U.S. GOVERNMENT PRINTING OFFICE

59–451 CC WASHINGTON : 1999

FINANCIAL MANAGEMENT: TIME TO REFORM THE

PROMPT PAYMENT ACT?

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY,

VETERANS AFFAIRS, AND INTERNATIONAL

RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JUNE 16, 1999

Serial No. 106–28

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON NATIONAL SECURITY, VETERANS AFFAIRS, AND INTERNATIONAL

RELATIONS

CHRISTOPHER SHAYS, Connecticut, Chairman

MARK E. SOUDER, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

DAVID M. MCINTOSH, Indiana

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

HELEN CHENOWETH, Idaho

ROD R. BLAGOJEVICH, Illinois

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

JOHN F. TIERNEY, Massachusetts

THOMAS H. ALLEN, Maine

EDOLPHUS TOWNS, New York

BERNARD SANDERS, Vermont

(Independent)

JANICE D. SCHAKOWSKY, Illinois

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

LAWRENCE J. HALLORAN, Staff Director and Chief Counsel

J. VINCENT CHASE, Chief Investigator

JASON CHUNG, Clerk

DAVID RAPALLO, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on June 16, 1999 ............................................................................... 1

Statement of:

Bloom, Thomas, Director, Defense Finance and Accounting Service, U.S.

Department of Defense, accompanied by Gregory P. Bitz, Director of

Finance, Defense Finance and Accounting Service; Robert J.

Lieberman, Assistant Inspector General, U.S. Department of Defense;

F. Jay Lane, Director, Office of Inspector General, Finance and Accounting Directorate, U.S. Department of Defense; David E. Cooper,

Associate Director, National Security and International Relations Division, U.S. General Accounting Office; and William T. Woods, Assistant

General Counsel, National Security and International Relations Division, U.S. General Accounting Office .......................................................... 2

McInerney, Thomas G., Lieutenant General, USAF (retired), president

and CEO, Business Executives for National Security, accompanied by

Erik Pages, vice president for Policy and Programs, Business Executives for National Security; Paul J. Dinkins, executive vice president,

the Profit Recovery Group; Jack Kenny, director of Operations, Government Audits, the Profit Recovery Group; and Rodney W. Mateer, partner, Deloite and Touche, Professional Services Council ............................ 80

Letters, statements, etc., submitted for the record by:

Bloom, Thomas, Director, Defense Finance and Accounting Service, U.S.

Department of Defense, prepared statement of ......................................... 6

Cooper, David E., Associate Director, National Security and International

Relations Division, U.S. General Accounting Office, prepared statement

of ..................................................................................................................... 37

Dinkins, Paul J., executive vice president, the Profit Recovery Group,

prepared statement of ................................................................................... 96

Lieberman, Robert J., Assistant Inspector General, U.S. Department of

Defense:

Information concerning Prompt Payment Act ........................................ 78

Letter dated July 2, 1999 ......................................................................... 57

Prepared statement of ............................................................................... 16

Mateer, Rodney W., partner, Deloite and Touche, Professional Services

Council, prepared statement of .................................................................... 110

McInerney, Thomas G., Lieutenant General, USAF (retired), president

and CEO, Business Executives for National Security, prepared statement of ........................................................................................................... 83

Woods, William T., Assistant General Counsel, National Security and

International Relations Division, U.S. General Accounting Office, letter

dated August 2, 1999 .................................................................................... 76

(1)

FINANCIAL MANAGEMENT: TIME TO REFORM

THE PROMPT PAYMENT ACT?

WEDNESDAY, JUNE 16, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON NATIONAL SECURITY, VETERANS

AFFAIRS, AND INTERNATIONAL RELATIONS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:01 a.m., in room

2247, Rayburn House Office Building, Hon. Christopher Shays

(chairman of the subcommittee) presiding.

Present: Representative Shays, Souder, and Terry.

Staff present: Larry Halloran, staff director and chief counsel; J.

Vincent Chase, chief investigator; Bob Newman, professional staff

meber; Jason Chung, clerk; and David Rapallo, minority counsel.

Mr. SHAYS. I would like to call this hearing to order.

In January, the General Accounting Office [GAO], reported that

serious financial management weaknesses continue to plague Department of Defense [DOD], stewardship of $1 trillion in assets and

$250 billion in annual spending. Despite ongoing reform efforts and

some improvements to financial systems, erroneous, fraudulent,

and improper payments persist. While not always asked to do so,

contractors returned almost $1 billion in overpayments from DOD

every year.

Today we focus on one aspect of the complex, erratic disbursement process, compliance of the Prompt Payment Act. Designed to

bring predictability, and a modest measure of speed to a largely

paper-based Federal payment regime, the act appears to be showing signs of age. In the decade since the act was last amended, narrow interpretations and rigid applications of key provisions have

hampered the Department’s ability to pay bills on time, pay them

accurately, capture available discounts, and embrace commercial

best practices.

As a result, the volume of late payments by DOD seems stuck

at 7 percent of the 12 million invoices paid each month by the Defense Finance and Accounting Services [DFAS]. The current $1

threshold for separate interest payments under the act requires

DFAS to process tens of thousands of checks worth less than the

time and effort it takes to print them.

Still, from fiscal year 1995 through March of this year, DFAS

paid $139 million in interest and penalties under the Prompt Payment Act. While that figure may be only three one-hundredths of

1 percent of total disbursements during that period, today it would

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buy five F–16’s for the Air Force, 140 new Army trucks, and more

than 400 Navy Tomahawk missiles.

Without question, more careful attention to the bottom line can

have a direct and substantial impact on the front line.

Our witnesses this morning will help us examine how the

Prompt Payment Act may be amended or reinterpreted to enhance

rather than impede the DOD efforts to modernize payment processing and adopt successful commercial business practices.

I would like to welcome our witnesses and announce who they

are. Speaking first, Mr. Thomas Bloom, Director, Defense Finance

Accounting Service, U.S. Department of Defense, accompanied by

Mr. Gregory P. Bitz, Director of Finance, Defense Finance and Accounting Services [DFAS].

We also have Mr. Robert J. Lieberman, Assistant Inspector General, U.S. Department of Defense, accompanied by Mr. F.J. Lane,

Director, Office of Inspector General, Finance and Accounting Directorate.

And third, we have Mr. David E. Cooper, National Security and

International Affairs Division, U.S. Accounting Office, accompanied

by Mr. William P. Woods, Assistant General Counsel, National Security and International Relations Division.

As is our practice, we would invite all six of you to stand. Is

there anyone else that might respond to a question? If so, I would

like them to stand, and we would swear them in, too.

OK. This is for the first panel. If you would raise your right

hands?

[Witnesses sworn.]

Mr. SHAYS. Thank you. Note for the record that all our witnesses

have responded in the affirmative.

We are going to take testimony from three witnesses, but all will

be welcome to respond to questions. And we will put on the light,

but—and we will let it go. It is a 5-minute timer. If you go over

we will reset it for an additional 5 minutes. We would hope that

you would finish before the second 5 minutes.

And we will start with you, Mr. Bloom.

STATEMENTS OF THOMAS BLOOM, DIRECTOR, DEFENSE FINANCE AND ACCOUNTING SERVICE, U.S. DEPARTMENT OF

DEFENSE, ACCOMPANIED BY GREGORY P. BITZ, DIRECTOR

OF FINANCE, DEFENSE FINANCE AND ACCOUNTING SERVICE; ROBERT J. LIEBERMAN, ASSISTANT INSPECTOR GENERAL, U.S. DEPARTMENT OF DEFENSE; F. JAY LANE, DIRECTOR, OFFICE OF INSPECTOR GENERAL, FINANCE AND ACCOUNTING DIRECTORATE, U.S. DEPARTMENT OF DEFENSE;

DAVID E. COOPER, ASSOCIATE DIRECTOR, NATIONAL SECURITY AND INTERNATIONAL RELATIONS DIVISION, U.S. GENERAL ACCOUNTING OFFICE; AND WILLIAM T. WOODS, ASSISTANT GENERAL COUNSEL, NATIONAL SECURITY AND

INTERNATIONAL RELATIONS DIVISION, U.S. GENERAL ACCOUNTING OFFICE

Mr. BLOOM. Thank you, Mr. Chairman. I am pleased to be here

today representing the Department of Defense and to talk about

the Department’s financial operations, the Defense Finance and AcVerDate 11-MAY-2000 13:44 Mar 21, 2001 Jkt 066346 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HEARINGS\59451 pfrm09 PsN: 59451
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counting Service, and, in particular, the Prompt Payment Act and

other issues related to the payment process.

Today is actually my 17th working day as the Director of DFAS.

So I am actually looking forward to this as a great learning experience for me as well as the committee. [Laughter.]

And as a former IG and a former independent auditor, I have a

full appreciation for what the GAO and the IG community have to

say and appreciate their remarks also.

Mr. SHAYS. Well, let me just say, I like that attitude, one, and,

second, it is very convenient for us and helpful for us to be able

to have you from the Department to be able to testify with the Inspector General’s Office and the General Accounting Office. It

makes it easier for us to do our job, and so we thank your willingness to do it that way and not demand that you have a single chair

at one table.

Mr. BLOOM. Happy to do that.

First, let me provide some background. The Defense Finance and

Accounting Service was created in 1991 to improve the quality and

to reduce the cost of financial operations within the Department of

Defense. These financial operations are so vast that DFAS is the

largest entity of its kind in the world.

We make monthly payments totaling more than $24 billion. That

is more than $1 billion a day. We make almost 9 million payroll

payments every month. We make over a million payments a month

to businesses and process a million travel, transportation, and miscellaneous payments every month. And we account for the expenditures of every dollar for each defense entity.

To achieve higher quality and lower cost financial operations, we

consolidated over 330 finance offices in the United States into 26,

a reduction of over 90 percent. We completed that consolidation

last year, 2 years ahead of schedule, and we are saving DOD and

the taxpayer $120 million a year in operating costs as a result.

We have reduced our staff from 31,000 to 20,000, more than a

third. And we expect to reduce it by another 4,000 in the near future. When we were created in 1991, we inherited over 300 finance

and accounting systems owned and developed by the military services and defense agencies. These systems did not talk to each other,

and they did not meet the requirements of the Chief Financial Officers Act.

We have eliminated 200 of these systems, a two-thirds reduction.

The number of systems we have now is less than many of the Fortune 500 companies. And we expect in the near future to eliminate

another 70.

We already have introduced standard systems in most of our pay

areas and soon will have standard practices in other accounting

areas. All of our critical systems are Y2K compliant.

Our operations cost our customers less than one-half of 1 percent

of their budget, a level that compares favorably with the private

sector.

We pay 99 percent of our payroll on time and 98 percent of it

accurately. And given the complexity of the payroll entitlements

that apply to military and civilian personnel we believe this is a

significant accomplishment.

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But good as these numbers are, I am committed to improving

them. We will work closely with the private sector to be sure that

we adopt the best practices and use state-of-the-art technology. In

fact, about one-fifth of our work already is contracted out to the

private sector, and we are involved in a number of cost comparison

competitions that the private sector could win.

We have a rigorous benchmarking program to compare ourselves

against public and private finance and accounting operations, both

domestic and foreign, and we use the results of such studies to

guide us in our planning.

I would caution, however, that outsourcing is not always a panacea, as you may well remember, and I remember from my Department of Education days as the IG there. I would hope the subcommittee would treat with some skepticism the claims that you

will hear that major corporations in America outsource their finance and accounting operations. Today, none of the top 10 in the

Fortune 500 currently outsource these operations due to complexity.

Let me turn now to our processes for paying contractor-vendors.

Timely and accurate payments are imperative for ensuring we have

goods and services available when and where we need them. Sometimes, rarely, we are late with our payments, and we have to pay

interest and, even more rarely, a penalty. In fiscal year 1998, our

interest payments amounted to less than three-one-hundredths of

1 percent of our total payments to contractors and vendors, still a

significant number, as the chairman pointed out.

Why do we sometimes make payments late? There are two main

reasons. First, though we are rapidly adopting electronic commerce

business practices throughout the Department, we still process a

great deal of paper. In order to make a payment, we must have

several crucial documents in our hand. When those documents are

paper rather than electronic, the mail and paper handling sometimes results in a delay.

Second, when we pre-validate our payments to make sure that

we have the money on hand in exactly the right pot and in the

right amounts, we sometimes require more time than allowed by

the Prompt Payment Act to determine that amounts are correctly

obligated by our customers.

In other words, to avoid making an improper payment, we spend

whatever time it takes working with the various military services

and DOD components to make sure we get it right.

Sometimes, again rarely, we overpay our contractors and vendors. We estimate that our overpayments total less than seven onehundredths of a percent of the total amount paid in fiscal year

1998. Paradoxically, taking the time to ensure that we do not make

an overpayment can result in our making a late payment and paying interest.

The advent of new payments systems that take full advantage of

the benefits of electronic commerce will put an end to these problems. We expect that next generation of systems to be available

within the next 2 years and are working hard to implement them.

Thus, we think we are able to comply with both the spirit and

the letter of the Prompt Payment Act. And we don’t think that

major revision of it is necessary. We believe that though it was last

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amended more than a decade ago, well before electronic commerce

became as commonplace as it is today, its provisions, if interpreted

properly, do not unduly hamper us. In fact, the Office of Management and Budget is updating the circular that guides Federal

agencies in carrying out the provisions of the statute to ensure we

are able to take full benefit of electronic commerce and at the same

time fully comply with the Prompt Payment Act.

I understand that the subcommittee is also interested in recovery

auditing. This practice, common in the private sector, seeks to recover overpayments to contractors. DOD recently conducted its own

pilot program in recovery auditing. Of the $29 million identified in

potential overpayments, the Department has collected about $2.5

million. Nearly $20 million is currently disputed by the contractors,

and we are working out those disputes. The remaining $6.5 million is deemed uncollectible. Still preliminary indications are that the amounts recovered exceed the cost of

the program. We would like to explore the further potential of this

area.

Mr. Chairman, this concludes my formal statement. And Mr. Bitz

and I would be happy to entertain any questions.

[The prepared statement of Mr. Bloom follows:]

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Mr. SHAYS. Thank you very much.

I just would like to recognize the presence of Lee Terry from Nebraska. Do you have any statement you would like to make?

[Mr. Terry shakes head indicating no.]

Mr. SHAYS. OK, it is nice to have you here.

And I would take this opportunity to ask unanimous consent that

all members of the subcommittee be permitted to place an opening

statement in the record and that the record remain open for 3 days

for that purpose. And without objection, so ordered.

And I ask further unanimous consent that all witnesses be permitted to include their written statement in the record. And without objection, so ordered.

At this time, we will invite Mr. Lieberman to address us.

Mr. LIEBERMAN. Thank you, Mr. Chairman. I appreciate the opportunity to be here today to talk about DOD financial management. As you know from previous testimony to this committee by

the IG and from the IG’s semi-annual reports to the Congress, we

have long agreed with GAO’s assessment of DOD financial management as being a principal high-risk area in the Federal Government.

We have been working very hard with DFAS throughout the decade of the nineties to improve the situation. And I think a fair accounting of where we are would indicate that a lot of progress has

been made. But serious problems remain.

The financial reporting problems, the inability to generate

auditable financial statements, tend to get the most play in the

media, but certainly our problems with the payment processes are

at least equally important, and I think it is very appropriate for

a congressional subcommittee to focus on the subject.

My statement contains some of the general background about

DFAS. I don’t want to repeat that. Mr. Bloom has just made the

point that it is a tremendously large and complex operation. That

is an important factor to keep in mind when we are talking about

something such as changing the provisions of the Prompt Payment

Act. We should not do something that makes the disbursement

process more complicated or retards the progress that is being

made toward improving its efficiency.

I hate to spoil Tom by agreeing with him in our first side-to-side

discussion of a DOD financial subject here. But I agree generally

with his feeling that the Prompt Payment Act does not need major

revision. This is not to say that some updating and clarification

would not be appropriate.

Certainly the requirement to pay interest payments as little as

$1 needs to be revisited, because we are talking about thousands

of payments in the magnitude of $1 to $5. And they are taking up

the time of DFAS personnel that could be better used for other purposes.

DFAS is not doing as well in terms of bill-paying timeliness as

it should and could. I think the best metric of the relative efficiency

of the process in terms of the payment deadline is how many invoices are paid on time and how many are not. If I recall the numbers correctly, in fiscal year 1998, DFAS paid against approximately 18.1 million invoices, and 1.2 million of those invoices were

not paid on time.

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There was a 17 to 1 ratio of on time versus not on time, but still

a pretty healthy number of transactions were not paid within the

generally prescribed 30-day time limit for payment.

Now, this is not to say that the law is too tough and we should

allow more than 30 days for payment. I agree very much with the

general observation that DFAS is now putting in the systems and

the processes that will enable it to dramatically improve its timeliness record in the future.

So even though we have paid a healthy sum in terms of interest

penalties in the last fiscal year, I don’t think that the process is

out of control. And prospects for near-term improvement are very

good. I think DFAS should be held to the expectation that we will

see fewer delayed payments and fewer interest penalties in the future.

I would like also to comment that a change to the Prompt Payment Act that would complicate the disbursement process would

probably aggravate some of the other chronic problems that plague

DOD at the present time. One of the best known of those, that we

have done recent audit work on, is so-called problem disbursements

or unmatched disbursements. This has been compared to the inability to balance one’s checkbook against one’s bank statements.

It is a little bit more complex than that. Basically, it reflects the

fact that we are still transitioning out of a rather Rube Goldberg

arrangement for doing disbursement accounting, where we have

the paying going on in one activity and the accounting going on in

another. Over the years, we have developed a process which was

extremely inefficient, remains inefficient to this day, and results in

any given time is having about $10 billion worth of disbursements

that we can’t match to proper obligations.

We should achieve victory over that problem within the next 2

or 3 years, provided that the systems that are now being developed

are fielded on time and live up to expectations.

But right now it is a real problem. It ties up money that the Department needs for other purposes; it makes us vulnerable to AntiDeficiency Act violations; and it makes us unable to readily detect

fraud, overpayment, and other errors.

In my written statement, I mention several other payment problems that we have, that we shouldn’t lose sight of. Our pay systems

are lucrative targets for hackers who wish to break into them and

either steal money or disrupt DOD financial operations. We need

to pay particular attention to the security of our financial systems.

Mr. Bloom mentioned the year 2000 problem. DFAS has been

working at it very hard, but that is a serious near-term concern

that we have to deal with. The overpayment problem remains very

much a major concern for the Department. We tend to talk about

the payments to contractors from Columbus Center, which handles

most of our large contracts. We also have to keep in mind that

there are lots of small payments being made in other activities.

I am particularly concerned about the transportation area, where

we have thousands and thousands of invoices being paid annually.

Each one may be very small, but we have indications of a lot of

fraud going on in that area. There are active criminal investigations now, which I think will prove the point.

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These are areas that are amenable to technological solutions, or

at least technology will help to improve the efficiency of the process. But management emphasis is extremely important, and I am

pleased to be able to report to you that DFAS management has

been very responsive to the IG in terms of taking an active interest

in improving DFAS anti-fraud protections, including DFAS ability

to detect fraud and then help us investigate and bring these people

to justice.

So we think the future for DFAS is reasonably bright. The agency had a very difficult startup period. It was put together in a topdown decisionmaking process. The parts of the puzzle didn’t want

to be in the puzzle. The military departments did not want to give

up their own financial operations. DFAS had to live through an extremely turbulent period, and I think it has now settled into an organizational structure that makes sense and has the right system

improvements in process.

I believe that, probably not next year but 2 years from now, you

can have a hearing and talk about DOD financial management

problems and you would probably be looking at a much shorter list.

Thank you.

[The prepared statement of Mr. Lieberman follows:]

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Mr. SHAYS. Thank you, Mr. Lieberman.

Mr. Cooper.

But before I ask you to address us, I just would want to recognize the presence of our vice chairman, Mark Souder. And, Mark,

do you have any comments you want to make or should we—— Mr. SOUDER. No.

Mr. SHAYS. Thank you.

Mr. SOUDER. I’m catching up on the testimony.

Mr. SHAYS. I am almost tempted to have someone tell a joke in

the middle of this. This is a very dry subject. [Laughter.]

Mr. COOPER. I think I can start with one. [Laughter.]

Mr. SHAYS. OK.

Mr. COOPER. Mr. Chairman, it is a pleasure to be here this morning. We have followed DOD payment problems for the last 5 years,

and I might just start by saying how this came to our attention.

We were doing some work back in the 1980’s with concerns about

$600 toilet seats and $400 hammers and things like that, and we

had a team down in a contractor’s plant in Texas. And one of the

contractor employees came up to us and asked, ‘‘What can we do

about all these extra checks we are getting from DFAS?’’ They

asked for our help to bring this problem to someone’s attention,

and we have tried to highlight the problem in our high-risk series

that you referred to in your opening statement.

And I am encouraged that DFAS has a number of efforts underway to correct the problems, but it will be a while before we see

some real improvements.

But, anyway, I would like to first talk a little bit about the problems that we have seen. We have issued a number of reports over

the last several years that show that contractors are returning very

significant amounts of money to DOD. In fact, during the 5-year

period ending—the 5-year period covering 1994 to 1998, almost $5

billion was returned to the Columbus Center.

While that is encouraging, we have also found through our audits

that all contractors don’t necessarily return the moneys they have

been overpaid. We found one contractor that was overpaid $7.5 million, kept that overpayment for almost 8 years before it was returned. And it happened then only because we visited the contractor and asked about it.

We have just recently finished some additional work, visiting 13

contractor locations. At four of those contractor segments, they

were retaining about $1.1 million of overpayments. And what is

discouraging about that is that those four contractors each told us

that their policy was to keep that money until the Government

asked for it through a demand letter. That is a formal request for

those moneys to be returned.

In fact, there is really no requirement, either regulatory or statutory, for contractors to return overpayments when they receive

them. And more discouraging, no one really knows the magnitude

of the moneys that have not been returned. We have attempted to

look at that a few times and have been frustrated in our efforts to

get a handle on that problem.

We have also reported that DOD wastes million of dollars annually because it is paying its bills late. We have already heard some

of that from the other witnesses. I have visited the contract entitleVerDate 11-MAY-2000 13:44 Mar 21, 2001 Jkt 066346 PO 00000 Frm 00039 Fmt 6633 Sfmt 6601 E:\HEARINGS\59451 pfrm09 PsN: 59451
36

ment director in DFAS earlier this month to get some updated information on late payments. During the first half of this fiscal year,

more than 31,000 late interest checks have been written by that directorate totaling almost $16 million in late interest.

We have also heard from the other witnesses the payment process is a very complicated one, that solutions won’t be easy. DOD

is taking a number of initiatives to improve their systems, integrating their systems, improving their technology, training their

employees, and we hope those actions will bring about some improvements.

Let me quickly just speak about recovery auditing for a second.

We were directed to do an audit of the DOD demonstration program on recovery auditing. We found it had a lot of potential to

help identify and recover overpayments. There is a bill before the

Congress now to expand that to other Federal agencies. We think

that is a good bill and it could go toward improving recovering

overpayments.

We do caution, though, that in implementing recovery auditing,

if that be the case, that agencies carefully consider the extent to

which recovery auditing applies to their type of operations and assess the cost benefits of undertaking moderate internal recovery efforts before they turn to an outside group to do that.

Regarding the Prompt Payment Act, it may be time to increase

the minimum threshold for the interest payments. It is currently

set at $1. We have already heard from the other witnesses that

many of the checks that DOD issues on late payments are for very

small amounts. In fact, when I was in Columbus, I was provided

some information that shows there were 31,000 checks issued the

first 6 months of this fiscal year. Nearly 41 percent of those checks

were for interest payments of less than $25. And that represents

less than 1 percent of the dollars that are being paid. The DFAS officials conservatively estimate that it costs them $24

for each check they issue. And my math shows the taxpayers paid

about $303,000 to issued interest payments totaling $114,000. That

is probably not a good use of our taxpayers money.

Mr. SHAYS. Want to just give that number again?

Mr. COOPER. It costs about $303,000 to issue those checks for $25

or less in interest, and the total interest for all of those checks

amounted to only $114,000. So it is costing more than double the

amount of interest we are paying to process the checks.

Now given the cost of processing, the administrative costs of

processing an interest-payment check, it might be cost-effective to

increase the minimum dollar threshold.

That completes my statement. I will be glad to answer any questions you or the other Members might have.

[The prepared statement of Mr. Cooper follows:]

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Mr. SHAYS. Thank you very much.

First, I want to say Mr. Bloom, the nice thing about you starting

in this position is that you can kind of look at it fresh, and you

don’t have to defend something that you did. But I also know you

want to be fair to the Department and your unit within the Department. So you are going to want to make it clear what you think

is wrong and what’s right.

And I do agree that, from a percentage standpoint, it’s tiny percents, but given the magnitude of the Department of Defense, the

numbers are huge.

It is unsettling for me to think that there would be, in some cases, voluntary return and in other cases at request, but total $1

billion a year. I mean, that just boggles my mind to think of that— $1 billion gets returned, because I just know human nature. And

it is very difficult to just voluntarily return money that was sent

to you. Kind of think of it as a gift, and you think, well, we will

just wait until they ask for it. So it makes you wonder how much

more is actually being overpaid. Mr. Cooper, so that is one area of

concern.

Another one is, obviously, late payments and the penalties. The

third is the issue of checks, and it just seems to me like we could

all agree pretty quickly that number should be increased.

I am going to expose my ignorance here by first asking: These

are checks for interest payments? Explain that to me, if you would,

Mr. Bloom.

Mr. BLOOM. In every case where we haven’t met the 30-day deadline, we owe the interest. And the current procedure is that we

issue a separate check for that amount.

Mr. SHAYS. And this is Government law that requires it?

Mr. BLOOM. It is Government law that we pay the interest.

Mr. SHAYS. So there is nothing that prevents us. And then tell me what the negative would be on it to take a threshold of $5 or

maybe even more. Or $25. Would you show the numbers again on

that—all right.

And so I would ask each of you what you would recommend. For

instance, is this from a statement—OK.

From our briefing memo, this is DFAS’s Columbus contract entitlement interest payments. And it shows that from $10 to $25, that

constitutes 1.2 percent of the total interest but it represents—so it

was 1.2 percent of the total interest that was required to be paid,

but it represents 18 percent of the total payments. And I make an

assumption that that is basically at cost or more. Because you are

basically at $24.

So I guess what I would like you to do, I would like each of you

to think about what you would recommend. I’ll come back to you

because I don’t want a quick answer. What would that threshold

be? Would it be $1, $5, $10, $15, $20, so on?

Mr. BITZ. Mr. Chairman.

Mr. SHAYS. Yes.

Mr. BITZ. Excuse me. If I can make a clarification?

Mr. SHAYS. Sure.

Mr. BITZ. The GAO report is addressing our Columbus operation,

and the system there is called MOCAS, and it does produce separate payments. But all of our other vendor-paying contractor sysVerDate 11-MAY-2000 13:44 Mar 21, 2001 Jkt 066346 PO 00000 Frm 00057 Fmt 6633 Sfmt 6601 E:\HEARINGS\59451 pfrm09 PsN: 59451
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tems that are at our other 25 locations, the payment of the interest

is in the normal payment. So if we owe them an EFT or a check

for an invoice for $1,000, the interest will just be added when that

payment is computed. It is only our Columbus Center where it is

a separate transaction.

Mr. SHAYS. Why?

Mr. BITZ. The system is 30 years old, sir, and it is being replaced

within the next 3 years. It’s a very old system.

Mr. SHAYS. So, what we looked at was a system that wasn’t as

typical as most of the systems?

Mr. BITZ. Correct, sir.

Mr. SHAYS. Anybody else want to comment on that?

Mr. LIEBERMAN. Well, it is the biggest system.

Mr. COOPER. Yes. It is the largest payment system, and it pays

the most late interest. So it is important that you fix that problem.

[Laughter.]

Mr. SHAYS. And that is called ‘‘the rest of the story.’’ [Laughter.]

No, it is important to point that out. But it is important.

Let me just ask another question, and then let me get to the

other committee members.

Mr. Cooper, in your statement on page 8, you say—I am just taking a certain part—DOD is enhancing its current technologies to

further automate the payment process. What improvements might

be implemented in the short term to reduce payment process complexities and the number of late payments?

Mr. COOPER. We have made recommendations in the past. There

are a lot of different factors that are causing the overpayment problem. One of the issues that I talk about in the statement is the

long line of accounting classification numbers that are used to

record the payments.

And going back to something the DFAS witness talked about is

DOD has been trying to move to integrate its various systems. You

have a payment system at one location, an accounting system at

another location, and the procurement people at a different location. And all of these people are generating the paper that was referred to earlier that you use to make payments.

And a lot of times there are errors made in the paperwork. The

accounting line has 51 digits on it, and it is very easy to get those

digits transposed or recorded incorrectly. When the payment people

who are trying to write the checks are sitting there trying to match

a disbursement with the accounting classifications and the obligations data, it almost has to be done manually. It can’t be done automatically.

And there are just any number of errors that are made in all of

this. So I mean that is a long way of saying, where the action needs

to be taken is, and DOD is headed in that direction in many cases,

is in fixing the technology, the systems. We need systems that talk

to each other. We need systems that share the same data so that

everyone can have the same data in front of them.

And they are moving in that direction. It will be a few more

years before we see that. I think some training of the people would

help. We have seen some errors that just are really mind-boggling.

I mean, contractors will send in an invoice for $5 million, and

marked on the invoice is a statement saying that we have already

55

been paid progress payments of $3.8, and they ask for the net

amount. Well, we have seen time after time the full amount of the

invoice paid.

Mr. SHAYS. But wouldn’t they be able—wouldn’t DOD be able to

check its own records to determine what’s been paid? It shouldn’t

rely on what’s on the statement.

Mr. COOPER. Well, unfortunately, right now, DOD is relying very

much on the contractors to return the money. What we have suggested—in fact, we are starting another effort very shortly—going

out to the contractors and asking for a reconciliation. We think

that is a fairly easy thing to do. DFAS tried it once and they only

got a 20 percent response from the contractors they went to.

And I might just add—and you will hear more about this later—

but in the recovery auditing process, a reconciliation or request for

the contractor to reconcile his accounts and provide that information to the Government is a pretty normal step to take. DOD could

easily do that to identify more of these overpayments.

Mr. SHAYS. I said one question, but you really answered the long

term. I gather from your point there is no short term?

Mr. COOPER. There is no short term.

Mr. SHAYS. The answer to the first question is no. And you have

given me the answer to my second question, which was what longterm steps.

Just because I don’t want to forget it, and it was the issue on

which you said you were frustrated early in your statement, I was

very tempted to—you said you wanted to do something, but you

were frustrated and didn’t know what——

Mr. COOPER. We were frustrated in trying to identify the amount

of overpayments that are with contractors today.

Mr. SHAYS. How frustrating, because you didn’t get cooperation,

frustrating because it is hard to determine because of the record?

Mr. COOPER. It is a very difficult task. I mean, there are literally

thousands and thousands of contractors that do business with

DOD. One of the problems with the records is just identifying

where these contractors are, getting a good address and——

Mr. SHAYS. What that raises, though, to me is that there are

going to be mistakes made as you talk about the various—you

know, they can record the data incorrectly. But it strikes me that

if you are frustrated because it is hard to determine, that this system opens itself to a tremendous amount of fraud.

Mr. COOPER. It has that potential, and I think the IG has seen

some of that. We have done some work showing that some Air

Force vendors had committed fraud against DOD. Yes, it is a ripe

opportunity for a lot of waste and abuse.

Mr. SHAYS. Let me just, before going to Mr. Terry—any of you

want to comment—Mr. Lieberman, Mr. Bloom, Mr. Lane, or Mr.

Woods—on what I just asked Mr. Cooper?

Mr. LIEBERMAN. I agree with Dave’s comments. I think that one

of the very most important challenges facing DFAS is to improve

all of the internal controls that would apply in the vendor-payment

process. To some extent, the new systems will eliminate some of

this manual processing that is very inefficient now and will improve the recordkeeping.

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We don’t have good audit trails. I understand what GAO is saying when they say it is very difficult to reconstruct what exactly

has transpired, and we don’t know how much overpaying is going

on.

Mr. SHAYS. But it shouldn’t be difficult to reconstruct. Correct?

I mean—— Mr. LIEBERMAN. That is right.

Mr. SHAYS. That is not what we should expect?

Mr. LIEBERMAN. Absolutely not. In an acceptable internal-control

environment, you wouldn’t have this confusion and this vulnerability. So this is an area that needs to be worked intensively. And

frankly, I think it is probably more important to get on top of this

particular problem than it is to be able to comply with the CFO

Act, which I suppose is heresy in some quarters.

But we are not, for instance, doing enough auditing to help

DFAS identify exactly what these control weaknesses are and to

monitor their progress because we are drawn away from the finance side of the operation to audit the accounting records, specifically the annual statement that is required by the CFO Act. And

we really have no choice in the matter.

Now if there were an unlimited number of auditors available, we

could do both, but there aren’t. So we have to do what is mandated

by law.

And I have to tell you, candidly, that our audit coverage of these

financial operations is just completely inadequate, even though we

are doing our best to cope.

Mr. Lane has done a terrific job in stretching very limited resources to do what we can. But this is a continuing problem, and

it has aggravated the situation in DFAS.

Mr. SHAYS. I think it is important, given that you made that

statement, to tell us in a written letter what you would need in

order to do that. In other words, what you are saying is that the

CFO requirements have diverted your attention from other areas.

And we need to know what you would logically need. Maybe you

could give me three different grades, and I could argue that this

happens.

Mr. LIEBERMAN. Be happy to.

Mr. SHAYS. And the staff will followup on this.

[The information referred to follows:]

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Mr. SHAYS. Mr. Bloom, any comment? And then, I am sorry, my

one last question was a joke. I had 10 questions. [Laughter.]

Mr. BLOOM. As a lawyer, I am used to that.

Mr. SHAYS. Well, I don’t like to be like that.

Mr. BLOOM. We do agree that this is a significant situation. And

actually, when I was briefed on this last week or so, I was very uncomfortable to hear that the solution really is a system that may

be 2 or 3 years away. That is what we are faced with. We are being

as diligent as we can. We are going to be more diligent. We agree

it is a significant problem. We may not agree with all the numbers,

but certainly the magnitude is that it is a significant problem.

Mr. SHAYS. Well, Mr. Bloom, you are a young man. So you can

wait a few years. My request would be that you not be reluctant

to share with the committee information you have, because we are

not a committee that will take it and have a press release and

throw stones at you. But we would like very much to deal with this

issue.

Mr. Terry.

Mr. TERRY. Thank you, Mr. Chairman.

I just need to get a feel for this, so I probably won’t ask as deep

and probing a questions as the chairman.

Mr. Bloom, I have a personal history, with outsourcing and privatization. I think that this is an asset and should be pursued. You

mentioned during your statement, and it piqued my attention,

about outsourcing.

First of all, what is being outsourced? I heard a number like onefifth or 25 percent—20 percent. But I didn’t know what was being

outsourced. And 20 percent of what?

Mr. BLOOM. It is 20 percent of our budget, the DFAS budget.

Mr. TERRY. Oh. So of the dollars, 20 percent of the overall dollars

are outsourced. And what are the specifics of the outsourcing?

Mr. BITZ. Sir, we are currently performing A–76 studies of our

civilian pay business area, our retired and annuitant pay business

area, and our transportation accounting business area. We will be

bringing forward to the Department some additional business areas

in the next year, also to be considered for A–76 or outsourcing

studies.

We are not directly outsourcing any of our activities at this time,

but we do have a significant contractor support in our automation

areas, our systems development areas, and in some of our specialty

areas such as conducting studies and in some our auditing areas

checking our activity-based costing and our efforts to do business

process re-engineering.

Mr. TERRY. Now I am more confused. But this is an area I don’t

want to get bogged in. There are just so many other questions. Let

me just followup on one more thing.

Are you telling really that there is no total area that is

privatized or outsourced? It is just some outsourced support within

each of the departments?

Mr. BITZ. Currently. But we do have three items on the street,

Congressman, that we are looking at moving the entire business

area if private industry wins.

Mr. TERRY. And what’s the timetable?

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Mr. BITZ. We are closing the packages at this time. All three are

looking to come due right after January 2000. They would have

come due on a normal 2-year time cycle during the holiday period

this year, but because they are payment areas, we thought that

might be disruptive and cause us to miss payments to our civilians

and our retirees. So we basically got a 2-month extension to have

it come due in January.

Mr. TERRY. What does ‘‘come due’’ mean?

Mr. BITZ. There is a process where we bid our best processes and

the private industry bids their best package against it, and the

winner gets the business area.

Mr. TERRY. All right. Managed competition.

Mr. BITZ. Yes, sir.

Mr. TERRY. Mr. Cooper, you mentioned some facts and figures

that also piqued my interest, and that was in the comparison of the

costs to process the interest check in relationship to the percentage

of checks that were cut for a lesser amount—equal or lesser

amount.

You stated that 41 percent of the checks—I assume that what

you are saying, is that 41 percent of all of the interest checks were

less than $25?

Mr. COOPER. That is right. In the first half of this fiscal year,

DFAS, the entitlement directorate, issued 31,000 checks; 41 percent of those were for $25 or less. And the value, the total dollar

value of that interest was 0.68 percent of the total interest paid

during that time.

Mr. TERRY. And I do agree that is an important figure to bring

up and discuss. I see it at two different levels. The first question

is, is the minimum dollar amount too low? Do we need to reassess

that? But, also, I have got to tell you that it costs $24 to process

a penalty check, 45 minutes of time in manpower involved to me

seems absurdly high.

How does it benchmark to the private sector? How does it compare? And what type of protocol is even used to raise the red flags

in the system?

Mr. COOPER. I can’t comment on how it compares to the private

sector. I think it is significantly higher. But one of the problems— and I think some of the other witnesses alluded to it—the system

is so antiquated there—they call it a MOCAS system—so antiquated that, when they make a payment and if it is late, you would

normally just add the interest to that payment, issue one check.

Well, today they are having to issue two checks, one for the late

interest, one for the actual payment. And that problem is not going

to go away for a few years. And that is adding to that inefficiency.

Mr. TERRY. Do you suggest that in the short term we increase

the amount of the minimum from $25 to $50 or something?

Mr. COOPER. Well, current threshold is $1.

Mr. TERRY. Right.

Mr. COOPER. $25 I don’t think would be a bad number to use.

Mr. TERRY. Good point.

Mr. COOPER. As I mentioned, it was only $114,000 of the total

of $16 million. So it is a very small portion of the total.

Mr. TERRY. Mr. Bloom and Lieberman, would you like to comment on that?

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Mr. BLOOM. On the threshold?

Mr. TERRY. Threshold.

Mr. BLOOM. I would be comfortable with $25 as the minimum because for the vendors there is also a cost. We send them a check;

there is a cost for them to process that and post it to their books.

And while I don’t want to say that $24 isn’t a lot of money, because

it may be to certain vendors, but it would seem that a number like

$25 is certainly in the ballpark.

Mr. TERRY. All right. Mr. Lieberman, would you like to comment?

Mr. SHAYS. You have had time to think about this. Now don’t—

[laughter.]

Mr. LIEBERMAN. I wish I were confident that we knew how much

it costs to process the check.

Mr. COOPER. That $24 is probably a very conservative number.

Mr. LIEBERMAN. Yes, we could certainly live with $25. I think

that would probably eliminate several thousand transactions. And

anything we can do to just reduce workload in these centers is

going to make them more efficient.

Mr. SHAYS. Would the gentleman yield?

Mr. SOUDER. I would like to ask a supplement to that, which is,

presumably the point of dollar payments wasn’t the financial damage; it was to try to encourage people to do it on time. Has it actually increased the number of payments going on time? And when

you say moving it to $25, presumably, it would be right away? Or

is there another tinkering process with this that you would have

30 days out?

Mr. TERRY. For example, 30 days to 45 days?

Mr. SOUDER. Do we have any data whether it actually increased

the rate of response?

Mr. BITZ. Congressman, the number of late payments has decreased each of the last 3 years, the actual number of late payments. The dollar amount of interest last year increased significantly, but the number of claimants went down. There are a lot of

causes, from significant systems issues over more than a couple

months, making Y2K changes; we couldn’t post records; bills were

allowed to accumulate. And we did our best to catch up and we

think we have done that.

I need to ask, though, if I can correct something earlier. Again,

the $24 a check is related to one system, and that system makes

a lot of payments. But it is still only about 10 percent of all of our

payments. All of our other systems, the interest is in the original

payments, and those payments average around $1.80 to $2.20,

counting on the system. We don’t pay $24 to make every check or

every EFT in the Department of Defense. It is just one big antiquated system that makes the biggest payments, but it doesn’t

make the most.

Mr. SHAYS. Would the gentleman, Mr. Terry, yield for just a second?

Mr. TERRY. I yield.

Mr. SHAYS. Would another possibility be that we just allow the

interest rate to accumulate? In other words—pardon me? I am

being corrected here. Not the rate but the amount? So maybe over

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3 months there might be a penalty, or would the interest just accumulate?

Mr. SOUDER. But it is still $1. It would be a check for $1.

Mr. SHAYS. Yes, because I make an assumption that you are not

going to make the same mistake again and not pay. Right? [Laughter.]

And have another interest payment.

Well, it is interesting. But there is some consensus that the dollar rate is too low.

Do you have—Mr. Souder, you may have the floor, if you like.

Mr. SOUDER. You’ve got momentum.

One of the things that it is hard for me to understand, it seems like we could have had a consensus on the $1 in the beginning.

And I am trying to figure out how we wound up with the $1. My

question, which I assume was to try to—I grew up in a small retail

store, and it sounds to me like simultaneously some of the things

used by the Department of Defense aren’t that dissimilar to what

we used in a little tiny retail operation, and other things that we

did in a little retail operation aren’t being used.

For example, you have the bills and you know when they are due

and the date is flagged right before that. The question is, why 3

days before the bill is due does it get delayed? And isn’t there kind

of like a red flag in the system that says this is about to become

due?

Mr. BITZ. Yes, sir. Again, I would like to take a second to differentiate between vendor payment systems and the contractor

payment system that they are talking about. In our vendor payment systems—Indianapolis, Omaha, and those locations—the system itself ages the transaction and tells us that we are missing a

document, one of the three components to make the payment.

And we send out notices, whether it be the receiving report or

acceptance document. If we have all three items in, it prepares it

for disbursement and then it warehouses it, waiting for the cash

management date to occur. What will happen is, since we are still

paper-based on receiving reports and some other elements, the No.

1 cause is still that we have not received a document from somewhere in the world saying the item was received. And we can’t

match that up to the other two parts that are usually timely, which

is the contract and the invoice from the vendor.

In the contract payment system, besides being very old, it also

has multiple categories of types of payments that are available,

progress payments, down payments, partial payments. And the system doesn’t know what it is flagging. So they were never able to

build an accurate flag to say, we are still missing one of the three

parts to do that.

Mr. SOUDER. That’s in Columbus?

Mr. BITZ. That is in Columbus, that one big system we run there.

We run other systems at Columbus that don’t have this problem.

So in the majority of our systems, we have the red flags. We have

the red flags that it is not all together yet. And we have the red

flags that it is together and it is time to release it.

But in the MOCAS system, we don’t have a flagging system

today. It is human beings going in, checking to make sure all three

components have arrived, taking the latest document and saying it

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is ready to pay, going out to look for a pre-validation to the accounting system to make sure the obligation is there. That is very

human-driven right now on that system, sir.

Mr. SOUDER. It seems to me that a second thing, to some degree,

is going on, and that is that the accounts payable area is co-mingled with internal management accounting, in the sense of, for example, one of the examples in the written testimony was assigning

some toy purchase to three different accounts, which sounds to me

like, in a small operation we had, one of our small stores was a

general store and many errors occur when you have one supplier

you are trying to put into six different categories. Any mathematical error in there goofs up the whole account.

But as you get bigger, as another company I had worked with,

you generally don’t co-mingle the payables. You have a simpler system to make sure you are not getting hit with the interest rates,

and then you have another document that tracks how you want to

internally know what you have been spending, what you have been

buying, what the sales rates are.

I am curious whether some of this is a mixing of accounting functions between internal reporting, reporting for Congress, and logical payables?

Mr. BITZ. I apologize, sir. This answer is going to probably be a

little more confusing than intended. In the payment system, the accounts payable system, we have a specificity desired by the Department that requires that we break down to very finite levels the different components of an item that we are buying.

It is not that we are buying a tank; it is that that we are buying

1,132 parts on the tank. And that detail is in the accounts payable

system. In the accounting system, resident at another location, that

same detail is present. Where the complication comes in, and the

auditors have tried to help us with over the years, is to reduce the

number of lines in the accounts payable system, so that the accounting system worries about that distribution.

Again, I hate to say it, but when we migrate to the new system

in a few years, we have that. Both systems will share the same

level, and it will be electronic. But, currently, with pre-validation

requirements, we are not supposed to make any payment for which

we cannot find an obligation. We have to keep the detail in the accounts payable system, so that when we go ask the accounting system the day before the payment, ‘‘Do you have a valid obligation

for the U.S. Government? Is it there?’’, that they match. And we

get lots of errors there, as the auditors have pointed out, and a lot

of mismatches.

Mr. SOUDER. Is it possible, until you transfer to that system—

I grew up in the furniture retail business, and we would get these

trucking bills. And they would have three or four different things,

and one wouldn’t be shipped. Then you were trying to figure out

whether in the freight bill you were paying the full amount or

whether they accidentally put that in at the last minute, when they

were loading the truck, they didn’t have it there.

It becomes an auditing nightmare. I can’t imagine doing this in

billions of dollars. If you don’t have the computer systems, could

you say that no single bill can have more than one item on it, and

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gether, then—in other words, are there some things that can be required from the company’s billing process to help the Government?

Mr. BITZ. One of the problems we are trying to address this

fall—we are going to make some interim changes to the current

system—is the ability to do something very similar to that, Congressman. It is a partial payment, where we will take the lines

that do match, make the payment for that, and then go back to the

accounting system of the contractor and see if we can determine between their records and ours why the other portion didn’t match.

That will accelerate our payments and reduce some of our interest.

The complexity of some of these contracting vehicles and the

items being delivered, though, precludes us from going one to one,

one item for one thing. We get a delivery of a tank. It just has

1,100 parts. And we ordered one tank and it is delivered, but those

parts were probably subbed: Someone else produced the 50-caliber.

So we have to keep track of that through our system.

Mr. SOUDER. I know, for example, the Hummer, I had more parts

of the Hummer in my district than another congressional district,

and the general showed me the sheet. I had 2.1 percent, and they

happened to have covered 235 congressional districts, by no accident.

Mr. SHAYS. Are you serious?

Mr. SOUDER. Serious.

I have a question of Mr. Cooper on the overpayments. In at least

your written testimony—I was trying to simultaneously listen and

catch up on all the written testimony here—you said, on page 10,

that PRGI identified 19.1 million overpayments. However, recovery

amounted to only 1.9, which looks like about 10 percent, in large

part because vendors took issue with some of the overpayments.

Could you explain? I mean, 90 percent are taking issue. Is it this

complication of sorting out the actual part that was delivered? Or

what? Well, it causes a 90 percent challenge.

Mr. COOPER. Let me try to comment on that, and I am sure the

PRGI people will provide you more detail. But that $19 million was

at the time we issued that report, and that demonstration program

was in progress. The numbers are now up to about $29 million of

overpayments have been identified. I think still about 10 percent

has been recovered, but there are a number of reasons why all that

money has yet to be recovered.

One is that when the vendors receive notice—and they receive

the notice from PRGI—their first reaction was, ‘‘Who is PRGI? We

deal with the contracting office in Philadelphia.’’ There was an

issue about who had the authority to ask for the money back. As

soon as they got those notices, everything came to a stop for about

8 months.

The Philadelphia people who issued the contract to PRGI have

agreed that PRGI is correct in the claims that they have identified

as overpayments, and they are pursuing those amounts. The delay

in receiving money back is not unusual. When contractors are

asked to give money back to the Government, it takes many, many

years in some cases——

Mr. SOUDER. Nobody likes to send money back.

Mr. COOPER. Nobody likes to give money back.

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Mr. SOUDER. But in the process of nobody—I am curious because

it is natural, then, to challenge, but part of the requests that came

in here was that we should potentially say that you have some

kind of obligation if you feel there is an overpayment.

What I am trying to get underneath this, is there actually a dispute as to whether these are overpayments, and should the burden

of proof really be on the individual company, because if these were

large items—in other words, could there be a threshold of saying,

if it is an overpayment of ‘‘X’’ amount, you are accountable?

But a lot of this stuff sounds like it is relatively small, and you

may not even realize it, and then you may have to go out and sort

it out. And I, as the company, because, yes, the Government is taking a bunch in, but a lot of these defense contractors are pretty big,

too, moving a lot, trying to sort out what went what day. I am trying to get a feel for, from their perspective, why 90 percent would

be questioning. Besides not wanting to give up the money and feeling the burden of proof is on the Government, is there some real

substance under here as to whether or not it was an overpayment?

And the second part of that was, what about a threshold? If it is

over a certain amount the company would be—— Mr. COOPER. OK. There is a dispute between the contractors and

vendors involved here, and PRGI and DOD in this case. We have

looked at some of the issues. One of the biggest issues is that there

is a clause in the contracts that are involved here that is generally

referred to as the ‘‘most-favored customer clause.’’ In other words,

the Defense Department will get as good of terms as any other person the company does business with.

In this case, one of the issues is whether the Government was

given the opportunity to get discounts for early payments. A lot of

the invoices came in for those goods that were delivered, and the

2 percent/net 10 terms were blanked out, and DOD wasn’t afforded

the opportunity to get discounts. So there are some lost discounts.

There are a host of issues that are—— Mr. SOUDER. I am interested—those host of issues are actually

pretty substantive when it is your dollars, that when we went into

the Prompt Payment Act question to guarantee that they got their

money on time, did the Government not address the question? In

other words, in return for prompt payment to the private sector,

rather than getting delayed, should not one of those have been

some kind of a standard that you get the same interest terms? Or

do manufacturers view it that, when they bid on a Government

contract at that date, it is a fixed price because they are supposed

to give the absolute bid at that point? And therefore, typical finance charges don’t apply because it is a different type of a bid

process?

Mr. COOPER. Right. It is all those issues, and in addition, there

is the other issue of price comparability. Part of a recovery auditing

process is to look at companies’ published price lists to see what

prices they are giving other customers. When PRGI did that, they

saw that the Defense Department wasn’t always given the same

prices for things like candy bars and bleach and soap, and all those

kinds of things.

Now the companies have claimed that, in fact, DOD was given

lower prices when those goods were shipped to commissaries or

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other locations. There is no documentation. That is part of the dispute. All those issues.

I don’t know if that answers your question or not.

Mr. SOUDER. It shows the complexity of the problem.

Mr. COOPER. It is a very complex problem.

Mr. SOUDER. It isn’t just a simple matter that we are not collecting overpayments. There is a difficult, substantive question

under here that has potentially huge paperwork questions as well

as equity questions. On one hand, the Government—I mean, I completely agree you don’t want to have the Government—we are supposed to get the lowest price. On the other hand, having functioned

in retailing, boy, the lowest price changed by day.

Mr. COOPER. Right. One of the problems with the demonstration

program—and we have pointed this out in the report—is that it

went back and covered 1993, 1994, and 1995, so they were looking

at old contracts. The recovery auditing process normally deals with

very current transactions, so that if there are disputes, the evidence or the information will be readily available and won’t lead

to these kind of disputes.

A lot of the problems in the demonstration program is that the

contractors did not have information, and they said it wasn’t worth

their time and effort to go try to re-create the transactions. So, I

mean, that is part of the problem.

Mr. SOUDER. A lot of defense contractors, because of downsizing,

have had a different thing, and that is that they will make the bid

on a defense contract, which will kind of be their base, and then

their additive business, which may be a slight variation or a different run, they will have to price compete differently at that point

than they did on their first contract. But, then, if they had to redo

their first contract, they wouldn’t even be in the market for the second one. I don’t know how to resolve that question.

Mr. Lieberman, do you have any comments? You are nodding

your head, but I don’t know—it doesn’t sound like there is an easy

solution to this other than we need better computers in Columbus.

Mr. LIEBERMAN. I totally agree with you that we could be looking

at a paperwork nightmare, if we inadvertently create a requirement to do anything other than take advantage of the flexibility

that the Prompt Payment Act already gives to the Government and

to vendors. That is the flexibility to specify what the pricing terms

are going to be in the contract.

If the contractor is going to offer a discount if we pay early, that

can be spelled out in the contract. The contractual terms override

the don’t-pay-before-7-days and must-pay-within-30-days rule. So

in those sectors of our buying, where this kind of approach makes

sense and is felt to be equitable from both the Government and the

contractor sides, there is already authority to deviate—the way is

clear to do that.

Frankly, we don’t have any information on how often that option

is already exercised, how many contracts we have that already

match those parameters. That is one of the unknowns here.

DOD buys so many different things from so many different sectors of the private economy that we have to be careful that we don’t

generalize off of a very limited pilot program to date, which has

dealt mostly with what we call subsistence items, food stuffs,

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things going into the PX’s, the commissaries, and things like that.

When we are talking about buying pieces of major weapon systems,

we are talking a whole different ballgame here in terms of pricing.

Also, we have to be careful to consider the impact of the changes,

such as really pushing anticipatory discounts such that both large

and small businesses are affected. Large businesses are very interested in getting money from the Government as soon as possible,

and they are going to instantly electronically transfer it into a bank

account someplace and be earning interest on it. And they literally

fly planes around to pick up checks—they used to fly planes

around; I guess we do it electronically now—because they understand the value of money.

With some small businesses, it is a different ballgame. Somebody

who gets a check is going to have to go stand in line at a bank

someplace to cash it. And they will say: I send in an invoice for

$100; I expect to get $100 back. I don’t want some bureaucrat deciding I am only going to get $90 because they paid me a couple

days early, and I am supposed to run down to the bank to make

sure that I recover the difference. So I think we have to be careful

on that end.

And then on recovery auditing, frankly, the prospect of getting

money back several years after the fact is better than not getting

it back at all. But we have to remember the money does not go

back into the programs that need it at the time the overpayment

is made.

We are talking about executing contracts and executing projects

for all sorts of purposes, and those programs need the money right

then. When it comes back several years later, it is too late. Those

programs either would have been made whole from other funding

sources or perhaps they won’t even exist anymore.

But what we need, I think, is a lot more emphasis on accurate

payment on the front end. There is a place for recovery auditing,

and I think the Congress’ approach in encouraging incremental

pilot programs, so that we can learn lessons about where it works

best, is the way to go, rather than just mandating application

across the board at this point.

Mr. SOUDER. Well, thank you very much. I need to get to a couple of other things here. I won’t say it was the most riveting session, but actually it was pretty interesting. And I don’t envy the

difficulties that you are all facing in trying to sort through these

things.

Mr. SHAYS. Mr. Lieberman—I thank the gentleman—when we

were doing Medicare and Medicaid audits, we had overpayments;

we called it pay and chase. It sounds to me like we don’t do much

chasing.

I have two areas, and then I really do want to get to the next

panel. One is—and, Mr. Bloom, you or Mr. Bitz maybe would be

better apt to describe it—I am told there are five pieces of paper

that have to kind of be accounted for. Two are internal and three

are external. And that you don’t make a payment until you have

those five papers that agree with each other. Is that an accurate

description?

Mr. BITZ. It is actually—we focus on three pieces in accordance

with the act. We require a contract in our hands to make the payVerDate 11-MAY-2000 13:44 Mar 21, 2001 Jkt 066346 PO 00000 Frm 00077 Fmt 6633 Sfmt 6601 E:\HEARINGS\59451 pfrm09 PsN: 59451
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ment, not just in the DOD, but it has to be into the paying office;

in support of that contract, all established amendments. We require a proper invoice.

Mr. SHAYS. Are we still at one?

Mr. BITZ. That is one, but that sometimes gets counted as two

because of the amendments.

Mr. SHAYS. OK. And then two is invoice?

Mr. BITZ. Then the invoice from the vendor or contractor, a proper invoice, into the paying location.

And three is an acceptance receiving document, and that is sometimes split as two. The acceptance location can be different from

the receiving location. Someone can receive it at the installation,

but the acceptance may be inside the hospital or something like

that.

Mr. SHAYS. And a 10-day discount payment would be when you

receive the bill?

Mr. BITZ. Well, actually, this is one of the inconsistencies in the

statute, Mr. Chairman. For paying interest penalty, we use the

date that we received the invoice in the proper paying office. But

for discounts, we are instructed to use the date on the invoice. And

we receive some invoices after the discount period has already expired due to mail processes and for other reasons.

Mr. SHAYS. So what is the net effect?

Mr. BITZ. The net effect is that we don’t take a lot of discounts

that are offered.

Mr. SHAYS. So we lose them?

Mr. BITZ. Yes.

Mr. SHAYS. All right. So that is something that I would think,

Mr. Bloom, that you would want to be addressing? Correct?

Mr. BLOOM. Yes, and I guess to the extent that there is the difference between when the clock starts for prompt payment and

when the clock starts for taking a discount, that is statutory and

that might be something that—— Mr. SHAYS. Yes, but don’t wait for us to figure it out. This is the

kind of thing that you who are in the field, you should just be coming to us and saying—this is the committee that—not this subcommittee—but we would recommend to Mr. Horn’s subcommittee

and to the full committee that we just take action, and we will. I

mean, that could go on the consent calendar.

That’s funny, I call it the consent calendar because that is what

it is in Hartford.

The other area would be, I would like to ask all three of you, and

I am not looking for long answers, but testimony from the next

panel says that the interim and progress payments under service

contracts should be covered by the Prompt Payment Act. I want to

know if you agree. We’ll start with you, Mr. Cooper. Service contracts are not part of the Prompt Payment.

Mr. Woods. Mr. Woods, I have a theory that the person who says

the least actually knows the most. [Laughter.]

Mr. WOODS. Well, actually, let me shoot a hole in that theory because we don’t have a position on that, Mr. Shays. The regulations

do provide that contract financing payments are not covered under

the Prompt Payment Act. And that would cover a lot of service contracts because they are paid in a contract financing mode.

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Mr. SHAYS. So the bottom line is that GAO has no opinion yet?

Mr. WOODS. Not on that issue, sir.

Mr. SHAYS. I would love it if you would have a dialog with your

people and see what you might recommend.

[The information referred to follows:]

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Mr. SHAYS. Mr. Lieberman.

Mr. LIEBERMAN. I am going to have to give you an answer for

the record on that, Mr. Chairman. We haven’t had a chance to

think about it.

Mr. SHAYS. I would like you to think about it.

[The information referred to follows:]

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Mr. SHAYS. Mr. Lane, do you have any comment, please?

OK. Mr. Bloom. Mr. Bitz.

Mr. BITZ. Mr. Chairman, we support the rewrite of the OMB circular that establishes that contract financing payments, of which

progress payments and certain service contracts are, are moneys

actually being paid prior to acceptance of goods on services and,

therefore, shouldn’t be under the Prompt Payment Act. But we will

do whatever the committee chooses.

Mr. SHAYS. I realize that, but we want to do what makes sense.

Let me ask this: If any of you would have a final comment—I

will get to the next panel, but I would invite all our witnesses up

there to make a comment they would like or to make an observation. I will start with you. Do you have any observation to make

to the subcommittee?

Mr. COOPER. Mr. Chairman, I can’t add much more than what

has already been said, but, I mean, we have reported, and I think

the committee understands, the payment problems in DOD are

very serious, that some action is underway to address some of the

problems. It will be a number of years before we see those initiatives come to fruition. In the meantime, we have got to be diligent

and try to continue doing the audits that identify these overpayments and try to recover the moneys.

Mr. SHAYS. Thank you. Mr. Lane.

Mr. LANE. Just a comment: One of the things that we are doing,

we are trying to work very closely with DFAS on a number of these

areas, and I think, as was alluded to earlier, the most important

thing is to make the payment right the first time and on time. That

is what we are really trying to do, and trying to get the systems

that will make sure that will happen.

Mr. SHAYS. Thank you. Mr. Lieberman.

Mr. LIEBERMAN. I would like to just underscore the fact that we

think the Prompt Payment Act is extremely important to keep the

Government as a reliable business partner. The Department is trying very hard not to discourage contractors, particularly those who

are offering high-technology products, from doing business with the

Government.

Mr. SHAYS. Very good point.

Mr. LIEBERMAN. And certainly not paying people on time means

you are an unreliable partner. So I think what we are talking

about here, in terms of the value of the Prompt Payment Act and

the need to comply with it, is the need to keep it there as a means

to hold our feet to the fire. This is very important and fits very well

into the Department’s overall acquisition reform goals in that respect.

Mr. SHAYS. Thank you. Mr. Bitz. Mr. Bloom.

Mr. BLOOM. I would echo what Mr. Lieberman said about the

supply chain being very important. We need to make sure we are

keeping our vendors in business. Clearly, there has been a lot of

work done at DFAS, and there is a lot left to do. And we are working hard at it.

Mr. SHAYS. That is why you were hired, right?

Mr. BLOOM. Absolutely.

Mr. SHAYS. I thank the panel, and I will call our next panel.

Thank you very much.

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Lieutenant General Thomas G. McInerney, president and CEO of

Business Executives for National Security [BENS], based in Washington, DC, accompanied by Dr. Erik Pages, vice president for Policy and Programs at BENS.

Our second testimony is from Mr. Paul Dinkins, executive vice

president, the Profit Recovery Group [PRG], based in Atlanta, GA,

accompanied by Mr. Jack Kenny, director of Operations, Government Audits.

And Mr. Rodney Mateer, partner, Deloite and Touche, Professional Services Council [PSC].

I would like them all to come, and if you would remain standing,

I will administer the oath.

Mr. Pages, why don’t we move you down one. Thank you.

If you would raise your right hands, please?

[Witnesses sworn.]

Mr. SHAYS. For the record, our witnesses responded in the affirmative.

And we will go in the order that I called you. I welcome you, and

I appreciate your patience in listening to our first panel. If you

want to comment on what the first panel said, I would be happy

to have you do that. And obviously, your full statements will be in

the record. And we will do the same thing; we will put a 5-minute

clock and roll it for a second 5 minutes. If you would stop at least

before the second one, that would be great.

General.

STATEMENTS OF THOMAS G. MCINERNEY, LIEUTENANT GENERAL, USAF (RETIRED), PRESIDENT AND CEO, BUSINESS EXECUTIVES FOR NATIONAL SECURITY, ACCOMPANIED BY

ERIK PAGES, VICE PRESIDENT FOR POLICY AND PROGRAMS,

BUSINESS EXECUTIVES FOR NATIONAL SECURITY; PAUL J.

DINKINS, EXECUTIVE VICE PRESIDENT, THE PROFIT RECOVERY GROUP; JACK KENNY, DIRECTOR OF OPERATIONS, GOVERNMENT AUDITS, THE PROFIT RECOVERY GROUP; AND

RODNEY W. MATEER, PARTNER, DELOITE AND TOUCHE,

PROFESSIONAL SERVICES COUNCIL

Mr. MCINERNEY. Mr. Chairman, Counsel. As you know, I am

president of the Business Executives for National Security [BENS],

which is a national, non-partisan organization of business and professional leaders dedicated to the idea that a strong but affordable

national security structure is everyone’s business.

Now roughly 2 years ago, we created the BENS Tail to Tooth

Commission chaired by former Senator Warren Rudman and Mr.

Josh Weston, honorary chairman of ADP. The commission is composed of senior business executives, former political leaders, and retired military officers. For instance, Sam Nunn, Bo Callaway, Vin

Weber, Bernie Marcus of Home Depot, Fred Smith of FedEx, Mort

Zuckerman of U.S. News and World Report, General Jack Vessey,

former chairman of the Joint Chiefs of Staff, General Tony

McPeak, Chief of Staff of the Air Force, and Gordon Sullivan, Al

Gray, Marine Corps Commandant. We have very prominent American business people and defense leaders.

We believe that the Pentagon now spends too much on administration and bureaucracy. In fact, nearly 70 percent of the current

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defense budget supports what we call the defense tail. We need to

see new investment in the Pentagon’s core business of combat capability, what we call the defense tooth. And you were talking a

lot about defense tail in the previous discussions.

We believe that DOD’s financial management problems have

structural causes that cannot be fixed through small-scale reforms,

such as changes to the Prompt Payment Act. Nonetheless, we do

believe that the solutions I will list can significantly improve

DOD’s performance, especially if they are included as part of a

more comprehensive financial management reform package.

The following six recommendations are the results of discussions

we have had with BENS members, in the industry, Government

and other experts. The recently completed study of DFAS by the

Joint Chiefs of Staff supports many of the following recommendations.

No. 1, reform of the Prompt Payment Act. One of the major concerns regarding application of the Prompt Payment Act is that current regulations do not effectively cover service contracts. And you

asked them those questions and they didn’t have the answers.

We believe that it would be important and that the subcommittee

support clarification of current regulations to ensure fair coverage

for service contracts.

No. 2, outsourcing of non-core defense DFAS functions that was

touched on but, frankly, we think it missed the mark widely. We

continue to support aggressive outsourcing of non-core functions at

DFAS. Since 1995, DFAS has initiated eight outsourcing studies by

the A–76 process for public-private competition. Three have been

completed, with none of the work going to the private sector.

Two current outsourcing studies, which were mentioned, defense

civilian payroll and the retired annuitant payroll are so unwieldy

and risky that few if any private-sector bidders are likely to

emerge. We fear that these efforts have been designed to fail. The

subcommittee should endorse a more effective strategy for

outsourcing these activities.

No. 3, fix feeder systems. Much of the problem with DOD financial management can be traced back to the old adage, GIGO, garbage in, garbage out. Currently, about 80 percent of all financial

data processed by DFAS originates in the services. And this data

often contains errors or is not compatible with existing information

processing systems. The subcommittee should also examine efforts

to improve the quality of information generated by the military

services.

No. 4, use activity-based costing. DOD will never meet privatesector standards until its financial operations are placed on an activity-based cost foundation. Only on this basis, can DFAS benchmark its operations against the best in the private sector and conclude its outsourcing competitions in equitable and auditable manner. This process will take time, but it should be pursued.

No. 5, continued consolidation. The Pentagon should continue to

consolidate finance and accounting operations DOD-wide by reviewing the exceptions that were granted in the early 1990’s by the

services to retain finance and accounting functions.

Mr. SHAYS. General, I just need to interrupt you. I am very sorry.

Someone left a suitcase outside the door. Is there anyone here who

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might have done that? Otherwise, the bomb squad is going to be

called. I would like to avoid that.

Your suitcase? You are the man? Thank you very much.

I just want to make sure that suitcase is OK if you are bringing

it in here. But that is another question. [Laughter.]

Mr. MCINERNEY. In particular, the Air Force and the Navy retain

large in-house financial management teams.

Six, create a corporate board of directors. DOD should establish

a DFAS board of directors composed of military, civilian, Government, and private sector leaders to approve expenditures and reform initiatives. This board will also improve cooperation between

DFAS and financial officers in the military services.

My concluding thoughts, Mr. Chairman: DOD can and should be

able to comply with, and take advantage of, provisions of the PPA.

In fact, with the proper focus on the customer, DFAS can be a

model for the rest of the Federal Government.

By looking at the lessons of the private sector accounting industry, DFAS can access the talent and technology that already exists.

There is no need to start from scratch. America’s modern private

sector has prospered on the basis of sound financial management

and adherence to standards and accepted accounting practices.

Were the Federal Government to do the same, there would be no

need for Congress to enforce compliance through repeated legislation.

With respect to DOD and DFAS, BENS believes that improving

its finance and accounting posture will allow them to identify and

free up the resources so desperately needed for force structure modernization.

Thank you, Mr. Chairman.

[The prepared statement of Mr. McInerney follows:]

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Mr. SHAYS. General, thank you very much.

Mr. Dinkins.

Mr. DINKINS. Thank you, Mr. Chairman. I appreciate the opportunity to testify before the committee today.

My company, the Profit Recovery Group, pioneered an accepted

business practice known as recovery auditing about 30 years ago.

Basically, this practice is designed to identify and recover overpayments that have been inadvertently been made to suppliers of

goods and services.

And it is a well-known fact that even the best known, best run

companies around the world with the best systems still make overpayments typically in the area of about one-tenth of 1 percent a

year.

In our written testimony, we have made reference to results to

date in several Government programs, the oldest of which is

AAFES. And, for example, last year we recovered just about $30

million on a purchase basis of about $51⁄2 billion.

We have been doing this now for about 30 years. We serve over

3,000 clients worldwide, across 22 countries, about half of which

are the Fortune 1,000 here in the United States. And because of

this global experience, we are pretty well experienced in the purchase and payment processes in large organizations. And I think

it is worth mentioning that the Department of Defense is the largest bill-paying entity in the world.

It is an extremely complex environment, and we think they do

a pretty good job given what they have to work with, the age of

the systems and the consolidation and processes that they have

gone through over the last few years.

Having said that, at DOD or any other entity, there will always

be overpayments. And the purpose of the recovery audit process is

to be a safety net to identify them and recover them after the fact.

We are now finalizing a recovery audit demonstration program

within the Department of Defense. A side benefit of this process is

the identification of factors that contribute to financial loss. As a

result of our experience in this program, we have become familiar

with the Prompt Payment Act and have prepared a series of recommendations to revise the act to better mirror private-sector business practices and eliminate millions of dollars of financial loss.

It is our understanding that the Prompt Payment Act was originally enacted at a time when the Government was unable to meet

the private sector’s standards for paying invoices accurately and on

time. While that situation has improved, we at this point believe

it is a good time to re-look at the Prompt Payment Act and the following recommendations we make to improve lost cash discounts,

to reduce penalty interest that we believe is paid in error, and to

improve contract prices that are achieved by the Government.

The first recommendation concerns cash discounts, and one of

the gentlemen had brought this point up earlier. The private sector

practice is to calculate cash discount due-dating from the later of

either the receipt of invoice, the receipt of goods, or the resolution

of invoice discrepancies, whichever is most advantageous.

The Prompt Payment Act, however, stipulates that cash discount

due dating begins with the date of the invoice. And as you have

heard in prior testimony, invoices are often received after the inVerDate 11-MAY-2000 13:44 Mar 21, 2001 Jkt 066346 PO 00000 Frm 00097 Fmt 6633 Sfmt 6601 E:\HEARINGS\59451 pfrm09 PsN: 59451
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voice cash terms—cash discount due-dating, which means that the

Government cannot avail itself of cash discounts. This results in

the inability to take advantage of cash discount terms. The clock

starts ticking oftentimes before the invoice is received.

In our limited scope of the demonstration program, we estimate

that roughly $20 million was lost on cash discounts that would otherwise have been taken advantage of on a base of payments of only

$6 billion in purchases. Therefore, you can extrapolate from that

there is a significant opportunity here when extended across the

entire purchase base for DOD. And we estimate this to be minimally at $100 million a year in savings with this correction.

The second topic and recommendation is penalty interest. First,

the private sector does not pay penalty interest. We do not recommend elimination of penalty interest, but rather revising this

portion of the act. The Prompt Payment Act stipulates that the

Government must pay penalty interest for any disbursements made

later than the due date stipulated by in the act even if the terms

offered by the vendor are more favorable. We recommend revising

the act to provide the Government the ability to accept vendor

terms stated on the invoice if more advantageous.

Our next recommendation concerns recognition of extended dating terms. Private industry offers extended dating terms in many

instances as an added incentive to take goods early. The Government is forced to pay these invoices within 30 days of receipt. This

results in many cases in the loss of use of this money for 60 days

or more. Again, we recommend revising the act to provide for acceptance of vendor terms invoiced if—vendor terms on the invoice

if more favorable to the Government but not stipulated in the

Prompt Payment Act.

As an example of that, often times extended dating terms would

be offered on an invoice that where goods are shipped and received

but the invoice stipulates payment, say for example, within 120

days. Based on the act today, that bill would have to be paid within

30 days, losing 90 days of interest on that money.

Our next recommendation has to do with recognition of commercial practice. Some Government contracts do stipulate that the

Government must receive terms of sale at least as favorable as that

offered to the private sector. We recommend that the act be revised

to include this language and provide for uniformity across all Government purchases of commercial items. This will help to ensure

Government receives the best price.

Last, but not least, our recommendation concerns anticipation.

Anticipation is a term used to describe a reduction of disbursed dollars based on the time value of money when payment is made in

advance of the actual due date. In effect, anticipation is the reverse

of penalty interest.

The Prompt Payment Act should be revised to provide for use of

anticipation on invoices paid early, as is common in the private sector. We recognize that it is not the Government’s intention to pay

invoices early; however, situations can and occur where payment is

in fact made early. In these instances, the time value of money can

be identified and recovered as part of the recovery audit process as

is common in the private sector.

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In summary, Mr. Chairman, the Prompt Payment Act has helped

to improve Government’s ability to pay vendors on time. Now that

these processes have been somewhat improved, we think it is a

good time to revise the Prompt Payment Act to adopt private-sector

business practices.

Our recommendations to revise the act will provide for improved

tax management, significantly reduce penalty interest paid, and

the loss of cash discounts. These recommendations in no way mitigate the beneficial aspects of the act. In fact, we believe these

changes will provide for a clear interpretation of the original intended purpose of the act.

Thank you, Mr. Chairman. We are happy to entertain questions.

[The prepared statement of Mr. Dinkins follows:]

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Mr. SHAYS. Thank you very much.

Mr. Mateer. Let me have you bring that microphone a little closer. Am I saying your name correctly?

Mr. MATEER. Yes, you are. Thank you.

Good morning, Mr. Chairman, I would like to thank you for the

opportunity to comment today on the Prompt Payment Act, its implementation, and how the professional and technical services companies who work for the Federal Government are being harmed by

some of the deficiencies in that implementation.

I am a partner and the national director of our Government contract consulting practice with Deloite and Touche. We are a national and international accounting firm. Many of our clients are

members of the professional services council, and I am here today

to speak for that trade association.

PSC members are technology companies that make up the fastest

growing sector of our Nation’s economy. Primarily, these services

are applications of professional, expert, and specialized knowledge

used to assist Government and private-sector clients to solve operational, technical, and management problems. Overall, this sector performs $600 billion in services in the econ- omy, including more than $100 billion in the Federal Government

each year in such areas as defense, international affairs, health,

environment, and others.

Before I explain the specific problems that I believe we are experiencing, allow me to briefly frame the issue for you, because this

gets into some technical details with the regulations, vis-a-vis the

law.

First off, Representative Jack Brooks sent a report which accompanied the original Prompt Payment Act, stated as follows: ‘‘Every

Federal agency shall pay an interest penalty on amounts owed to

business concerns through the acquisition of property or services

when the agency does not pay on time.’’ And that is fundamentally what our issue is here today. The

issues I will address in this testimony are essentially twofold. One,

the purpose of the Prompt Payment Act is fundamentally fair, but

the implementing regulations are at best unclear and at worst inconsistent with the law. And two, the application of these regulations have resulted in an inequity in the professional and technical

services community by excluding the protections of the Prompt

Payment Act on certain billing transactions where valid services

have otherwise been performed.

I also want to emphasize that at the very onset of my testimony

that we acknowledge that the agencies have in certain circumstances will pay in less than 30 days. In fact, they have policies

in some cases. The Department of Defense will pay certain transactions in 7 days or 14 days. We believe this scenario is ideal, and

we would like to see that efficiency applied to all payments.

But more to our concerns: Our concerns rest primarily with the

facts that an unacceptably high number of services contractors are

not getting paid under the Prompt Payment Act. In fact, a number

of our members have indicated that they have had delayed payments that are 50 to 80 to 100 days or more. This can result in

a significant cash drain on a company’s operations, particularly for

small business. And most companies secure lines of credit or other

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forms of financing to float those delinquent payments. Obviously,

this is a hardship on the contractor community because these types

of costs are not allowable, these financing costs, under the Federal

acquisition regulations.

Particularly perplexing and in our opinion indefensible is the fact

that service contractors are in effect being treated differently than

other Federal contractors. The fundamental equity argument here

is that the Prompt Payment Act does not intend to make a distinction between service and non-service contractors. The problem

arises in the regulations and their interpretation in implementing

the act.

By way of background, service contractors perform—are performed by both large and small companies, are typically reimbursed—and this is a point you brought up earlier in your question, Mr. Chairman—reimbursed as interim payments or as

progress payments based on costs incurred or on fixed hourly rates.

This is important because the regulations expressly exclude these

forms of payment from the Prompt Payment Act coverage. However, in our view, each labor hour that is billed and its related

costs incurred is a service performed. And if that service complies

with the other requirements of the act and the regulations in terms

of a valid invoice, compliance with the terms and conditions of the

contracts and the like, it should be subject to the Prompt Payment

Act.

Focusing on the Prompt Payment Act purpose for just a moment,

the law, we are most interested in stressing that the purpose of the

act, which is to protect to a certain degree the contractor community by providing an incentive for the Government to pay its bills

on time and to compensate contractors for delays in those payments. That is essentially the purpose.

The Prompt Payment Act generally provides that the Government must pay a proper invoice within 30 days. The act applies to

the acquisition of property or services. However, we believe that

the regulations again do not reflect the clear intent of the act and

are not in step either with acquisition reform.

The current regulations properly state the law’s purpose to pay

contractors fairly for work performed; however, again, at best they

are unclear or at worst inconsistent regarding the exclusion of terminology that has occurred in the regulation that is not in the law

called contract financing payments. Contracting financing payments in the regulations are specifically excluded from the Prompt

Payment Act.

Now, as was mentioned earlier today, these are very common

types of payments for the professional services business. In the

FAR they are defined as Government disbursements of moneys to

a contractor under a contract clause or other authorization prior to

acceptance of supplies and services by the Government. And it

gives illustrations as to particular types of billing transactions that

are excluded, such as the interim payments.

The problem with this language is that we believe that the regulatory definition of a contract financing payment has resulted in

the Government’s misapplication of the law’s requirements. The

definition has—and this is a key point—has essentially legitimized

the Government’s acceptance process as being integral to applicaVerDate 11-MAY-2000 13:44 Mar 21, 2001 Jkt 066346 PO 00000 Frm 00112 Fmt 6633 Sfmt 6601 E:\HEARINGS\59451 pfrm09 PsN: 59451
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tion of the Prompt Payment Act. This categorically lists specific

types of payments that are not covered by the Prompt Payment

Act. The FAR does that as well.

In contrast to the law, the FAR coverage on contract financing

payments, the law uses no such terminology, as I indicated, but instead the law, I believe, focuses on the substance, not the form, of

the payment. The legal prerequisites for application of Prompt Payment Act are particularly very clear in the 1988 amendments to

the Prompt Payment Act, are one that there is an invoice, and if

required by the contract, for supplies delivered or services performed.

Let me point out that some of the confusion on this in the past,

I believe in its application, has been that there has to be something

tangibly provided. It has to be delivered; it has to be given; it has

to be accepted, approved, signed off, et cetera.

However, the 1988 amendments to the law make it very clear

that Congress was concerned about activities that were taking during the performance of the contract and that prompt payment

should apply to in-process work as well. And so I think that is pretty clear in the 1988 amendments.

And, too, the law speaks in terms of requirements as acceptance

of the property or services. We see the term ‘‘acceptance,’’ but we

also see, particularly in the 1988 amendments, ‘‘or a determination

by such employee that such performance complies with contract

terms and conditions.’’ Again, my sense is that the act is much

more flexible in its application than the FAR is as it relates to

these types of issues.

In conclusion, Mr. Chairman, it is our recommendation that as

you and this committee look at improvements to the Prompt Payment Act, we ask that you carefully consider the inequities that

have resulted in its implementation. We strongly believe that there

is no valid reason for service contractors to be singled out and

treated differently because of the type of payments requested and

submitted in a way that is inconsistent with the intent of the

Prompt Payment Act.

We believe that the Government should promptly pay for services

performed, that conform to contract terms and conditions in the

same manner as other transactions. I would also advise you that

we have requested that the FAR council revise the FAR language.

We have had meetings to this date with them on contract financing payments so that it complies with the intent of the law. We

have also requested that the Office of Federal Financial Management revise OMB circular A–125 so that it, too, complies with the

intent of the Prompt Payment Act. We hope the committee will

stress these changes as well in its oversight capacity.

Thank you, Mr. Chairman, and I stand ready for any questions.

[The prepared statement of Mr. Mateer follows:]

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Mr. SHAYS. Thank you very much, Mr. Mateer.

Let me start with you, General McInerney. From your basic report, I think you wanted to make the point before we talked about

Prompt Payment Act that you believe that we have to totally reexamine our military from a standpoint of what are its core missions as too much into administration and not for the combat. We

refer to that as the ‘‘Tail-to-Tooth Commission.’’ And this committee will be looking at that in some measure, or are we deferring

to other committees on that, because I do think it is really one of

the very key questions.

Your point, I think, was that the Prompt Payment Act is a tiny,

tiny part of the overall. And I am going to accept that because I

do concur. Even when it is a small part, we are still talking billions.

Mr. MCINERNEY. We think it is important, Mr. Chairman.

Mr. SHAYS. Yes, right. And you then made a number or recommendations. You, obviously, talked about your deep concern

about DOD’s financial practices, and we have strongly supported

the outsourcing of key parts of DFAS. In some ways, I almost wish

this panel goes first and then I can have the other panel follow, but

it has been an improvement just to have DOD sit in with GAO and

the inspector general. It has been helpful.

I am going to take your recommendations and I am going to ask

Mr. Dinkins and Mr. Mateer and Mr. Kenny, please feel free to

jump in, what you—I think there is consensus, and you have given

me the structure to do that.

One was just general reforms of the Prompt Payment Act. And

there is consensus here. I think that the service contracts should

be included. Obviously, you think—— Mr. MCINERNEY. Yes, sir.

Mr. SHAYS. Yes. Mr. Dinkins, that service contracts should

be——

Mr. DINKINS. Yes. Without having studied this at any length, it

sounds reasonable.

Mr. SHAYS. It is reasonable but this isn’t something you have

really focused—— Mr. DINKINS. No. It is not our area of expertise.

Mr. SHAYS. Right. Mr. Mateer.

Mr. MATEER. Yes.

Mr. SHAYS. Clearly, yes. OK. The outsourcing of non-core DFAS

functions, describe to me, first, Mr. McInerney, the difference between outsourcing. Oh, excuse me, that was basically Mr. Souder’s

comments and you responded to that. You think they haven’t even

gotten to first base on this issue?

Mr. MCINERNEY. Not at all. And we have studied very closely

their RFP. They put out a request for proposal for those two, civilian pay and retired annuitant. It is a very convoluted request for

proposal. It is 3,500 pages, including attachments. That stack or

pile will go here. They have broken it down into four different proposals. And it is in the A–76 process. Frankly, Mr. Chairman, I

don’t think the industry is going to bid on it.

And, of course, they will win. And the danger of that is then they

have what they call their most efficient organization, the MEO and

the A–76 process, and they don’t really jump forward on the latest

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information technology and the latest business practices that industry today is using, and which we have a financial sector and

people that do this in all industries. So they are not able to benchmark the very best practices.

And when they say several years, Mr. Chairman, they mean several years. They will say 2 to 3, but I think you will see, from being

implemented, it ends up being 3 to 5.

Mr. SHAYS. One of the discouraging things from my standpoint,

when we looked at healthcare billings, was that the Government

would lock into a system that was obsolete practically before they

even started to implement it.

Mr. MCINERNEY. That’s correct.

Mr. SHAYS. Yes. Any comments on that, Mr. Dinkins, Mr.

Mateer?

Mr. DINKINS. No.

Mr. MATEER. No.

Mr. SHAYS. Any disagreement about outsourcing, or is this just

not something you have looked at?

Mr. MCINERNEY. Could I just add one thing on that so people understand? Companies like ADP, Automatic Data Processing, Inc.,

they pay 26 million people a month, 23 million in the United

States, 3 million outside the United States. They are the largest

payroll provider in the world. You have Ceridian that does 2 to 4

million. So you are often overwhelmed when Government witnesses

come here, and the numbers that clearly DFAS states are correct.

Mr. SHAYS. Right.

Mr. MCINERNEY. It is not the numbers that is so significant. It

is the processes they are using. Today, with computers, no one

cares if it is a $1 billion airplane, B–2, a $2 billion B–2. The fact

is, the process they are using, is that the best process?

Mr. SHAYS. Yes. I think that comes through pretty loud and clear

in the hearings and other things we looked at.

Explain to me what you mean by the fixed-feeder systems.

Mr. MCINERNEY. Well, the fixed-feeder systems are, you know,

the services have still large financial people working there, and

they feed those dollars over to DFAS. Those, as I said in my testimony, those parts of their——

Mr. SHAYS. OK. I hear you.

Mr. MCINERNEY. So that interconnecting system needs to be improved.

Mr. SHAYS. When you refer to the services, I refer to them as the

branches. Am I——

Mr. MCINERNEY. The branches, that is correct. Well, Army,

Navy, Air Force are the services.

Mr. SHAYS. OK. Oh, good.

Mr. MCINERNEY. Same.

Mr. SHAYS. And so, your basic point is that what we are getting

from them is just pretty antiquated?

Mr. MCINERNEY. That is correct. Time-consuming.

Mr. SHAYS. Any comments from others?

[No response.]

Mr. SHAYS. The activity-based costing, want to just explain that?

Mr. MCINERNEY. That is clearly what the private sector uses. So

you know what each activity costs you. Today, unfortunately, in

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Government, people don’t know what it costs them to do different

business processes. And because they don’t, they don’t know where

to focus their effort.

And you hear the discussions on checks. It costs $8.50 to pay a

uniform serviceman, but really the fully burdened cost, they had an

activity-based costing system that could—it is probably $12.50. And

so, they are not able to identify clearly what their costing is.

And the Congress has directed DOD to go into the activity-based

costing, and they just have not aggressively pursued it.

Mr. SHAYS. Continued consolidation? That is the finance and accounting, merging the two?

Mr. MCINERNEY. Well, today the services still have 18,000 to

22,000. DFAS has roughly 20,000, and the services have, say,

roughly, 20,000. So we have 40,000 people in the Department of

Defense in finance and accounting.

Mr. SHAYS. And now when you do tooth to tail, that would be the

tail?

Mr. MCINERNEY. That is correct.

Mr. SHAYS. But if you then outsource, we would still be legitimate and utilize the outsourcing costs when we look at tooth to

tail?

Mr. MCINERNEY. Yes, sir. What I would say is, I got the chairman, General Shelton, when I told him that he had—this was a

year-and-a-half ago—23,000 in DFAS and not one of them pulled

a trigger; he went back and did his due diligence and found out

from the staff that was correct. That is why we are working very

closely with the Chiefs of—JCS.

Now, DFAS, the bill is about $1.67 billion today in their working

capital fund that they get. We think the fully burden costs are

higher. But the fact is, the private sector benchmark standards

would probably be about half that, and you could save upwards of

$800 million by using the very best business practices. Then you

shift those dollars over to modernization that is required.

Wouldn’t take it away from the services because they have a

major problem in modernization. They are depreciating the force at

$118 billion—the tanks, airplanes, and that—and last year they

only modernized at $44 billion.

So the military is going to break. The aircraft in Bosnia today—

I am digressing, but to give you feel of the importance of this—the

average age in Kosovo is 26 years. So our force is aging, and this

has not been brought up. And that is why what you are doing this

oversight; it is so important to be looking in these areas. The

Prompt Payment Act is worthwhile, the look you are giving it, because it is part of the overall problem.

Mr. SHAYS. And then, finally, you had mentioned about creating

a board of oversight. I am just going to make a comment, and then

I will ask the others, too.

Mr. MCINERNEY. Yes, sir. We think that by having, say, the service comptrollers involved and some private-sector people that have

no vested interest in this, but that bring in the outside experience,

would be very helpful.

Mr. SHAYS. Mr. Dinkins, when you were speaking, I was thinking, your basic task is you come in and you help chase the dollars

and recover them. Then you take a percent of the recovered money.

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Mr. DINKINS. Yes, the first task is to identify that there was, in

fact, an overpayment.

Mr. SHAYS. Right. And I am struck by—the gentleman who had

written ‘‘Up the Organization Man,’’ Townsend, I think it was, he

talked about how salesmen should get whatever they bring in business even if they get 10 times more than the president. And the

foolish company is the one that starts to tell their salesmen that

they are not going to get paid as much, and they start not having

the sales.

So I am sympathetic to the fact that if you are able to bring in

a certain amount, that you are going to take a percent of it, but

the one thing I don’t want to make is it so easy because we are

so foolish in our overpayments that you come in and quite easily

get that. I would rather it be more difficult for you. And then you

will have earned your percent, which is to say, is your assessment—you made comparisons of percent—is your assessment when

you have looked at this, that there are some overpayments that

clearly never should have been made?

Mr. DINKINS. Yes. Well, I would revise that to say that overpayments always occur in every organization that we work for, which

includes the largest corporations around the world. They always

occur. It is a fact of life.

Mr. SHAYS. I realize that. I really do. But it is kind of astounding

to me to think of $1 billion coming back, and most of it, a chunk

of it voluntarily. That is a lot of money.

Mr. DINKINS. Right. It is probably appropriate to comment here;

there was some prior discussion about that fact. In the private sector, there is no obligation to tell another private-sector company

that they have been overpaid. And I think that is the same situation you will find with the Government.

You will find instances——

Mr. SHAYS. So I hear you clearly, you mean there is no obligation

for the company to return the money?

Mr. DINKINS. Absolutely. Unless it is found—actually, in many

cases they don’t know where to apply it. So they don’t even, in fact,

know they have been overpaid. They just know that they have

unapplied cash sitting in an account and don’t know what to tag

it.

Mr. SHAYS. Must be wonderful.

Mr. DINKINS. So they let it sit there until it is identified and that

they have something to tag it to. And then they are happy to give

it back.

And, you know, a further point of view is that——

Mr. SHAYS. So that really argues for making sure we don’t overpay?

Mr. DINKINS. Yes, but even as diligent as you will be on the front

end of that process, there will always be overpayments. And this

process is one to ensure that they are identified and recovered.

Mr. SHAYS. Especially when you have archaic systems.

Mr. DINKINS. Yes.

Mr. SHAYS. I mean, if you have already made a payment and you

get an invoice that says you owe a 100 percent when you have paid

30 percent already, and you just don’t have that on your records

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because you can’t compare the data, you are going to make overpayments you should never make.

Mr. DINKINS. Yes, but this is not a unique situation to the Federal Government. You can go to—I mean, the people who get the

money last in every organization tends to be accounts payable in

back-office financial systems.

Mr. SHAYS. Yes. I learned something about the private sector.

And the difference is, when the private sector is foolish, they go out

of business. And I remember Combustion Engineering; they went

out of business. And they had two buildings, and the CEO didn’t

like the fact that the underground passageway sloped down. He

wanted it straight across. And he spent a half a million dollars to

have a straight tunnel instead of a sloping one. And I thought, if

we had done that in Government, we would have been very criticized. I don’t use the private sector always as the benchmark.

Mr. DINKINS. Right.

Mr. SHAYS. But, with the private sector, especially when times

aren’t good, they go out of business. So we don’t have that same

kind—— Mr. DINKINS. True, but their priorities are different. For exam- ple, if a large retailer has $100 million to spend, they are more

likely to spend it on new stores and merchandise as opposed to fixing a back-office system. But they do get around to fixing these

things.

Mr. SHAYS. Yes.

Mr. DINKINS. It is probably worth mentioning that this process

of recovery auditing is a repetitive process that just goes on year

after year, and try as our clients will to clean it up, there are always overpayments.

Mr. SHAYS. Right. You are still going to have work from DOD;

I just want to make sure that we reduce. I think that any organization—I go back to my first point, the salesman who makes the sale

should get that percent. If you are able to recover money that we

wouldn’t have recovered otherwise, God bless you.

Mr. DINKINS. One thing to keep in mind though: This is a little

bit like an automotive assembly line. For every minute that goes

by, it is one more car that doesn’t come off the line if it stops. And

this process is similar in the sense that you can only go back so

far before the records become too aged. In the private sector, typically, this year we would be auditing last year—not 4 and 5 years

ago.

And so I would encourage the committee to think about how to

expedite the process such that it is more current to the transaction.

Mr. SHAYS. Well, I am left with one bias, and that is that privatization or outsourcing is more important in the public sector because what we pay our employees and our ability to modernize is,

I think, a greater lag in the public sector. And so I don’t think we

are always able to be on the cutting edge. The private sector, I

think, clearly has a better option.

Let me ask each of you if you would like any closing comments.

And, Mr. Kenny, is there any comment you would want to make,

any statement that you would like to—any observation, actually?

Mr. KENNY. No.

Mr. SHAYS. OK. Mr. Mateer.

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Mr. MATEER. I have no additional comments.

Mr. SHAYS. OK. Mr. Dinkins.

Mr. DINKINS. No, sir.

Mr. SHAYS. Thank you. I really appreciate your testimony. I

think it is very helpful. And we obviously have lots of opportunities

here. Thank you very much.

This hearing is closed.

[Whereupon, at 12:02 p.m., the subcommittee was adjourned.]

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