United States General Accounting Office

GAO Report to Congressional Requesters

October 1995 DOD PROCUREMENT

Millions in Contract

Payment Errors Not

Detected and Resolved

Promptly

GAO/NSIAD-96-8

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-256249 

October 6, 1995

The Honorable John Glenn

Ranking Minority Member

Committee on Governmental Affairs

United States Senate

The Honorable William V. Roth, Jr.

The Honorable Charles E. Grassley

The Honorable Barbara Boxer

United States Senate

In response to your request, we surveyed a group of large and small

defense contractors to identify the amount of outstanding Department of

Defense (DOD) overpayments and underpayments identified in contractors’

records. We also reviewed selected overpayments to these contractors to

determine whether DOD was detecting and recovering contract

overpayments promptly. Our review focused on the actions taken to

recover overpayments at the Defense Finance and Accounting Service

(DFAS) Center in Columbus, Ohio, which in June 1995, made payments on

about 373,500 defense contracts. The total value of these contracts is

about $602 billion.

Background Sound financial management operations are critical to ensuring that DOD

effectively manages its contracts and that funds are disbursed properly.

DOD has recognized that it has serious, long-standing problems in correctly

disbursing billions of dollars in payments and providing reliable financial

information. In January 1991, DOD created DFAS to strengthen DOD’s

financial management operations by standardizing, consolidating, and

streamlining finance and accounting policies, procedures, and systems.

But efforts to improve financial management through DFAS have yet to be

successful, and much remains to be done to improve its performance. We

have reported on a number of issues related to DOD’s financial

management problems. A list of our recent products is included at the end

of this report.

A dramatic indicator that sound financial management operations are not

in place is when contractors are returning overpayments to the paying

office and that office is not aware that overpayments were made. In 1994

we reported on such contract overpayments being returned to the DFAS

Page 1 GAO/NSIAD-96-8 DOD Procurement
B-256249 

Columbus Center.1 Our examination of $392 million of the $751 million in

checks processed by the DFAS Columbus Center during a 6-month period in

1993 disclosed that about $305 million, or about 78 percent, represented

overpayments by the government. The overpayments principally occurred

because DOD paid invoices without recovering previous progress payments

or because it made duplicate payments. Underscoring our concern about

such overpayments is the fact that the majority of the overpayments we

examined were detected by contractors, rather than by DFAS.

Our August 1994 report identified unresolved payment discrepancies, both

overpayments and underpayments, at nine contractor locations and raised

questions as to whether such discrepancies were widespread.2

 As a result

of that report, you requested that we obtain data on payment

discrepancies from selected large and small contractors. The methodology

used to conduct the data request and analyze the contractors’ responses is

explained in appendix I, and a copy of the data request is shown in

appendix II.

Results in Brief The 374 business units (representing 82 large defense contractors and 

57 small contractors) that responded to our request for data as of 

July 1994 reported about $231.5 million in outstanding overpayments and

about $625.9 million in underpayments. The evidence suggests and

contractors reported that they followed up to collect underpayments and

usually notified DOD of overpayments. However, contractors did not

always return overpayments unless instructed to do so.

The DFAS Columbus Center cannot readily detect payment discrepancies

because of significant errors in its automated payment records. Despite

these errors, Center personnel, in accordance with payment procedures,

pay contractor invoices as if the payment data were correct. With

significant errors in the automated payment records, incorrect payments

are likely to continue.

The Center did not properly pursue recovery after overpayments were

reported by contractors or identified through contract reconciliation. On

the basis of our research of $84.2 million in overpayments, the Center’s

delay in collecting overpayments was long and costly. For those

1

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

Mar. 14, 1994).

2

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

(GAO/NSIAD-94-245, Aug. 5, 1994).

Page 2 GAO/NSIAD-96-8 DOD Procurement
B-256249 

overpayments, we estimate that recovery delays cost the government

about $10.6 million in interest. Even after a public accounting firm

completed contract reconciliations to identify the amounts owed the

government, the Center did not recover overpayments promptly.

In response to our August 1994 recommendation that DOD mobilize

resources to identify, verify, and correct payment discrepancies, DOD

advised us in May 1995 that various actions were underway or planned to

reduce payment discrepancies and to use contractor records to facilitate

reconciliations. Also, on July 31, 1995, DFAS requested the Columbus

Center to undertake a new effort to identify and resolve payment

discrepancies.

Contractors Report

Significant Payment

Discrepancies

In response to our data request, 374 business units of large and small

contractors reported overpayments and underpayments using their

accounting records. The business units responding to our request reported

payment discrepancies of $857.4 million—overpayments of $231.5 million

and underpayments of $625.9 million.

Our analysis of the responses from selected business units showed that

(1) the reported information had been drawn from their accounting

records and (2) most of the units applied some judgments to extract data

from their accounting records. The judgments applied in compiling the

information varied among the contractors. For instance, some contractors

did not report what they considered to be low-dollar invoices, such as

amounts less than $10,000 or $50,000. Some contractors did not report

unpaid (as opposed to partially paid) invoices and vouchers over 30 days

old as underpayments. One contractor that reported $15 million in

overpayments as outstanding on July 31, 1994, did not include a

$7.1 million overpayment that it included in a liability account. The overall

effect of the anomalies we identified in the contractors’ responses was

that the reported overpayments and underpayments were less than the

amounts recorded in the contractors’ accounts.

Both overpayments and underpayments result in unnecessary costs to the

government. Overpayments increase the government’s interest costs

because funds are needlessly disbursed. Contractors are not assessed

interest on overpayments until 30 days after a demand for repayment is

made. For underpayments, the Prompt Payment Act requires DOD to pay an

interest penalty for an invoice payment made after the due date or 30 days

Page 3 GAO/NSIAD-96-8 DOD Procurement
B-256249 

after the presentation of a valid invoice. The Center’s late payment

penalties reported for fiscal year 1994 were about $5 million.

Many contractors notified the government of payment errors but did not

always return overpayments until instructed to do so. Table 1 shows that

343 of the 374 business units (92 percent) reported having a policy or

practice of notifying the government paying office and/or government

contracting officers when payment errors are encountered. Because of the

poor state of DOD’s accounting records and control systems, overpayments

might never be recovered if contractors do not report them.

Table 1: Reported Policy or Practice

for Notifying DOD of Errors

Policy

Number of

business units

Written notification or telephone contact with paying office 303

Notification of government contracting

officer instead of paying office 40

Other, such as sending refund or correcting error on next invoice 20

None or non-applicable 6

Did not respond 5

Errors in Automated

Payment Records

Cause Payment

Discrepancies

Our review of selected payment discrepancies showed that errors in the

automated payment records cause payment errors. Center personnel, in

accordance with payment procedures, pay contractor invoices as if the

payment information in the system were correct, even though the

information in the system is known to have a high error rate. A March 15,

1994, audit report by the DOD Inspector General reported obligation errors

in 23 percent of the contracts examined and accounting data errors in

39 percent of the contracts examined.3

For overpayments, the most frequent cause of error (45 percent) identified

by Columbus Center analysis is the incorrect recovery (liquidation) of

progress payments. Progress payments are recovered in accordance with

contract financing provisions when paying invoices for delivered items.

Correct liquidation requires accurate records of the progress payments

made regarding the delivered items. If the automated payment records are

in error, the invoice will likely be paid in error unless adequate research is

performed before making the payment. Research results in the avoidance

of some overpayments. But research is effective only if proper underlying

records are kept, and it is time-consuming and costly.

3

Funds Control Over Contract Payments at the Defense Finance and Accounting Service—Columbus

Center (94-054 Mar. 15, 1994), DOD, Office of Inspector General.

Page 4 GAO/NSIAD-96-8 DOD Procurement
B-256249 

In addition to being time-consuming and costly, research could delay

payments beyond the time provisions of the Prompt Payment Act, and the

Center would then have to pay the contractor late payment interest.

Balancing the need for doing necessary research to make an accurate

payment, with the cost of late payment interest is difficult for Center

personnel. The Center accounts for the cost of interest on late payments

but neither accounts for nor reports on the government’s cost of money to

finance contract overpayments.

The cost to the government of poor record-keeping and inadequate

research can be significant. For example, a $7.7-million overpayment was

made to a contractor because the Center’s records of progress payments

had been incorrectly recorded. The error was discovered with research

after the contractor notified the Center that it had been overpaid. The

overpayment, outstanding for over 2 years and costing the government

about $820,000 in interest, could have been avoided if proper records had

been kept and adequate research had been done before the contractor was

paid.

In another case, a $7.5-million overpayment was outstanding for 8 years

and might not have been recovered if the contractor had not notified DFAS

of the overpayment. The records in this case were so error prone that

contractor assistance appeared essential to recovering the overpayment.

In this case, research was either not done or was totally ineffective.

Researching can be a good control technique when used on large and

complex contracts, but it is not a substitute for good record-keeping.

DFAS Did Not

Promptly Recover

Millions in

Overpayments

The Federal Acquisition Regulation (FAR) provides for the prompt recovery

of contract debt originating from overpayments. The FAR requires that a

demand letter be issued as soon as the amount due the government is

computed. The regulation also requires that the responsible official

establish a control record for tracking the efforts to determine and collect

the debt. If not recovered promptly, contract debts increase the

government’s cost of funds and unnecessarily expose the government to

losses because some debts become uncollectible. The Columbus Center

did not comply with the FAR. It did not collect overpayments promptly

when contractors and auditors reported them.

Overpayments Reported by

Contractors Not Recovered

Promptly

The Columbus Center did not promptly recover identified overpayments

because it did not (1) follow the Center’s policy of requesting contractors

to immediately return identified overpayments pending a reconciliation

Page 5 GAO/NSIAD-96-8 DOD Procurement
B-256249 

and (2) record and track actions on reported overpayments. To evaluate

the Center’s recovery actions, we researched overpayments of about

$84.2 million on eight contracts for which contractors had reported large

overpayments. Data on these contract overpayments are shown in table 2

and discussed in more detail in appendix III.

Table 2: Data on Selected Contract

Overpayments

Contract number and

contractor

Overpayment

amount

Estimated

days

outstandinga

Estimated

interest costb

F33657-89-C-0082

Hughes Missile $35,299,784 63-283 $1,410,339

DAAB07-92-C-G004

ITT Aerospace/Communications 20,180,209 26-225 943,621

N00039-90-C-0165

ITT Aerospace/Communications 1,701,530 82 31,490

N00024-88-C-5670

ITT Gilfillan 7,693,081 794 820,304

F19628-84-C-0151

Litton Systems 5,254,771 741 878,806

DAAJ09-90-C-0352

McDonnell Douglas Aerospace 5,872,240 143-1,173 1,695,925

DAAE07-84-C-A001

Textron Lycoming 7,505,668 2,837 4,805,843

DAAE07-86-C-A050

Textron Lycoming 667,130 unknown unknown

Total $84,174,413 $10,586,328

aBecause overpayments on some contracts occurred on several different dates and

overpayments were recovered on several different dates, we show the least number of days and

the most number of days an overpayment was outstanding.

bTo estimate the government’s interest cost, we used the period that overpayments were

outstanding and the current prompt payment interest rate established by the Secretary of the

Treasury.

Although the Center has had a written policy since November 5, 1993, to

ask contractors to return overpayments immediately, contractor relations

personnel told us they were not aware of the policy and were not asking

contractors to return overpayments. For the overpayments we examined,

the contractors were not asked to immediately return the overpayments

after reporting them to contractor relations personnel at the Center. None

of the overpayments we examined became uncollectible because of these

delays; however, the delays were costly because the overpayments were

outstanding for extended periods. We estimate that delays in recovering

the $84.2 million in overpayments cost the government about $10.6 million

Page 6 GAO/NSIAD-96-8 DOD Procurement
B-256249 

in interest. Our search for records of actions taken to recover the selected

overpayments showed that generally the Center had incomplete records of

notifications by contractors and no record to show what collection

actions, if any, were taken.

Overpayments Identified

by Contract Reconciliation

Not Recovered Promptly

In addition to being notified by contractors, the Center also identifies

payment discrepancies by auditing or reconciling contracts. As of

December 1994, the Center had identified 14,840 contracts that required

review or reconciliation. About 4,000 contracts were determined to require

complete reconciliation. These reviews and reconciliations will be

completed by either Center personnel or a public accounting firm hired for

that purpose. Reconciliations completed by the firm are returned to the

Center for action—for example, the issuance of demand letters for the

amount due the government.

A cumulative report of the firm’s activities from October 1990 through

April 1995 showed the following:

• About 4,723 contracts had been reconciled by the firm.

• About $76 billion in accounting adjustments were needed to correct

payments that had been made from wrong accounts.

• About $314 million had been identified as owed to the government.

• About $94 million had been identified as owed by the government to

contractors.

• Demand letters had been issued to contractors for about $152 million

based on the firm’s reconciliations, with about $80 million collected, and

about $17 million disputed and classified as in-process.

• About $19 million may not be collectable for one or more reasons,

including $8 million due from contractors involved in bankruptcy.

As of May 1995 the accounting firm classified $178 million of the reported

$314 million due the government as “in-process.” The Center did not have

debt records or other documents to show what specific collection actions,

if any, had been taken to collect the $178 million. Based on our expressed

concern about the status of the $178 million classified as in-process,

Center officials agreed to research this matter. After researching individual

contract payment files and accounts receivable files, the Center issued

demand letters for $23 million that had been outstanding for over 60 days

and identified other disposition actions. In June 1995, Center officials told

us they could not determine what collection action, if any, had been taken

on about $75 million of the $178 million. The Center continued research

Page 7 GAO/NSIAD-96-8 DOD Procurement
B-256249 

and reported at the end of August that it had determined the status of all

but $11 million.

We reviewed the collection actions on all audits completed by the public

accounting firm during an 18-month period ending March 31, 1995, to

determine whether the Center was promptly collecting identified

overpayments. In total, 160 completed audits identified $82.1 million as

being owed to the government. Records showed that the Center had

issued demand letters for $36.8 million of the $82.1 million. The demand

letters, on average, were sent about 3 to 4 months after the Center was

informed of the overpayments and, in one case, was not sent until more

than a year after notification. For the remaining $45.3 million, the Center

had either no record of demand letters issued ($33.1 million) or were

considering whether to accept the results of the audit ($12.2 million).

Some of the audits not yet accepted had been under consideration for

extended periods.

Center personnel researched the $45.3 million identified as owed the

government for which we were unable to find collection records. Through

this additional research, the Center was able to initially identify collection

actions for about $15.8 million of the $45.3 million—leaving $29.5 million

owed the government for which the Center could identify no collection

action.

According to officials, the Center does not have statistical information on

the results of audits and reconciliations performed by Center personnel.

However, in those few cases where the Center had reconciled the

contracts for overpayments that we examined, the Center did not take

prompt collection actions.

Delays in recovering identified overpayments compound the problem and

suggest management as well as systems and records shortcomings.

Actions to Identify

and Resolve Payment

Discrepancies

In our August 1994 report we stated that DOD does not have an effective

system to identify and resolve payment discrepancies and expeditiously

recover amounts owed the government. We recommended that DOD

develop a comprehensive plan to mobilize resources to identify and

correct payment discrepancies. We reported that such action was

necessary to reduce (1) the cost to the government, (2) future payment

discrepancies, and (3) the incidence of uncollectable overpayments.

Page 8 GAO/NSIAD-96-8 DOD Procurement
B-256249 

Both DOD and DFAS Columbus Center officials have said that they are taking

significant steps to resolve specific problems identified in our reports. For

example, Center officials advised us of corrective actions being taken to

improve the detection and collection process, including

• changes to ensure that the Center’s policy of asking contractors to

immediately return overpayments is implemented, including an

August 1995 pilot installation of telephone and computer equipment to

establish a historical record, by contract, of payment problems identified

by customers;

• changes to prevent overpayments that occur because of incorrect progress

payment liquidations, including both procedural and systems changes that

are expected to improve payment research and progress payment records;

• changes in monitoring and reporting practices to ensure that all

reconciliations that identify amounts owed the government are resolved

promptly; and

• increases in the resources directed toward reducing the backlog of

contracts requiring reconciliation by December 1995.

Also, after discussing the results in this report with DOD and DFAS officials,

DFAS, on July 31, 1995, directed the Columbus Center to begin surveying

contractors to identify and resolve payment discrepancies. Also, the

on-site personnel from the Defense Contract Management Command and

the Defense Contract Audit Agency will continue to assist in the

identification and resolution of payment problems.

In addition to resolving specific payment problems, DOD stated it is

implementing systemic solutions to prevent the types of payment

problems identified in our reports. DOD said that it is making coordinated

improvements in its contract writing, contract management, contract

payment, and accounting systems to ensure that all payments are

computed, issued, and accounted for properly.

Although the actions reported by DOD and DFAS appear to be a positive step

toward addressing contract payment discrepancies, we remain concerned

about DOD’s ability to eliminate contract payment discrepancies, make

coordinated improvements in all aspects of contract payment processes,

and incorporate leading-edge business practices. We have ongoing and

planned work to further evaluate DOD’s plans for improving financial

management operations and will periodically monitor DOD’s progress in

eliminating contract payment discrepancies.

Page 9 GAO/NSIAD-96-8 DOD Procurement
B-256249 

Agency Comments In commenting on a draft of this report, DOD said that it generally

concurred with the report and offered a clarification regarding actions by

the Defense Contract Management Command and the Defense Contract

Audit Agency. The clarification has been incorporated. DOD’s comments

are reprinted in their entirety in appendix IV.

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

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

earlier. At that time, we will send copies to the Secretary of Defense; the

Director, Office of Management and Budget; and other interested

congressional committees. Copies will also be made available to others

upon request.

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

concerning this report. Major contributors to this report are listed in

appendix V.

David E. Cooper

Director, Acquisition Policy, Technology,

 and Competitiveness Issues

Page 10 GAO/NSIAD-96-8 DOD Procurement
Page 11 GAO/NSIAD-96-8 DOD Procurement
Contents

Letter 1

Appendix I 

Scope and

Methodology

14

Appendix II 

Reporting Format for

Information

Requested by the U.S.

General Accounting

Office

17

Appendix III 

Examples of Selected

Overpayments

19

Appendix IV 

Comments From the

Department of

Defense

24

Appendix V 

Major Contributors to

This Report

26

Related GAO Products 27

Tables Table 1: Reported Policy or Practice for Notifying DOD of Errors 4

Table 2: Data on Selected Contract Overpayments 6

Table I.1: Amount of Overpayments and Underpayments

Reported by 374 Business Units

15

Table I.2: Number of Business Units Reporting Overpayments 15

Table I.3: Number of Business Units Reporting Underpayments 15

Page 12 GAO/NSIAD-96-8 DOD Procurement
Contents

Abbreviations

DFAS Defense Finance and Accounting Service

DOD Department of Defense

FAR Federal Acquisition Regulation

Page 13 GAO/NSIAD-96-8 DOD Procurement
Appendix I 

Scope and Methodology

We requested business units of 204 large and small contractors to provide

information on the status of their open accounts receivable with the

Department of Defense (DOD) as of July 1994. The large contractors were

96 of the top 100 defense contractors as measured by DOD contract award

data published by DOD’s Directorate for Information Operations and

Reports.1

 According to published DOD data, the top 100 contractors

received about 62 percent of the DOD prime contracts awarded in fiscal

year 1993. The 108 small contractors included the contractors classified as

small businesses that had the largest amounts of contract awards as

reported by the Federal Procurement Data Center.2

We used mailing addresses identified in a Federal Procurement Data

System listing that was extracted from government contract awards. This

listing contained 1,287 addresses for these 204 contractors. Since we were

unable to determine which of these addresses were appropriate for

contacting the accounts receivable sections for business units that had

DOD contracts, we mailed data requests to all available addresses. For

example, we sent data requests to six addresses in Orlando, Florida, for

the same contractor because we did not know which addresses

maintained the accounts receivable data. Also, we were unable to

determine whether all business units with DOD contracts were included in

these addresses.

Each data request asked the recipient to return the request form if the

recipient did not maintain accounts receivable for the business unit and to

provide the address for that business unit’s accounts receivable section.

We mailed an additional 75 data requests to addresses identified. We also

sent follow-up reminders to addresses that did not respond to the initial

mailing.

Using this approach, we received 374 data responses, which included

responses from at least one business unit of 139 contractors—82 large

contractors and 57 small contractors. However, we did not receive

responses from all business units of these contractors. This report

presents the data obtained from the 374 business units and cannot be

projected or generalized to about 26,000 business units paid by the DFAS

Columbus Center.

1

Four contractors were not mailed data requests because addresses were not in the Federal

Procurement Data System.

2

Of the 120 contractors in this category, 12 were not mailed data requests because addresses were not

in the Federal Procurement Data System, 4 other small contractors were excluded because they were

included in the top 100 large contractor listing, and 4 were included in the survey because their names

were similar to other contractor business units searched in the Federal Procurement Data System.

Page 14 GAO/NSIAD-96-8 DOD Procurement
Appendix I 

Scope and Methodology

As shown in table I.1, business units of large contractors accounted for

$223.6 million (97 percent) of the $231.5 million reported overpayments

and $611.5 million (98 percent) of the $625.9 million reported

underpayments.

Table I.1: Amount of Overpayments

and Underpayments Reported by 374

Business Units

Reporting business unit Overpayment Underpayment Total

Large contractors $223,613,745 $611,463,842 $835,077,587

Small contractors 7,890,931 14,470,671 22,361,602

Total $231,504,676 $625,934,513 $857,439,189

As shown in table I.2, 134 (43 percent) of the 315 large contractor business

units reported overpayments of more than $1,000 and 14 (24 percent) of

the small contractor business units reported overpayments of more than

$1,000. These 148 business units accounted for more than 99 percent of the

$231.5 million in overpayments reported.

Table I.2: Number of Business Units

Reporting Overpayments Large contractors Small contractors

Reported amount of

overpayment

Total

overpayment

Number of

units

Total

overpayment

Number

of units

0 to $1,000 $3,132 181 $0 45

More than $1,000 223,610,613 134 7,890,931 14

Total $223,613,745 315 $7,890,931 59

As shown in Table I.3, 185 (59 percent) large contractor business units

reported underpayments of more than $1,000, and 25 (42 percent) of the

small business units reported underpayments of more than $1,000. These

210 business units accounted for more than 99 percent of the

$611.5 million in underpayments reported.

Table I.3: Number of Business Units

Reporting Underpayments Large contractors Small contractors

Reported amount of

underpayment

Total

underpayment

Number of

units

Total

underpayment

Number

of units

0 to $1,000 $512 130 $460 34

More than $1,000 611,463,330 185 14,470,211 25

Total $611,463,842 315 $14,470,671 59

The reported data may be affected by erroneous contractor records or by

contractors’ misstatement of facts in their responses. We visited 12

business units to verify that the payment data reported in response to our

Page 15 GAO/NSIAD-96-8 DOD Procurement
Appendix I 

Scope and Methodology

data request was extracted from the business units’ accounting records.

These 12 units reported $83.6 million of overpayments (36 percent of the

reported total), and $62.3 million of underpayments (10 percent of the

reported total). The business units visited were selected based on

geographic dispersion and the amount of reported payment discrepancies,

including reports of “zero” payment discrepancies. We also had telephone

discussions with contractor officials at a number of other business units to

help ensure complete responses to our data request.

We also researched overpayments on eight contracts presented in detail in

appendix III. We examined the actions taken at the Columbus Center to

resolve these overpayments. We collected information on underpayments,

but we did not review the resolution of underpayments. We conducted our

research of selected overpayments at the Columbus Center and used all

available contract records. We also interviewed payment personnel,

contractor relations personnel, and supervisors (including division chiefs

and directors) at the Center. We also obtained information and contract

records from DOD contracting officers and discussed payment issues with

them. Data obtained from contractors and contracting officers were

compared with the Columbus Center records.

In addition, we reviewed laws and regulations pertaining to the

administration and management of contracts and contract payments,

including those related to collection of contract debts. We also discussed

payment errors with the Defense Logistics Agency, the Defense Contract

Management Command, and the Defense Finance and Accounting Service

(DFAS) officials.

We conducted our review between August 1994 and June 1995 in

accordance with generally accepted government auditing standards.

Page 16 GAO/NSIAD-96-8 DOD Procurement
Appendix II 

Reporting Format for Information

Requested by the U.S. General Accounting

Office

REPORTING FORMAT FOR

INFORMATION REQUESTED BY THE

U. S. GENERAL ACCOUNTING OFFICE

STOP -- If you answered No to question 1

above, please do not continue but return this

request in the enclosed envelope. Please do not

forward to the business unit that does your

billings and maintains your accounts receivable.

However, please provide the address for the

business unit that maintains your accounts

receivables so we can verify that the unit has

been included in the initial mailing of this data

request.

NAME:

The Chairman of the Senate Governmental Affairs

Committee has asked the U. S. General Accounting

Office to obtain data from contractors on the extent of

underpayments and overpayments outstanding on

contracts with the Department of Defense (DOD). This

data will be used as part of an ongoing assignment

(GAO code 705074 ) to evaluate DOD’s contract

payments system. Please follow the attached

instructions when accumulating the requested

information and return it in the enclosed envelope by

September 30, 1994. The mailing address for this

request is:

U.S. General Accounting Office

Suite 1500

1445 Ross Avenue

Dallas, TX 75202-2783.

Any questions should be directed to: Seth Taylor, Jeff

Knott, or Joe Quicksall in our Dallas Regional Office at

(214) 777-5600.

I. GENERAL INFORMATION

The business unit for which the information is

being requested is (please make any corrections

needed to business unit identification):

Person to be contacted if additional information is

needed:

NAME:

TELEPHONE NUMBER:

PARENT COMPANY (Name and Address)

II. CONTRACT INFORMATION

1. Does your business unit prepare contract billings

and maintain accounts receivable for contracts with

the DOD?

Yes (SKIP TO QUESTION 2)

No

2. Do some of your contracts with DOD provide for

progress payments?

Yes

No

Page 17 GAO/NSIAD-96-8 DOD Procurement
Appendix II 

Reporting Format for Information

Requested by the U.S. General Accounting

Office

3. From your accounts receivable or other appropriate

accounting record, provide total dollar amounts of

existing overpayments and underpayments (billed

amounts versus payments received) for all DOD

contracts as of July 31, 1994 (or if July 31 is

impracticable, specify the alternative July as of date

used). Note: We expect overpayments or

underpayments caused by incorrect liquidation of

progress payments to be included in the summary

totals provided in response to this question.

(July as of Date Used:_____________________)

OVERPAYMENTS

UNDERPAYMENTS

Provide a list of the DOD contracts to which the

above overpayments and underpayments apply.

(Attach the list to this form.)

4. List the current top 3 DOD paying offices, based on

dollar amount, that pay contract billings submitted

by your business unit (exclude classified paying

offices). Provide an estimate of the percentage of

your dollar billings paid by each of these paying

offices.

List top 3 paying offices’ name and address

1.

2.

3.

5. What is your business unit’s current policy or

practice regarding notifying DOD when your records

indicate an error has been made in paying an

invoice or progress payment request? (Briefly

describe below or attach your response to this form.)

6. List the most recent annual gross dollar amount of

contract billings to DOD by your business unit.

YEAR DOLLAR AMOUNT OF

ENDING BILLINGS TO DOD

Please attach any additional information or specific

comments and issues concerning your DOD contract

payment experiences that you believe we should

consider.

Thank you for your prompt response. Please retain any work sheets or records used to prepare this response.

Page 18 GAO/NSIAD-96-8 DOD Procurement
Appendix III 

Examples of Selected Overpayments

We reviewed over $84 million in overpayments on eight contracts to

determine why the overpayments were made and to evaluate the efforts of

the DFAS Center in Columbus, Ohio, to recover the overpayments. Most of

the overpayments were outstanding more than 180 days, and one was

outstanding about 7 years. Overpayments occurred mostly because prior

progress payments were not properly considered when paying invoices. In

general, the root of the problems could be traced to errors in the

government’s payment record.

For each example, we attempted to identify the dates the overpayments

occurred, the reason they occurred, the date the Center was notified of

them by the contractor, and the date the money was recovered. Where

these dates could not be clearly determined, we estimated the dates using

available records and/or interviews with the government and contractor

personnel involved.

1. Contract F33657-89-C-0082 with Hughes Missile Systems, Tucson,

Arizona

The DFAS Center overpaid this contract by about $24.7 million in

January 1994 because an invoice was paid without fully liquidating

progress payments. The contractor notified the Center of the overpayment

in April 1994, about 3 months after the invoice was paid incorrectly. The

Center and contractor agreed to eliminate the $24.7 million overpayment

by a setoff to other contractual debts rather than by a cash collection. To

collect by contract setoff, the Center did not pay $24.7 million of other

payment requests. The recovery by setoff was completed in October 1994,

about 10 months after the overpayment was made, and 6 months after the

Center was notified.

Shortly after recovering the $24.7 million overpayment, the Center again

overpaid this contract by $10.5 million because invoices were paid out of

the sequence expected by the contractor. The out-of-sequence payment, in

turn, caused an overpayment because the Center did not adequately

research the payments before responding to the contractor’s refund

request. The Center recovered this overpayment in about 60 days by

another setoff.

The overpayments and the delay in recovering the overpayment after they

were identified cost the government about $1.4 million. Our review

indicated that reliance on inaccurate payment records without further

research was a primary cause of overpayments. The Center is researching

Page 19 GAO/NSIAD-96-8 DOD Procurement
Appendix III 

Examples of Selected Overpayments

the underlying cause of errors in the payment records. A recently

completed reconciliation of this contract’s payment records showed 

68 errors. The errors included 44 payments from the wrong funds, 

6 overpayments, 3 duplicate payments, and 2 underpayments. In addition,

the records contained six posting errors and three extension errors. Any of

these errors could cause additional payment errors.

2. Contract DAAB07-92-C-G004 with ITT Aerospace, Fort Wayne, Indiana

The DFAS Center overpaid about $20 million on this contract because

progress payments were not liquidated at the contract rate. The incorrect

liquidation began in September 1993 and continued at least through April

1994. The contractor advised the government contracting officer and

Center contract relations personnel of the overpayments in November

1993. At that time, the overpayments totaled about $4.5 million. We found

no record of any Center action to recover the overpayments identified in

the November 1993 notification. In a January 1994 letter, the contractor

requested a meeting with Center officials to resolve the continuing

overpayment problem on this contract. By then, the overpayments had

increased to $18.9 million, but again no action was taken to recover the

overpayments. In March 1994, the Center began a limited scope

examination to verify the overpayment amount that had increased to

$19 million according to the contractor. Finally, in May 1994, the

contractor asked the Center to issue a demand letter for the overpayment,

which the contractor reported as $19.5 million.

The Center issued a demand letter for about $18 million in June 1994 and

recovered that amount in July 1994. The contractor returned an additional

$2.1 million in October 1994.

3. Contract N00039-90-C-0165 with ITT Aerospace, Fort Wayne, Indiana

The Center overpaid this contract by about $1.7 million because it did not

liquidate progress payments at the contract level on invoices between

May 1993 and July 1994. The contractor notified the cognizant government

contracting officer in August 1994 of the overpayments. The contracting

officer issued a demand letter for the $1.7 million overpayment in

September 1994, and the contractor returned the overpayment the

following month. The Center apparently was not aware of the payment

errors until after receipt of the contractor’s check.

Page 20 GAO/NSIAD-96-8 DOD Procurement
Appendix III 

Examples of Selected Overpayments

4. Contract N00024-88-C-5670 with ITT Gilfillan, Van Nuys, California

This contractor was overpaid about $7.7 million on a December 1992

invoice because progress payments were incorrectly liquidated. The

incorrect liquidation resulted from posting errors to the automated

payment system. Rather than demanding return of the overpayment, the

Center decided to recover the overpayment by contract setoff. When we

examined the payment records in March 1995, over 2 years after the

overpayment, the contractor still owed the government about $4.5 million.

The recovery by setoff was approved by the reconciliation clerk,

reconciliation supervisor, division chief, and associate director without

research to determine whether the amount could be promptly recovered

through setoff. After we questioned the wisdom of this, the Center issued a

demand letter for about $4.5 million. The final collection was made in

April 1995—over 2 years after the Center made the overpayment.

5. Contract F19628-84-C-0151 with Litton Systems, College Park, Maryland

This contract was overpaid because invoices were paid at estimated prices

until the prices were definitized in March 1993, about 8 years after

deliveries started. The contract prices were definitized at less than the

estimated prices used by the Center to pay the contract. Both the

contracting officer and the contractor should have known that the

contract was overpaid as soon as the price was definitized. The contractor

began discussing the amount of overpayment with the contracting officer

in August 1993. In October 1993, the contractor provided the Center with

the results of its reconciliation showing the contract overpayment to be

about $5.2 million. From October 1993 until at least June 1994, the

contractor and Center personnel exchanged letters and telephone calls

concerning the exact amount of the overpayment.

When we reviewed the contract records in February 1995, we questioned

the wisdom of continuing to leave the reported overpayment of

$5.2 million outstanding for over 16 months while efforts were underway

to research a disputed difference of about $63,000. In March 1995, the

Center issued a demand letter for the $5.2 million the contractor agreed

was overpaid. The contractor returned the $5.2 million 30 days after

receiving the demand letter. The disputed amount will ultimately be

demanded, if sufficient records are available to support the claim.

Page 21 GAO/NSIAD-96-8 DOD Procurement
Appendix III 

Examples of Selected Overpayments

6. Contract DAAJ09-90-C-0352 with McDonnell Douglas Aerospace,

Huntington Beach, California

This contractor notified the DFAS Center in November 1992 of

overpayments on the contract caused by not properly liquidating progress

payments. The Center has no record of efforts to recover the

overpayments identified in this notification or subsequent notifications by

the contractor of continuing overpayments on this contract. The

contractor determined the amount of overpayment was about $5.8 million

and refunded that amount to the Center in March 1994. The Center’s initial

review of payment records for this contract found no overpayments, and

the Center returned the $5.8 million refund to the contractor in

August 1994. The return of this refund was specifically approved by the

reconciliation clerk, reconciliation supervisor, and the division chief. The

contractor’s disagreement with this action resulted in the government

contracting officer requesting the Center to reconcile the contract. The

Center’s reconciliation identified an error in posting progress payments

that caused the overpayment. The Center issued a demand letter for

$5.8 million in November 1994. The Center received the contractor’s

refund check in December 1994, over 2 years after the overpayment.

7. Contract DAAE07-84-C-A001 with Textron Lycoming, Stratford,

Connecticut

According to this contractor, it notified the Center in November 1993 of a

$7.5 million overpayment on a completed contract. The overpayment

resulted from both duplicate payments and incorrect liquidation of

progress payments. The Center had no record of this notification and no

record of efforts to recover the amount identified in this notification. The

contractor again notified the Center in June 1994 of the overpayment. A

record of this notification was in the Center’s contract file. Shortly after

we visited the company in December 1994 to verify reported data, the

company returned $7.5 million as a refund of the overpayment on this

contract. The contractor had retained most of this amount for about 

8 years—since the last shipment on the contract in January 1987.

A November 1994 reconciliation disclosed that the payment records on

this contract contained 125 errors. Most of the errors, 67 of 125, were

contract payments made from the wrong fund control citations. In

addition, there were 22 underpayments, 10 invoice payments with

incorrectly liquidated progress payments, 13 overpayments, and 

3 duplicate payments. The remaining errors were erroneous postings of

contract entries, such as cash collections or modifications. Using these

Page 22 GAO/NSIAD-96-8 DOD Procurement
Appendix III 

Examples of Selected Overpayments

payment records without adequate research is the likely cause of the

overpayment.

8. Contract DAAE07-86-C-A050 with Textron Lycoming,

Stratford,Connecticut

The contractor reported an overpayment of $667,130 as of July 1994 that

was subsequently resolved, according to the contractor, by contract setoff

in August 1994. While the contractor believes this contract is settled, the

government agencies involved have been unable to reach agreement on

the payment status of the contract. In December 1994, the funding station

(U.S. Army Tank-Automotive and Armaments Command) believed the

contract was overpaid by $10 million and requested the Columbus Center

to take immediate action to collect money due from the contractor.

However, as of May 1995, the Center’s automated payment records

showed the contract to be underpaid by about $2.7 million. While this

contract had been in and out of reconciliation during the prior 4 years by

the public accounting firm employed by the Center, the reconciliation

results had been inconclusive. In late May 1995, the Center and

government funding station personnel initiated meetings to resolve

differences in their contract records and to reach agreement on the

payment status of the contract.

According to a September 10, 1994, Audit Report of Errors prepared by the

public accounting firm, the firm’s reconciliation disclosed that the

payment records on this contract contained 1,123 errors. Most of the

errors, 885 of 1,123, were contract payments made from the wrong fund

control citations. The remaining errors identified during reconciliation

included 197 posting errors.

Page 23 GAO/NSIAD-96-8 DOD Procurement
Appendix IV 

Comments From the Department of Defense

Now on p. 9.

Now on p. 7.

Page 24 GAO/NSIAD-96-8 DOD Procurement
Appendix IV 

Comments From the Department of Defense

Now on p. 9.

Page 25 GAO/NSIAD-96-8 DOD Procurement
Appendix V 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

David Childress

Dallas Regional Office Jeffrey L. Knott

Joe D. Quicksall

Seth D. Taylor

James W. Turkett

Page 26 GAO/NSIAD-96-8 DOD Procurement
Related GAO Products

DOD Infrastructure: DOD’s Planned Finance and Accounting Structure Is Not

Well Justified (GAO/NSIAD-95-127, Sept. 18, 1995).

Financial Management: Challenges Confronting DOD’s’ Reform Initiatives

(GAO/T-AIMD-95-146, May 23, 1995).

Financial Management: Challenges Confronting DOD’s Reform Initiatives

(GAO/T-AIMD-95-143, May 16, 1995).

Defense Infrastructure: Enhancing Performance Through Better Business

Practices (GAO/T-NSIAD/AIMD-95-126, Mar. 23, 1995).

DOD Procurement: Overpayments and Underpayments at Selected

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

Defense Business Operations Fund: Improved Pricing Practices and

Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,

June 22, 1994).

Financial Management: DOD’s Efforts to Improve Operations of the

Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, Mar. 24, 1994).

DOD Procurement: Millions in Overpayments Returned by DOD Contractors

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

Financial Management: Status of the Defense Business Operations Fund

(GAO/AIMD-94-80, Mar. 9, 1994).

Financial Management: Strong Leadership Needed to Improve Army’s

Financial Accountability (GAO/AIMD-94-12, Dec. 22, 1993).

Letter to the Deputy Secretary of Defense (GAO/AIMD-94-7R, Oct. 12, 1993).

Financial Management: DOD Has Not Responded Effectively to Serious,

Long-standing Problems (GAO/T-AIMD-93-1, July 1, 1993).

Financial Management: Opportunities to Strengthen Management of the

Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993).

Financial Management: Navy Records Contain Billions of Dollars in

Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993).

Page 27 GAO/NSIAD-96-8 DOD Procurement
Related GAO Products

Military Bases: Analysis of DOD’s Recommendations and Selection Process

for Closures and Realignments (GAO/NSIAD-93-173, Apr. 15, 1993).

Financial Audit: Examination of Army’s Financial Statements for Fiscal

Year 1991 (GAO/AFMD-92-83, Aug. 7, 1992).

Financial Management: Immediate Actions Needed to Improve Army

Financial Operations and Controls (GAO/AFMD-92-82, Aug. 7, 1992).

Financial Management: Defense Business Operations Fund

Implementation Status (GAO/T-AFMD-92-8, Apr. 30, 1992).

Financial Audit: Aggressive Actions Needed for Air Force to Meet

Objectives of the CFO Act (GAO/AFMD-92-12, Feb. 19, 1992).

Financial Audit: Status of Air Force Actions to Correct Deficiencies in

Financial Management Systems (GAO/AFMD-91-55, May 16, 1991).

Defense’s Planned Implementation of the $77 Billion Defense Business

Operations Fund (GAO/T-AFMD-91-5, Apr. 30, 1991).

Financial Audit: Financial Reporting and Internal Controls at the Air

Logistics Centers (GAO/AFMD-91-34, Apr. 5, 1991).

Financial Audit: Financial Reporting and Internal Controls at the Air Force

Systems Command (GAO/AFMD-91-22, Jan. 23, 1991).

Financial Audit: Air Force Does Not Effectively Account for Billions of

Dollars of Resources (GAO/AFMD-90-23, Feb. 23, 1990).

(705074) Page 28 GAO/NSIAD-96-8 DOD Procurement
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