GAO

United States General Accounting Office

Report to the Honorable 

Tom Harkin U.S. Senate

July 1999 DOD CONTRACT 

MANAGEMENT

Greater Attention 

Needed to Identify and 

Recover 

Overpayments

GAO/NSIAD-99-131

Page 1 GAO/NSIAD-99-131 DOD Contract Management

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-280329 Letter

July 19, 1999

The Honorable Tom Harkin

United States Senate

Dear Senator Harkin:

In October 1997, we reported to you that from October 1992 through April 

1997, defense contractors refunded $5.1 billion to the Defense Finance and 

Accounting Service’s (DFAS), Columbus Center, the largest Department of 

Defense (DOD) payment center, and we discussed the reasons for the 

refunds. As requested, we (1) updated this information through fiscal year 

1998 and (2) visited 13 contractor locations to ascertain if the contractors 

were retaining overpayments and how quickly overpayments were 

refunded. We also obtained information on the backlog of contracts 

waiting to be examined for possible overpayment.

Results in Brief In the 5 years between fiscal year 1994 and 1998, defense contractors 

returned about $4.6 billion to the Columbus Center--in fiscal year 1998,

$746 million. The Center attributes most of the returned money to 

overpayments caused by factors outside its control. However, payment 

errors by the Center were also a factor.

It took about a year, on average, before the 13 contractors refunded 

overpayments of $56.2 million to the Center. In addition, four of the 

contractors were still retaining overpayments totaling $1.1 million. After 

we brought these overpayments to the contractors’ and the government’s 

attention, the contractors refunded the overpayments. A Defense Contract 

Management Command area office also instructed its personnel to ask 

contractors reporting overpayments to immediately return the money. In 

some cases, government personnel were aware of overpayments, but they 

did not take timely action to obtain recovery. Under current law, there is no 

requirement for contractors who have been overpaid to notify the 

government of overpayments or to return overpayments prior to the 

government issuing a demand letter.1

1

A demand letter is a formal notification to the contractor to pay money owed the government. 
B-280329

Page 2 GAO/NSIAD-99-131 DOD Contract Management

The Center has a sizable and growing backlog of contracts waiting to be 

examined to ensure that contractors were properly paid—a process called 

reconciliation. Reconciliation has often resulted in claims against 

contractors for overpayments. The longer a contract remains 

unreconciled, the longer any overpayment identified through reconciliation 

will remain undetected, and the greater will be the government’s loss of the 

timely use of these monies. Further, delays in seeking return of 

overpayments may result in increased difficulty in collection or actual 

monetary loss to the government.

We are making recommendations to the Secretary of Defense to improve 

the process for identifying and collecting overpayments.

Background In August 1988, the Defense Logistics Agency established a finance center 

in Columbus, Ohio, to consolidate contract payments and other functions 

previously performed at 20 agency sites. In January 1991, the Agency’s 

finance operations at Columbus became part of DFAS, a consolidated DOD 

finance and accounting function under the DOD Comptroller. According to 

the Columbus Center, in fiscal year 1998, it paid about $70.5 billion on over 

1 million invoices.

DOD’s payment process involves several organizations, including DFAS. 

Some of the organizations are the Defense Contract Management 

Command (DCMC), which administers contracts, and the Defense Contract 

Audit Agency (DCAA), which reviews contractors’ records, internal 

controls, and billing systems. The contractors that perform the contracted 

work and bill the government are also involved in the process.

Contractors retaining overpayments is not a new issue. In 1994, based on 

our work at nine contractor locations, we reported that while each 

contractor had returned some overpayments, all were retaining additional 

overpayments.2

2

DOD Procurement: Overpayments and Underpayments at Selected Contractors Show Major Problem

(GAO/NSIAD-94-245, Aug. 5, 1994).
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Page 3 GAO/NSIAD-99-131 DOD Contract Management

Refunds Amount to 

Hundreds of Millions of 

Dollars a Year

Between fiscal year 1994 and 1998, the Columbus Center received refunds 

from defense contractors totaling $4.6 billion. The amounts have declined 

since fiscal year 1996. (See fig. 1.) 

Figure 1: Refunds from Defense Contractors

Source: DFAS, Columbus.

According to the Columbus Center, $3.6 billion of the $4.6 billion it received 

was due to factors outside its control, such as downward contract price 

adjustments that resulted in overpayments. The remaining $984 million 

was attributable to Center payment errors, such as paying the same invoice 

twice, making erroneous progress payment liquidations, and misreading 

invoice amounts.

As indicated in figure 2, Center payment errors decreased from fiscal year 

1994 to 1997 but increased in fiscal year 1998. According to Center 

personnel, the increase was due to a computer problem resulting in two 

overpayments to one contractor, one for $20 million and another for

0

200

400

600

800

1,000

1,200

94 95 96 97 98

Fisca l ye a r

Total amounts received

Dollars in millions
B-280329

Page 4 GAO/NSIAD-99-131 DOD Contract Management

$10 million. The overpayments were promptly returned, and DFAS said the 

computer problem was immediately corrected.

Figure 2: Contractor Refunds by Reason

Source: DFAS, Columbus.

Review of Selected 

Contractors Discloses 

Additional Payment 

Problems

From overpayments returned to the Center in fiscal year 1998, we selected 

and visited 13 contractor locations to ascertain (1) if contractors were 

retaining overpayments and (2) how quickly overpayments were refunded.

0

100

200

300

400

500

600

700

800

900

94 95 96 97 98

Fiscal Year

DFAS payment error

Contract administration and other non-DFAS actions

Dollars in millions
B-280329

Page 5 GAO/NSIAD-99-131 DOD Contract Management

Some Contractor Locations 

Retain Overpayments

Four of the 13 contractors were retaining overpayments totaling about

$1.1 million. Contractor personnel at each location told us they had not 

returned the money because each contractor had a practice of retaining 

overpayments until the government issued a demand letter. Under current 

law, there is no requirement for contractors who have been overpaid to 

notify the government of overpayments or to return overpayments before 

the government issues a demand letter.

Contractor officials at one location we visited in May 1998 told us that they 

were retaining an overpayment of about $36,800 received in 1995 because 

their practice is to retain overpayments until the end of a contract unless a 

demand letter is received. They said without a demand letter, they could 

not be sure that their account would be properly credited. For that reason, 

they said they did not notify DOD about the overpayment. At our request, 

the contractor reported the overpayment to the government’s 

administrative contracting officer (ACO) who issued a demand letter. The 

contractor refunded the overpayment in June 1998. After our visit, DCAA 

issued an audit report on an audit that was ongoing at the time of our visit, 

requiring the contractor to establish written policies and procedures to 

ensure overpayments are identified and reported to the government. 

According to DCAA, the contractor has established such controls. 

At another location, a contractor was retaining overpayments of about 

$41,700 that it had known about since January 1997. A contractor official 

said that it is company policy to first resolve payment discrepancies with 

DFAS. The official also said that unless this is done and a demand letter 

issued, DFAS does not properly credit their account. At our request, the 

contractor notified the ACO of the overpayment in June 1998. The ACO 

requested the Center to verify the accuracy of the reported overpayment. 

Initially, the Center concluded that no overpayment had occurred. 

However, upon closer examination, the Center concluded that the 

government had overpaid the contractor. In October 1998, the Center 

issued a demand letter, and the contractor refunded the money promptly. 

The DCMC area office also issued a memorandum to its field operations 

personnel instructing them to ask a contractor reporting an overpayment to 

immediately return the money.

We also found cases where the government was aware of overpayments but 

did not take timely action to obtain recovery. For example, the ACO at one 

contractor location told us that he had identified overpayments of more 

than $400,000 in March 1997. According to the ACO, he notified the Center 

of the overpayments because it had access to the payment records and 
B-280329

Page 6 GAO/NSIAD-99-131 DOD Contract Management

was, therefore, in a position to determine the amount of overpayments and 

issue a demand letter. According to the ACO, the Center informed him that 

the overpayments would be recovered from the contractor’s future 

shipment, even though he had informed the Center that the contract had 

been completed and no future shipment would be made. Notwithstanding 

this information, the Center did not issue a demand letter. After our visit, 

the ACO issued two demand letters for about $425,000, which the 

contractor refunded.

At another location, according to a contractor official, contractor 

personnel notified the Center of overpayments beginning in 1991 but did 

not refund the money because they were waiting for a demand letter. 

According to this official, their experience has been that their account was 

not properly credited when they refunded money without a demand letter. 

As a result, the contractor kept track of the overpayments and waited for 

the government to issue a demand letter. At our request, the contractor 

provided us a list showing accumulated overpayments of about $627,000. In 

August 1998, we provided the Center the list and requested it to recover the 

overpayments, and in December 1998, the Center requested that the 

overpayments be returned. In April 1999, a company official advised us 

that the money had been refunded and that the company would revise its 

procedures to refund overpayments without a demand letter.

Timeliness in Obtaining 

Refunds of Overpayments

Obtaining timely return of overpayments is important. If overpayments are 

not recovered promptly, DOD forgoes the use of these monies and may 

suffer actual monetary loss if the debt becomes uncollectible. It took about 

a year, on average, before overpayments of $56.2 million were refunded to 

the Center by the 13 contractors. This varied from about 2 weeks to nearly 

6 years in one case.

At one location, the contractor was overpaid $6.1 million between 1992 and 

1996. In December 1997, the contractor voluntarily refunded the money. 

According to a contractor official, the company’s practice was to retain 

overpayments in an advance payment account until a demand letter was 

received or the end of the contract to ensure the Center would properly 

credit the company’s account. Due to a change in company practice, the 

overpayments were remitted before the end of the contract.

At a second location, the government’s contracting officer did not request a 

refund when, in August 1995, the government agreed to replace contractor 

purchased material with government-furnished material, resulting in the 
B-280329

Page 7 GAO/NSIAD-99-131 DOD Contract Management

contractor being overpaid. According to contractor officials and the DOD 

contracting office, the amount of overpayment was difficult to determine 

because the extent of use of the government material was uncertain. Yet, 

even after production was completed and contract items had been 

delivered in November 1996, the contracting officer did not request a 

refund. The government ultimately negotiated price reductions of over 

$1.6 million in July 1997 and requested repayment in September 1997.

At a third location, the ACO did not take timely steps to recover 

overpayments of over $4 million that had been identified as early as June 

1989 in contractor reports to the ACO. By June 1993, the reported 

overpayment totaled about $8.5 million. Partial refunds of about

$2.9 million and $4.4 million were made in 1994 and late 1997, respectively. 

According to government officials, the total amount of overpayment was 

not determined until November 1997 due to staffing constraints, priorities 

given to new contracts, and unknown requirements that could surface 

during contract performance. Production requirements, however, had 

been completed in March 1990.

The timeliness of obtaining refunds of overpayments is not a new issue. In 

March 1994, we reported that the Center did not collect overpayments 

promptly when reported. In some cases, contractors planned to return 

overpayments but were told to hold the money until the contracts could be 

reconciled and demand letters issued.3

 We found similar problems in 1995 

and estimated that delays in recovering about $84 million in overpayments 

cost the government about $10.6 million in interest.4

 In that review, we also 

found that the Center did not pursue timely recovery even after a contract 

reconciliation identified overpayments. 

DCAA Did Not Identify 

Overpayments

A key procedure for identifying overpayments is to have the contractor 

periodically reconcile its billings to the government with its accounting 

data and with the payments it receives from the government. Since June 

1994, DCAA, as part of its periodic review of contractor billing systems, has 

been required to ensure that a contractor (1) has written procedures for 

periodically reconciling its billing and accounting data and notifying the 

3

DOD Procurement: Millions in Overpayments Returned by DOD Contractors (GAO/NSIAD-94-106,

Mar. 14, 1994).

4

DOD Procurement: Millions in Contract Payment Errors Not Detected and Resolved Promptly

(GAO/NSIAD-96-8, Oct. 6, 1995).
B-280329

Page 8 GAO/NSIAD-99-131 DOD Contract Management

government of overpayments and (2) is effectively implementing these 

procedures. At two locations, we noted that DCAA auditors did not 

identify overpayments.

For example, in September 1997, while reconciling its accounts in 

preparing its final billing on the contract, one contractor discovered it had 

erroneously billed and been overpaid $591,000 in March 1994. The 

contractor said that its procedures in effect at the time did not catch the 

overbilling or the resulting overpayment and that it has since established 

stronger controls that provide for periodic reconciliation of billing and 

accounting data. However, we noted that in reviewing the contractor’s 

billing system in 1996, DCAA did not identify the overpayment and 

concluded that the system was adequate.

At another contractor location, the company’s practice was to keep 

overpayments in an advance payment account until it received a demand 

letter or the contract was completed. The advance payment account had a 

balance of at least $6.1 million that had been accumulating since 1992 

before the contractor refunded it in December 1997. DCAA auditors said 

they were unaware of the overpayments in that account. Moreover, DCAA 

did not test the contractor’s comparisons of amounts received to amounts 

billed for each invoice and did not determine if the contractor had a policy 

of timely notifying the paying office of overpayments, which it should have 

based on its audit guidance. According to the auditors, they used the 

standard DCAA billing system audit program, dated October 1993, to 

conduct their audit in October 1994. This audit program did not require 

DCAA to evaluate the contractor’s controls for identifying and notifying the 

government of any overpayments. However, in June 1994, DCAA had 

revised its audit program to require such an evaluation. The revised 

program was provided to DCAA regional directors and field detachments in 

September 1994, before DCAA began its review of this contractor.

Growing Backlog of 

Unreconciled 

Contracts Precludes 

Timely Identification of 

Overpayments

In our March 1994 report, we pointed out the large backlog of contracts 

requiring reconciliation and the large sums of money owed the government 

that come about through reconciliation. For example, we noted that the 

reconciliation results of a public accounting firm employed by the Center 

showed that from October 1990 through November 1993, about $208 

million had been identified as being owed to the government.

The Center continues to have a sizable and growing backlog of contracts to 

be reconciled. As of January 1999, the Columbus Center had a backlog of 
B-280329

Page 9 GAO/NSIAD-99-131 DOD Contract Management

2,453 contracts requiring reconciliation. About 38 percent of these 

contracts have been waiting reconciliation for more than a year. (See

fig. 3.)

Figure 3: Contracts Waiting Reconciliation

The January backlog of 2,453 contracts had increased from 1,660 contracts 

a year earlier. The number of unreconciled contracts may increase before 

it gets better. According to the Center, while the number of contracts 

requiring reconciliation has increased, the number of staff available to 

perform contract reconciliation has decreased. The number of Center 

contract reconciliation employees decreased from 156 in March 1998 to

109 in January 1999, and staff obtained from a public accounting firm to 

assist in reconciling contracts decreased from 60 staff years in 1997 to

40 staff years in 1998. The Center estimates that it will take 387 staff years 

to reconcile the January backlog.

0

100

200

300

400

500

600

700

800

900

1000

0-90 91-180 181-360 >360

Days outstanding

Number of contracts
B-280329

Page 10 GAO/NSIAD-99-131 DOD Contract Management

In June 1998, DFAS revised its contract reconciliation procedures to 

improve the timeliness and the accuracy of its payments and reduce 

problem disbursements. According to the Center, these revised 

procedures, issued in January 1999, are intended to improve resource 

efficiency and provide for more timely reconciliation.

Conclusions Contractors return overpayments to the Columbus Center amounting to 

hundreds of millions of dollars a year. However, this represents only the 

amount that has been identified and returned. There are likely more 

overpayments that have yet to be identified and returned. We found 4 of 

the 13 contractors were retaining overpayments of about $1.1 million. In 

addition, there are likely to be substantial overpayments in the Center’s 

backlog of contracts that are waiting to be reconciled. 

Given the past problems that the Center has had making accurate 

payments, and the Center’s backlog of contracts waiting to be reconciled, a 

number of steps can be taken to identify overpayments and obtain timely 

refunds. These steps involve actions by both the contractor and the 

government contracting and payment personnel and should not place an 

unreasonable burden on either the contractor or government personnel. 

These steps would require (1) contractors to immediately notify the 

government when they have been overpaid, (2) DOD to reemphasize the 

need for government contracting or payment personnel to request refunds 

immediately upon becoming aware of overpayments and not wait for the 

more formal demand letter, and (3) the Center to consider periodically 

requesting contractors to provide the Center with the status of their 

accounts with the government.

The increasing backlog of unreconciled contracts is of particular concern. 

The longer a contract remains unreconciled, the longer any overpayments 

identified through reconciliation will remain undetected and in the 

contractors’ possession and the greater will be the government’s loss of the 

use of these monies. Further, the longer a debt remains outstanding, the 

greater may be the difficulty in collection and the chance that the debt will 

become uncollectible.

Recommendations We recommend that the Secretary of Defense 
B-280329

Page 11 GAO/NSIAD-99-131 DOD Contract Management

• require contractors to promptly notify the government of overpayments 

made to them; 

• direct the Director, DFAS, and the Commander, DCMC, to reemphasize 

the need to request refunds of overpayments promptly and to perform 

timely reconciliation; and

• direct the Director, DFAS, to examine the cost-effectiveness of requiring 

contractors to periodically provide a status of their accounts with the 

government.

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, DOD concurred with our 

recommendations and agreed that it could strengthen its ability to identify 

overpayments. However, DOD stated that it believes the Federal 

Acquisition Regulation (FAR) and the Defense Federal Acquisition 

Regulation Supplement (DFARS) contain appropriate procedures to 

recover overpayments. (See app. II.)

While the FAR and DFARS require that debts be collected as rapidly as 

possible, they do not require contractors to notify the government when 

they have been overpaid. In addition, we noted instances where 

government personnel, when made aware of overpayments, were not 

requesting refunds in a timely manner. DOD should reemphasize to its 

contracting and payment personnel the need to make timely requests for 

overpayment refunds. If, upon final debt determination, these refunded 

amounts are found to be in error, the erroneous amounts can be refunded 

to a contractor.

DOD took exception to our comment that DCAA failed to perform the 

required audit steps and commented that the cited overpayment was due to 

an inadvertent contractor error. We have revised our report based on 

DCAA’s comments. The key point is that DCAA’s audit procedures did not 

identify the overpayment at the subject contractor location.

Scope and 

Methodology

To update our prior data on checks received by the Columbus Center and 

the reasons for them, we analyzed the Center’s database of checks 

received, but did not verify the accuracy of the data. To ascertain the 

reasons for the increase in checks received due to the Center’s errors, we 

reviewed the Center’s policies and procedures to ensure payment accuracy. 

We also discussed with Center officials the controls to ensure that the 

policy to obtain timely refunds is followed. We did not examine any 
B-280329

Page 12 GAO/NSIAD-99-131 DOD Contract Management

underpayments that may have resulted from the Center’s payment 

activities.

To ascertain if contractors were retaining overpayments, and how quickly 

overpayments were refunded, we selected 13 contractor locations that had 

returned overpayments from October 1, 1997, through March 31, 1998, for a 

detailed review. These contractors were selected to represent the various 

reasons, as determined by the Center, for the overpayments, as well as to 

reflect differences in contractor size and geographical location. We visited 

each contractor location to obtain a better understanding of the reasons for 

the overpayments and to ascertain the contractors’ controls to prevent 

erroneous billing and to ensure prompt refunds. We also asked each 

contractor to provide us a reconciliation of its accounts with the 

government to determine if it was retaining overpayments. At each 

contractor location, we reviewed contract documents, billing records, 

contractor billing policies and procedures, and discussed with contractor 

officials their policies or practices for identifying and returning 

overpayments. We also discussed with DOD contracting officials and 

government auditors the controls used to monitor contractor billings and 

payment accuracy. We conducted our review between April 1998 and 

February 1999 in accordance with generally accepted government auditing 

standards.

Because the backlog of unreconciled contracts was a problem we had 

identified previously, we obtained information from the Center on the 

current status of the backlog and its progress in reducing the backlog.

As agreed with your office, we plan no further distribution of this report 

until 30 days from its issue date unless you publicly announce its contents 

earlier. At that time, we will send copies to the Honorable William Cohen, 

Secretary of Defense; the Honorable Jacob Lew, Director, Office of 

Management and Budget; Major General Timothy P. Malishenko, 

Commander, Defense Contract Management Command; and Mr. William 

Reed, Director, Defense Contract Audit Agency. We will make copies 

available to others upon request.
B-280329

Page 13 GAO/NSIAD-99-131 DOD Contract Management

Please contact me at (202) 512-4587 if you or your staff have any questions 

concerning this report. Major contributors to this report are Charles W. 

Thompson, Odi Cuero, and Kenneth Roberts.

Sincerely yours,

David E. Cooper

Associate Director

Defense Acquisitions Issues
Page 14 GAO/NSIAD-99-131 DOD Contract Management

Appendix I

Contractors Reviewed ApenxIdi

Lockheed Martin, Tactical Aircraft Systems, Fort Worth, Tex.

Allied Signal, Inc., Electronic Systems, Teterboro, N.J.

Sikorsky Aircraft Corporation, Stratford, Conn.

Bell Helicopter, Textron, Fort Worth, Tex.

Hughes Aircraft (now Raytheon), Fullerton, Calif.

TRW, Sunnyvale and Redondo Beach, Calif.

Raytheon, Bedford, Mass.

Earth Tech, Long Beach, Calif. 

Northrop Grumman Electronics & Systems Integration, Melbourne, Fla.

Primex Technologies, Inc., Downey, Calif. 

Lockheed Martin Electro-Optical Systems, Pomona, Calif.

Harris Corporation, Electronic Systems Sector, Melbourne, Fla.

Boeing, Long Beach, Calif.
Page 15 GAO/NSIAD-99-131 DOD Contract Management

Appendix II

Comments From the Department of Defense ApenxIdi
Page 16 GAO/NSIAD-99-131 DOD Contract Management

Related GAO Products

Contract Management: DOD Is Examining Opportunities to Further Use

Recovery Auditing (GAO/NSIAD-99-78, Mar. 17, 1999).

Contract Management: Recovery Auditing Offers Potential to Identify

Overpayments (GAO/NSIAD-99-12, Dec. 3, 1998).

DOD Procurement: Funds Returned by Defense Contractors

(GAO/NSIAD-98-46R, Oct. 28, 1997).

Contract Management: Fixing DOD’s Payment Problems Is Imperative

(GAO/NSIAD-97-37, Apr. 10, 1997).

DOD Procurement: Millions in Contract Payment Errors Not Detected and

Resolved Promptly (GAO/NSIAD-96-8, Oct. 6, 1995).

DOD Procurement: Overpayments and Underpayments at Selected

Contractors Show Major Problem (GOA/NSIAD-94-245, Aug. 5, 1994).

DOD Procurement: Millions in Overpayments Returned by DOD

Contractors (GAO/NSIAD-94-106, Mar. 14, 1994).

(707358) Letr
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