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NASA Contract Payments (23-MAY-02, GAO-02-642R).		 
                                                                 
This report examines whether the National Aeronautics and Space  
Administration (NASA) had significant problems with overpayments 
to its contractors. GAO did not find that NASA had a significant 
or systemic problem with overpayments or underpayments during	 
fiscal year 2001. The controls that NASA put in place to prevent 
and detect payment errors appeared to be properly designed.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-642R					        
    ACCNO:   A03450						        
  TITLE:     NASA Contract Payments				      
     DATE:   05/23/2002 
  SUBJECT:   Accounting errors					 
	     Contractor payments				 
	     Internal controls					 
	     Overpayments					 

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GAO-02-642R
     
GAO- 02- 642R NASA Contract Payments

United States General Accounting Office Washington, DC 20548

May 23, 2002 The Honorable Dan Burton Chairman Committee on Government
Reform House of Representatives

Subject: NASA Contract Payments

Dear Mr. Chairman: You asked us to determine whether the National
Aeronautics and Space Administration (NASA) had significant problems with
overpayments to its contractors. The objectives of our review were to (1)
survey contractors and vendors to determine whether NASA had made
significant payment errors on its contracts and purchase orders and (2)
review the design of NASA?s controls to prevent, detect, and correct payment
errors.

We selected 110 contracts and purchase orders on which NASA had made $4.8
billion in payments during the first 9 months of fiscal year 2001 (the most
recent data available at the time). During those 9 months, NASA had
disbursed about $8.7 billion on 6,815 contracts and purchase orders. By the
end of fiscal year 2001, NASA disbursed almost $11.7 billion on 8,141
contracts and purchase orders, of which about $11.5 billion pertained to the
contracts and purchase orders included in the 9- month population from which
we made our selection.

For the survey, we selected the 10 contracts and 10 purchase orders with the
highest total disbursements for the 9- month period and random samples of 45
contracts and 45 purchase orders. NASA disbursed about $6.3 billion during
fiscal year 2001 on these 110 contracts and purchase orders. For the
selected items, we asked the contractors and vendors to identify payments
that were more than or less than the amounts they had billed NASA during the
year, with the exception of advances and properly calculated progress
payments. 1 Our survey was intended to identify whether NASA had a
significant problem with payment errors but not to project the amount or
number of errors to NASA?s payment population. For our random samples, one
or more payment errors reported to us in the survey would indicate a
significant or systemic problem during the review period. For the 20 largest
contracts and purchase orders, the dollar amounts of reported errors would
have to be evaluated individually

1 Under certain circumstances, the Federal Acquisition Regulation authorizes
reductions in progress payments, which can be paid in advance of work being
accepted. Therefore, we did not consider any reduced progress payments as
underpayments.

GAO- 02- 642R NASA Contract Payments Page 2 to determine their significance.
Because the contractors and vendors self- reported

these overpayments and underpayments, the reliability of our survey results
is dependent upon the reliability of their responses.

We defined payment errors as payments that were more than or less than what
was owed to the contractor or vendor as of the payment date. We did not
consider billed amounts that NASA was disputing or billings less than 30
days old as of September 30, 2001, to be underpayments. Also, overpayments
and underpayments that resulted from routine retroactive adjustments by
contractors and vendors to overhead or general and administrative rates were
considered errors only if they were not resolved promptly.

We also reviewed information on some of the refunds that NASA had received
during fiscal year 2001 and other financial data from the period to identify
evidence of payment errors. Finally, we reviewed the design of the controls
that NASA implemented to detect and prevent overpayments to contractors and
vendors. Our scope and methodology is discussed in more detail in enclosure
I. We conducted our work from October 2001 through March 2002 in accordance
with generally accepted government auditing standards. We provided a draft
of this letter to NASA officials and their comments are reprinted in
enclosure II.

Results in Brief

We did not find that NASA had a significant or systemic problem with
overpayments or underpayments during fiscal year 2001. Contractors and
vendors responded to our request for payment information on 108 of the 110
contracts and purchase orders we selected for review. Only one respondent
reported an overpayment that met our definition of a payment error. The
error occurred on a contract selected specifically because of its high-
dollar disbursements and resulted from an incorrect calculation made by a
NASA procurement official and a miscommunication between NASA and the
contractor. The error was identified by the contractor and corrected
promptly. The dollar amount of the error ($ 570,171) was insignificant-
about 0.2 percent- relative to total disbursements of almost $258 million on
this contract in fiscal year 2001.

The controls that NASA put in place to prevent and detect payment errors
appeared to be properly designed. These controls ranged from automated
system edits to supervisory review and postpayment audits. At our request,
NASA officials told us of instances in which preventive controls were
circumvented by human error, but officials indicated that those instances
were infrequent and were usually resolved promptly. We then reviewed certain
NASA records related to refund payments and amounts owed to the agency and
found that most were not due to payment errors on contracts and purchase
orders. For those amounts that did represent payment errors, it appeared
that NASA?s detective controls had identified many of them. NASA centers
that identified failures in their preventive controls told us that they are
taking actions to improve the effectiveness of those controls, such as
improving training for the clerks who input payment information and for the
examiners who review the invoices and supporting documents before payments
are made.

GAO- 02- 642R NASA Contract Payments Page 3 While the surveys and our other
work did not disclose any significant or systemic

problems with payment errors during fiscal year 2001, the controls
implemented by both NASA and its contractors and vendors are not infallible
and are subject to change over time. In fact, NASA officials informed us
about a large overpayment that occurred after the period of our review on a
contract that was part of our sample. The contractor quickly identified the
overpayment, which was caused by a problem in the contractor?s billing
system, immediately informed NASA of the error, and offset the overpayment
amount against its next bill. Defense Contract Audit Agency (DCAA)
officials, who are responsible for reviewing and approving contractors?
billing systems, are working with the contractor to identify the extent of
its systems problems and the necessary corrective actions. Meanwhile, NASA
says that it has increased its review of invoices from that contractor.

Background

NASA?s payment process primarily involves three parties- contractors and
vendors, NASA procurement officials, and NASA finance officials. Each of
these parties is responsible for a different part of the process, and each
has controls in place to prevent or detect payment errors.

 Contractors and Vendors: Contractors and vendors generate the bills for
goods and services and are responsible for ensuring that the bills they send
to NASA are correct. Effective February 19, 2002, the Federal Acquisition
Regulation was amended to add a paragraph to the recommended ?prompt
payment? clauses of contracts to require the contractor to notify the
contracting officer if it becomes aware of a duplicate payment or other
overpayment on an invoice payment. The contractor must request instructions
on the disposition of the overpayment. 2

 NASA Procurement: NASA procurement officials manage NASA?s contracts and
purchase orders. Contracting officers authorize payment of invoices and are
responsible for confirming that the goods and services ordered have been
received and are satisfactory- or that acceptable progress is being made on
contracts- before authorizing payment. Contracting officers also check
contractor cost or price calculations and calculate contract fee amounts.
Contracting officers may delegate certain duties to DCAA or the Defense
Contract Management Agency (DCMA). 3 For instance, they may request that
DCAA review contractor cost vouchers on certain contracts and audit
contractor billing systems, incurred costs, and overhead rates. When the
work on a contract or purchase order is complete, procurement officials
review the contract or purchase order file to ensure that the proper amount
has been paid for the goods or services purchased, a process known as
closeout.

2 By its terms, this requirement does not apply to overpayments due to
errors in financing payments or contract administration actions. Further,
this requirement is binding on the contractor only if the contracting
officer includes the clause in the contract. 3 NASA has an agreement with
the Department of Defense stating that the department will provide

contract administration and audit services in support of NASA contracts.
DCAA provides contract audit services, including audits of contractor
billing systems and incurred costs. DCMA provides contract administration
services, including quality assurance and engineering support. NASA
determines, for each contract, which functions are to be delegated to these
Defense agencies.

GAO- 02- 642R NASA Contract Payments Page 4

 NASA Finance: NASA finance staff process the actual payments on contracts
and purchase orders. The finance office receives invoices either from the
procurement office or directly from contractors and vendors. 4 When an
invoice arrives in finance, office personnel ensure that it has the proper
approval signatures and appropriate supporting documentation, such as a
receiving report. If the invoice is acceptable, office personnel enter
information into an automated payment system, including the contractor or
vendor taxpayer identification code or name and address, contract or
purchase order number, invoice number, and payment amount. The system
automatically checks to ensure that the contract or purchase order is valid
(i. e., the contract or purchase order number is in the system and an
obligation has been established) and funds are available to be disbursed (i.
e., the obligated amount is sufficient to cover the payment as well as any
previous payments). The system also checks to see whether this invoice
number has already been entered for payment on this contract or purchase
order. In addition to the system edits, finance office supervisors review
certain payments- such as particularly large payments or payments being
processed by less- experienced staff- to ensure that they have been properly
entered. Once an invoice has been processed, personnel enter the payment
information on a schedule that is kept in the finance file for that
particular contract or purchase order. The automated payment information is
then transmitted to the U. S. Treasury, which makes the actual payment.

Overpayments and underpayments may occur because of various factors that are
an inherent part of the procurement process or because of payment errors.
For example, overpayments and underpayments may occur as a result of routine
retroactive adjustments to contract terms or changes in overhead rates,
items being returned, or other actions that are a normal part of the
procurement process. These overpayments and underpayments do not represent
problems unless they are not resolved promptly.

Payment errors, on the other hand, occur when personnel involved in the
payment process make mistakes. For instance, payment errors may occur if
contracting officers approve payment of duplicate bills or if finance
personnel process payments to the wrong vendors. Payment errors may also
occur if finance personnel make errors or override controls when entering
information into the automated payment system.

Payment Errors Appear to Be Infrequent and Promptly Resolved

For the NASA contracts and purchase orders that we selected, survey
respondents did not report significant problems with overpayments or
underpayments during fiscal year 2001 nor did they indicate that they were
aware of any systemic problems at NASA that could result in significant
undetected payment errors during that period. We performed a limited review
of NASA?s controls for preventing and detecting payment errors and found
them to be properly designed. While NASA?s preventive controls are not
infallible and some errors do occur, NASA documentation indicated that these
errors are usually promptly identified and corrected.

4 For contractors with DCAA- approved accounting and billing systems, NASA
procurement may allow the contractors to submit their invoices directly to
finance without going through procurement.

GAO- 02- 642R NASA Contract Payments Page 5 One Erroneous Payment Reported
in Sample

For our selected 55 contracts and 55 purchase orders, we asked contractors
and vendors whether they had received any overpayments or underpayments from
NASA during fiscal year 2001. For our samples of 45 contracts and 45
purchase orders, one or more payment errors would have indicated a
significant problem at NASA. For the 20 largest contracts and purchase
orders, any reported payment errors would have to be evaluated individually
for significance. We received responses for 108 contracts and purchase
orders, and only one respondent reported an overpayment that met our
criteria for a payment error. We defined an error as a payment that was more
than or less than what was owed to the contractor or vendor as of the
payment date, with the exception of an advance or a properly calculated
progress payment. We also provided the following information to assist the
respondents in identifying payment errors.

 Erroneous overpayments result when NASA makes duplicate payments, pays
invoices without properly considering previous progress payments, or
improperly considers contract modifications, or from other situations.

 Erroneous underpayments result when NASA does not pay an invoice,
calculates discounts incorrectly, or incorrectly offsets a subsequent
invoice, or from other situations.

 Amounts that are under dispute or billings that are less than 30 days old
as of September 30, 2001, should not be considered underpayments for
purposes of the survey.

 Overpayments and underpayments that result from retroactive adjustments by
contractors and vendors to overhead or general and administrative rates
should be considered errors only if they are not resolved promptly (i. e.,
within 30 days).

The error occurred on a contract we had selected because of its high
disbursement value and was the result of an incorrect calculation made by a
NASA official and a miscommunication between NASA and the contractor. The
contractor identified the error promptly and corrected the overpayment
problem by subtracting the erroneous amount from its next bill. The amount
of the error ($ 570,171) was not significant relative to the almost $258
million disbursed on that contract during fiscal year 2001.

Controls Appear to Be Designed Properly NASA has designed its payment
systems and processes to include both automated and human controls to
prevent and detect payment errors. These controls include

 automated payment system edits designed to prevent payments from being
processed without adequate funding (the current payment plus previous
payments cannot exceed the obligated amount) and to prevent duplicate
payments (the same invoice number cannot be used more than once for a given
contract);

 various supervisory reviews in both the procurement and finance offices,
including reviews of invoices being processed for payment and reviews of
obligated and unobligated balances; and

GAO- 02- 642R NASA Contract Payments Page 6

 NASA and DCAA postpayment audits, including annual incurred- cost audits
and contract closeout audits.

While the design of NASA?s controls generally appeared to be effective, no
controls are infallible. For example, automated controls may be willfully or
mistakenly circumvented and supervisory reviews can fail if they are not
done properly. Nevertheless, when taken as a whole, the controls appeared to
be properly designed, and information we received from NASA indicated that,
in general, the controls were working as intended.

While we did not test controls related to payment processing, we reviewed
cases in which the controls had functioned as designed during the period.
Six NASA centers provided us with information on payment errors that had
occurred and been resolved for contracts and purchase orders not included in
our sample. Although NASA?s controls did not prevent these errors from
occurring, other controls enabled NASA to detect them promptly as
illustrated by the following examples.

 A duplicate payment was not detected by automated system edits because,
while processing the payment a second time, a finance clerk made a
typographical error when entering the invoice number- the clerk entered the
letter ?O? instead of the numeral ?0.? Because this invoice number was not
identical to the number entered the first time, the system edit did not
identify the invoice as a duplicate. Although the preventive control failed
in this instance, finance staff identified the duplicate payments while
reviewing a vendor disbursement report- a detective control. As a result,
NASA notified the contractor of the payment error and recovered the funds
within 20 days of identifying the error.

 An overpayment was made because a finance clerk input an incorrect dollar
amount for payment, that is, the total value of the invoice was entered even
though only a partial payment was due. The contracting officer detected the
error when reviewing obligations, costs, and disbursements for the contract.
NASA planned to recover the funds by deducting the overpayment amount from
the amount to be paid on the next contract invoice.

Based on the documents that we reviewed, when errors were identified, NASA
and its contractors or vendors usually corrected them quickly. In some
cases, contractors and vendors sent checks to NASA for overpayment amounts.
In others, contractors and vendors offset future payments on the particular
contract or purchase order to compensate for the error. Centers that
identified failures in their controls told us that they are taking actions
to improve the effectiveness of those controls, such as additional training
for finance clerks who input payment data and for invoice examiners who
approve items for payment.

Contractor Billing System Weakness Caused Large Overpayment

While the surveys and our other work did not disclose significant or
systemic problems with payment errors during fiscal year 2001, we did
identify instances in which payment errors were made and later corrected, as
discussed in the previous section. In addition, NASA officials told us about
an overpayment that occurred after the period of our review on a contract
that was part of our sample. Because of

GAO- 02- 642R NASA Contract Payments Page 7 weaknesses in its billing
system, one of NASA?s largest contractors overbilled NASA

by $47 million on a multibillion dollar contract. At the time the invoice
was sent, according to both NASA and contractor officials, neither party was
aware of the error. However, upon receipt of the overpayment amount, the
contractor realized that it had made a billing error, notified NASA of the
mistake, and adjusted its next monthly invoice appropriately.

NASA, in turn, informed DCAA of the billing error. DCAA, which was already
in the process of reviewing the contractor?s billing system, expanded the
scope of its review. In February 2002, DCAA issued an interim report that
identified several weaknesses in the contractor?s billing system and
recommended corrective actions to the contractor. DCAA is continuing its
review and will issue a final report when work is completed. Meanwhile,
NASA, DCAA, and the contractor are meeting at least monthly to implement
improvement actions for ensuring accurate billings. The contractor?s action
plan identifies strategies and improvement initiatives, interim goals and
milestones, and major delivery items.

Agency Comments

In written comments on a draft of this report, NASA?s Associate Deputy
Administrator for Institutions stated that the agency will continue to
strive to improve the effectiveness of its entire internal control system
and, as part of that effort, will emphasize the importance of staff training
and supervisory review. NASA?s comments are reprinted as enclosure II to
this letter.

 We are sending copies of this
letter to the Chairmen and Ranking Minority Members of the Senate Committee
on Commerce, Science, and Transportation, the Senate Committee on
Governmental Affairs, and the House Committee on Science, and to the Ranking
Minority Member of the House Committee on Government Reform. We are also
sending copies to NASA?s Administrator and Chief Financial Officer. The
letter will also be available on GAO?s home page at http:// www. gao. gov.

GAO- 02- 642R NASA Contract Payments Page 8 If you or your staff have any
questions concerning this letter, please contact me at

(202) 512- 9505 or by e- mail at kutzg@ gao. gov or Molly Boyle, Assistant
Director at (202) 512- 9524 or by e- mail at boylem@ gao. gov. Major
contributors to this letter were Kristi Karls, Fannie Bivins, Thanomsri S.
Piyapongroj, Maria Storts, and Carolyn Voltz.

Sincerely yours, Gregory D. Kutz Director, Financial Management and
Assurance

Enclosures

GAO- 02- 642R NASA Contract Payments Page 9 Enclosure I

Scope and Methodology

To determine whether NASA had a significant problem with payment errors, we
selected 110 contracts and purchase orders for which NASA made disbursements
during the first 9 months of fiscal year 2001 (the most recent data
available at the time). The items we chose for review were the 10 contracts
and 10 purchase orders on which NASA made the largest total disbursements
during the first three quarters of fiscal year 2001 and 45 other contracts
and 45 other purchase orders chosen at random. These 110 items accounted for
$4.8 billion of the $8.7 billion that NASA disbursed on contracts and
purchase orders during those 9 months. Our methodology was not intended to
project the dollar amount or number of overpayments and underpayments to
NASA?s payment population. For our random samples, one or more payment
errors reported to us in the survey would indicate a significant or systemic
problem during the review period. For the 20 largest contracts and purchase
orders, the dollar amounts of reported errors would have to be evaluated
individually to determine their significance. Because the contractors and
vendors self- reported these overpayments and underpayments, the reliability
of our survey results depends on the reliability of their responses.

To select the contracts and purchase orders, we used information from NASA?s
Financial and Contractual Status (FACS) system for the first 9 months of
fiscal year 2001. FACS contains summary- level disbursement data for all of
its contracts and purchase orders. While we did not fully assess the
reliability and completeness of these disbursement data, we compared the
disbursement totals from FACS to amounts in NASA?s report on budget
execution and budgetary resources. For the 110 contracts and purchase orders
we reviewed, we also compared the disbursement data from FACS to data
maintained in the NASA procurement system and the Federal Procurement Data
System to ensure that disbursed totals did not exceed total contract value
or total obligations.

Although our sample was selected using data for 9 months, our survey
pertained to payments made on our 110 sample items during the entire fiscal
year 2001. We asked contractors and vendors whether they received any
payments from NASA that were significantly more than or less than the
amounts billed on those 110 contracts and purchase orders during fiscal year
2001. We considered individual overpayments or underpayments of $500 or more
to be significant. We defined overpayments as occurring whenever NASA paid
contractors and vendors more than they were owed and underpayments as
occurring whenever NASA paid contractors and vendors less than they were
owed, excluding items for which NASA was disputing charges.

We received information from contractors or vendors on 108 of the 110 items
we reviewed. Of the two contractors that did not respond to our information
requests, one had dissolved prior to the beginning of our work and the other
did not respond to our attempts to make contact. Therefore, we obtained and
reviewed billing and payment records for these contracts from NASA for
fiscal year 2001. That review did not reveal any reason to suspect payment
errors on these contracts.

For contractors and vendors that indicated they had received overpayments or
underpayments, we followed up with further discussions with them or NASA, or
both,

GAO- 02- 642R NASA Contract Payments Page 10 to determine whether the
overpayments or underpayments were caused by errors or

were the result of normal procurement processes. Of 14 such responses, our
followup work indicated that only one of these items was a payment error,
which we discuss in our report. Because the error occurred in a contract
that we selected specifically because of its high- dollar disbursements
total and not in one of our randomly sampled items, we evaluated the error
individually for significance.

To determine what NASA was doing to detect and prevent payment errors, we
examined the design of the controls that NASA had in place. We did not,
however, test the operating effectiveness of the individual controls and,
accordingly, we express no opinion on their effectiveness. We spoke with
NASA staff at headquarters and three of the centers- Johnson Space Flight
Center in Houston, Tex.; Marshall Space Flight Center in Huntsville, Ala.;
and Goddard Space Flight Center in Greenbelt, Md. We reviewed how their
payment processes function and the design of the controls in place at
different points in the process to prevent and detect payment errors. We
discussed the roles and responsibilities of procurement and finance
officials and of DCAA and DCMA officials who support NASA operations. We
also reviewed relevant portions of the NASA Financial Management Manual, the
Federal Acquisition Regulation, and the NASA Federal Acquisition Regulation
Supplement.

Although we did not test the effectiveness of individual controls that NASA
has in place, we reviewed payment information that demonstrated how the
controls functioned collectively as designed. For the centers we visited, we
obtained information on the overpayments and underpayments they had
identified during fiscal year 2001. We also obtained accounts receivable and
accounts payable data. We reviewed this information to see if there was
evidence of payment errors occurring or being corrected. We also obtained
data from all of the NASA centers on reported refunds to identify whether
these refunds related to contracts and purchase orders and whether they
resulted from payment errors. To the extent that we found evidence of such
errors, we spoke with center officials to discuss the causes and how the
errors were detected and resolved. We also discussed the actions that were
being taken to prevent similar errors from occurring in the future,
particularly at centers where certain types of errors were more prevalent.

To understand the role that Department of Defense organizations have in
helping NASA prevent and detect payment errors, we spoke with DCAA auditors
who had reviewed NASA contractors and we obtained copies of recent DCAA
reports on NASA contractor billing systems and incurred costs. We also spoke
with DCMA staff members about the services they may perform for NASA.

We conducted our fieldwork from October 2001 through March 2002 in
accordance with generally accepted government auditing standards. We
requested comments on a draft of this letter from the NASA Administrator.
Written comments from NASA?s Associate Deputy Administrator for Institutions
are reprinted in enclosure II.

GAO- 02- 642R NASA Contract Payments Page 11 Enclosure II

Comments from the National Aeronautics and Space Administration

GAO- 02- 642R NASA Contract Payments Page 12

(192039)
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