a

GAO

United States General Accounting Office

Report to the Chairman, Committee on 

Government Reform, House of 

Representatives

May 2002 DOD CONTRACT 

MANAGEMENT

Overpayments 

Continue and 

Management and 

Accounting Issues 

Remain 

GAO-02-635
Page i GAO-02-635 DOD Contractor Overpayments

Contents

Letter 1

Results in Brief 2

Background 4

Overpayments and Underpayments Continue 6

DOD Initiatives to Manage and Reduce Overpayments 19

Management and Accounting Control Issues Remain 22

Conclusions 29

Recommendations for Executive Action 29

Agency Comments and Our Evaluation 30

Appendixes

Appendix I: Scope and Methodology 32

Appendix II: List of Contractors We Surveyed and Results 35

Appendix III: Contractor Survey 41

Appendix IV: Summary of Results from DCAA Visits to 28 Contractor 

Locations 47

Appendix V: Comments from the Department of Defense 48

Tables Table 1: Summary of Survey Results by Large and Small Business 

Contractors 8

Table 2: Refunds to the Government from Fiscal Years 1994 through 

2001 11

Table 3: DFAS Columbus Contracts Waiting for Reconciliation at 

Fiscal Year-End from 1995 to 2001 16

Table 4: Aging of DFAS Columbus Contracts Awaiting 

Reconciliation as of September 30, 2001 17

Table 5: DFAS Columbus Fiscal Year 2001 Monthly Accounts 

Receivable and Amounts in Dispute 26
Contents

Page ii GAO-02-635 DOD Contractor Overpayments

Abbreviations

CCR Central Contract Registry

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency

DFAS Defense Finance and Accounting Service

DMO Debt Management Office

DOD Department of Defense

DPPS Defense Procurement Payment System

FAR Federal Acquisition Regulation

FDPS Federal Procurement Data System

IG inspector general

MOCAS Mechanization of Contract Administration Services

SFFAS Statement of Federal Financial Accounting Standards

SPS Standard Procurement System
Page 1 GAO-02-635 DOD Contractor Overpayments

United States General Accounting Office

Washington, D.C. 20548

A

May 30, 2002 Letr

The Honorable Dan Burton

Chairman

Committee on Government Reform

House of Representatives

Dear Mr. Chairman:

Since we reported on Department of Defense (DOD) contractor 

overpayments in 1994,1

 we have issued additional reports highlighting 

billions of dollars of overpayments to Defense contractors. As a result of 

these and other reports, there has been increasing congressional interest in 

recovering overpayments made to contractors. In December 2001, this 

interest led to the Congress amending Title 31 of the United States Code2

 to 

require a federal agency with contracts totaling over $500 million in a fiscal 

year to have a cost-effective program for identifying payment errors and for 

recovering amounts erroneously paid to contractors. 

You requested that we update our previous reviews to determine whether 

DOD’s problems with overpayments continue. Specifically, we determined 

(1) whether overpayments and underpayments to contractors have 

continued, (2) what actions DOD has taken to address payment 

discrepancies with contractors, and (3) whether the Defense Finance and 

Accounting Service (DFAS) properly accounts for and collects amounts 

due from contractors and accounts for amounts the government owes 

contractors. 

Amounts due the government from DOD contractors can arise from 

(1) improper payments made because of progress payment liquidation 

errors, contractor billing errors, and other processing errors and 

(2) contract administration actions, such as item price adjustments, 

changes in delivery schedules, and changes in the quantities ordered, all of 

which can occur after valid payments have been made on a contract. The 

Federal Acquisition Regulation (FAR) refers to any amounts due the 

government resulting from these actions as contractor debt or 

1

U.S. General Accounting Office, DOD Procurement: Millions in Overpayments Returned 

by DOD Contractors, GAO/NSIAD-94-106 (Washington, D.C.: Mar. 14, 1994).

2

31 U.S.C. 3561-3567, National Defense Authorization Act for Fiscal Year 2002, section 831, 

Public Law No. 107-107, 115 Stat. 1012, 1186 (2001). 
Page 2 GAO-02-635 DOD Contractor Overpayments

overpayments. However, not all of these overpayments could 

appropriately be considered improper payments. Specifically, those 

resulting from contract administration actions were correct when made, 

but due to subsequent changes, the excessive portion of the payment is to 

be immediately pursued and promptly collected. 

To accomplish our objectives, we (1) surveyed 183 DOD contractors, as 

agreed to with your staff, similar to the approach we took in our 1995 

report on contractor payment problems,3

 (2) assessed DFAS data on 

contractor refunds, (3) obtained the status of DOD corrective actions on 

our previous recommendations, and (4) reviewed the management of and 

accounting for overpayments and underpayments. We focused our work at 

DFAS Columbus, which was also the area of emphasis in prior audit reports 

on DOD contractor payment problems, because it is the largest, centralized 

DFAS disbursing activity—disbursing $78 billion of contract payments to 

DOD contractors in fiscal year 2001. To effectively use audit resources, the 

Defense Contract Audit Agency (DCAA), as part of its contract audits at 

high-risk contractors, tested the validity of selected contractor survey 

responses for us. 

Our scope and methodology are described in more detail in appendix I. We 

did not fully assess the reliability of the underlying data in the contractors’ 

responses or the data we obtained from DFAS Columbus. We reviewed and 

discussed DCAA’s work at selected contractor locations where it 

performed follow-up work for us. We requested comments on a draft of 

this report from the Secretary of Defense or his designee. We received 

written comments from the Under Secretary of Defense Comptroller and 

have reprinted the comments in this report. We performed our work from 

August 2001 through April 2002 in accordance with generally accepted 

government auditing standards. 

Results in Brief DOD contractors’ responses to our survey indicate that they have millions 

of dollars in overpayments and underpayments on their records, and based 

on DFAS Columbus records, they are continuing to refund overpayments—

about $488 million in fiscal year 2001. Contractors cited progress payment 

liquidation errors as a primary reason for the overpayments and 

underpayments. They usually did not include debt due to contract 

3

U.S. General Accounting Office, DOD Procurement: Millions in Contract Payment Errors 

Not Detected and Resolved Promptly, GAO/NSIAD-96-8 (Washington, D.C.: Oct. 6, 1995). 
Page 3 GAO-02-635 DOD Contractor Overpayments

administration actions—the reason for the majority of contractor refunds 

according to DFAS Columbus records—in their reported overpayments. 

Additional overpayments and underpayments could be identified when 

audits of the over 3,200 contracts requiring some level of reconciliation, as 

of September 30, 2001, are completed by DFAS Columbus. Contractor 

debt, regardless of cause, is likely to continue due to DOD’s complex 

contract management and payments processes. Even when payment 

discrepancies are identified, they are not always promptly resolved. 

DOD has taken actions to address problems with contractor overpayments. 

In addition to its contract audit functions and as part of a broad-based 

program to assist DCMA and DFAS, DCAA is auditing at least 190 large 

DOD contractors to identify overpayments and ensure that contractors 

have adequate internal controls for prompt identification and reporting of 

overpayments. This type of activity can be considered part of a recovery 

audit program. DFAS Columbus has implemented procedures to better 

identify potential duplicate payments before the invoices are paid and to 

determine and monitor the causes of the duplicate payments. As part of its 

long-term solution to contract payment problems, DOD also is 

implementing the Standard Procurement System and the Defense 

Procurement Payment System to replace current contract administration 

and payment systems. However, the full implementation of these systems 

has been delayed and their success is uncertain. 

While DOD has several initiatives to reduce overpayments, it still does not 

yet have basic accounting control over contractor debt and underpayments 

because its procedures and practices do not fully meet federal accounting 

standards and federal financial system requirements for the recording of 

accounts receivable and liabilities. As a result, DOD managers do not have 

important information for effective financial management, such as 

ensuring that contractor debt is promptly collected. Further, DOD’s 

reported accounts receivable, accounts payable, and other liabilities could 

be understated or overstated at the end of an accounting period. Without 

complete accounting for overpayments and underpayments, DOD has not 

established adequate performance measures to monitor and manage the 

timely resolution of overpayments and underpayments. 

This report contains recommendations to the Under Secretary of Defense 

Comptroller and the Under Secretary of Defense for Acquisition, 

Technology, and Logistics concerning actions to require internal controls 

on the recovery of overpayments, establish procedures for the recording of 

receivables and liabilities, and to develop and maintain more complete 
Page 4 GAO-02-635 DOD Contractor Overpayments

records on contractor refunds and underpayments. In written comments 

on a draft of this report, DOD concurred with our report recommendations 

and discussed actions it intends to take to implement each of our 

recommendations. These actions appear to respond to our 

recommendations. 

Background DOD’s contract administration and payment processes involve numerous 

organizations, including 23 DFAS offices; the contractors that perform 

work and bill the government; the Defense Contract Management Agency 

(DCMA), which administers most of DOD’s largest procurement contracts; 

military components’ project and contracting offices; and DCAA, which 

reviews contractors’ records, internal controls, and billing systems. The 

contract administration and payment processes have been described in our 

prior reports. If DCMA administers a contract, DFAS Columbus makes 

payments using the Mechanization of Contract Administration Services 

(MOCAS) system, and DOD refers to the disbursements as “contract pay.” 

In fiscal year 2001, DFAS Columbus disbursed about $78 billion for over 

300,000 contracts managed in MOCAS. Contracts that DCMA does not 

administer are paid using other systems at the DFAS offices. DOD refers to 

these contract disbursements as “vendor pay.” The Navy’s shipbuilding and 

repair contracts are viewed as vendor pay because they are not managed by 

DCMA or paid by DFAS Columbus using MOCAS. In fiscal year 2001, DFAS 

processed over 10 million vendor pay invoices, valued at over $59 billion. 

Large contractors with numerous DOD contracts and locations can receive 

both contract pay and vendor pay. Effective April 1, 2001, DFAS contract 

pay and vendor pay management were consolidated at DFAS Columbus.

Contract payments involve payments for the delivery of goods and services 

and financing payments. Financing payments include (1) progress 

payments to cover a contractor’s costs as they are incurred during the 

construction of facilities or the production of major weapons systems and 

(2) performance-based payments that are based on the accomplishment of 

particular events or milestones—typically used on production contracts. 

When contractors deliver items and submit invoices for the delivered 

items, DFAS Columbus deducts financing payments from the prices of the 

delivered items, or “liquidates” the financing payments, based on a 

predetermined liquidation rate. Liquidation rates may be adjusted when 

costs are higher or lower than projected. Contract modifications can often 

occur due to changes in liquidation rates, quantities ordered, and 

production schedules. These modifications and other contract 
Page 5 GAO-02-635 DOD Contractor Overpayments

administration actions are managed by DCMA through coordination with 

the contractors. 

Our prior reports on contractor overpayment problems have highlighted 

that (1) Defense contractors were refunding hundreds of millions of dollars 

to DFAS Columbus each year, (2) DFAS Columbus had made overpayments 

due to duplicate invoices and paid invoices without properly and 

accurately recovering progress payments, (3) contract administration 

actions had resulted in significant contractor debt or overpayments, 

(4) DOD and contractors were not aggressively pursuing the timely 

resolution of overpayments or underpayments when they were identified, 

(5) DFAS Columbus did not have statistical information on the results of 

contract reconciliation, and (6) DOD has ongoing actions to address 

contractor payment problems.

DFAS Columbus can identify overpayments during contract reconciliation 

or can be notified of an overpayment by a contractor or DCMA. When 

DFAS Columbus becomes aware of an overpayment, its Accounts 

Receivable Branch is to issue an initial demand letter to the contractor and 

works with the entitlement divisions, which process and pay invoices, to 

collect amounts due the government by initiating an “offset” that reduces 

the amount paid on invoices in process. The Accounts Receivable Branch 

also maintains the detailed records on the accounts receivable. The 

contract reconciliation function deals with contracts being closed out as 

well as active contracts needing partial audits to resolve prior and current 

payment problems, such as overpayments, underpayments, and invoice 

deficiencies. Since the mid-1990s, DFAS Columbus has contracted with a 

major accounting firm to help reconcile and close out thousands of 

contracts. When an amount exceeding $600 is due to the government and 

is not collected within 90 days, the debt is supposed to be transferred to 

DFAS’s central Debt Management Office (DMO) for further collection 

actions that can include referring debts to the Defense Criminal 

Investigative Service or the U.S. Treasury’s centralized debt collection 

programs. 
Page 6 GAO-02-635 DOD Contractor Overpayments

Within the last 6 months, three key actions have been taken to address 

governmentwide issues on improper payments. As previously stated, in 

December 2001, the Congress amended Title 31 of the United States Code 

to require an agency with contracts totaling over $500 million to have a 

cost-effective program for identifying payment errors and for recovering 

amounts erroneously paid to contractors. The resources for implementing 

the recovery program can include the agency, other federal departments or 

agencies, and the private sector. As of March 2002, the Office of 

Management and Budget had not issued implementing guidance on this 

law.4

 Another key action was our issuance of an executive guide,5 in 

October 2001, that discusses strategies and control activities, such as 

recovery auditing, contract audits, and data mining, to identify and correct 

improper payments. The third action, in response to our recommendation,6

was a change in the FAR, effective February 19, 2002, which added a 

paragraph to the “prompt payment” clause of contracts that requires a 

contractor to notify the contracting officer if the contractor becomes aware 

of an overpayment and to request instructions for disposition of the 

overpayment. 

Overpayments and 

Underpayments 

Continue 

Defense contractors’ responses to our survey indicated that they have 

millions of dollars in overpayments and underpayments on their records, 

and based on DFAS Columbus records, they are continuing to refund 

overpayments. According to the contractors, a primary reason for these 

payment discrepancies was progress payment liquidation errors. 

Contractors usually did not include contractor debt arising from contract 

administration actions in the overpayments amounts they reported. 

However, according to DFAS Columbus records, contract administration 

actions were the primary reason for the $488 million that contractors 

refunded in fiscal year 2001. Contractor refunds are likely to continue 

because of DOD’s complex contract management and payment processes. 

Also, even when payment discrepancies are identified, they are not always 

promptly resolved.

4

31 U.S.C. 3561-3567. 

5

U.S. General Accounting Office, Strategies to Manage Improper Payments: Learning 

From Public and Private Sector Organizations, GAO-02-69G (Washington, D.C.: Oct. 2001). 

6

U.S. General Accounting Office, DOD Contact Management: Greater Attention Needed to 

Identify and Recover Overpayments, GAO/NSIAD-99-131 (Washington, D.C.: July 19, 1999). 
Page 7 GAO-02-635 DOD Contractor Overpayments

Contractors Reported 

Overpayments and 

Underpayments but Extent 

of Them Is Uncertain 

Based on information from our surveys, business units of 67 contractors 

reported that they had about $62 million of overpayments and about

$176 million of underpayments in their records as of September or October 

2001.7

 We sent surveys to 497 business units of 183 contractors, and at least 

249 of the business units of 120 contractors responded. The business units 

of the remaining 53 contractors that responded did not report any 

overpayments or underpayments in their records. Appendix II provides the 

details of our survey results and appendix III contains the survey.

As shown in table 1, which summarizes the results of the survey, 34 of the 

largest contractors did not respond to the survey. The 10 largest 

contractors—according to their reported annual billings—that responded 

to our survey reported about 86 percent of the total overpayments and 78 

percent of the total underpayments reported by all of the contractors. One 

Boeing contract alone accounted for $27 million of underpayments due to 

contract funding issues. Contractors cited DFAS progress payment 

liquidation errors as a primary reason for the overpayments and 

underpayments. Contractors usually did not include contractor debt 

arising from contract administration actions in the overpayment amounts 

they reported. However, as discussed later in this report, contract 

administration actions are the primary source of contractor refunds. Most 

of the contractors reported that demand letters had not been issued for the 

overpayments in their records but that they planned to return about 29 

percent of the overpayments by check or offset. For the remaining 71 

percent of the overpayments, contractors did not indicate any planned 

actions. According to DCAA, it plans to ensure that all of the overpayments 

are properly handled.

7

Even though we requested data as of September 30, 2001, some contractors reported as of 

that date and others reported as of various dates, most in October 2001. 
Page 8 GAO-02-635 DOD Contractor Overpayments

Table 1: Summary of Survey Results by Large and Small Business Contractors

a

Large contractors have the highest dollars of contract actions in the Federal Procurement Data 

System, and small business contractors are designated as such in the system.

Source: GAO survey results.

These survey results cannot be used to determine the extent of 

overpayments and underpayments in contractor records at a point in time. 

Specifically, the results cannot be projected to a universe of DOD 

contractors even if all contractors had reported because the surveyed 

contractors were not randomly selected. Further, our analysis of 

contractors’ responses showed inaccuracies in their reporting. For 

example, at least 3 contractors included information on contract payments 

to federal agencies other than DOD and even to nonfederal entities. At 

least 1 contractor reported overpayments that had been refunded the 

government and, therefore, should not have been reported because they 

were not outstanding overpayments. We also observed that contractors 

were not consistent in reporting actions taken on overpayments. Out of at 

least 588 reported overpayments, contractors indicated in their responses 

that they had notified DOD of 251 overpayments. At the same time, 

contractors reported that they had not notified DOD of 236 overpayments. 

For the remaining 101 overpayments, contractors did not provide any 

indication one way or the other.

Large

contractors

surveyeda

Small business

contractors

surveyeda Total

Number of contractors surveyed 92 91 183

Number of contractors with at least 

one response

58 62 120

Number of contractors that did not 

respond

34 29 63

Number of contractors reporting 

overpayments

31 11 42

Number of contractors reporting 

underpayments

31 26 57

Number of contractors reporting zero 

payment discrepancies

21 32 53

Total overpayments reported (dollars 

in millions)

$61.0 $1.0 $62.0

Total underpayments reported 

(dollars in millions)

$165.3 $10.8 $176.1

Total gross billings reported (dollars 

in millions)

$28,656.0 $2,718.0 $31,374.0
Page 9 GAO-02-635 DOD Contractor Overpayments

Based on factors such as contractor size, geographic location, and amount 

of reported payment discrepancies, we selected, in coordination with 

DCAA, 27 contractor locations involving 24 companies to test the validity 

of contractors’ responses. The selected business units reported 

$58 million, or 94 percent, of the total reported overpayments and 

$126 million, or 71 percent, of the total reported underpayments. We 

provided our survey results to DCAA for these business units, and its 

auditors found that 10 of the contractor locations underreported 

overpayments by $57.2 million and underreported underpayments by

$58.0 million. DCAA stated that the remaining 17 locations had reported 

accurately. According to DCAA, 5 contractors are primarily responsible for 

these large differences and most of the differences are due to contractors’ 

billing weaknesses and erroneous reporting of unpaid invoices. Appendix 

IV summarizes the DCAA results. At these same 10 contractor locations, 

DCAA also found that (1) differences in application of liquidation rates and 

weaknesses in contractor billing systems were primary reasons for both 

overpayments and underpayments and (2) unpaid invoices over 30 days old 

were another primary reason for underpayments. Such results 

demonstrate the need for recovery audit programs, such as DCAA’s 

contractor overpayment and underpayment audits to identify payment 

errors, recover erroneous payments, and identify payments due to the 

contractor. 

During its follow-up to our surveys, DCAA also found that contractors are 

reluctant to return overpayments on a contract when underpayments on 

the same contract result in a net underpaid status. For example, 1 of the 

largest DOD contractor’s records showed a contract with millions of 

dollars of overpayments and underpayments that resulted in a $1.8 million 

net underpaid status. According to the contractor’s records, some of these 

overpayments had occurred in 1997 and had not been resolved. As of 

September 30, 2001, the contract was in reconciliation, and, as of February 

2002, these payment discrepancies had not been resolved. According to 

DCAA officials, they decided, after consulting with DFAS, that settlement 

of any overpayments and underpayments would be deferred until contract 

reconciliation is complete and the final contract amount is settled. DCAA 

officials stated that the contractor had basic internal controls for 

overpayments, and DCAA is assisting the reconciliation through its project 

on audits of contractor-prepared reconciliations. 

In responses to our survey, contractors also included overpayments and 

underpayments associated with contracts paid through vendor pay. For 

example, at least 28 contractors, including 3 major shipbuilding and ship 
Page 10 GAO-02-635 DOD Contractor Overpayments

repair contractors, reported overpayments and underpayments associated 

with vendor pay. These 3 major shipbuilding contractors, alone, reported 

overpayments of almost $9.4 million and underpayments of about

$0.5 million. According to a response from 1 shipbuilding contractor, 

overpayments and underpayments that occur on a contract are not 

resolved until contract closeout, which could be several years later. 

Another vendor pay contractor reported about $12 million of 

underpayments primarily due to underpaid invoices. For contractors 

indicating receipt of vendor pay, we could not accurately eliminate the 

vendor pay discrepancies from the total amounts reported by the 

contractors because (1) not all contractors provided sufficient and 

consistent detailed information and (2) we did not validate all of the 

responses. Nevertheless, we asked DFAS Columbus to compare its records 

to the contractor responses for 106 contracts, and DFAS Columbus told us 

it did not make the payments on 42 of the contracts because they were 

vendor payments. 

Although our prior reports placed more emphasis on contract pay than 

vendor pay, recent DOD Office of Inspector General (IG) audits also have 

identified weak internal controls in vendor pay systems and overpayments 

to contractors. For example, in October 2001 and March 2002, the DOD IG 

reported that the Computerized Accounts Payable System, a vendor pay 

system used by DFAS Kansas City and DFAS Indianapolis, did not have 

proper internal controls to detect and prevent improper payments, and that 

DFAS had made at least $13 million of duplicate payments.8

 As a result, 

recovery audits and recovery activities that are now required by 31 U.S.C. 

3561 could be used to improve the management of contract payments 

associated with both “contract pay” and “vendor pay.” 

Contractor Refunds 

Primarily due to Contract 

Administration Actions but 

Improper Payments Also 

Occurred

From fiscal years 1994 through 2001, DOD contractors have refunded over 

$6.7 billion to DFAS Columbus. However, as shown in table 2, DFAS 

Columbus records showed that contractor refunds dropped to about 

$488 million in fiscal year 2001 from $901 million in fiscal year 2000. Of the 

$488 million in refunds, DFAS Columbus collected $449 million by 

8

DOD Inspector General, Controls Over the Computerized Accounts Payable System at 

Defense Finance and Accounting Service Kansas City, Report No. D-2002-008 

(Washington, D.C.: Oct. 19, 2001), and Financial Management: Controls Over Vendor 

Payments Made for the Army and Defense Agencies Using the Computerized Accounts 

Payable System, Report No. D-2002-056 (Washington, D.C.: Mar. 6, 2002). 
Page 11 GAO-02-635 DOD Contractor Overpayments

contractors submitting checks and the remaining $39 million through 

offsets. However, the level of refunds could be greater because contracting 

officers often collect funds from the contractors by offsets that are agreed 

to during contract negotiations, and DFAS might not be notified. Since 

DFAS keeps track of only those offsets it processes, its records would not 

have the number of refunds due to these other offsets handled directly by 

DCMA and the contractors. 

Table 2: Refunds to the Government from Fiscal Years 1994 through 2001

Source: GAO reports and DFAS Columbus. 

DFAS Columbus records showed that about $360 million, or 80 percent of 

the $449 million in checks sent to the government in fiscal year 2001, was 

due to DCMA contract administration actions and the remaining 

$89 million, or 20 percent, was due to payment problems. This is consistent 

with what we have previously reported. For example, in February 2001,9

we reported that 77 percent of $351 million in excess payments was 

primarily related to contract administration actions, and, in July 1999, we 

reported10 that about 78 percent of the contractor refunds was due to 

contract administration and other actions outside of DFAS’s control. 

Dollars in millions

Fiscal year Amount of refunds

1994 $940

1995 1,000

1996 1,020

1997 950

1998 746

1999 670

2000 901

2001 488

Total $6,715

9

U.S. General Accounting Office, Contract Management: Excess Payments and 

Underpayments Continue to Be a Problem at DOD, GAO-01-309 (Washington, D.C.: Feb. 

22, 2001). 

10GAO/NSIAD-99-131. 
Page 12 GAO-02-635 DOD Contractor Overpayments

In tracking contractor refunds due to payment problems, DFAS Columbus 

distinguishes between refunds with issued demand letters and refunds 

without demand letters—or unsolicited refunds. According to DFAS 

Columbus records, refunds due to payment problems were caused 

primarily by DFAS processing errors, including improper progress payment 

liquidations. We reviewed 12 unsolicited contractor refunds valued at 

about $24.2 million, or 83 percent of the total $29.2 million in unsolicited 

contractor refunds during the months of October 2000, March 2001, and 

August 2001. Our review revealed that 6 of the overpayments were due to 

progress payment liquidation errors and 6 were duplicate payments caused 

by contractor billing errors along with DFAS weaknesses in detecting and 

avoiding overpaying in these situations. Some examples follow. 

• In September 2000, Textron Systems refunded $8,194,856 because of a 

DFAS error in liquidating progress payments. In August 2000, Textron 

billed a net amount of $2,739,301, based on contract delivery price of 

$10, 957,205, of which $8,217,904 should have been liquidated. However, 

DFAS paid $10,934,158 in August 2000. 

• In July 2001, Boeing refunded $5,527,922 due to the incorrect liquidation 

of progress payments on two invoices. DFAS overpaid one invoice by 

$2,077,922 and another invoice by $3,450,000 because it used an 

incorrect liquidation rate.

• In March 2001, Northrup Grumman refunded $1,855,788 for a duplicate 

payment. DFAS first paid this amount in September 1999 for an invoice 

submitted in August 1999, and it paid the same amount again in January 

2000. DFAS documentation did not indicate what allowed the invoice to 

be processed twice. The unsolicited refund was about 15 months after 

the overpayment.

• In August 2001, the Eagle Support Services Corporation refunded 

$958,339 because it had received two payments for the same invoice. 

The contractor submitted an electronic invoice on June 28, 2001, which 

DFAS paid on July 10, 2001. However, the contractor had earlier 

submitted a hard copy invoice on June 11, 2001, which DFAS paid on 

July 18, 2001. DFAS processed each invoice because the invoices had 

different shipment numbers. 
Page 13 GAO-02-635 DOD Contractor Overpayments

DOD contract management, payment, and accounting processes are 

complex and remain at risk of contractor debt arising from contract 

administration actions and overpayments caused by payment and billing 

errors. We reported in January 199811 that DOD’s contract management 

and payment process involves numerous organizations that share data 

using both manual and automated means that are not integrated. Since 

then, DOD has implemented more electronic sharing of contract 

information and invoicing to reduce manual processes. However, in 

December 2000 and April 2001, the DOD IG reported that additional 

controls were needed in electronic document sharing and interchange to 

ensure security of the data.12 In addition, DFAS personnel told us that 

contract and invoicing information still must be manually entered into 

MOCAS. For example, contracts with special payment instructions need to 

be processed manually because they are an exception to the MOCAS 

automatic payment process.

One effect of the overall complex process is that DFAS Columbus can 

sometimes issue demand letters that it later cancels due to subsequent 

contractor, contracting officer, or DFAS actions to correct or otherwise 

resolve the basis for the debt. In fiscal year 2001, DFAS Columbus canceled 

$37.5 million of demand letters. A few examples follow.

• Lucent Technologies almost received a duplicate payment of $1,397,200 

when the contractor submitted invoices to DFAS Omaha in October 

2000 and DFAS Columbus in December 2000 for the same amount. 

DFAS Omaha, the originally designated contract payment office, paid 

the first invoice. Subsequently, DFAS Columbus became the payment 

office, and the contractor resubmitted the invoice to DFAS Columbus, 

which initiated payment. However, DFAS Columbus identified the 

duplicate payment, issued a demand letter, and then canceled the 

demand letter when it stopped the electronic funds transfer payment 

before it was processed by the contractor’s bank.

11U.S. General Accounting Office, Financial Management: Seven DOD Initiatives That 

Affect the Contract Payment Process, GAO/AIMD-98-40 (Washington, D.C.: Jan. 30, 1998). 

12DOD Inspector General, Controls Over Electronic Document Management, Report No. D2001-101 (Washington, D.C.: Apr. 16, 2001); Controls for the Electronic Interchange at the 

Defense Finance and Accounting Service Columbus, Report No. D-2001-095 (Washington, 

D.C.: Apr. 6, 2001); and General Controls Over the Electronic Document Access System, 

Report No. D-2001-029 (Washington, D.C.: Dec. 27, 2000) 
Page 14 GAO-02-635 DOD Contractor Overpayments

• In April 2001, DFAS issued a demand to Lockheed Martin for a 

$2,755,244 debt that occurred in September 1997 when a contracting 

officer issued a contract modification reducing the contract amount. An 

April 1998 audit of the contract identified that the wrong accounting line 

was cited in this modification, which created a debt. Even though the 

contracting officer was notified of the mistake at that time, no action 

was taken until DFAS issued the demand letter. In May 2001, a 

contracting officer prepared another contract modification to cite the 

correct accounting line, which eliminated the debt. DFAS then canceled 

the demand.

• A demand to Litton Systems Advanced, Inc. for a $2,124,022 

overpayment was canceled when the contractor sent an invoice with the 

amount reduced for the overpayment. 

The entire contract management and payment process, which has been 

described in our prior reports, is further complicated by how progress 

payments are accounted for in contract records, a method that can 

ultimately create (1) differences in contractor and DFAS Columbus records 

and (2) future payment and contract reconciliation problems. In April 

1997, we reported13 that contract payment problems can occur when DFAS 

Columbus liquidates progress payments because of payment allocations to 

an accounting classification reference number on a contract that have little 

relationship to the work performed. If payment allocations must be made 

using a different process than the MOCAS automated process, especially 

when contracts have special payment instructions, the risk of error 

increases. As mentioned earlier in this report, contractors responded that 

progress pay liquidation errors were a major reason for overpayments. 

This is consistent with our October 1995 report14 indicating that according 

to DFAS Columbus analysis the most frequent cause of an overpayment 

was the incorrect recovery of progress payments. DFAS Columbus data on 

fiscal year 2001 overpayments showed that progress payment liquidation 

problems were one cause of the overpayments, but that the primary 

reasons were contract modification and invoice processing errors.

13U.S. General Accounting Office, Contract Management: Fixing DOD’s Payment Problems 

Is Imperative, GAO/NSIAD-97-37 (Washington, D.C.: Apr. 10, 1997).

14GAO/NSIAD-96-8. 
Page 15 GAO-02-635 DOD Contractor Overpayments

Overpayments Likely to Be 

Identified by Contract 

Reconciliation

Even though contractors or contracting officers identify many 

overpayments, the DFAS Columbus contract reconciliation function is also 

likely to identify many overpayments. Of the 2,512 demand letters issued 

by DFAS Columbus in fiscal year 2001, its records showed that contract 

reconciliation had identified overpayments associated with 1,115 demand 

letters, valued at about $83.4 million. Its records also showed that the 

contractor or a contracting officer had initiated the remaining 1,397 

demand letters, valued at about $43.8 million. The contract reconciliation 

process is intended to identify and correct imbalances between (1) the 

contractor’s invoiced amounts and recorded amounts paid in MOCAS, 

(2) contract obligation and disbursement balances in DFAS accounting 

records and MOCAS, and (3) the contract obligation amount and MOCAS 

obligation and disbursement amounts. The contract reconciliation 

function at DFAS Columbus deals not only with contracts that are 

candidates for closure but also those contracts needing partial audits to 

resolve prior payment problems and correct deficiencies so that DFAS 

Columbus can pay current invoices. 

As shown in table 3, at fiscal year-end, the number of contracts waiting for 

reconciliation had averaged about 2,300 for the past 7 years. However, 

during the year, the number of contracts going through reconciliation can 

be much greater. For example, in fiscal year 2001, DFAS Columbus 

processed over 8,100 contracts through reconciliation. As of September 30, 

2001, DFAS Columbus had 3,249 contracts waiting for some level of 

reconciliation, a higher level than in the prior 6 years. Based on prior year 

results, contract reconciliation will likely identify millions of dollar of 

overpayments needing resolution. 
Page 16 GAO-02-635 DOD Contractor Overpayments

Table 3: DFAS Columbus Contracts Waiting for Reconciliation at Fiscal Year-End 

from 1995 to 2001 

Source: DFAS Columbus.

As shown in table 4, of the 3,249 contracts awaiting reconciliation, as of 

September 30, 2001, 575 had been in this status for over 360 days, while 

1,523 of the contracts had been awaiting reconciliation for 90 days or less. 

This is fewer than what we reported15 in July 1999 when over 900 of 2,453 

contracts had been in reconciliation for over a year. Included in the 

contracts awaiting reconciliation are contracts for some of the largest 

contractors included in our survey. For example, 3 of the largest DOD 

contractors that responded to our survey—Lockheed Martin, Raytheon, 

and Boeing—had 205, 191, and 119 contracts, respectively, waiting for 

reconciliation as of August 31, 2001. In addition, 1 of the large contractors 

that did not respond to our survey had 56 contracts in reconciliation at 

DFAS Columbus. As noted later in this report, DCAA is auditing contractorprepared reconciliations at these large contractors, and DFAS uses the 

audit results in completing the contract closeout process.

Fiscal year-end 

Number of contracts awaiting

reconciliation

1995 2,372

1996 2,553

1997 2,167

1998 2,494

1999 1,881

2000 1,507

2001 3,249

Average for fiscal years 2,318

15GAO/NSIAD-99-131. 
Page 17 GAO-02-635 DOD Contractor Overpayments

Table 4: Aging of DFAS Columbus Contracts Awaiting Reconciliation as of 

September 30, 2001

Source: DFAS Columbus.

The error-prone nature of the contract management and payment process 

is illustrated by over 15,000 contracts in fiscal years 2000 and 2001 

combined that have gone through some level of reconciliation at DFAS 

Columbus. Contract provisions often change, affecting deliveries, progress 

payment liquidation rates, and indirect cost rates, which creates excess 

payments after invoices have been paid. As we reported16 in January 1998, 

MOCAS records may differ from the accounting office records because 

contract information, such as modifications, may not have been properly 

and consistently processed by all locations. DFAS and contractors can 

process invoices in different sequences resulting in discrepancies in how 

progress payments are liquidated. As a result, many contracts can require 

some type of reconciliation more than once during their life. DFAS 

Columbus contract reconciliation results for fiscal year 2001 indicated that 

the majority of payment problems identified during research were due to 

payment system errors and erroneous processing of contract 

modifications.

Overpayments Are Not 

Always Recovered Promptly

We also have previously reported that overpayments are not always 

recovered promptly.17 As mentioned in prior reports, such delays can cost 

the government in lost interest charges and use of the funds. 

Days in reconciliation

Number of contracts awaiting

reconciliation

90 days or less 1,523

91 to 180 666

181 to 360 485

361 to 720 219

Over 720 356

Total 3,249

16GAO/AIMD-98-40. 

17GAO-01-309 and GAO/NSIAD-99-131. 
Page 18 GAO-02-635 DOD Contractor Overpayments

According to DFAS Columbus records, even though it had collected almost 

$85.7 million in fiscal year 2001, problems remain with the timely recovery 

of overpayments. For example, of the 546 overpayments, including 

voluntary contractor refunds, for which DFAS Columbus had recorded in 

its records both the check receipt date and the date the overpayment was 

identified, only 75 were refunded within 30 days, with 294 being refunded 

after 90 days. Moreover, 360 additional refunds did not have the dates 

necessary to determine the timeliness. Further, as of August 2001, DFAS 

Columbus accounts receivable records showed that about $26 million out 

of $54.8 million total receivables, or 47 percent, had been outstanding for 

over 90 days. Of those outstanding for over 90 days, about $18.8 million 

had not been resolved for over a year because contractors had disputed 

these receivables—also discussed later in this report. We reviewed 11 files 

for these old accounts receivable and some examples follow. 

• In November 1997, DFAS Columbus issued a demand letter to 

McDonnell Douglas for $2,294,454. The contractor disputed the demand 

and, in March 1998, the contract was submitted to audit. As a result of 

the audit, the demand was reduced to $27,904. However, DFAS did not 

issue a demand for the reduced amount. In May 2000, DFAS decided to 

update the audit on the contract. As of December 2001, over a year 

after the second audit, the recorded receivable was still $2,294,454 

because the DFAS Columbus Accounts Receivable Branch had not been 

informed of the audit results. 

• In August 1996, DFAS Columbus issued a demand letter to Hughes 

Aircraft for $2,032,113. DFAS subsequently issued a second demand 

letter in September 1996. The contractor disputed the demand but did 

not provide sufficient detail to support the dispute so that an audit could 

resolve the dispute. In January 1997, DFAS Columbus asked the 

contractor for additional information, and the contractor responded that 

the problem might be with several different progress payment and 

liquidation rates on the contract. As of December 2001, the account 

receivable file showed that no action had been taken.

• In September 1999, DFAS Columbus issued a demand letter for 

$3,886,567 to Raytheon because of a duplicate payment that had 

occurred in 1995. The contractor disputed the demand and provided 

evidence that it had sent a check for $3,137,200 for the debt in August 

1995. However, according to DFAS Columbus, this left a balance due of 

$749,369. In November 1999, DFAS issued a demand letter for this new 
Page 19 GAO-02-635 DOD Contractor Overpayments

balance due, and Raytheon disputed the remaining amount of the debt. 

As of December 2001, the $749,369 demand had not been resolved. 

After we shared our concerns about aged disputes with DCAA, it attempted 

to resolve these receivables as part of its recovery audit effort. As of this 

report’s date, DCAA is still in the process of examining contractor data to 

determine the validity of the debt. DFAS inattention to resolving these 

disputed receivables and determining their validity could result in 

potentially overstated accounts receivable balances. Further, contract 

closeout problems, which we reported on in July 2001,18 can be 

exacerbated when payment discrepancies are not promptly resolved. We 

reported that DFAS had made $615 million of illegal and improper 

adjustments to closed appropriation accounts, and these adjustments 

included $9.9 million of overpayments that had been improperly 

redistributed to open appropriation accounts after the original accounts 

were closed.

DOD Initiatives to 

Manage and Reduce 

Overpayments

In response to our prior recommendations, DOD has taken both short-term 

actions and established long-term initiatives to address long-standing 

contract payment problems that result in overpayments and 

underpayments. Some of the short-term actions appear to be having some 

positive results. However, the success of the longer-term initiatives, which 

are more critical to resolving underlying problems in the contract payment 

systems and processes, is uncertain. 

In the short term, DFAS, DCMA, and DCAA, in coordination with the DOD 

Comptroller, have initiatives to (1) audit major DOD contractors to identify 

overpayments and evaluate their internal controls for identifying and 

reporting overpayments and (2) reconcile and close out old contracts. 

Specifically, in August 2001, DCAA agreed to assist DFAS in addressing 

excess payments to contractors, debt collection, invoice payment 

instructions, contract reconciliation, and professional development. 

Subsequently, in November 2001, DCAA began audits on overpayments and 

related contractor internal controls for identifying and promptly reporting 

overpayments. Its plan is to complete audits at 190 contractors in fiscal 

year 2002. As of March 2002, the number of contractors to be audited had 

increased to 195. As part of this effort, DCAA is also examining some of the 

18U.S. General Accounting Office, Canceled DOD Appropriations: $615 Million of Illegal or 

Otherwise Improper Adjustments, GAO-01-697 (Washington, D.C.: July 26, 2001).
Page 20 GAO-02-635 DOD Contractor Overpayments

aged (over 90 days old) accounts receivable in dispute according to DFAS 

Columbus records. 

As of January 2002, DCAA had completed audits of overpayments at 46 

contractors and identified over $22.7 million of overpayments. From 

additional special audits of progress payments, DCAA identified about 

another $27.3 million of overpayments, most of which were promptly 

resolved. These results illustrate what can be accomplished from 

programs to identify payment errors and recover erroneous payments. 

DCAA officials stated that they would continue overpayment audits until 

contractors’ controls ensure prompt identification and reporting of 

overpayments to DOD. While DCAA efforts could be viewed as a type of 

recovery activity, DOD does not have an overall recovery audit program 

that includes all types of contract payments. DCAA also has been involved 

with the contract reconciliation of old contracts at large contractors to 

facilitate contract closeout and the transition to the new systems intended 

to replace MOCAS. 

DCMA, in response to DOD overpayment issues, has issued additional 

guidance to its contracting officers. For example, in April 2000 and 

November 2001, it issued memorandums on the identification and recovery 

of overpayments and excess progress payments, respectively. These 

memorandums emphasized the need for contracting officers to be alert to 

situations in which contractor debt is incurred and to immediately issue 

demand letters. Further, in a response to our February 2001 

recommendation, DCMA stated that it is using DFAS Columbus 

information on refunds to identify and evaluate possible systemic contract 

administration problem areas.

DFAS Columbus, in response to prior reported deficiencies, has 

implemented practices to provide better oversight of the reasons for 

overpayments and the results from contract reconciliation. For example, it 

established a central-tracking database to categorize reasons for contractor 

refunds. This database identifies different types of possible DFAS 

Columbus errors and the types of contract administration actions creating 

the contractor debt. In addition, DFAS Columbus has been tracking 

contract reconciliation results to identify reasons for the payment 

problems identified during reconciliation. Although DFAS Columbus 

personnel easily provided us summary and detailed information from these 

databases, the information had not been summarized and incorporated into 

performance management indicators. 
Page 21 GAO-02-635 DOD Contractor Overpayments

An additional DFAS Columbus effort, initiated in May 2000, is to identify 

and monitor the potential for duplicate payments. Monthly reports, 

including one on causes of duplicate payments, are prepared for each of 

the three entitlement sections at DFAS Columbus and summarized for 

management review. According to the duplicate payment report for the 

first quarter of fiscal year 2002, DFAS Columbus had avoided making about 

$181.7 million of duplicate payments that had been identified as a result of 

the new procedures. DFAS Columbus has also issued several operating 

procedures to improve payment processing. 

The success of DOD’s implementation of new systems to address the root 

causes of contract administration and payment problems is uncertain. 

DOD is planning on full implementation of the Standard Procurement 

System (SPS) and the Defense Procurement Payment System (DPPS) to 

improve contract management and payment processes by replacing 

MOCAS, which has been used since 1968. SPS is intended to be DOD’s 

single, standard system to support contracting functions and interfacing 

with financial management functions, such as payment processing. 

However, in July 2001, we reported19 that (1) full implementation of SPS 

has been delayed 3-1/2 years, (2) DOD had not justified the continued 

investment in SPS, (3) SPS modules to manage the large weapons systems 

procurements had not yet been implemented, and (4) the DOD IG had 

found that the system lacked critical functionality and users were generally 

dissatisfied with the system. 

DPPS is intended to be DOD’s standard contract payment system. 

However, DPPS implementation at DFAS Columbus has been delayed over 

2 years—from August 2001 to October 2003. According to DPPS program 

officials, the implementation of DPPS is not dependent on the full 

implementation of SPS. Nevertheless, the DOD IG concluded in its 

September 2001 report that DPPS would not fully eliminate disbursement 

and contract accounting problems because DFAS, in order to comply with 

special payment instructions, will need to continue making manual 

payments for which there is a greater risk of errors being made. 

19U.S. General Accounting Office, DOD Systems Modernization: Continued Investment in 

the Standard Procurement System Has Not Been Justified, GAO-01-682 (Washington, D.C.: 

July 31, 2001). 
Page 22 GAO-02-635 DOD Contractor Overpayments

Management and 

Accounting Control 

Issues Remain 

Despite DOD’s initiatives and accomplishments in addressing overpayment 

problems, DOD does not yet have fundamental control over contractor 

debt and underpayments because its procedures and practices do not fully 

meet federal accounting standards, federal financial system requirements, 

and its own accounting policy. Further, DOD managers do not have the 

performance measures needed to assess compliance with policies and 

procedures and the extent of overpayment and underpayment problems at 

a point in time. Specific examples follow.

• Federal accounting standards, federal financial system requirements, 

and DOD’s accounting policy call for the prompt and accurate recording 

of accounts receivable upon completion of the event that entitles 

collection of the amount.20 These standards and requirements specify 

that an amount be estimated if the exact amount is unknown at the time 

the claim is established. However, contractor debt arising from contract 

administration actions usually is not recorded as an accounts receivable 

when the debt is established in the contract or its modification—the 

event that entitles DOD to collect an amount from the contractor. 

Instead, the DFAS Columbus Accounts Receivable Branch records an 

account receivable after it has been notified of the debt and it or DCMA 

has issued a demand letter. Contractors often refund amounts from 

contract administration actions, as well as from payment and billing 

errors, without DCMA or DFAS Columbus issuing demand letters. 

Together, these factors would tend to mask the extent of overpayment 

problems and result in overpayments not being known or promptly 

addressed.

• Federal financial system requirements and DOD accounting policy also 

stipulate that accounts receivable are to be aged for monitoring and 

controlling collection. DOD accounting policy specifies that accounts 

receivable are to be aged into 10 groups, ranging from 1 to 30 days 

delinquent to over 3 years delinquent. Even though DFAS Columbus 

tracks the number of accounts receivable in dispute, its Accounts 

Receivable Branch, which collects overpayments and maintains the 

20Statement of Federal Financial Accounting Standards (SFFAS) No. 1, Accounting for 

Selected Assets and Liabilities, Mar. 30, 1993; SFFAS No. 5, Accounting for Liabilities of 

the Federal Government, Dec. 20, 1995; Joint Financial Management Improvement Program, 

Federal Financial Management System Requirements: Core Financial System 

Requirements (Washington, D.C.: Sept. 1995); and DOD, Financial Management 

Regulation, vol. 4, chap. 3, (Washington, D.C.: Jan. 2001).
Page 23 GAO-02-635 DOD Contractor Overpayments

detailed accounting records to support collection activities, does not 

routinely age accounts receivable according to DOD accounting policy 

to help manage and monitor the timely resolution of the accounts. 

• DOD policies require that a receivable be recorded within the same 

month discovered in order to be recorded timely and that contractor 

debts be promptly collected. However, DOD does not have adequate 

performance measures on the timeliness of collection efforts for 

contractor debt once it has been identified.

• Federal accounting standards also specify that accounts payable and 

other liabilities will be recorded when the potential for the liability is 

first recognized. Such liabilities include estimates of work completed 

for facilities and equipment or requests for progress payments for items 

constructed or manufactured to contract specifications. DFAS 

Columbus does not maintain detailed records on underpayment 

liabilities or accounts payable after the contractors notify it of the 

underpayments, even though the underpayments could be for millions 

of dollars and take months to resolve. 

As a result, DOD managers do not have appropriate management control of 

accounts receivable and accounts payable and other liabilities stemming 

from its contract administration and payment processes. Aside from the 

high risk that these accounting records could be misstated at the end of an 

accounting period, failure to instill these disciplines magnifies the level of 

effort required to later identify and collect these amounts. 

Contract Administration 

Events That Create an 

Account Receivable Are Not 

Recorded When They Occur

DFAS Columbus does not usually record an accounts receivable when the 

debt is first created by a contract administration action. Instead, it only 

tracks the checks from contractors when they are received and the offsets 

of contractor invoices after they have been completed. DOD policies and 

procedures require the contracting officer to issue a demand letter to a 

contractor when an overpayment is identified and to send a copy of the 

demand letter to DFAS Columbus where it is recorded as an accounts 

receivable. When contract administration actions are implemented 

through contract modifications or other signed agreements, these 

documents recognize that a repayment will result from the action and the 

amount owed is identified or can be readily calculated. However, DCMA 

and DFAS do not always issue demand letters for contractor debt based on 

contract administration actions because the debt could be resolved 

promptly and issuing a demand letter would involve additional effort. 
Page 24 GAO-02-635 DOD Contractor Overpayments

While federal accounting standards require that such events be recognized 

as accounts receivable, DFAS cannot recognize the receivable unless it is 

promptly notified of contractor debt. 

In fiscal year 2001, DFAS Columbus records showed that contractors 

refunded about $360 million due to contract administration actions, but the 

Accounts Receivable Branch only recorded about $127 million of accounts 

receivable based on issued demand letters that included duplicate 

payments and other payment errors. This comparison shows that 

established procedures are not always followed. Additionally, we 

reported21 in February 2001 that contracting officers do not consistently 

issue demands for payment when contract changes are negotiated even 

though the amount usually is known or can be calculated. As a result, 

significant amounts of contactor debt arising from contract administration 

actions are not being recorded when they first occur as accounts receivable 

for financial management control and reporting. A further result, discussed 

later, is that DOD cannot fully measure the timeliness of contractor debt 

collection so that problems can be identified and effective solutions 

implemented prior to final contract reconciliation.

Effective February 19, 2002, the FAR was amended to add a paragraph to 

the recommended “prompt payment” clauses of contracts requiring the 

contractor to notify the contracting officer if it becomes aware of a 

duplicate payment or an overpayment on an invoice. By its terms, 

however, this requirement does not apply to overpayments due to errors in 

financing payments or contract administration actions. With few 

exceptions, the contracting officer should include this clause in contracts. 

A similar revision to the FAR contract financing clauses would ensure that 

all contractor debt would be promptly identified, reported, and collected. 

The Office of Federal Procurement Policy is currently reviewing for 

approval and publication revisions to the FAR financing clauses that will 

require contractors to notify the government if they become aware of 

overpayments arising from financing payments. Adequate implementation 

of these procedures along with prompt contracting officer action could 

facilitate the proper and complete recording of accounts receivable by 

DFAS.

21GAO-01-309. 
Page 25 GAO-02-635 DOD Contractor Overpayments

Accounts Receivable Were 

Not Aged

DFAS Columbus is a primary DFAS activity involved in collecting 

contractor debt and maintaining the detailed accounting records to support 

collection activities. However, its Accounts Receivable Branch did not 

routinely age its accounts receivable records, stemming from DOD’s 

contract management and payment process, as required by DOD’s 

accounting policy. The DFAS “Concept of Operations for Recording and 

Reporting Receivables Due From the Public” effectively exempts DFAS 

Columbus from this requirement because all receivables that are not 

collected in 90 days are supposed to be sent to DMO. DFAS Columbus 

procedures also specify that any debt in excess of $600 that has not been 

resolved after two demand letters be transferred to DMO. However, DFAS 

Columbus personnel told us that when a contractor disputes the first or 

second demand letter the debt would not normally be transferred to DMO 

because the validity of the debt has not been established. Even though 

DFAS Columbus maintained information on the number of accounts 

receivable in dispute each month, the disputed amounts were not routinely 

aged. As we discussed earlier, about 47 percent of the receivables were 

over 90 days old. As of August 2001, over $23.5 million of the $35.1 million 

of demand letters in dispute had been outstanding for months, even years, 

and, therefore, had not been transferred to DMO.

As a result of the policy exemption and DFAS Columbus not aging its 

accounts receivable, DFAS did not have proper control over receivables 

due from contractors. In fiscal year 2001, DFAS Columbus issued demand 

letters for about $127 million. However, as shown in table 5, the amounts in 

dispute averaged about $33.8 million, or almost 60 percent of the total 

monthly receivables, during the year. 
Page 26 GAO-02-635 DOD Contractor Overpayments

Table 5: DFAS Columbus Fiscal Year 2001 Monthly Accounts Receivable and Amounts in Dispute

Source: DFAS Columbus and GAO calculations.

In May 2001 and June 2001, the DOD IG and we reported22 that even when 

debts were transferred to DMO, collection of the debts was not being 

effectively and proactively pursued. In its comments to our report, DOD 

indicated that it took immediate actions to monitor and improve debt 

collection in DMO. However, we did not assess the status and effectiveness 

of these actions for this report—we limited our review to those accounts 

receivable that had not been transferred to DMO as of August 2001.

Lack of Performance 

Measures on Timeliness of 

Collection Efforts 

DOD also does not have adequate performance measures to monitor how 

timely contractor debt is collected once it is identified. For example, 

DCMA does not include the timeliness of contracting officers’ actions on 

Accounts receivable balance Accounts receivable in dispute

Month

Number of

transactions

Dollars in

millions

Number of

transactions

Dollars in

millions

Percentage dollar value

of accounts receivable

in dispute

October 613 60.0 109 35.9 60

November 597 62.8 110 36.2 58

December 642 57.1 114 32.5 57

January 579 57.8 115 32.6 56

February 582 51.9 114 32.7 63

March 561 51.9 115 33.8 65

April 554 61.8 113 33.6 54

May 666 50.1 116 34.8 70

June 699 61.5 119 35.7 58

July 731 56.7 116 34.8 61

August 782 54.8 118 35.1 64

September 667 55.0 91 27.6 50

Average per 

month

639 56.8 113 33.8 60

22U.S. General Accounting Office, Debt Collection: Defense Finance and Accounting 

Service Needs to Improve Collection Efforts, GAO-01-686 (Washington, D.C.: June 29, 2001) 

and DOD Inspector General, DOD Contractor Debt Collection Process, Report No. D-2001-

114 (Washington, D.C.: May 7, 2001).
Page 27 GAO-02-635 DOD Contractor Overpayments

overpayments as a key performance measure, and DCMA officials stated 

that statistics on demand letters issued by contracting officers are not kept. 

FAR and DCMA’s procedures require the contracting officer to take prompt 

action on contractor debt. However, the contracting officer might not 

always take immediate action to collect the overpayment due a large 

workload or oversight. For example, during its follow-up at 1 major 

contractor, DCAA found that the contractor had reported to its contracting 

officer a $59,346 overpayment in June 1998 and a $144,504 overpayment in 

March 2001. The contractor assumed that these amounts would be 

collected by an offset, but DOD did not take actions to collect these 

amounts until after our survey. In January 2002, the $144,504 was collected 

through offsets and a refund check. In December 2001, the $59,346 had 

only been partially collect through offset and $21,913 was still outstanding 

at the time of DCAA’s review in February 2002. In addition, the DFAS 

Columbus refund records lack key data, such as dates of contract 

modifications or credit memorandums, needed to measure the timeliness 

of collection for most refunds of contractor debt arising from contract 

administration actions. Our review of the documentation for 15 contract 

administration refunds, valued at $62.3 million, found that (1) 5 of them did 

not have enough information to determine whether the funds were 

collected timely, (2) 2 were collected within 30 days from the time an 

amount due the government was identified, and (3) 8 were collected in over 

30 days—1 in over 90 days and another in over a year. 

Even for the offsets that DFAS Columbus processes, it tracks them 

separately from the other refunds, does not measure the timeliness of 

collection, or does not always identify the reason for the overpayment. Our 

review of 15 offsets from January, February, and June 2001 found that 12 of 

them took over 30 days to fully collect the debt and reasons for the debt 

were not always identified. Two examples follow.

• On February 21, 2001, United Technologies agreed to DFAS Columbus 

taking offsets to collect $8,607,568 of overpayments. Three offsets were 

taken to collect the full amount—the initial offset occurred on February 

24, 2001, and the third offset occurred on March 23, 2001. The recording 

of these offsets in the contract accounting records was completed on 

April 6, 2001, or 44 days later. DFAS Columbus records also did not 

indicate a reason for the overpayment. 

• In November 1999, Viasat, Inc. first contacted DCMA about $2,605,889 it 

owed the government due to a change in contract terms. The contractor 

contacted DCMA again in October 2000 to discuss an offset. DCMA 
Page 28 GAO-02-635 DOD Contractor Overpayments

provided DFAS Columbus a credit voucher on November 13, 2000, and 

DFAS processed the voucher on December 18, 2000. However, DFAS 

Columbus did not complete the offset until January 29, 2001—97 days 

after the contractor expressed interest in an offset. DFAS Columbus 

records did not indicate a reason for the time involved to complete the 

offset. 

In its contractor overpayment audits, DCAA also is examining contractor 

records on refunds and offsets. According to DCAA, preliminary results 

from its contractor audits indicate that (1) not all amounts due the 

government are promptly returned and (2) contractor controls over offsets 

are weak because the contractors lack supporting documentation and 

DFAS is not always notified of offsets that occur. As a result, contractor 

and DFAS accounting records may not agree for certain contracts, and 

DOD lacks complete information on the amount of refunds being collected. 

Inadequate Monitoring of 

Underpayments 

DOD also is unable to fully measure and monitor underpayments and the 

timeliness of their resolution. Even though DFAS Columbus maintains data 

on unpaid contractor invoices, it could not provide us any other 

information on contractor underpayments. According to DFAS Columbus 

officials, they do not maintain detailed records on underpayments because 

contractors usually notify them promptly about underpayments, which is 

not always the case with overpayments. Yet, the contractors that 

responded to our survey indicated that they had over $176 million of 

underpayments in their records at the end of fiscal year 2001. According to 

federal accounting standards and financial system requirements, such 

information on underpayments should be routinely recorded and 

maintained in accounts payable or other liability records. In February 

2001, we reported23 that for the 39 contractors we reviewed, all of the fiscal 

year 1999 unresolved underpayments had been unresolved for over 180 

days. Without complete detailed accounting records on payables, DFAS 

Columbus is unable to adequately monitor the resolution of 

underpayments, and the amount of payables reported by DFAS Columbus 

could be understated at the end of an accounting period. Further, any 

problems with unresolved underpayments could hinder prompt resolution 

of overpayments. 

23GAO-01-309. 
Page 29 GAO-02-635 DOD Contractor Overpayments

Conclusions Survey results, DCAA audits, and DFAS Columbus data indicated that 

contractor debts resulting from contract administration actions as well as 

payment problems exist for all DOD contract payments—contract pay as 

well as vendor pay. Further, resolution of contractor debt has not always 

been timely. DOD has taken short-term actions, including increased 

contract audits focusing on overpayments that are achieving immediate 

results. However, its longer-term initiatives rely on new automated systems 

that have not been implemented to address many of the existing problems 

in DOD’s contract management and payment processes. The success of 

these systems is uncertain because of the problems in functionality, costs, 

and significant delays that the DOD IG and we have reported on. Until 

these contract management and payment processes are improved, DOD’s 

risk of contractor overpayments, regardless of cause, and underpayments 

will continue. Accordingly, development and implementation of an internal 

control to identify and recover contractor debt, which is now required by 

31 U.S.C. 3561, will be important.

DOD could have better management control of all types of contractor debt, 

regardless of cause, and underpayments by establishing procedures calling 

for (1) accounts receivable and liabilities to be recorded in accounting 

records according to federal accounting standards and federal financial 

system requirements and (2) mechanisms to hold staff and management 

accountable for doing so. The accounting records could then provide more 

comprehensive performance measures for DOD managers to monitor the 

timely collection of all amounts due the government and resolution of 

underpayments. Such measures could, in turn, result in more effective 

financial management and help reduce contract reconciliation and closeout 

problems in the future. 

Recommendations for 

Executive Action

We recommend that the Under Secretary of Defense Comptroller in 

coordination with the under Secretary of Defense for Acquisition, 

Technology, and Logistics 

• implement an internal control, as now required by 31 U.S.C. 3561, to 

identify and collect overpayments to contractors, regardless of contract 

payment type;

• reevaluate DCMA, DOD Comptroller, and DFAS established procedures 

and controls and revise them as needed to ensure prompt recognition 

and recording of receivables and potential liabilities stemming from 
Page 30 GAO-02-635 DOD Contractor Overpayments

DOD’s contract management and payment processes, according to 

federal accounting standards and financial management system 

requirements; and 

• develop and maintain more comprehensive and complete records on 

contactor refunds and underpayments to better measure and monitor 

(1) the timeliness of all collections, including checks and offsets, (2) the 

resolution of demand letter disputes, (3) the causes of overpayments 

and underpayments, (4) the resolution of overpayments and 

underpayments and the need for corrective actions, and (5) compliance 

with policies and procedures. 

Agency Comments and 

Our Evaluation

DOD provided written comments on a draft of this report, which are 

reprinted in appendix V. DOD concurred with the report’s 

recommendations. 

In its comments, DOD emphasized that it supports the requirement for an 

audit recovery program, was taking actions consistent with such a program 

before the enactment of 31 U.S.C. 3561, and will comply with future Office 

of Management and Budget guidance. In addition, DOD stated that

(1) DFAS has implemented several additional internal controls in its 

contractor entitlement and payment process to identify erroneous 

payments for recovery and minimize future erroneous payments, (2) new 

MOCAS procedures are being developed and implemented to reduce 

progress payment liquidation differences, and (3) its contract audit 

resources are being better used to detect overpayments. DOD also stated 

that its financial management guidance on recording accounts receivable 

and payable and account aging is consistent with the federal accounting 

standards, but to improve compliance requires consideration of the 

existing processes, factors establishing claims or obligations, and ways to 

manage efficiently and cost effectively. Further, DOD stated that to 

improve compliance, (1) DOD is developing new performance indicators 

on accounts receivable, overpayments, and aging, (2) DFAS is reviewing 

and revising its procedures in this area, and (3) DFAS Columbus plans to 

modify its accounts receivable processes to measure the timeliness of 

collections for amounts due and is working with contractors and DCAA to 

reduce the number and age of disputes. 

DOD also provided detailed technical comments that we incorporated into 

the report as appropriate.
Page 31 GAO-02-635 DOD Contractor Overpayments

As you requested, unless you publicly announce its contents earlier, we 

plan no further distribution of this report until 30 days from the issue date. 

At that time, we will send copies of this report to interested congressional 

committees. We also will send copies of this report to the Secretary of 

Defense; the Under Secretary of Defense for Acquisition, Technology, and 

Logistics; the Under Secretary of Defense Comptroller; the Director of the 

Defense Finance and Accounting Service; and the Director of the Office of 

Management and Budget. We will make copies available to others upon 

request, and the report will also be available on GAO’s home page at 

http://www.gao.gov.

If you have any questions regarding this report, please contact me at (202) 

512-9505 or David Childress at (202) 512-4639. Key contributors to this 

report are Jean Lee, Harold Reich, Alan Steiner, and Gary Wiggins.

Sincerely yours,

Gregory D. Kutz

Director, Financial Management and Assurance
Page 32 GAO-02-635 DOD Contractor Overpayments

Appendix I

Scope and Methodology AAppenednxidexiIs

To determine the number and value of overpayments and underpayments 

in selected DOD contractors’ records at end of fiscal year 2001, we 

surveyed 183 DOD contractors. Appendix II has a complete list of these 

contractors. We identified the top 100 DOD contractors and the top 100 

small business DOD contractors based on total dollar value of fiscal year 

2000 contract actions recorded in the Federal Procurement Data System 

(FPDS). After identifying the contractors, we used DOD’s Central Contract 

Registry (CCR) to identify contractor business units, their addresses, and 

points of contact. Contractors must be in CCR to receive payments, and 

contractors are responsible for maintaining the data in the registry. About 

54 percent of the large DOD contractors had multiple business units. For 

example, Lockheed Martin, Raytheon, and Boeing had 114, 100, and 61 

business units, respectively. Accordingly, we contacted officials at many of 

the contractors for help identifying the appropriate addresses to which the 

questionnaires should be sent so that the appropriate finance units would 

receive them. The appropriate finance units for our survey were those that 

handle the billings and maintain accounts receivables; some business units 

for which we had addresses do not maintain these records. We did not 

send surveys to all of the 200 contractors as listed in FPDS because 1 of 

them was classified, 7 of the small businesses were also included in the top 

100 contractors, 3 contractors’ names could not be matched to those in 

CCR, and 5 contractors listed in FPDS had merged with other 

contractors—for example, Boeing had merged with McDonnell Douglas—

or were business units of major contractors already listed.

We subsequently mailed 497 surveys to business units of 183 DOD 

contractors requesting the total overpayments and underpayments in their 

records as of September 30, 2001,24 and specific detail on individual 

overpayments and underpayments equal to or over $1,000. The survey is 

similar to the one we used in our 1995 report.25 A copy of our final survey is 

in appendix III. We either telephoned or sent follow-up reminders to 

business units. In response to our mailings and follow-up, we received 249 

survey responses from business units of 58 large contractors and 62 small 

business contractors. However, some of the responses we received did not 

include all of the business units from the contractor, and others indicated 

that another business unit would have the information. Twenty-two 

mailings were returned as undeliverable. The 249 business units that 

24See footnote 7. 

25GAO/NSIAD-96-08. 
Appendix I

Scope and Methodology

Page 33 GAO-02-635 DOD Contractor Overpayments

responded to our survey reported on overpayments and underpayments 

associated with over 600 contracts. The findings from our survey apply 

only to the contractor business units that responded and cannot be 

projected to any others.

We coordinated with DCAA, as part of its ongoing recovery audits, for its 

auditors to test the validity of the contractors’ responses on 27 business 

units in our survey. These units reported about $58 million, or 94 percent, 

of the total reported overpayments, and about $126 million, or 71 percent, 

of the total reported underpayments. We and DCAA selected the business 

units to visit based on a combination of factors, including geographic 

location, size of the contractor, the amount of reported payment 

discrepancies, and the nonreporting of payment discrepancies with 

significant annual billings. We also visited DCAA offices to discuss the 

agency’s audit results in verifying overpayments and underpayments 

reported for 9 of the 27 contractor locations.

To determine the status of DOD corrective actions, we obtained and 

reviewed fiscal year 2000 and 2001 data collected by DFAS Columbus on 

contractor refunds, offsets, and reasons for the refunds. In addition, we 

obtained data on the number of contracts in reconciliation at the end of 

fiscal year 2001, the number of contracts that had been partially or 

completely reconciled in fiscal years 2000 and 2001, and the reasons for 

payment problems that DFAS Columbus had identified during 

reconciliation. We did not verify the data provided. 

We also obtained and evaluated fiscal year 2001 accounts receivable 

balances, which represented demand letters issued by DFAS Columbus. To 

identify some of the conditions and reasons for overpayments, we selected 

58 of the highest dollar transactions from the 3 months in fiscal year 2001 

with the highest balances for accounts receivable cancellations, transfers, 

collections made through offsets, and unsolicited refunds. The 

transactions selected represented about 80 percent of the total dollar value 

of the group for that month. In addition, we obtained a detailed list of all 

accounts receivable over 90 days old as of August 2001 and reviewed the 

highest dollar value transaction in each year from 1996 through 2001. To 

further assess the timeliness of collections, we analyzed data in DFAS 

Columbus records on refunds due to payments errors and attempted to 

determine the collection time for 15 contract administration action refunds 

in fiscal year 2001. 
Appendix I

Scope and Methodology

Page 34 GAO-02-635 DOD Contractor Overpayments

Further, we obtained information on performance measures, certain DFAS 

Columbus procedural changes, and the planned implementation of DPPS. 

We also discussed payment problems and corrective actions with DFAS 

Columbus and DCMA officials. We reviewed prior GAO and DOD IG 

reports on contract payment problems, applicable laws and FAR sections, 

federal accounting standards and financial system requirements, the DOD 

Financial Management Regulation, DCMA policies and procedures 

contained in its “One Book,” and DFAS Columbus procedures regarding 

accounts receivable, contractor refunds, and contract reconciliation. 

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

Defense or his designee. We received comments from the Under Secretary 

of Defense Comptroller and have reprinted these comments in appendix V. 

We conducted our review from August 2001 through April 2002 in 

accordance with U.S. generally accepted government auditing standards.
Page 35 GAO-02-635 DOD Contractor Overpayments

Appendix II

List of Contractors We Surveyed and Results ApendxiI

Contractor names and fiscal year 2000 contract actions are from the 

Federal Procurement Data System. Dollars of overpayments and 

underpayments are from survey responses received before February 2002. 

Contractor name

Dollars of

overpayments

Dollars of

underpayments

Fiscal year 2000

contract actions

(dollars in thousands)

Lockheed Martin Corp. 9,424,034 24,070,485 15,592,665

Boeing - McDonnell Douglas 32,738,149 65,981,813 12,261,227

Raytheon Company 2,304,572 3,767,230 6,120,469

Bath Iron Works Corp. 1,214,695 330,520 4,164,569

Northrop Grumman Corp. No response 2,944,473

Ingalls Shipbuilding, Inc. No response 2,745,694

Pratt & Whitney 74,357 0 2,022,865

TRW, Inc. 70,794 23,514,753 2,010,996

General Electric Company 5,356 77,578 1,599,304

SAIC Information Services No response 1,540,529

United Defense, L.P. 0 0 1,203,056

Computer Sciences Corp. 84,728 1,841,404 1,173,953

Bell Helicopter Textron, Inc. No response 1,156,910

BAE Systems Technical Services 55,142 0 967,891

Honeywell International, Inc. 1,522,194 8,394,462 908,509

Dyncorp 427,612 200,801 762,608

Newport News Shipbuilding & Drydock 6,924,277 0 741,523

Bechtel National, Inc. 179,558 158,218 735,434

Canadian Commercial Corp. No response 659,145

Westinghouse Electric Corp. No response 619,694

Raytheon Engineers & Construction No response 598,725

Rockwell Collins, Inc. 0 0 593,550

Brown & Root Services 53,553 6,649 590,689

Atlantic Richfield Company, Inc. 0 0 558,129

ITT Federal Services Corp. No response 556,422

Foundation Health Federal Services 0 0 550,668

Beneco Enterprises, Inc. No response 499,464

Alliant Techsystems 2,620,865 528,680 462,132

Federal Express Corp. 0 0 452,513
Appendix II

List of Contractors We Surveyed and Results

Page 36 GAO-02-635 DOD Contractor Overpayments

Expresser Transport Corp. 0 332,423 426,798

Stewart & Stevenson Services No response 424,053

Booz Allen & Hamilton, Inc. No response 421,237

Federal Ministry No response 410,555

The Mitre Corp. 0 0 409,221

Sverdrup Technology, Inc. 0 0 395,160

Motorola, Inc.a 451,374 2,222,106 392,952

Interstate Electronics Corp. No response 373,024

Oshkosh Truck Corp. 0 1,184,999 372,916

Alascom, Inc. 0 0 358,116

Massachusetts Institute of Technology No response 347,248

Triwest Healthcare Alliance Co. 0 0 334,342

The Aerospace Corp. 0 0 334,194

AM General Corp. 0 142,216 332,383

J.A. Jones Construction Co. No response 331,725

Electronic Data Systems Corp. 1,280 9,969,770 329,391

Mobil Oil Corp.b 0 0 324,772

Sencom Corp. No response 321,788

Johns Hopkins University 11,252 5,389,410 321,317

Hughes Arabia Limited No response 308,876

Dell Marketing, L.P. No response 299,981

GTSI No response 299,249

Vector Data Systems, Inc. No response 286,019

Norfolk Shipbuilding & Drydock 1,216,004 202,782 277,618

Arinc, Incorporated No response 272,468

Harris Corp. 123,614 0 267,232

Equilon Enterprises, LLC 0 0 265,600

Texas Instruments, Inc. 2,843 0 244,741

WTAK-3, Inc.c No response 241,912

Systems & Electronics, Inc. 746,438 1,135,482 237,113

Coastal Aruba Refining Companyc No response 231,784

The Procter Gamble Distributing Co. No response 228,437

CACI, Inc.- Federal 264,145 583,686 220,547

Bergen Brunswig Corp. No response 217,183

Anthem Alliance Health Insuranceb 0 0 215,299

Johnson Controls World Service No response 214,447

(Continued From Previous Page)

Contractor name

Dollars of

overpayments

Dollars of

underpayments

Fiscal year 2000

contract actions

(dollars in thousands)
Appendix II

List of Contractors We Surveyed and Results

Page 37 GAO-02-635 DOD Contractor Overpayments

Mantech International Corp. No response 211,471

B.F. Goodrich Aerospace 0 282,274 204,447

Parsons Corp. No response 204,262

Bindley Western Industries 49,411 11,710,683 204,040

Rolls-Royce, PLC No response 196,478

Foster Wheeler Environmental 203,750 1,874,331 185,755

Cubic Defense Systems, Inc. 22,421 0 184,474

Resource Consultants, Inc. No response 182,720

Emery Air Freight Corp. 17,855 292,236 165,119

Unisys Corp. 0 0 163,238

Battelle Memorial Institute 83,894 46,296 162,749

Chugach Management Services 0 0 162,692

Great Lakes Dredge & Dock 0 0 150,300

Kraft Foods, Inc. 20,914 134,441 149,545

AAI/ACL Technologies, Inc. 0 0 149,537

Motor Oil ( Hellas ) Corinth 0 636,200 148,432

Metro Machine Corp. 0 0 147,301

Lucent Technologies, Inc. No response 143,019

Hunt Building Corp. 0 1,023,459 140,314

General Atomics Aeronautical 0 0 134,234

Sierra Health Services, Inc. 0 0 134,022

EG&G Technical Services, Inc. No response 130,811

Conoco, Inc. No response 130,735

Humana Military Healthcare 0 0 129,163

CH2M Hill Companies, Ltd. 24,368 1,500,973 127,505

Rand Corp. 516,231 3,763 127,079

Bell Atlantic Network Services No response 126,906

Navajo Refining Company 0 0 121,075

Spectrum Astro, Inc. 0 0 111,579

Oracle Corp. No response 91,294

M.S. Aerospace No response 90,220

Ameriqual Group, LLC No response 89,682

Digital System Resources, Inc. 0 163,000 87,939

Paramount Petroleum Corp. No response 82,708

Bay Ship Management Inc. No response 77,957

Mantech International Corp. No response 77,744

(Continued From Previous Page)

Contractor name

Dollars of

overpayments

Dollars of

underpayments

Fiscal year 2000

contract actions

(dollars in thousands)
Appendix II

List of Contractors We Surveyed and Results

Page 38 GAO-02-635 DOD Contractor Overpayments

Ocean Triumph Shipping, Inc. 0 58,156 76,347

EER Systems, Inc. No response 73,770

Todd Pacific Shipyards Corp. No response 72,599

Mevatec Corp. 13,712 212,212 72,147

Petro Star Valdez, Inc. 0 6,403 64,050

Sparta, Inc. 3,671 0 63,027

Earl Industries, LLC 18,115 0 62,942

RQ Construction, Inc. 0 252,161 61,114

Dynetics, Inc. 0 6,828 58,620

Sealift Holdings, Inc. 0 0 56,972

Gary-Williams Energy Corp. 0 0 56,528

Colsa Corp. No response 56,295

Environmental Chemical Corp. 0 1,434,416 54,578

Viasat, Inc. 0 0 54,002

Premier Technology Group, Inc. 69,731 0 53,987

American Renovation & Construction No response 53,710

Scientific Research Corp. 29,356 354,671 53,248

Storage Area Networks, Inc. 0 0 52,439

Nan, Inc. 0 1,342,934 52,342

Bender Shipbuilding & Repair 0 0 52,296

Bioport Corp. 0 0 51,550

Signal Corp. 0 0 51,266

Federal Data Corp. No response 50,839

NLX Corp. 0 409,241 50,416

Spectral Systems, Inc. 0 0 49,761

The Wornick Company 0 53,760 49,648

Applied Research Associates 0 325,673 48,428

CAS, Inc. 0 248,645 48,398

Placid Refining Company, LLC 0 0 47,004

Sytex, Inc. 0 0 45,745

Sabreliner Corp. No response 45,125

N.E.T. Federal, Inc. No response 44,838

Point Blank Body Armor, Inc. No response 43,982

Sharp, George G, Inc. No response 43,464

DJ Manufacturing Corp. No response 41,873

Jaycor, Inc. No response 41,002

(Continued From Previous Page)

Contractor name

Dollars of

overpayments

Dollars of

underpayments

Fiscal year 2000

contract actions

(dollars in thousands)
Appendix II

List of Contractors We Surveyed and Results

Page 39 GAO-02-635 DOD Contractor Overpayments

Ages Group, LTD Partnership 200,459 733,264 40,785

Sundt/Ninteman, Joint Venture 0 0 40,721

KDI Precision Products, Inc. 0 0 40,594

Landmark Construction Corp. 0 0 39,070

Fibertek, Inc. 0 0 38,928

World Wide Technology No response 38,423

Evans & Sutherland Corp. 0 0 38,237

Mission Research Corp. 7,878 150,957 37,891

U.S. Oil & Refining Co. 0 0 37,729

Assurance Technology Corp. 0 0 37,411

Tybrin Corp. 0 9,011 36,823

Griffin Services, Inc. 0 0 36,370

Sierratech, Inc. 0 0 35,565

Sevenson Environmental Service 0 0 35,538

O.K. James Construction, Inc. No response 34,276

Baltimore Marine Industries 0 270,008 33,910

McBride and Associates, Inc. No response 33,901

Logistic Services International 0 0 33,798

American Mechanical, Inc.c No response 33,791

Pride Companies, LP No response 33,355

Cormorant Shipholding Corp. 0 11,544 33,156

Dataline, Inc. 22,375 0 31,548

Golden Manufacturing, Inc. 12,293 11,880 31,391

Specialty Plastic Products No response 31,385

Science & Engineering Associates 0 0 31,275

S.W. Day Construction Corp. No response 31,012

Premco Holdings, Inc.c

 No response 30,905

Space Mark, Inc. 0 89,000 29,874

Condor Systems, Inc. 0 2,250 29,830

Nichols Research Corp. No response 29,750

Petroleum Traders Corp. 2,333 1,880 29,391

Sy Technology, Inc. 155,756 641,422 29,247

J.F. Taylor, Inc. 0 0 28,728

Soza & Company, Ltd. 0 1,650,253 28,224

DME Corp. No response 28,066

Bulova Technologies, LLC 0 106,941 27,913

(Continued From Previous Page)

Contractor name

Dollars of

overpayments

Dollars of

underpayments

Fiscal year 2000

contract actions

(dollars in thousands)
Appendix II

List of Contractors We Surveyed and Results

Page 40 GAO-02-635 DOD Contractor Overpayments

a

Units that reported these amounts are now General Dynamics Decision Systems, Inc.

b

Responses indicated that these companies no longer have DOD contracts.

c

Surveys were returned due to invalid addresses.

Engineering Research & Consulting 0 0 27,511

E-OIR Measurements, Inc. 0 0 27,418

Butt Construction Company, Inc. 0 0 27,166

Akima Corp. 0 0 26,904

Martin Electronics, Inc. 0 2,306 26,711

Bradley Broadcast Sales, Inc. 0 0 26,469

Manufacturing Technology, Inc. No response 26,312

Sechan Electronics, Inc. 0 0 26,305

SMF Systems Corp. 0 0 26,280

Camber Corp. No response 26,243

Total 61,991,268 176,088,939

(Continued From Previous Page)

Contractor name

Dollars of

overpayments

Dollars of

underpayments

Fiscal year 2000

contract actions

(dollars in thousands)
Page 41 GAO-02-635 DOD Contractor Overpayments

Appendix III

Contractor Survey ApendxiI

Enclosure 1

REPORTING FORMAT FOR

INFORMATION REQUESTED BY THE

U. S. GENERAL ACCOUNTING OFFICE

The Chairman of the House Committee on Government Reform has asked the U. S. General Accounting Office (GAO) to

obtain data from contractors on the extent of overpayments (any dollars owed) and underpayments (dollars owed to

you) outstanding on contracts with the Department of Defense (DOD). This data will be used as part of an ongoing

assignment (GAO code 192036) to update the status of DOD’s contract overpayments and underpayments and to

determine what progress has been made from prior reports. Please follow the attached instructions when accumulating

the requested information and return it in the enclosed envelope by October 26, 2001. If you do not have any

overpayments or underpayments, we would still appreciate you returning this survey indicating that you have not

identified any such payments. Please return your completed survey and schedules by mail, fax or obtain a survey by

email:

Mr. Harold D. Reich Or Fax to: Harold D. Reich Or Get Email format from

U.S. General Accounting Office (213) 830-1180 (reichh@gao.gov)

Los Angeles World Trade Center

350 South Figueroa Street, Suite 1010

Los Angeles, CA 90071

Any questions should be directed to Harold Reich at (213) 830-1078 (reichh@gao.gov) or Eric Johns at (213) 830-1154

(johnse@ gao.gov) in our Los Angeles Field Office or Al Steiner in our Washington, D.C. office at (202) 512-9332

(steinera@gao.gov).

I. GENERAL INFORMATION

1. We are requesting information on the single business unit at the address listed below, unless you find an

Attachment 3 in your survey. If you have an Attachment 3 your response should be an aggregate response for all

listed and confirmed business units, or any units you might add, for which you handle accounts receivable and

payable.

(Please make any corrections to address in this space)

2. Please provide the name and telephone number of a contact in the accounting and financial unit for us to contact if

additional information is needed:

NAME OF CONTACT: EMAIL ADDRESS: .

PHONE NUMBER: (______) ______ - ____________

3. If your business unit is a subsidiary of a parent company, please list the name, DUNS number, and address of the

parent business.

PARENT COMPANY:__________________________________________ DUNS: ______________________________

BUSINESS ADDRESS: _________________________________________

4. Does your business unit prepare contract billings and maintain accounts receivable for contracts with the DOD?

[NOTE: If we have called you to make other arrangements, please proceed directly to question 5 as we already

have the information for this question.]

 Yes (GO TO QUESTION 5)

 No (READ INSTRUCTION IN BOX BELOW.)

STOP – If you answered “No” to question 4 above, please do not continue but return this request

in the enclosed envelope after supplying the information requested in this box.

Please do not forward to the business unit that does your billings and maintains your accounts receivable.

Instead, please provide the name and address for the business unit that maintains your accounts receivables

so we can verify that the unit has been included in the initial mailing of this data request.

(List below the name and address of the business unit that maintains your accounts receivable:

NAME:

ADDRESS:

CONTACT PERSON: PHONE:
Appendix III

Contractor Survey

Page 42 GAO-02-635 DOD Contractor Overpayments

II. CONTRACT INFORMATION

5. From your accounts receivable and payable ledgers, or other appropriate accounting record, provide total gross

dollar amounts of existing overpayments and underpayments (billed amounts versus payments received) for all DOD

contracts as of September 30, 2001 (or if September 30 is impracticable, please specify the “as of “ date you have

used). Overpayments should exclude advance payments. The total underpayments extracted should exclude 1)

billings less than 30-days old on the "as of" date for the information provided (this excludes billings for which

payments are not delinquent), and 2) claims, accounts under dispute, and unbilled receivables on long-term

contracts. However, we expect overpayments or underpayments caused by incorrect liquidation of progress

payments to be included in the summary totals provided in response to this question.

Gross Overpayment Dollar Amount: _______________________________

Gross Underpayment Dollar Amount: _____________________________

As of date used: _____________________

MM / DD / YYYY

6. For each overpayment exceeding $1,000, please provide the following information on the Schedule for Contract

Overpayments (Attachment I): contract number, the amount of the overpayment, the date the overpayment was

identified: action you have taken (i.e., notified DCMA and/or DFAS, adjustments by check, offset, or no action);

indicate whether you received a demand letter for the overpayment, and the potential cause for each payment.

If you are unable to provide this detail contract information, please briefly explain why it is not available:

7. For each underpayment exceeding $1,000, please provide the following information on the Schedule For Contract

Underpayments (Attachment II): contract number, the amount of underpayment, the date the underpayment was

identified; notification and the action you have taken; and the potential cause for the underpayment.

If you are unable to provide this detail contract information, please briefly explain why it is not available:

8. List the most recent annual dollar amount of gross contract billings to DOD by this business unit.

YEAR ENDING: __________/______________

 Month / Year

GROSS DOLLAR AMOUNT

OF BILLINGS TO DOD: $____________________________

9. Please include any additional information or specific comments and issues concerning your DOD contract payment

experiences that you believe we should consider.

Please retain any work sheets or records used to prepare this response.

Thank you for your prompt response.
Appendix III

Contractor Survey

Page 43 GAO-02-635 DOD Contractor Overpayments

Enclosure 2

INSTRUCTION SHEET

FOR COMPLETING INFORMATION REQUEST

I. GENERAL INFORMATION

The information requested regarding the business unit reporting is intended to identify the unit providing the

information. Please make any appropriate changes to the name and address of your business unit (Question 1).

Please provide the name, telephone number, and email address of a contact person (Q2) who could best respond

to our technical questions about the information you provide. Also identify the parent company of this business

unit (Q3) providing the name, DUNS number, and mailing address.

II. CONTRACT INFORMATION

Q4. The accounting and finance unit that maintains the accounts receivable and related billing accounts for

contracts with DOD should respond to this data request. We intended to send this data request to the

business units that are listed in the CCR and could maintain accounts receivable and billing records. If your

unit does not maintain these records, please provide the name, address of the business unit and a contact

with phone number who maintains your accounts receivable for DOD contracts, but do not forward this

request to that unit.

Q5. From your accounts payable and receivable ledgers or other appropriate accounts that include information

by individual billing numbers (invoices and vouchers), please provide the total gross dollar amounts of

overpayments and underpayments (including unpaid bills) for all DOD contracts billed directly to the

government as of September 30, 2001. If the information is not available as of this date, provide the

information for a date as close as practicable and specify the date used. The total underpayments extracted

should exclude billings less than 30-days old on the "as of" date for the information provided (this excludes

billings for which payments are not delinquent). Please ensure that you do not consider (1) advance

payments as overpayments and (2) claims, amounts under dispute, and unbilled receivables on long-term

contracts as underpayments.

 

The amounts listed in response to question 5 should provide a point-in-time measurement of total

underpayments and overpayments as shown by contractor records and include the effects of incorrectly

liquidated progress payments. We recognize that the payment status for DOD contracts will change after

the "as of" date.

Q6. Following the instructions below, please complete the Schedule for Contract Overpayments(Attachment I).

Column Instructions

a, b, c Enter the contract number, amount of the overpayment, and date on which the overpayment was

identified. Provide this information for individual contract overpayments exceeding $1,000. Do not

include advance payments. Round dollar amounts to the nearest dollar.

d, e If you have notified DOD of the overpayment, specify which DCMA and/or DFAS office you

contacted and the date you notified them.

f, g, h Check if you have made payment by check, made plans to offset against another payment, or if no

action has been taken.

i, j If a demand letter was received from DOD for the overpayment, please indicate the date of the letter

and which DCMA or DFAS office sent it.

k For the potential cause, please provide a brief description—i.e., contract modification-scope change,

contract modification-price adjustment, contract modification-other, duplicate payment, recording

error, etc.

Q7.Following the instructions below, please complete the Schedule for Contract Underpayments(Attachment II).

Column Instructions

a, b, c Enter the information indicated for individual contract underpayments exceeding $1,000. Round

dollar amounts to the nearest dollar.

d, e, f If you have notified DOD of the underpayments, specify which DCMA and/or DFAS office you

contacted and the date you notified them. Or if no action taken, check column f.

g For the potential cause, please provide a brief description—i.e., progress payment calculation

error, prices not updated, recording error, lost inventories, contract modification not processed,

etc.

Q8. State the volume of business your business unit has with DOD as measured by total gross billings

 to DOD for your most recent year ending date. Please include the ending date (month and year) for

 the total billings listed.
Appendix III

Contractor Survey

Page 44 GAO-02-635 DOD Contractor Overpayments

Attachment 3

Business Units Handle By Your Accounts Receivable and Payable Office

INSTRUCTIONS: Through review of the Central Contract Registry (CCR), or by prior contact with your company, we

have indications that your business unit maintains the accounts receivable and payable for each of the units listed

below. Please confirm that you do maintain accounts for each of these business units by 1) crossing out any units not

maintained, and 2) adding the name and address of any additional units for which you maintain these accounts. Your

survey response should be an aggregate response for all the confirmed business units.

ADDITIONAL SITES:
Appendix III

Contractor Survey

Page 45 GAO-02-635 DOD Contractor Overpayments

Attachment I

Schedule for Contract Overpayments (Exceeding $1,000)

(See Enclosure 2 for detail instructions on completing this schedule.)

IMPORTANT: Please ensure that you do not consider advance payments as overpayments.

OVERPAYMENT

(Insert information.)

ACTION TAKEN OR PLANNED DEMAND LETTER

(Only if letter received.)

CAUSE FOR OVERPAYMENT

Notifying DOD

(Insert information.)

Adjustments

(Check one column.)

f

Return

Overpayment

by Check

g

Offset

Against

Another

Payment

a

Contract Number

b

Amount of

Overpayment

(Round to the

nearest dollar)

c

Date

Overpayment

Identified &

By Whom

(Contractor

or DOD)

d

DFAS or DCMA

Office Notified

e

Date

Office

Notified

Done Planned Done Planned

h

No

Action

Taken

i

Date of

Demand

Letter

j

DOD

Office

Sending

Demand

Letter

k

Potential Cause

(Describe briefly.)

1.2.3.4.5.6.7.8.9.
Appendix III

Contractor Survey

Page 46 GAO-02-635 DOD Contractor Overpayments

Attachment 2

Schedule For Contract Underpayments (Exceeding $1,000)

(See Enclosure 2 for detail instructions on completing this schedule.)

IMPORTANT: The total underpayments extracted should exclude billings less than 30-days old on the "as of" date for the information provided (this excludes billings for which payments are not

delinquent). Also, do not consider claims, amounts under dispute, and unbilled receivables on long-term contracts as underpayments.

UNDERPAYMENT

(Insert Information)

NOTIFICATION

(Insert information, or

check No Action Taken)

CAUSE FOR UNDERPAYMENT

a

Contract Number

b

Amount of

Underpayment

(Round to the

nearest dollar)

c

Date

Underpayment

 Identified &

By Whom

(Contractor

or DOD)

d

DFAS or DCMA

Office Notified

e

Date

Office

Notified

f

No

Action

Taken

g

Potential Cause

(Describe briefly)

1.2.3.4.5.6.7.8.9.
Page 47 GAO-02-635 DOD Contractor Overpayments

Appendix IV

Summary of Results from DCAA Visits to 28 

Contractor Locations ApendxiIV

DCAA auditors found that 17 contractor locations did not have any 

differences or the differences were immaterial based on their review of 

contractors’ records and comparison to their survey responses. Shown 

below are 10 contractor locations with material differences identified by 

DCAA and the primary reasons for the differences. In addition, DCAA 

auditors visited 1 contractor—SAIC—that did not respond to the survey, 

and they found $259,194 of overpayments and $2,002,243 of underpayments 

in the contractor’s records.

a

The contractor is now Volvo Aero Services and no longer has DOD contracts.

Contractors—material 

differences from survey

Overpayment

differences Primary reasons for differences

Underpayment

differences

Primary reasons for 

differences

Ages Groupa ($319,025) Overbilled costs were not reported 0 Not applicable

Boeing – St. Louis 1,895 Not identified ($997,141) Unpaid invoices not reported

Honeywell Shared Services (6,946,813) Unanalyzed overpayments were 

not reported

(7,672,885) Unanalyzed underpayments 

were not reported; unpaid 

invoices not reported 

Lockheed Martin Shared 

Service

(30,432,643) Unanalyzed overpayments were 

not reported; outstanding payment 

variances and contract 

administration adjustments not 

reported 

(16,554,214) Unanalyzed underpayments 

were not reported

Lockheed Martin NE & SS (37,833) Not identified (876,695) Unpaid invoices not reported—

only reported invoices with 

partial payments

Newport News Shipbuilding (12,688,525) Contractor failed to report 

overpayments; inappropriate 

accounting for labor and material 

transfers

(83,694) Not identified

Raytheon – El Segundo (4,028,327) Overpayments over 1 year old 

were not reported

(22,612,605) Underpayments over 1 year 

old were not reported; unpaid 

invoices not reported—only 

reported invoices with partial 

payments

TRW Space & Electronics (75,103) Not identified (631,577) Underpayments on certain 

contracts were not reported

TRW Systems East 0 Not applicable 1,574,295 Erroneously reported unpaid 

invoices under 30 days

TRW Systems West (2,666,281) Overpayments on certain contracts 

were not reported; overpayments 

and underpayments netted for 

reporting

(10,386,620) Underpayments on certain 

contracts were not reported

Totals ($57,185,791) ($58,040,558)
Page 48 GAO-02-635 DOD Contractor Overpayments

Appendix V

Comments from the Department of Defense ApendxiV
Appendix V

Comments from the Department of Defense

Page 49 GAO-02-635 DOD Contractor Overpayments
Appendix V

Comments from the Department of Defense

Page 50 GAO-02-635 DOD Contractor Overpayments
Appendix V

Comments from the Department of Defense

Page 51 GAO-02-635 DOD Contractor Overpayments
Appendix V

Comments from the Department of Defense

Page 52 GAO-02-635 DOD Contractor Overpayments
Appendix V

Comments from the Department of Defense

Page 53 GAO-02-635 DOD Contractor Overpayments
Appendix V

Comments from the Department of Defense

(192036) Page 54 GAO-02-635 DOD Contractor Overpayments
GAO’s Mission The General Accounting Office, the investigative arm of Congress, exists to 

support Congress in meeting its constitutional responsibilities and to help improve 

the performance and accountability of the federal government for the American 

people. GAO examines the use of public funds; evaluates federal programs and 

policies; and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of accountability, 

integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail this 

list to you every afternoon, go to www.gao.gov and select “Subscribe to daily

E-mail alert for newly released products” under the GAO Reports heading.

Order by Mail or Phone The first copy of each printed report is free. Additional copies are $2 each. A check 

or money order should be made out to the Superintendent of Documents. GAO 

also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a single 

address are discounted 25 percent. Orders should be sent to:

U.S. General Accounting Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Public Affairs Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Service Requested

Presorted Standard

Postage & Fees Paid

GAO

Permit No. GI00