not have been fully identified. 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 an item was delivered.
Finally, in looking at how quickly payment issues were resolved, GAO found that a portion of excess payments—at least 39 percent of dollars owed—were not repaid within 30 days. In addition, about 72 percent of underpayments took over 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. Most excess payments, by contrast, were attributed to contract adjustments that have usually been agreed to by both the contractor and the government.
GAO recommended focusing on reducing excess payments by periodically assessing the reasons excess payments occur and encouraging contractors to refund excess payments promptly. DoD generally agreed with GAO's 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.
Part 2 will address the reasons behind these overpayment is greater detail. To download a copy of this GAO report, go to http://www/goa.gov. Click on Today's Reports, then click on March 26, 2001. You also can request a printed copy of this report from the GAO Document Distribution Center by calling 202-512-6000.