United States General Accounting Office

GAO Report to the Ranking Minority Member,

Committee on Governmental Affairs,

U.S. Senate

January 1998 FINANCIAL

MANAGEMENT

Seven DOD Initiatives

That Affect the

Contract Payment

Process

GAO/AIMD-98-40

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-274829 

January 30, 1998

The Honorable John Glenn

Ranking Minority Member

Committee on Governmental Affairs

United States Senate

Dear Senator Glenn:

This letter is in response to your request that we provide information on

seven technological initiatives that the Department of Defense (DOD) has

identified as key elements of its efforts to improve the contract payment

process. DOD has long recognized weaknesses in its contract payment

process and has hundreds of efforts under way to improve its contract

payment and other disbursement processes. In his November 1997

Defense Reform Initiative Report, the Secretary of Defense stated that the

department must adopt and adapt the lessons of the private sector if

America’s armed forces are to maintain their competitive edge in the

rapidly changing global security arena. In adopting the best business

practices of the private sector, the Secretary established a goal that by

January 1, 2000, all aspects of the contracting process for major weapons

systems will be paper free. The seven technology initiatives described in

this report are intended, in part, to help meet this goal.

As of August 1997, DOD reported that its contract payment center in

Columbus, Ohio, was administering about 382,000 contracts with a total

value of $857 billion. For fiscal year 1997, the Columbus center processed

about 1.2 million payments totaling about $69 billion. As of September 30,

1997, DOD had at least $22.7 billion1

 in disbursing problems.2 As part of our

1997 high-risk series, we identified defense contract management, which

includes contract payment, as one of 25 high-risk areas in the federal

government.3

Results in Brief The descriptive information presented in this letter highlights several

areas of concern that could prevent DOD from meeting its goal of a

1

This figure includes in-transit transactions. As we previously reported, DOD has removed this

category of problem disbursements from its problem disbursement totals. See DOD Problem

Disbursements (GAO/AIMD-97-36R, Feb. 2, 1997).

2

We have previously reported that DOD’s problem disbursement reporting has not been accurate. See

Financial Management: Improved Reporting Needed for DOD Problem Disbursements

(GAO/AIMD-97-59, May 1, 1997).

3

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

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paperless contracting process by the year 2000. For example, even if DOD

successfully meets the current schedule, as of September 30, 1997, three of

the four long-term initiatives are not scheduled for completion until the

end of fiscal year 2001.4

 In addition, the initiatives may not eliminate the

weaknesses in the contract payment processing. As we have previously

reported, although DOD has numerous initiatives under way to help resolve

its disbursement and accounting problems, it has not performed the

in-depth analysis necessary to fully determine the underlying causes of

these problems and therefore identify the most effective solutions and

rank specific reforms.5

 As a result, as with its other initiatives, the extent

to which these seven technology initiatives discussed in this letter will

resolve DOD’s long-standing disbursement problems is unclear. Even in a

highly automated and paperless environment, proper payments can only

be made by ensuring that accurate and complete data are available in the

systems. For example, for some types of payments, unless provided with

information that identifies the cost of work accomplished with the

appropriate funding source, the new systems and databases will not have

the information necessary to ensure that proper payments are made.

Objective, Scope, and

Methodology

As you requested, the objective of this report is to provide a general

description of three short-term6 DOD technology initiatives, which affect

the current payment process, and four long-term initiatives, which are

expected to change the way DOD currently does business. Although some

of the initiatives include planned improvements to both contract and

vendor payment processes, we focused on the contract payment process

in this report. This report is limited to descriptive information on each of

the initiatives and therefore does not address specific implementation or

execution issues.

We reviewed the Joint Financial Management Improvement Program’s

Framework for Federal Financial Management Systems and the Office of

Management and Budget’s (OMB) Circular A-127 to determine federal

financial systems requirements. To determine the current DOD contract

payment process, we reviewed DOD documents that discussed how DOD is

organized, identified the various activities involved in the process, and

4

In commenting on a draft of this report, DFAS officials said that one of these three systems will not be

completed until April 2002.

5

Financial Management: Improved Management Needed for DOD Disbursement Process Reforms

(GAO/AIMD-97-45, Mar. 31, 1997).

6

We use the term “short-term” initiatives to describe those initiatives that are currently being

developed and are in use to some degree. “Long-term” initiatives refer to four of DOD’s major target

initiatives that are being planned or are under development to provide fully integrated computer

systems.

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collected data on the number and dollar value of contracts. We also

reviewed DOD reports that addressed problems inherent in the contract

payment process. To accumulate information on the seven initiatives, we

reviewed DOD documents that (1) identified how the planned initiatives

would streamline and improve DOD’s payment processes and (2) discussed

the status and interrelationship of the initiatives. Given the overall

assignment objectives and the descriptive nature of our report, we did not

verify the data in the DOD reports.

In addition, we interviewed headquarters and field office officials,

including the program managers for each of these initiatives, to determine

the current DOD contract payment process and obtain updated information

on each initiative. We performed our work at DOD headquarters, Pentagon,

Virginia; Defense Finance and Accounting Service (DFAS) headquarters,

Arlington, Virginia; DFAS centers, Columbus, Ohio, and Indianapolis,

Indiana; and Defense Logistics Agency (DLA) headquarters, Fort Belvoir,

Virginia.

We performed our work from October 1996 through December 1997 in

accordance with generally accepted government auditing standards.

We requested comments on a draft of this report from the Secretary of

Defense or his designee. On January 20, 1998, DOD officials provided oral

comments, which are discussed in the “Agency Comments and Our

Evaluation” section of this report. Additional technical comments have

been addressed as appropriate throughout the report.

Background The following sections describe DOD’s current contract payment process,

the controls necessary to ensure accurate contract payment, and DOD’s

long-standing problems with matching disbursements to corresponding

obligations.

DOD’s Current Contract

Payment Process

Over time, DOD’s contract payment and accounting procedures have

evolved into the complex, inefficient processes that exist today. These

processes span numerous DOD and contractor organizations operating

incompatible procurement, logistics, and accounting systems. Currently,

much of the data are shared using hard copy documents that must be

manually entered into numerous systems or electronic data that still must

be manually verified and entered into the system. Figure 1 illustrates the

current paper flow for the contract payment process.

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Figure 1: DOD’s Current Contract Payment Process

- Contracts and Modifications

- Receiving reports

- Invoices

- Payment information

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▲

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Military Services

Requiring

Activity

(Operating

Command)

Buying

Activity

(Support

Command)

DLA/DCMC

Contract

Administration

Receiving

Activity

(Source)

▲

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Contractor

Accounting

Office

Contract

Payment

(DFAS Columbus)

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C

C C

I

DFAS

R

I

C

C

C

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C

I

a

Receiving

Activity

(Destination)

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R

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I

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P

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P

aThese activities are also performed by other DOD components.

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DOD has numerous nonintegrated automated and manual systems that

contain contract data. There are 150 accounting systems, 76 procurement

writing systems, numerous logistics systems, and 1 contract

administration and payment system—Mechanization of Contract

Administration Services (MOCAS). Although only 5 percent of DOD’s

contractor and vendor invoices are processed and paid through MOCAS,

these payments represent approximately 44 percent of the dollars paid by

the department to contractors and vendors for fiscal year 1997. The

remaining 95 percent of the invoices are primarily for vendor payments

that are made by other disbursing offices.

Because of DOD’s numerous nonintegrated computer systems, much of the

data generated by procurement, logistics, and accounting systems cannot

be electronically transferred among these systems, and therefore must be

read, interpreted, and manually entered from hard copy documents. This

duplicative manual entry of accounting data into the various systems is

prone to keypunch errors, errors caused when data entry personnel are

required to interpret sometimes illegible contracts, and inconsistencies

among data in the systems.

In January 1991, DOD established the Defense Finance and Accounting

Service to assume responsibility for DOD finance and accounting. DFAS’

center in Columbus, Ohio, pays contracts administered by the Defense

Contract Management Command (DCMC) of the Defense Logistics Agency.

DCMC has post-award contract responsibility, which includes overseeing

contractor progress, inspecting and accepting items, receiving and

entering contractor delivery data, administering progress payments,

negotiating contractor indirect costs, administering contract

modifications, and negotiating final settlement proposals.

DFAS-Columbus uses MOCAS to compute contractor payments, while DCMC

uses this system to maintain contract administration and payment data on

its contracts. DFAS-Columbus makes two basic types of contract

payments—delivery payments and financing payments. About two-thirds

of all payments are delivery payments for goods and services; the balance

are financing payments. Delivery payments are made upon receipt of

products or services. Financing payments, such as progress payments, are

made as contractors incur costs and submit billings.

The numerous parties involved in DOD’s contract payment process may

increase the opportunity to introduce errors. DOD has 1,400 separate

buying activities, up to 64,000 receiving locations, over 25,000 contractors,

Page 5 GAO/AIMD-98-40 Technological Initiatives
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and 44 accounting offices,7 all funneling information to MOCAS. In addition,

although MOCAS provides the accounting data used to control obligations

and payments on these contracts, it does not maintain the official

accounting records for the contracts. Instead, the official accounting

records are kept at the 44 accounting offices located throughout the

country. MOCAS records may differ from accounting office records because

contract information, such as modifications, may not have been sent to or

properly processed by both locations.

To help alleviate this problem, DOD recently completed implementation of

a direct input initiative started in October 1994. As of June 30, 1997,

administrative contracting officers at all DCMC sites were able to input

contract information, including modifications, directly to MOCAS from their

remote locations. However, direct input of contract modification

information by the administrative contracting officers is intended to be a

temporary initiative and is expected to eventually be replaced by some of

the other technological initiatives discussed in this report.

Before making payments, DFAS-Columbus requires the matching of a

number of key documents (such as the contract, the receiving report, and

the invoice for delivery payments). However, problems often arise after

payments have been made when the accounting offices, which maintain

the official accounting records, cannot reconcile their obligation records

to the payment information generated by MOCAS. DOD has instituted a

prevalidation policy, which requires that before making a payment,

DFAS-Columbus validate that sufficient funds are available from the

appropriate obligation at the accounting offices. Prevalidation of payments

made by MOCAS is required for expenditures of $3 million or more for

contracts dated prior to fiscal year 1997, and $2,500 or more for contracts

dated 1997 and later.

Concept of Contract

Payment Financial Control

The financial management systems policy stated in OMB Circular A-127

requires that each agency establish and maintain a single, integrated

financial management system. Having a single, integrated financial

management system does not mean having only one software application

covering all financial management system needs. Rather, a single,

integrated financial management system is a unified set of financial

systems and financial portions of mixed systems encompassing the

software, hardware, personnel, processes (manual and automated),

7

DOD is in the process of consolidating its accounting offices, which at one time numbered over 300.

As of November 20, 1997, there were 22 small accounting offices (which will be closed during fiscal

year 1998), 17 operating locations, and 5 accounting centers.

Page 6 GAO/AIMD-98-40 Technological Initiatives
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procedures, controls, and data necessary to carry out financial

management functions, manage financial operations of the agency, and

report on the agency’s financial status to central agencies, Congress, and

the public. Unified means that the systems are planned for and managed

together, operated in an integrated fashion, and linked together

electronically in an efficient and effective manner to provide the

agencywide financial system support necessary to carry out the agency’s

mission and support the agency’s financial management needs.

Figure 2 illustrates how, in the ideal environment, DOD could use integrated

systems that share data among the procurement, logistics, and accounting

functions to ensure financial control over the money spent for goods and

services. For example, when a military service’s requiring activity

determines that goods or services are needed, such as a tank or aircraft,

the system would make that information available to both the military

service’s buying activity and the DFAS accounting office. When the contract

is issued, the military service buying activity, in turn, would provide that

information through the system to the DLA receiving activity to expect the

item as well as to the DFAS accounting office to obligate funds in the

accounting systems. Throughout the procurement process, DLA contract

administration personnel would monitor the contractor’s progress to

ensure that the contractor is meeting all cost and delivery requirements.

As construction of the tank or aircraft progresses, or at final delivery, the

contractor would submit bills to the contractor payment personnel. All

contract-related data would be available to authorized users in an

integrated financial management system.

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Figure 2: Financial Control Over Contract Payments

▲

Military Services

Requiring

Activity

Buying

Activity

DLA/DCMC

Contract

Administration Receiving

Activity

(Source)

Accounting

Office

Contract

Payment

▲

▲

DFAS

▲

▲

▲

▲

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Integrated Financial Management System

Contractor

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Receiving

Activity

(Destination)

a

▲

▲

▲

▲

aThese activities are also performed by other DOD components.

DOD’s Long-standing

Disbursement Problems

DOD has acknowledged its long-standing problems with properly matching

its disbursements to specific obligations. As of September 30, 1997, DOD

had at least $22.7 billion in problem disbursements.8 Its disbursement

problems fall into three basic categories.

8

See footnotes 1 and 2.

Page 8 GAO/AIMD-98-40 Technological Initiatives
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Unmatched disbursements - Disbursements and collections that have been

received by the accounting office, attempted to be matched to an

obligation, but have not been matched because an obligation was not

identified in the accounting system.

Negative unliquidated obligations (NULOs) - Disbursements that have been

received and posted to specific obligations by the accounting office but

recorded disbursements exceed recorded obligations—more funds have

been paid out than were recorded as obligated.

Aged in-transits - Disbursements and collections that have been reported

to the Treasury but either have not been received by the accounting

station or have been received but not processed or posted by the

accounting office. DFAS considers in-transits to be aged if they have not

been processed within 120 days, depending on the source of the

transaction and the service processing the transaction.

As noted previously, much of the inefficiency and errors associated with

DOD’s contract payment process can be attributed to the lack of integrated

computer systems that electronically link procurement, logistics, and

accounting. Because the process is highly dependent on manual data

entry, the information needed to make contract payments is plagued with

timeliness and accuracy problems. The reliance on paper documents,

which must be mailed to the proper location and stored for future

reference, also adds to DOD’s payment difficulties. For example, we

previously reported that DFAS-Columbus files about 25,000 loose contract

documents per week.9

DOD has hundreds of efforts under way to help resolve disbursement and

accounting problems, including the seven technology initiatives discussed

in this report. However, as we have previously reported, DOD has not

performed the in-depth analysis necessary to fully determine the

underlying causes of its disbursement and accounting problems and

therefore identify the most effective solutions and rank specific reforms.10

Short-term Initiatives The three short-term technology initiatives—electronic document

management, electronic document access, and electronic data

9

Contract Management: Fixing DOD’s Payment Problems Is Imperative (GAO/NSIAD-97-37, Apr. 10,

1997).

10Financial Management: Improved Management Needed for DOD Disbursement Process Reforms

(GAO/AIMD-97-45, Mar. 31, 1997).

Page 9 GAO/AIMD-98-40 Technological Initiatives
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interchange—are intended to move DOD’s contract payment processes

toward a paperless environment and reduce dependence on manual data

entry. Although none of the initiatives significantly change the existing

contract payment process, all are directed at providing more accurate and

timely information or improving the processing of data at DFAS-Columbus.

The lack of timely information and DFAS-Columbus’ reliance on

cumbersome paper processes have been cited as contributing factors to

problem disbursements.

Electronic Document

Management

Electronic Document Management (EDM) is a technology initiative

intended to convert paper copies of DOD contract payment documents to

electronic images. The paper documents are received by DFAS-Columbus11

from DOD’s logistics and procurement communities and contractors. EDM’s

objectives are to reduce DFAS-Columbus’ reliance on paper, increase its

processing efficiency, and, as a result, reduce its operating costs. As we

stated in our April 1997 report,12 DFAS-Columbus’ paper-dependent

workflow has frequently led to misrouted and misplaced paper

documents. This condition delays payments and further increases

processing costs.

As shown in figure 3, contracts, modifications, receiving reports, and

invoices, which are received as paper documents, are scanned by

DFAS-Columbus employees and stored as electronic images for

DFAS-Columbus use.

11Although EDM is also being developed and implemented at other DFAS centers and operating

locations for vendor pay and garnishments of wages, we concentrated our efforts on EDM’s

deployment at DFAS-Columbus’ contract payment facility.

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

Page 10 GAO/AIMD-98-40 Technological Initiatives
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Figure 3: Electronic Document Management

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Military Services

Requiring

Activity

(Operating

Command)

Buying

Activity

(Support

Command)

DLA/DCMC

Contract

Administration

Receiving

Activity

(Source)

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Contractor

Accounting

Office

Contract

Payment

(DFAS Columbus)

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C

C C

I

DFAS

C

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C

C I

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C

a

Receiving

Activity

(Destination)

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C

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R

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- Contracts and Modifications

- Receiving reports

- Invoices

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P

- Payment information

Mailed to Columbus

Scanned and electronically imaged at DFAS Columbus

P

R

C

I

aThese activities are also performed by other DOD components.

Page 11 GAO/AIMD-98-40 Technological Initiatives
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EDM has three basic components: document imaging, electronic foldering,

and workflow processing. All paper documents received by

DFAS-Columbus, such as contracts, invoices, and receiving reports, will be

scanned and converted to electronic images—similar to photographs—and

stored in an EDM database at DFAS-Columbus. Once stored, these images

can be retrieved and viewed by DFAS-Columbus personnel. Because this

initiative was implemented for DFAS-Columbus as a way of relieving its

dependence on paper documents, the technology needed to view the

scanned documents is only available at DFAS-Columbus for its EDM

database.

Since these electronic images are essentially “pictures” of the original

paper documents, the data entry personnel can only view these

documents, the same way they would look at a piece of paper. Thus, the

data entry personnel must still view these “images” on their computers to

obtain the data needed to process the payment and then manually enter

those data into MOCAS.

The electronic foldering component allows contract, invoice, and other

related documents to be associated together for quick electronic retrieval.

For example, the system would be able to associate all documents for a

particular contract by a unique contract number and then retrieve all

documents relating to that contract, eliminating the need for multiple

manual searches.

The workflow processing component helps to manage workload

distribution by (1) automatically directing the electronic document to the

appropriate processing technician and (2) tracking the progress of each

document through the contract administration and payment process. This

component, along with the foldering component, is expected to

significantly reduce the time spent on manual voucher processing, which

is necessary when MOCAS is unable to complete an automated verification

of certain payment data. In 1997, approximately 45 percent of all invoices

had to be processed manually. As we reported in April 1997, manual

processing can cost up to seven times more than an automated payment.

This increased cost is due to the time spent by DFAS-Columbus employees

manually retrieving, verifying, and matching payment data to various

records (invoices, purchase orders, receiving documents, DFAS-Columbus

obligation records, or accounting office records) for these payments.

Reductions in time are expected to result from employees being able to

locate the needed documents more readily. These documents, once

entered into the EDM database, will always be available for viewing, thus

Page 12 GAO/AIMD-98-40 Technological Initiatives
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mitigating the problems associated with lost and misplaced documents

within DFAS-Columbus. In addition, EDM also allows multiple employees at

DFAS-Columbus to concurrently view a single electronic document.

DOD’s 1996 Chief Financial Officer Financial Management Status Report

and Five Year Plan states that the objective of EDM is to reduce operating

costs. This affects DFAS-Columbus in a number of ways, such as, reducing

the volume of paper; eliminating the need for paper storage; reducing

document handling, copying, and manual retrieval; and reducing personnel

requirements.

Electronic Data Systems is developing EDM under a 5-year contract

awarded in September 1994. EDM is being implemented at DFAS-Columbus

for contract pay in one of its 11 operating divisions. Initial operational

testing is expected to be completed in March 1998. According to the DFAS

program manager for EDM, as of September 30, 1997, the program

development and implementation is expected to be completed by the end

of fiscal year 1999 at a cost of approximately $115 million. The

$115 million reportedly includes EDM development and deployment costs

for both contract and vendor pay processes, as well as for garnishment of

wages. According to an EDM official, the DFAS-Columbus contract pay

portion is expected to cost $33 million.

Electronic Document

Access

In contrast to EDM, which begins with paper documents that are then

captured as electronic images, the Electronic Document Access (EDA)

initiative is designed to eliminate the original paper documents and

capture these documents as electronic images from the beginning.

Documents, such as contracts and contract modifications, are originally

captured as a print file, similar to saving a word processing file on disk,

and then converted to an electronic image for storage in the EDA database.

These documents can then be accessed and viewed by authorized

accounting, procurement, and logistics personnel on DOD’s computer

network, the Non-Classified Interactive Processor Router Network

(NIPRNET). This accessibility contrasts with documents scanned using EDM

technology, which are only available to DFAS-Columbus personnel.

EDA is being developed under the EDM program as an alternative to having

DOD activities produce paper documents. EDM officials indicated that the

expanded use of EDA by DOD will eventually reduce the need for the

imaging component of EDM. EDA is expected to significantly reduce the

amount of time spent mailing and distributing paper contracts and

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contract modifications.13 It is also expected to eliminate both document

loss and delays that can result from mailing and the need to store paper

documents.

However, an EDM official stated that some imaging capability will always

be needed since only contracts, contract modifications, government bills

of lading, and payment vouchers are being captured and stored in the EDA

database. For example, invoices and correspondence are not being

captured and stored in the EDA database. As illustrated in figure 4, the

electronic images of contract documents available via EDA can be retrieved

and viewed by DFAS-Columbus personnel and other users of DOD’s NIPRNET,

but the needed data on the document still must be manually entered into

the appropriate systems.

13In addition to contracts and contract modifications, EDA also provides electronic access to

government bills of lading and payment vouchers.

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Figure 4: Electronic Document Access

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▲

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Military Services

Requiring

Activity

(Operating

Command)

Buying

Activity

(Support

Command)

DLA/DCMC

Contract

Administration

Receiving

Activity

(Source)

Contractor

Accounting

Office

Contract

Payment

(DFAS Columbus)

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I

DFAS

I

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C

C

C

C

C

I

C

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C

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a

Receiving

Activity

(Destination)

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NIPRNET

C

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- Contracts and Modifications

- Receiving reports

- Invoices

R

C

I

P

▲

P

- Payment information

Document electronically accessed

aThese activities are also performed by other DOD components.

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EDA is currently being used on a limited basis by DOD to view contracts,

modifications, and other documents via NIPRNET and is beginning to reduce

the amount of paper documents being exchanged. DFAS-Columbus is

currently working with the military services and DLA to expand the EDA

database by putting more of their documents on the system. We were told

that over 100,000 contracts, representing all Services and DLA, have been

loaded into the EDA database as of December 1997. DFAS has reached an

agreement with each of the Services and with DLA to use EDA exclusively

for contracts issued by some of the largest contract writing systems. Thus,

as shown in figure 4, EDA will eliminate the need to mail paper contracts to

many DOD locations. By accessing the contract from EDA, these locations

will avoid not only the potential problems involved in mail delays and

losses but the contract they see via EDA will be a clear original, not a

photocopy, which can be difficult or impossible to read.

According to the DFAS program manager for EDA, as of September 30, 1997,

EDA is expected to cost about $2.7 million and is scheduled for completion

in December 1998. EDA began in April 1996 and is funded as part of EDM.

Electronic Data

Interchange

Electronic Data Interchange (EDI)14 is the computer-to-computer exchange

of routine business information using standardized data formats. For

nearly three decades, EDI has been popular among large companies

because it saves money that otherwise would be spent processing paper

and rekeying data. DOD, realizing that EDI technology could save the

department millions of dollars annually, initiated the EDI program in May

1988 to create paperless business processes for exchanging information

between DOD activities and industry. As part of this DOD initiative, DFAS

initiated this program in October 1994 and established an electronic

commerce program office in March 1995 to support its procurement and

payment processes.

Various DOD activities are working together to ensure that the EDI initiative

will work on their individual systems. However, the development and

implementation of EDI is made more difficult because of the hundreds of

nonstandard, nonintegrated computer systems involved. To implement EDI,

each system’s data must be individually converted to a standard format to

be transmitted. In addition, the transmitted data must then be converted

from the standard format to the format used by the receiving system.

14EDI is one initiative included in Electronic Commerce (EC). EC, which is the electronic exchange of

the information needed to do business, embraces many technologies, including electronic mail,

computer bulletin boards, and electronic funds transfer.

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For example, DOD is using EDI to support its procurement processes. DOD

has approximately 76 nonstandard procurement systems generating

contractual documents and has begun working with 9 of the largest

systems to convert their data for electronic transmission. Once converted,

this information will be sent, via EDI, to one or more of the approximately

150 accounting systems, MOCAS, and various other contractor and DOD

systems where the transmitted information must then be converted into a

form useable by them.

As illustrated in figure 5, the existing contractor payment processes

related to the dissemination of contract and payment data between the

procurement, accounting, and payment systems will become largely

automated for those systems that will use EDI technology to transmit and

receive data. However, because DOD’s systems were not developed with

the EDI standard format, the use of EDI will require a conversion15 process

for DOD’s numerous nonstandard systems. Using conversion and EDI

technology, invoices, and receiving reports—traditionally conveyed in

paper form—can be transmitted electronically between computers

without human intervention.

15The process of “conversion” enables systems using different, nonstandard EDI formats to do

business. As used in this report, conversion is the mapping from one system’s nonstandard EDI format

to a standard format, and then from the standard format to another system’s nonstandard format.

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Figure 5: Electronic Data Interchange

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Military Services

Requiring

Activity

(Operating

Command)

Buying

Activity

(Support

Command)

DLA/DCMC

Contract

Administration

Receiving

Activity

(Source)

▲

▲

Contractor

Accounting

Office

Contract

Payment

(DFAS Columbus)

▲

▲

DFAS

▲

I

I

C

C

C

C

C

R

C

I

▲

a

Receiving

Activity

(Destination)

▲

R

C

▲

▲

▲

R

- Contracts and Modifications

- Receiving reports

- Invoices

C

▲

I

R

P

P - Payment information

Conversion by DISA

EDI transmission

aThese activities are also performed by other DOD components.

Page 18 GAO/AIMD-98-40 Technological Initiatives
B-274829 

As systems increasingly implement the EDI standard formats, the extensive

conversion process required for today’s many nonstandard systems will be

reduced and efficiency improved. Where EDI is used, it will eliminate

duplicative manual input—the source of many of the errors in the current

process of getting information into the procurement, accounting, and

contract payment systems.

As of September 30, 1997, approximately 80 DOD contractors were

approved to use EDI to transmit invoices to MOCAS; however, only about 50

contractors were actually transmitting invoices using EDI at that time. In

addition to invoices, some contract data are also being transmitted

through EDI. Two of the nine largest procurement systems are currently

electronically transmitting contract data to MOCAS. Six of the remaining

seven systems are scheduled to be using EDI to transmit contract data to

MOCAS by the end of 1998. The remaining program is scheduled to transmit

contract data using EDI in 1999. These nine procurement systems account

for approximately 90 percent of all contract actions.

Even when the procurement systems are on-line, not all data can be

converted and transmitted using EDI. Presently, about 15 to 20 percent of

all DOD contracts contain one or more nonstandard clauses that cannot be

transmitted using EDI. For example, a nonstandard contract clause could

say that contractor employees will only be paid local mileage for trips that

exceed 50 miles. Until the nonstandard clause issue is resolved,

DFAS-Columbus personnel will need to review a paper copy of the entire

contract or view the contract via EDA and/or EDM. DOD is currently working

to standardize the nonstandard clauses, and expects to have this issue

resolved by June 30, 1998.

In addition, EDI is not yet being used to transmit receiving report

information. Traditionally, a contractor prepares the receiving report and

submits it to a DOD official for verification of the receipt of the items

purchased. The receiving report is then sent to MOCAS. DFAS is currently

working with some contractors to convert receiving report data to the EDI

standard. This capability is expected to be fully operational by the middle

of 1998.

According to the EDI program manager, as of September 30, 1997, DFAS

plans to spend $47.1 million to develop and implement EDI for its centers

and accounting offices over the 5-year period beginning in fiscal year 1995

and ending in fiscal year 1999.

Page 19 GAO/AIMD-98-40 Technological Initiatives
B-274829 

Schedule and Costs of

Short-term Initiatives

As shown in figure 6, DOD plans to spend about $80 million from fiscal

years 1995 through 1999 developing and implementing the three short-term

initiatives. This estimate includes contractor, personnel, and training

costs.

Figure 6: Schedule and Costs of

Short-term Initiatives as of

September 30, 1997

1992 1994 2002

Initiatives

1996 1998 2000

Calendar year

EDM

EDA

EDI

$33 million

(1)

$47 million

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

Long-term Initiatives The four long-term initiatives—Standard Procurement System, Defense

Procurement Payment System, Shared Data Warehouse, and DFAS

Corporate Database—are aimed at moving DOD’s contract payment

process toward an integrated system using standard data, where a single

copy of the official records is available to all users. The short-term

initiatives discussed previously will all play a role, to some degree, in DOD’s

long-term contract payment strategy. The scanning and image storage

features of EDM will be used as part of the future payment system.

However, because they are still in the process of analyzing contractors’

proposals, DOD officials are uncertain if they will use EDM’s foldering and

workflow processing features. As currently envisioned, EDA will be used in

conjunction with DOD’s planned Standard Procurement System to produce

a “picture” of the contract for all authorized users to view as necessary.

Finally, EDI will be used by all the long-term initiatives as the vehicle to

transmit and transfer data among the systems and databases.

Page 20 GAO/AIMD-98-40 Technological Initiatives
B-274829 

As illustrated in figure 7, DOD plans to significantly change its contract

payment process to conform to its vision of the future system. The lines in

the figure indicate the numerous paper documents whose data must be

electronically transmitted for the contract payment process to be paper

free, such as contracts, contract modifications, receiving reports, and

invoices. While these initiatives move DOD closer to a paper free

environment, they will not allow DOD to meet the Secretary of Defense’s

recently established goal of a paper-free contracting process by the year

2000, since three of the four long-term initiatives are not scheduled for

completion until the end of fiscal year 2001.16

16See footnote 4.

Page 21 GAO/AIMD-98-40 Technological Initiatives
B-274829 

Figure 7: DOD’s Future Contract Payment Process

Military Services DLA/DCMC

DFAS

Contractor

▲

▲

▲

▲ ▲

a

Buying Activity

(Support Command)

Receiving

Activity

(Destination)

Requiring Activity

(Operating Command) Contract

Administration

Receiving

Activity

(Source)

Standard

Procurement

System (SPS)

▲

▲ ▲

▲

▲

Contract

Payment

(DFAS Columbus)

Defense

Procurement

Payment System

(DPPS)

▲

▲

- Contracts and Modifications

R - Receiving reports

C I

I

C

C

C C C

C

C

R R

R

R

P

▲

▲

R

▲

▲

▲

▲

Accounting

Office

▲

C

▲

P

▲

▲

C R Logistics

Systems

▲

▲

 Pay-related data (Replicated)

I R C

P

▲

▲

Accounting

Systems

DFAS

Corporate

Database

Shared Data

Warehouse

(SDW)

▲

- Invoices

- Payment information

aThese activities are also performed by other DOD components.

Page 22 GAO/AIMD-98-40 Technological Initiatives
B-274829 

Standard Procurement

System

The objective of the Standard Procurement System (SPS) is to establish a

fully functional automated procurement information system, which will be

used to prepare procurement contracts and be used by contracting

officials for contract administration. SPS is planned to replace DOD’s manual

procurement systems and about 76 unique automated procurement

systems that are used to prepare contracts. These systems had been

developed over the years to meet individual mission needs using

nonstandard processes and data and could not communicate well with

each other or with MOCAS. Although some of these systems were able to

transmit limited contract information to MOCAS electronically, hard copy

paper contracts still had to be mailed to DFAS-Columbus before contract

data, which is necessary to make a payment, could be entered into the

system. As described in the background section of this report, the reliance

on paper documents, such as contracts and contract modifications, and

repetitive manual data input are major causes of disbursing problems.

SPS will also be the system used by contracting officials to monitor and

administer contracts. Currently, contracting officials have to rely on MOCAS

to provide them the information they need to accurately account for the

contracts. However, MOCAS is usually not provided with information that

identifies the cost of the work accomplished with a specific funding

source. Therefore, DOD is unable to ensure that payments are being made

from the appropriate funding source. Accurate payments can only be made

if accurate and complete data are available—regardless of which system is

used.

DOD officials stated that this technology initiative is expected to

standardize procurement business practices and data elements throughout

the department and provide benefits to the procurement and accounting

communities by providing timely, accurate, and integrated contract

information. Using SPS, the goal is that required contract and contract

payment data will only be entered once—at the source of the information

and be stored in the Shared Data Warehouse (another initiative described

later in this report) for use by the entire procurement community. This is

intended to result in more efficient management of contracts, standard

contract business practices and processes, and less data entry and paper

handling—a key factor in contract payment errors. SPS is planned to

improve the procurement community’s ability to manage contracts from

pre-award through contract closeout.

The SPS program started in January 1994. The procurement software is a

version of American Management Systems, Inc. (AMS) commercial

Page 23 GAO/AIMD-98-40 Technological Initiatives
B-274829 

software that is being tailored for DOD. The AMS contract was awarded in

April 1997. SPS began deployment (installation, training, and deployment

assistance) in May 1997. As of September 30, 1997, SPS was available to

2,535 users out of a planned total of 43,826. According to the program

manager for SPS, as of September 30, 1997, the program development and

implementation is expected to be completed by September 30, 2001, at a

cost of about $295 million, including $20 million for the Shared Data

Warehouse.

Defense Procurement

Payment System

The Defense Procurement Payment System (DPPS) is intended to be the

single standard DOD system for calculating contractor payments17 and

generating accounting records. The system, as designed, will replace the

contract payment functions currently in MOCAS. It is expected to

standardize and improve contract payment processes by computing timely

and accurate payments and making the disbursement data available to DOD

entities responsible for procurement, logistics, and accounting.

DPPS is expected to improve payment process efficiencies by (1) providing

a single system that DFAS can use to validate funds availability, (2) reducing

DFAS’ reliance on hard copy documents, and (3) eliminating manual

reconciliations. DPPS will operate in an on-line, real-time

environment—providing up-to-date contract and payment information. To

calculate and schedule payments, DPPS will rely on the DFAS Corporate

Database (another initiative described later in this report) for the needed

contract and receiving report information. Contract payment information

generated by DPPS will also be stored in the DFAS Corporate Database.

Contract payment information needed by contracting officers to

administer the contracts will be duplicated from the DFAS Corporate

Database into the Shared Data Warehouse for their use.

The DPPS program started in September 1995. DFAS plans to award a

contract for DPPS by April 1998. DFAS also plans to procure a commercial

off-the-shelf software package to compute entitlements and support the

DPPS accounting functions. According to the DFAS program manager for

DPPS, as of September 30, 1997, full DPPS deployment is expected by August

31, 2001, and the total program cost is reported to be $46 million. In

commenting on a draft of this report, a DFAS official said that the program

costs have been recalculated and as of December 31, 1997, they were

17DPPS will also be DOD’s standard procurement payment system for calculating vendor payments,

grants, and other entitlements.

Page 24 GAO/AIMD-98-40 Technological Initiatives
B-274829 

estimated to be $114 million, and the system is expected to be completed

by April 15, 2002.

Shared Data Warehouse The Shared Data Warehouse (SDW) is a DOD initiative that is intended to be

the single database containing the official procurement records needed to

support contract placement and contract administration functions in SPS.

Although DOD officials agree that the information produced in the

accounting and procurement communities must be shared with each

other, they have not finalized their plans on how or to what extent they

will do this. SDW is designed to support the complete contract cycle, from

initial concept and contract award through contract closeout.

All contract information and contract modification information created in

SPS will be stored in the SDW database. Original receiving report

information will also be electronically entered into SDW from the existing

logistics systems. Contract payment information generated by DPPS, which

is originally stored in the DFAS Corporate Database, will be duplicated in

SDW for use by the contracting officers to administer contracts. In addition,

some procurement information, such as contracts, contract modifications,

and receiving reports, which are stored in SDW and are needed by DFAS to

compute contract payments, will also be duplicated and stored in the DFAS

Corporate Database. Although SDW and the DFAS Corporate Database will

contain duplicate information, it is likely that some information will not be

shared. For example, some nonfinancial information, such as special

shipping instructions and dates, would not be needed for contract

payment and may only be stored in SDW.

The SDW database is intended to significantly improve efficiency, reduce

accounting errors, and support the payment process. SDW is expected to

provide improved data integrity and accuracy and allow for a single point

of data entry and for storage of procurement data, therefore reducing the

need for manual re-keying of procurement data into multiple, nonstandard

systems.

According to the deputy program manager for SPS, as of September 30,

1997, SDW is to be completed by the end of fiscal year 2001 at a cost of

$20 million, and is funded and developed as part of SPS. The SDW contract

was awarded to Boeing Information Services and DLA’s System

Development Center. They are currently developing the prototype

database and completed their initial testing by loading a limited amount of

contract data from MOCAS as of October 1997. An SDW official said that the

Page 25 GAO/AIMD-98-40 Technological Initiatives
B-274829 

test had been successful and, as new information is loaded into MOCAS,

these data are duplicated into SDW for future use. The SDW program

manager expects the procurement community to begin using the SDW

information for decision-making by early fall of 1998. In addition to

loading the information from MOCAS, they are also working to accept

contracts and modifications, receiving reports, and other data directly

from the procurement and logistics systems.

DFAS Corporate Database The DFAS Corporate Database, as conceptualized, will be a single DFAS

database that will be utilized by all DFAS systems. This shared database will

contain all DOD financial information required by DFAS systems and will be

the central point for all shared data within DFAS. This database will also

contain all the data needed for DPPS to calculate contractor payments. For

example, the database will include contracts, contract modifications, and

receiving report information duplicated from SDW. Contract payment

information, created by DPPS, will also be stored in the DFAS Corporate

Database, for use by other DFAS payment and accounting systems.18

The DFAS Corporate Database will be used as a principal source of contract

and contract payment information for all of DFAS. While SDW is intended to

serve the needs of DLA’s procurement community, the DFAS Corporate

Database will be used by authorized DFAS system users to support the

contract payment and accounting process.

The DFAS Corporate Database is intended to significantly improve

efficiency, reduce accounting errors, and support the payment and

accounting process. It is expected to improve data integrity and accuracy

and serve as a single point of DFAS data entry and storage for procurement

data, therefore reducing the need for manual re-keying of data into

multiple, nonstandard systems. Although DFAS has not established a firm

date, DFAS officials stated that this database will eventually be used as the

official accounting records, shifting this responsibility from the accounting

offices.

The DFAS Corporate Database program office was established in June 1997.

Preliminary planning, design, and prototyping activities are currently

taking place. The target implementation date for those aspects of the DFAS

Corporate Database needed to support DPPS is May 1998. According to the

DFAS Corporate Database program manager, the initial cost to establish the

18The DFAS Corporate Database will also support many other systems, including civilian and military

pay, transportation, travel, and disbursing.

Page 26 GAO/AIMD-98-40 Technological Initiatives
B-274829 

program office and design, prototype, and test the shared database

structure is estimated to be about $300,000 as of September 30, 1997. The

costs of accessing the corporate database will be paid by the users.

Schedule and Costs of

Long-term Initiatives

As shown in figure 8, DOD expects to spend about $341 million developing

and deploying the four long-term initiatives during fiscal years 1994

through 2001. In commenting on a draft of this report, a DFAS official said

that the DPPS program costs have been recalculated, and as of December

31, 1997, they were estimated to be $114 million, and the program is

expected to be completed by April 15, 2002. With this change, DOD now

estimates the total program costs for these four initiatives to be

$409 million.19

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

change.

Page 27 GAO/AIMD-98-40 Technological Initiatives
B-274829 

Figure 8: Schedule and Costs of

Long-term Initiatives as of

September 30, 1997 Initiatives SPS

DPPS

SDW

$295 million

(3)

$46 million

1992 1994 1996 1998 2000 2002

Calender year

DFAS - CDB

(2)

(1)

(1) As of December 31, 1997, program costs were estimated at $114 million. DPPS is expected to

be completed by April 15, 2002.

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

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

Agency Comments

and Our Evaluation

In commenting on a draft of this letter, Department of Defense officials

generally concurred with our description of how these seven DOD

initiatives affect the contract payment process. They provided us with

some suggested technical changes, which we incorporated throughout the

report as appropriate.

However, DOD officials were concerned that the report seemed to contrast

the short-term initiatives with the long-term initiatives. DOD stated that the

short-term and the long-term initiatives are designed to work in tandem.

DOD officials added that the short-term initiatives support the department’s

achievement of the Secretary of Defense’s goal of achieving a paper-free

contracting process by the year 2000. DOD officials also stated that the

long-term initiatives will bring the department greater benefits over the

Page 28 GAO/AIMD-98-40 Technological Initiatives
B-274829 

long haul, but that the long-term initiatives will take longer to implement

and their schedule and cost definitely carry an element of greater risk and

more uncertainty.

Our report describes the short-term and long-term initiatives separately

and is not intended to contrast these efforts. Also, at the time of our

review, DOD had not yet fully defined how these independently managed

initiatives will work in tandem. To the extent that relationships between

initiatives were identified by DOD during our review, those relationships

are incorporated in this report. In commenting on the draft, DOD provided

no further clarification or documentation of those relationships.

As discussed in the report, regarding the capability of the short-term

initiatives to achieve the Secretary’s broader goal of having all aspects of

the contracting process for major weapons systems paper free, EDM is only

accessible to DFAS-Columbus; EDA does not capture all documents, such as

the invoice; and the EDI schedule is only for implementation at DFAS

centers and accounting offices.

We agree with DOD that the long-term initiatives will take longer to

implement and carry a greater risk and uncertainty. It is, therefore,

important that as DOD continues its efforts to improve technology it

understands and documents the problems in all aspects of the contracting

process for major weapons systems and addresses the needs of

procurement, logistics, and accounting functions.

We are sending copies of this letter to the Chairman of the Senate

Committee on Governmental Affairs; the Chairmen and Ranking Minority

Members of the Senate Committee on Armed Services, the House

Committee on National Security, the House Committee on Government

Reform and Oversight and its Subcommittee on Government Management,

Information and Technology; and the Director of the Office of

Management and Budget. We are also sending copies of this report to the

Secretary of Defense, the Acting Director, Defense Finance and

Accounting Service, and the Director, Defense Logistics Agency. Copies

will be made available to others upon request.

Page 29 GAO/AIMD-98-40 Technological Initiatives
B-274829 

Please contact me at (202) 512-9095 if you or your staff have any questions

about this letter. Janett P. Smith, Roger Corrado, William Bricking, and

Jean Lee were major contributors to this report.

Sincerely yours,

Lisa G. Jacobson

Director, Defense Audits

(918891) Page 30 GAO/AIMD-98-40 Technological Initiatives
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