a

GAO

United States General Accounting Office

Report to the Chairman, Committee on 

the Budget, House of Representatives

August 2003 DOD CONTRACT 

PAYMENTS

Management Action 

Needed to Reduce 

Billions in 

Adjustments to 

Contract Payment 

Records

GAO-03-727
For fiscal year 2002, DFAS Columbus data showed that about $1 of every $4 

in contract payment transactions in the MOCAS system was for adjustments 

to previously recorded payments—$49 billion of adjustments out of 

$198 billion in transactions. To research payment allocation problems, 

DFAS Columbus reported that it incurred costs of about $34 million in fiscal 

year 2002. This represents about 35 percent of the total $97 million that 

DFAS Columbus spent on contract pay services. DFAS Columbus bills DOD 

activities for contract pay services based on the number of accounting lines 

on an invoice. Consequently, all DOD activities pay the same line rate, 

regardless of whether substantial work is needed to reconcile problem 

contracts and adjust payment records. 

GAO’s analysis of two contracts showed that the contracts were complex 

because of the (1) legal and DOD requirements to track and report on the 

funds used to finance the contracts, (2) substantial number of modifications 

made on the contracts to procure goods and/or services, and (3) different 

pricing provisions on the contracts. GAO’s review of $160 million of 

adjustments showed that the adjustments were made for four reasons: 

• The Army made an error in accounting for obligations, resulting in about 

$127 million in payment allocation adjustments. 

• DFAS Columbus did not follow its internal procedures for allocating 

payments to accounts on an Army contract containing multiple pricing 

provisions, resulting in about $5 million in adjustments. 

• DFAS made over $2 million in adjustments to correct recording errors on 

an Army contract due to complex and changing payment instructions. 

• The Air Force frequently changed payment instructions after payments 

were made on an Air Force contract, resulting in about $26 million in 

adjustments. 

DOD has initiated a major long-term effort to improve its business 

operations, including its acquisition and disbursement activities. If 

implemented successfully, this initiative may help correct many of the 

contract payment allocation problems. In the interim, DOD has initiatives 

under way to address payment allocation problems, including (1) billing 

DOD contracting offices for contract reconciliation services, (2) providing 

DOD activities information on the correct method for presenting payment 

instructions, and (3) establishing a working group to develop options for 

presenting standard contract payment instructions. While the DOD working 

group initiative may reduce payment allocation errors associated with 

misinterpreting contract payment instructions, DOD needs to automate the 

standard payment instructions to eliminate payment allocation errors 

associated with manually allocated payments. 

GAO has reported that the 

Department of Defense’s (DOD) 

inability to accurately account for 

and report on disbursements is a 

long-term, major problem. GAO 

was requested to determine (1) the 

magnitude of the adjustments and 

related costs in fiscal year 2002, 

(2) why contracts, including 

payment terms, are so complex, 

(3) the key factors that caused 

Defense Finance and Accounting 

Service (DFAS) Columbus to make 

payment adjustments, and (4) what 

steps DOD is taking to address the 

payment allocation problems. 

GAO recommends that DOD 

(1) develop options for presenting 

standard payment instructions in 

contracts and (2) automate those 

instructions in the Mechanization 

of Contract Administration 

Services (MOCAS) system. GAO 

also recommends that DOD’s 

contracting community and DFAS 

follow existing regulations and 

procedures concerning contract 

payment instructions. In its 

comments, DOD concurred with 

two recommendations and partially 

concurred with two others related 

to developing and automating the 

standard payment instructions. 

DOD stated that although the 

working group would analyze their 

feasibility, until the coordination 

and review process was completed, 

it could not commit to these 

actions. We continue to believe 

that decisive steps towards a 

lasting solution are needed to 

address DOD’s long-standing 

contract payment problems. 

www.gao.gov/cgi-bin/getrpt?GAO-03-727. 

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory D. 

Kutz at (202) 512-9505 or kutzg@gao.gov. 

Highlights of GAO-03-727, a report to the 

Chairman, Committee on the Budget, 

House of Representatives 

August 2003 

DOD CONTRACT PAYMENTS 

Management Action Needed to Reduce 

Billions in Adjustments to Contract 

Payment Records 
Page i GAO-03-727 DOD Contract Payments

Contents

Letter 1

Results in Brief 2

Background 5

DFAS Columbus Made $49 Billion of Adjustments at a Cost of about 

$34 Million in Fiscal Year 2002 12

Contracts Were Complex Due to Legal and DOD Requirements, 

Contract Modifications, and Pricing Provisions 12

Reasons for DFAS Columbus Making 

$160 Million of Adjustments to Correct Prior Payment

Allocations 17

DOD Initiatives to Address Payment Allocation Problems 23

Conclusions 27

Recommendations for Executive Action 28

Agency Comments and Our Evaluation 29

Appendixes

Appendix I: Scope and Methodology 32

Appendix II: Comments from the Department of Defense 34

Appendix III: GAO Contact and Staff Acknowledgments 37

GAO Contact 37

Acknowledgments 37

Related GAO Products 38

Table Table 1: Reasons for $160 Million in Contract Payment Adjustments 

for Two Contracts 17

Figures Figure 1: Sample Line of Accounting on the Air Force Contract 6

Figure 2: Payment Process Information Flow for the Air Force 

Contract 7

Figure 3: Army Tactical Missile Launched from Multiple Launch 

Rocket System 10

Figure 4: Army Data Link System Transferring Information 

Collected by Aircraft, Satellites, and Ground Stations 11

Figure 5: Contract Funding Structure for Three Contract Line 

Items on the Air Force Contract 22
Contents

Page ii GAO-03-727 DOD Contract Payments

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Page 1 GAO-03-727 DOD Contract Payments

United States General Accounting Office

Washington, D.C. 20548

A

August 8, 2003 Letr

The Honorable Jim Nussle

Chairman

Committee on the Budget

House of Representatives

Dear Mr. Chairman:

The reliability of contract disbursing data is critical to the Department of 

Defense (DOD) for (1) properly accounting for and accurately making 

contract payments, (2) effectively accounting for and controlling billions of 

dollars in budget authority, and (3) preparing reliable financial information 

on the results of operations to support management and congressional 

decision making on programs, operations, and budget requests. We have 

previously reported1

 on DOD’s inability to accurately account for and 

report on disbursements, which is a long-term problem that is pervasive 

and complex in nature. For example, Defense Finance and Accounting 

Service (DFAS) Columbus fiscal year 1999 data showed that almost $1 of 

every $3 in contract payment transactions in the Mechanization of Contract 

Administration Services (MOCAS) system was for adjustments to 

previously recorded payments—$51 billion of adjustments out of 

$157 billion in transactions. 

You asked that we determine (1) the magnitude of adjustments that 

affected previously recorded payments and DFAS Columbus’s reported 

cost to make these adjustments during fiscal year 2002, (2) why contracts, 

including payment instructions, were so complex, (3) the key factors that 

caused DFAS Columbus to make payment adjustments for the two 

contracts that we reviewed in detail, and (4) what steps DOD has taken or 

planned to address the adjustment problem. As agreed with your office, we 

analyzed two contracts to determine how complex contracts and related 

payment instructions contributed to DOD’s payments not being properly 

allocated to the correct obligations. In selecting these two contracts, we 

worked with DFAS Columbus to identify complex contracts for which they 

had encountered problems with correctly allocating payments to 

obligations. Thus, the two contracts—a $565 million Army missile contract 

and a $49 million Air Force communications contract—are not 

1

See Related GAO Products at the end of this report.
Page 2 GAO-03-727 DOD Contract Payments

representative of all DOD contracts but, based on our experience, have 

characteristics similar to other complex contracts. 

Our review was performed from August 2002 through July 2003 in 

accordance with U.S. generally accepted government auditing standards. 

We did not audit the DFAS Columbus data on disbursements, collections, 

and adjustments or the costs incurred by DFAS Columbus to reconcile 

contracts. Further details on our scope and methodology can be found in 

appendix I. We requested comments on a draft of this report from the 

Secretary of Defense or his designee. Written comments from the Director, 

Defense Procurement and Acquisition Policy, Under Secretary of Defense 

(Acquisition, Technology, and Logistics), are reprinted in appendix II. 

Results in Brief For fiscal year 2002, DFAS Columbus data showed that about $1 of every $4 

in contract payment transactions in MOCAS was for adjustments to 

previously recorded payments—$49 billion of adjustments out of $198 

billion in disbursement, collection, and adjustment transactions. This is an 

improvement over fiscal year 1999 when reported adjustments represented 

$1 of every $3 in contract payment transactions. To research the payment 

allocation problems and make adjustments to correct the disbursing and 

accounting records, DFAS Columbus reported that it incurred costs of 

about $34 million in fiscal year 2002 primarily for hundreds of DOD and 

contractor staff. This represents about 35 percent of the total $97 million in 

reported costs related to the DFAS Columbus contract pay service 

operations. DFAS Columbus currently bills DOD activities (for example, 

the Army) for contract pay services based solely on the number of lines of 

accounting on an invoice. Consequently, all DOD activities pay the same 

line rate, regardless of whether substantial work is needed to reconcile 

problem contracts and adjust the payment records. As a result, the 

contracting offices that contributed to payment allocation problems had 

insufficient incentives to reduce payment errors and associated costs.

Our analysis of the two contracts we reviewed in detail showed that the 

contracts and payment instructions were complex because of a 

combination of factors including the following: 
Page 3 GAO-03-727 DOD Contract Payments

• Legal and DOD requirements to track and report on the funds used to 

finance the contract. For example, on the $565 million Army missile 

contract, (1) 74 different accounting classification reference numbers 

(ACRN)2

 were funded by eight different appropriation accounts and 

sales to three foreign countries, (2) 24 of the 74 ACRNs were created to 

comply with legal requirements to report on the appropriations used to 

finance the contract as well as the types of obligations, such as 

personnel, supplies, and acquisition of assets, and (3) the remaining 50 

ACRNs were created to comply with DOD requirements.

• Substantial number of contract modifications over the years that added 

goods and/or services, or added or changed payment instructions. For 

example, the $49 million Air Force communications contract was 

modified 82 times over a 3-year period, including 73 modifications that 

changed the payment instructions. 

• Different pricing provisions for goods and services on the contract. For 

example, the Army contract contained 25 separate contract line 

items3

—15 were to be paid for under fixed price provisions and 10 were 

to be paid for under cost reimbursable provisions. 

Our analysis of $160 million of adjustments for the two contracts we 

reviewed showed that 1,458 adjustment transactions were made to 

reallocate payments to the correct ACRNs for four reasons: (1) the Army 

made an error in accounting for obligations, resulting in about $127 million 

in payment allocation adjustments, (2) DFAS Columbus did not follow its 

internal procedures for allocating payments to ACRNs on an Army contract 

containing multiple pricing provisions when the Army failed to provide 

payment instructions, resulting in about $5 million in adjustments,

(3) DFAS Columbus made over $2 million in adjustments to correct 

recording errors on the Army contract due to complex and changing 

payment instructions, and (4) the Air Force frequently changed payment 

2

For all contracts, the contracting office assigns a two-digit ACRN to each line of accounting 

containing unique accounting information in accordance with the requirements contained in 

the Defense Federal Acquisition Regulation Supplement (DFARS). Obligations are 

established at the ACRN level to ensure that funds are available to cover disbursements. 

DFAS Columbus allocates the payments to the ACRNs in an attempt to match contractor 

payments to the corresponding obligations.

3

According to DFARS 204.7103-1, contracts shall identify the items or services to be 

acquired as separate contract line items.
Page 4 GAO-03-727 DOD Contract Payments

instructions after payments were made on the Air Force contract, resulting 

in about $26 million in adjustments.

Since 1995, DOD had been attempting to develop a new system—called the 

Defense Procurement Payment System (DPPS)—to resolve DOD’s longstanding disbursement problems. However, DOD terminated DPPS in 

December 2002, after 7 years in development at a reported cost of over 

$126 million, because of poor program performance and increasing life 

cycle costs. DOD has now initiated a major long-term effort—referred to 

as an enterprise architecture—to improve its business operations, 

including its acquisition and disbursement activities. If implemented 

successfully, this initiative may help correct many of the contract payment 

allocation problems. 

In the interim, DOD officials informed us they have several efforts under 

way to address these types of payment allocation problems that would help 

reduce adjustments made to previously recorded payments. First, 

beginning in fiscal year 2004, DFAS Columbus plans to realign its billing 

structure and bill contracting offices for reconciliation services to provide 

them with an incentive to reduce payment errors and related reconciliation 

costs. Second, DFAS Columbus, in partnership with the Defense Contract 

Management Agency, visited major procuring activities throughout DOD 

and provided information on the correct methods for presenting payment 

instructions on contracts. Finally, in September 2002, DOD established a 

working group4

 to develop payment allocation options for presenting 

standard payment instructions on complex contracts that, if implemented, 

would be used throughout the DOD contracting community. Our analysis 

showed that this initiative should help reduce some of the payment 

allocation errors that are the result of misinterpreted payment instructions 

but would not completely eliminate payment allocation errors made by 

DFAS Columbus when it manually allocates payments to contract ACRNs. 

In order to eliminate payment allocation errors, DOD would need to take 

the next step in the process and automate the standard payment 

instructions so that DFAS Columbus can electronically process the 

payments with minimal manual intervention. The working group has not 

completed its work and has not yet established a completion date. Further, 

DOD has not yet made a final decision to implement the payment allocation 

4

The working group consists of representatives from the Offices of the Under Secretary of 

Defense (Comptroller) and the Under Secretary of Defense (Acquisition, Technology, and 

Logistics), DFAS Columbus, and the Defense Contract Management Agency.
Page 5 GAO-03-727 DOD Contract Payments

options for presenting standard payment instructions throughout the DOD 

contracting community.

We are making recommendations to the Secretary of Defense to improve 

the process of properly allocating payments to correct ACRNs, including 

(1) developing payment allocation options for presenting standard payment 

instructions contained in contracts and (2) automating the standardized 

payment instructions. We are also making recommendations to the Under 

Secretaries of Defense (Acquisition, Technology, and Logistics) and 

(Comptroller) to follow existing regulations and procedures concerning 

contract payment instructions. In its comments on a draft of this report, 

DOD concurred with two of the four recommendations and partially 

concurred with the two recommendations related to developing and 

automating the standard payment instructions. DOD stated that although 

the working group would analyze their feasibility, until the coordination 

and review process was completed, it could not commit to these actions. 

DOD did not indicate any time frame for completing the coordination and 

review process referred to in its response. We continue to believe that 

decisive steps towards a lasting solution in these two areas are essential to 

address DOD’s long-standing contract payment problems. 

Background DFAS Columbus uses MOCAS to make contract payments for the Army, 

Navy, Air Force, and other DOD organizations. In fiscal year 2002, DFAS 

Columbus reported that it made about $87 billion of contract payments. 

DOD, including DFAS Columbus, uses a line of accounting to accumulate 

appropriation, budget, and management information for contract 

payments. Figure 1 shows a line of accounting on the Air Force contract 

that we reviewed.
Page 6 GAO-03-727 DOD Contract Payments

Figure 1: Sample Line of Accounting on the Air Force Contract 

A line of accounting provides various information, such as (1) department 

code (for example, those for the military services) and (2) fiscal year and 

appropriation account financing the contract. For all contracts, the 

contracting office assigns an ACRN to each line containing unique 

accounting information in accordance with the requirements contained in 

the Defense Federal Acquisition Regulation Supplement (DFARS). 

Obligations5

 are established at the ACRN level to ensure that funds are 

available to cover disbursements. DFAS Columbus allocates payment 

amounts to ACRNs to match contractor payments to the corresponding 

obligations.

Organizations Involved in 

the Contract Payment 

Process

DOD payment and accounting processes are complex, generally involving 

separate functions carried out by separate offices in different locations 

using different procurement, accounting, and payment systems. The 

processes are not always integrated and require data to be entered and 

5

Obligations are the amounts of orders placed, contracts awarded, services received, and 

similar transactions during an accounting period that will require payment during the same, 

or a future, period.

BK 97 0 0400 4500 0 5D 5D07 71001000000 255Y 9HZZZZ MIPROLRAB9H756 09H690 S28043

ACRN

Department code

Appropriation

account

Element of resource

code (object class)

Appropriation limit

Fiscal year

Operating

agency

Job order number

Fiscal accounting station number Allotment

serial number

Commitment issuing office code

Fiscal

year

Army management

structure code

Commitment

document number

Source: DOD.
Page 7 GAO-03-727 DOD Contract Payments

sometimes reentered manually. Figure 2 shows the payment process 

information flow for the Air Force contract that we reviewed. 

Figure 2: Payment Process Information Flow for the Air Force Contract

Invoices/

vouchers Payments

Goods and

services

Communications

contractor

DOD

activities

DFAS Columbus

(paying office)

Disbursement

data Adjustments

DFAS accounting

stations

Receiving reports

Voucher approval

Air Force

contracting office

Contract and

modifications

Contract and

modifications

Purchase

requests

DOD funding

activities

Defense Contract

Management Agency

Defense Contract

Audit Agency

Source: GAO and Art Explosion.
Page 8 GAO-03-727 DOD Contract Payments

As illustrated above, the payment process information flow for the Air 

Force contract began when DOD funding activities requested that the Air 

Force contracting office procure engineering and technical services as well 

as spare parts. The Air Force contracting office awarded the contract and 

modified it to procure additional items. The Air Force contracting office 

forwarded the contract and modifications to several organizations, such as 

the communications contractor and DFAS Columbus paying office. Upon 

receipt of the contract and modifications, the communications contractor 

performed work for the DOD activities and submitted invoices to DFAS 

Columbus for payment. For goods procured under the contract, the 

Defense Contract Management Agency, which is located at the contractor’s 

site, accepted the goods on behalf of the DOD activities and provided 

receiving report information to DFAS Columbus. The communications 

contractor then forwarded the goods to the DOD activities. For services 

provided by the contractor, the contractor submitted vouchers for services 

directly to DFAS Columbus for payment. The vouchers were subject to 

later audit by the Defense Contract Audit Agency.

Before making payments to the contractor, DFAS Columbus matched the 

documents—through automated and manual processes—provided by the 

Air Force contracting office, the communications contractor, and Defense 

Contract Management Agency to ensure that (1) items ordered were 

received and (2) funds were obligated and available to make the payments. 

Finally, DFAS Columbus paid the contractor, recorded the payment data in 

DFAS Columbus records, and forwarded these data to the DFAS 

accounting stations responsible for recording the data in the various DOD 

organizations’ accounting systems. When errors occurred in allocating 

payments to the correct ACRNs, the DFAS Columbus contract 

reconciliation branch made adjustments to correct the payment allocations 

in DFAS Columbus and the applicable DFAS accounting station records. 

Description of the Army and 

Air Force Contracts 

Reviewed

In order to identify some of the problems DFAS Columbus has experienced 

in properly allocating payments to the ACRNs on contracts, we selected an 

Army and an Air Force contract for a detailed review. These contracts 

support two programs—the Army Tactical Missile System and the Army 

Data Link System. A description of each of these programs is presented 

below.

• We reviewed an Army contract (contract number DAAH01-98-C-0093) 

with Lockheed Martin Vought Systems Corporation concerning the 

Army Tactical Missile System. This missile system is one of a family of 
Page 9 GAO-03-727 DOD Contract Payments

complementary weapons initially developed by the Army and Air Force 

for engaging enemy forces deep behind the front battle lines. The 

missile system was designed to attack those forces that are in a position 

to have an immediate or directly supporting impact on the close-in 

battle, but are beyond the range of cannon and rocket artillery systems. 

It is intended to delay, disrupt, neutralize, or destroy targets, such as 

second echelon maneuver units, missile sites, and forward command 

posts.

The Army Tactical Missile System consists of a surface-to-surface 

ballistic missile that can be launched from and controlled by the Army’s 

Multiple Launch Rocket System. The missile system was initially fielded 

with an “antipersonnel/antimaterial warhead” for attacking stationary 

targets. Since the weapon system was first fielded, the missile system 

has been modified to increase its range, improve its guidance systems, 

and reduce collateral damage. This missile system was used in the 

recent war in Iraq. Figure 3 is a photograph of the missile system. 
Page 10 GAO-03-727 DOD Contract Payments

Figure 3: Army Tactical Missile Launched from Multiple Launch Rocket System 

Source: U.S. Army Aviation and Missile Command, Public Affairs Office. 

• We reviewed an Air Force contract (contract number F09604-00-C-0090) 

with L-3 Communications to maintain the Army portion of the Army 

Data Link System.6

 The Army and Air Force developed the Army Data 

Link System to transfer near-real-time targeting information collected by 

aircraft, satellites, and ground stations and provides this information to 

aircraft and tactical commanders on the ground in-theater. The system 

consists of three major components—the Army Interoperable Data Link, 

the Direct Air to Satellite Relay, and the Reach Back Relay. The Army 

6

In prior years, the Army portion of the Army Data Link System was part of another contract 

that supported both the Army and Air Force. According to Air Force contracting officials, 

the Air Force separated its portion from the Army portion of the contract because the 

contract became difficult to administer due to its size. The Air Force contracting office 

retained responsibility for administering both the Army and Air Force portions of the data 

link systems.
Page 11 GAO-03-727 DOD Contract Payments

Interoperable Data Link provides two-way secure direct 

communications between aircraft and aircraft-to-ground stations. The 

Direct Air to Satellite Relay communicates data gathered by aircraft 

through a secure satellite link to an in-theater ground processing facility. 

The Reach Back Relay communicates data gathered through a secure 

satellite link to ground processing facilities in the continental United 

States. The Data Link System was also used in the recent war in Iraq. 

Figure 4 shows how the communications system transfers data. 

Figure 4: Army Data Link System Transferring Information Collected by Aircraft, Satellites, and Ground Stations 

Source: Air Force contractor L-3 Communications.

ARL DASR

ETRAC TMET

Remote

Repeater

Guardrail
Page 12 GAO-03-727 DOD Contract Payments

DFAS Columbus Made 

$49 Billion of 

Adjustments at a Cost 

of about $34 Million in 

Fiscal Year 2002

For fiscal year 2002, our analysis of DFAS Columbus data showed that 

about $1 of every $4 in contract payment transactions in MOCAS was for 

adjustments to previously recorded payments—$49 billion of adjustments 

out of $198 billion in disbursement, collection, and adjustment 

transactions. This is an improvement over fiscal year 1999 when DFAS 

Columbus data showed that about $1 of every $3 in contract payment 

transactions (transactions for disbursements, collections, and 

adjustments) in MOCAS was for adjustments to previously recorded 

payments—$51 billion of adjustments out of $157 billion in transactions. 

While DOD has been working on resolving these problems for years, it has 

yet to correct them. 

To research the payment allocation problems and make adjustments to 

correct the disbursing and accounting records, DFAS Columbus reported 

that it incurred costs of about $34 million in fiscal year 2002, primarily for 

hundreds of DOD and contractor staff. This represented about 35 percent 

of the $97.4 million that DFAS Columbus spent on contract pay service 

operations. Our review showed that the specific contracting offices that 

contributed to payment allocation problems resulting in adjustments did 

not pay for all of the work DFAS Columbus performed to make the 

adjustments. This occurred because DFAS Columbus currently bills DOD 

activities (for example, the Army) for contract pay services based solely on 

the number of lines of accounting on an invoice. Consequently, all DOD 

activities pay the same line rate, regardless of whether substantial work is 

needed to reconcile problem contracts and adjust the payment records. As 

a result, the contracting offices that contributed to payment allocation 

problems had insufficient incentives to reduce payment errors and 

associated costs. As discussed later in this report, DOD is taking action to 

change its billing structure for DOD activities.

Contracts Were 

Complex Due to Legal 

and DOD 

Requirements, 

Contract 

Modifications, and 

Pricing Provisions

Our analysis of an Army and an Air Force contract showed that the 

contracts and related payment instructions were complex because of a 

combination of factors, including the (1) legal and DOD requirements to 

track and report on the funds used to finance the contract, (2) number of 

modifications made to the contract over the years that added goods and/or 

services, or added or changed payment instructions for these goods and/or 

services, and (3) different pricing provisions to pay for goods and services 

on the contract. While we identified these three factors as unique areas, 

the factors are interrelated and contributed to the contracts containing 

complex payment instructions and the difficulty DFAS Columbus had in 
Page 13 GAO-03-727 DOD Contract Payments

properly allocating payment amounts to the correct ACRNs, ultimately 

contributing to a high rate of adjustments.

Legal and DOD 

Requirements Contribute to 

Complex Contracts

In order to maintain administrative control over appropriated funds, DOD 

has established a system of controls to help ensure that funds obligated and 

then expended for the procurement of goods and services were used as 

intended and in accordance with applicable laws and regulations. A system 

of controls should be designed to help ensure that agencies do not obligate 

or expend more funds than available. However, DOD’s system contributes 

to the complexity of the contracts. 

To report on the status of its appropriated funds—including amounts 

obligated and expended—DOD uses a line of accounting to accumulate 

appropriation, budget, and management information. For all contracts, the 

contracting office assigns a two-digit ACRN to each line containing unique 

accounting information in accordance with the requirements contained in 

DFARS 204.7107 (c). DFAS Columbus allocates payments to the ACRNs to 

match contract payments to the corresponding obligations.

For the two contracts that we reviewed, the Army contract that was valued 

at $565 million contained 74 separate ACRNs funded by 8 different 

appropriation accounts and sales to three foreign countries, and the Air 

Force contract that was valued at $49 million contained 89 ACRNs funded 

by 23 different appropriation accounts. Each ACRN was established to 

comply with the DFARS requirement for a separate ACRN for each unique 

line of accounting. The information on the line of accounting (1) is needed 

to track the obligations and disbursements back to the DOD activity 

authorizing the work and (2) provides information on the obligations and 

disbursement data, such as the organizations providing the funding. While 

DOD created all of these ACRNs to comply with its requirements, our 

analysis of the lines of accounting showed that DOD used ACRNs to 

provide the information needed to comply with legal requirements to
Page 14 GAO-03-727 DOD Contract Payments

account for obligations by appropriation account7 and by object class.8 On 

the Army contract that contained 74 ACRNs, 24 of these ACRNs—about 

one-third—were used by DOD to provide the information needed to satisfy 

the legal requirements. Likewise, on the Air Force contract that contained 

89 ACRNs, 48 of these ACRNs—or more than half—were used by DOD to 

provide the information needed to satisfy the legal requirements. DOD 

accounts for each of these ACRNs separately—in effect treating them as 

separate bank accounts—even though they all fund the same contract. 

Each additional ACRN increases the risk of incorrectly allocating payments 

to the wrong ACRN.

Frequent Contract 

Modifications Contribute to 

Complex Contracts

While accounting requirements and related ACRNs contributed to complex 

contracts, frequent contract modifications to procure additional goods and 

services are another factor that contributed to complex contracts. When 

DOD orders more goods and/or services than provided on the original 

contract, DOD modifies the contract and pays the contractor for the 

additional goods and/or services. Many times different appropriation 

accounts are used to pay for these additional goods and/or services 

resulting in DOD creating more ACRNs to account for the funds. Our 

analysis of two DOD contracts showed that they were modified many times 

over the years to procure additional goods and/or services, as well as to 

add or change payment instructions. Our review found that modifications 

that changed payment instructions resulted in DFAS Columbus making 

adjustments to correct prior payment allocations to ACRNs.

• In 1997, the Army contracted with Lockheed Martin Vought Systems 

Corporation to produce an updated version of the Army Tactical Missile 

System. The basic contract was for the procurement of 100 guided 

7

Several statutes and implementing regulatory requirements established by the Secretary of 

the Treasury (Treasury) and the Office of Management and Budget (OMB) require the 

reporting of contractual obligations, properly recorded as prescribed by 31 U.S.C. Section 

1501, and related disbursements. Principal among these are the content requirements for 

agencies’ annual budget submission and budget execution reports, 31 U.S.C. Sections 1108c 

and 1554, respectively, and the Treasury and OMB accounting system and financial reporting 

requirements that implement 31 U.S.C. Sections 1511 to 1514.

8

Object classes present information on obligations by the items or services purchased by the 

federal government. Object classes include personnel compensation and benefits, 

contractual services and supplies, and acquisition of assets. The President’s budget is 

required by 31 U.S.C. Section 1104(b) to present obligations by object class for each 

account, and OMB requires agencies to report on these object classes.
Page 15 GAO-03-727 DOD Contract Payments

missiles and launching assemblies for the Army missile program. The 

Army program office initially obligated $14.2 million in 1997 for this 

effort. As of September 30, 2002, the estimated contract value increased 

to almost $565 million. Our analysis of this contract showed that it was 

modified 122 times over a 5-year period to (1) increase the number and 

type of missile systems ordered for the Army and three foreign countries 

from 100 to 833, (2) procure over 270,000 engineering service hours to 

support the production of the missile systems, and (3) make other 

changes necessary to administer the contract. The Army contracting 

office also issued six modifications to provide detailed payment 

instructions to DFAS Columbus. According to the Administrative 

Contracting Officer, the payment instructions were issued to resolve 

payment allocation errors made by DFAS Columbus and to ensure that 

the payments were applied to the correct ACRNs on the contract.

• Like the Army contract, the Air Force contract was also modified a 

number of times to procure additional goods and services and to 

administer the contract. In October 1999, the Air Force contracted with 

L-3 Communications to maintain the Army portion of the Army Data 

Link System. The basic contract contained a description of the 

engineering and technical services and spare parts necessary to 

maintain the communications system worldwide. The contract also 

stated that funding for the engineering and technical services as well as 

miscellaneous spare parts would be included on individual funding 

modifications on this contract. As of September 30, 2002, the estimated 

contract value was about $49 million. Our analysis of this contract 

showed that it was modified 82 times over a 3-year period by five 

different procurement contracting officers to (1) provide funding for 

and/or increase/decrease the requirements for engineering and technical 

services and miscellaneous spare parts to maintain the Army assets for 

the Army Data Link System and (2) make other changes necessary to 

administer the contract. Furthermore, 73 of the 82 modifications 

revised the payment instructions. 
Page 16 GAO-03-727 DOD Contract Payments

Contract Pricing Provisions 

Contribute to Complex 

Contracts

Our analysis of two DOD contracts showed that contract-pricing provisions 

were a third factor that contributed to the complexity of these contracts. 

As stated previously, the Army and Air Force contracting offices issued 

many contract modifications to procure goods and services on behalf of the 

military services. These modifications included several contract line items 

that contained numerous goods or services with different pricing 

provisions. Contract pricing provisions can be placed into two broad 

categories—fixed price or cost reimbursable. For example, the Army 

contract contained firm-fixed-price provisions9

 for procuring 833 missiles, 

and cost-plus-fixed-fee10 and cost-plus-award-fee11 provisions for procuring 

270,000 engineering service hours to support the missile production. 

Our review found that contracts containing different pricing provisions are 

more complex, and thus it is more difficult to properly allocate payments to 

the correct ACRNs because DFAS Columbus voucher examiners must 

allocate payment amounts manually, resulting in a greater opportunity for 

error. When DFAS Columbus voucher examiners manually allocate 

payment amounts to contract ACRNs, the voucher examiners must ensure 

that the payment amounts associated with fixed price and cost 

reimbursable provisions are allocated to those ACRNs funding those 

payment provisions only. However, in some cases it is difficult for the 

voucher examiner to readily identify these ACRNs without performing a 

labor-intensive review of the contract. As a result, sometimes the voucher 

examiner incorrectly applies the payment amounts to ACRNs funding fixed 

price provisions instead of ACRNs funding cost reimbursable provisions. 

Our review of the Army contract found that it contained 25 separate 

contract line items—15 were to be paid for under fixed price provisions 

9

A firm-fixed-price contract provides for a price that is not subject to any adjustment on the 

basis of the contractor’s cost experience in performing the contract. This contract type 

places the maximum risk and full responsibility for all costs and resulting profit or loss on 

the contractor.

10A cost-plus-fixed-fee contract is a cost reimbursement contract that provides for payment 

to the contractor of (1) allowable incurred cost, to the extent prescribed in the contract, and 

(2) a negotiated fee that is fixed at the inception of the contract. The fee does not vary with 

actual cost, but may be adjusted as a result of changes in the work to be performed under 

the contract.

11A cost-plus-award-fee contract is a cost reimbursement contract that provides for a fee 

consisting of (1) allowable incurred cost, to the extent prescribed in the contract, (2) a base 

amount fixed at inception of the contract, and (3) an award amount, based on the 

judgmental evaluation by the government, sufficient to provide motivation for excellence in 

contract performance.
Page 17 GAO-03-727 DOD Contract Payments

and 10 were to be paid for under cost reimbursable provisions. Similarly, 

the Air Force contract contained 66 separate contract line items—16 were 

to be paid for under fixed price provisions and 50 were to be paid for under 

cost reimbursable provisions.

Reasons for DFAS 

Columbus Making 

$160 Million of 

Adjustments to Correct 

Prior Payment 

Allocations 

As stated previously, the Army and Air Force contracts that we reviewed 

were complex due to a number of factors, including legal and DOD 

requirements, contract modifications, and pricing provisions. These 

factors contributed to the difficulty DFAS Columbus had in properly 

allocating payment amounts to the correct ACRNs. As a result, payment 

amounts on these contracts were not allocated to the correct ACRNs, and 

DFAS Columbus made substantial adjustments to correct the payment 

allocations. Our evaluation of $160 million of adjustments showed that 

DFAS Columbus made these adjustments to reallocate payments to the 

correct ACRNs. Table 1 summarizes the reasons for the adjustments and 

provides the number and dollar amount of adjustment transactions made to 

reallocate payments to the correct ACRNs. 

Table 1: Reasons for $160 Million in Contract Payment Adjustments for Two 

Contracts

Source: GAO.

Reasons for the adjustments

Number of 

adjustment 

transactions

Dollar value of 

adjustments

(dollars in 

millions)

Army contract writing system error in accounting for 

contract obligations. 92 $127.2

Procedures and regulations for an Army contract 

containing multiple pricing provisions were not 

followed. 88 4.7

Complex and changing payment instructions for the 

Army contract. 16 2.4

Frequent contract modifications to change payment 

instructions for the Air Force contract. 1,262 26.1

Total 1,458 $160.4
Page 18 GAO-03-727 DOD Contract Payments

An Army Contract Writing 

System Error in Accounting 

for Contract Obligations 

From 1998 through 2001, DFAS Columbus paid 43 invoices totaling 

$63.5 million for the procurement of several missile systems. DFAS 

allocated these payment amounts to two ACRNs according to the payment 

instructions in effect at the time of the payment. Subsequently, the 

contractor submitted price reductions to the Army for certain contract 

items that DFAS Columbus had previously paid. In response to the price 

reductions, the Army issued a contract modification to account for the 

reductions. When the Army processed this modification, the Army contract 

writing system incorrectly deobligated the amount for the missiles on the 

two ACRNs in error and established two new ACRNs on the contract 

containing the reduced amount. As a result, in January 2002, DFAS 

Columbus processed 92 adjustment transactions totaling about 

$127.2 million to move payment amounts to the new ACRNs. In discussing 

this problem with Army officials, they informed us that they did not know 

that the system error resulted in DFAS Columbus having to do additional 

work to make these adjustments. According to these officials, the system 

problem that resulted in the creation of the new ACRNs was corrected in 

2001.

Procedures and Regulations 

for an Army Contract 

Containing Multiple Pricing 

Provisions Were Not 

Followed

From June 1999 through April 2001, DFAS Columbus paid 38 invoices 

totaling about $16 million for engineering services on the Army contract. 

When DFAS Columbus paid the contractor, the contract did not contain 

specific payment instructions on how to allocate payment amounts to 

ACRNs as required by DFARS 204.7107 (e)(3)(i). According to this 

regulation, when a contract line item is funded by multiple ACRNs, the 

contracting officer shall provide adequate instructions in the contract to 

permit the paying office (DFAS Columbus in this case) to accurately charge 

the ACRNs assigned to that contract line item. Without these payment 

instructions, DFAS Columbus voucher examiners should follow DFAS 

Columbus internal procedures.12 These procedures require voucher 

examiners to prorate payment amounts across all available ACRNs under 

cost reimbursable provisions when the contract or contractor’s invoice 

does not provide specific payment instructions on which ACRNs should be 

charged. However, instead of charging ACRNs funding cost reimbursable 

provisions only (engineering services), DFAS Columbus voucher 

examiners manually allocated the payment amounts to ACRNs that funded 

both engineering services (cost reimbursable provisions) and missiles 

12DFAS Columbus Contract Entitlement, Desk Procedure 401, June 1996.
Page 19 GAO-03-727 DOD Contract Payments

(fixed price provisions). As a result, some payment amounts for 

engineering services were incorrectly allocated to ACRNs funding the 

procurement of missiles. 

According to Army contracting officials, in April 2001—almost 2 years after 

DFAS Columbus paid the first invoice—the Army issued a modification 

containing detailed payment instructions once it became aware that DFAS 

was having difficulty in allocating payment amounts to the correct ACRNs. 

These instructions were different from the payment allocation procedures 

followed by DFAS Columbus. However, by that time, DFAS Columbus had 

made 38 payments to the contractor for engineering services and allocated 

these payments to several ACRNs. To correct payment allocation problems 

associated with 7 of the previous 38 payments, DFAS Columbus processed 

88 adjustment transactions totaling about $4.7 million to reallocate 

previously recorded payments according to the new instructions.

Complex and Changing 

Payment Instructions for 

the Army Contract

DFAS Columbus also processed 16 transactions totaling about $2.4 million 

in adjustments to correct payment errors made by DFAS Columbus 

voucher examiners when they manually applied payment amounts to 

ACRNs on the Army contract. In April 2001, the Army issued a contract 

modification that provided specific payment instructions to ensure that 

funds were used prior to cancellation. DFAS Columbus officials told us 

that these payment instructions were complex and changed several times 

after the modification was first issued. For example, the following 

instructions were included in contract modifications to provide payment 

instructions for contract line item number (CLIN)13 0030.

• Contract modification 74 dated April 2001 stated that, “Subclins under 

CLIN 0030 – prorate across ACRNs BR, BS, and BT.”

• Seven months later, in November 2001, contract modification 89 added 

additional payment terms for CLIN 0030 by incorporating instructions 

for CLIN 0031 and instructions for contract award fees under these two 

CLINs. The modification stated, “Subclins under CLIN 0030/0031 – 

prorate across ACRNs BR, BS, BT, BX, BY, and CD, unless voucher 

identifies award fee then prorate across ACRNs CE, CF, CG, and CH.”

13According to DFARS 204.7103-1, contracts shall identify the items or services to be 

acquired as separate contract line items.
Page 20 GAO-03-727 DOD Contract Payments

• Seven months later, in June 2002, contract modification 109 provided 

more payment instructions for CLIN 0030/0031. The modification noted 

that, “Subclins under CLIN 0030/0031 – prorate across ACRNs BR, BS, 

BT, BX, CD, CN, CT, CU, CW and DA, unless voucher identifies award 

fee then prorate across ACRNs CE, CF, CG, CH and CV, or if voucher 

identifies technical publications then prorate across ACRNs BY, CR, and 

DA.”

Our analysis of the payment instructions showed that the instructions were 

complex, changed several times, and were difficult to administer properly. 

We found that $2.4 million of adjustment transactions were the result of 

errors made by voucher examiners. These errors occurred because the 

examiners did not follow the complex, frequently changed, and 

nonstandard payment instructions correctly. In order for DFAS Columbus 

to properly allocate payments on CLIN 0030, our work showed that the 

voucher examiner must (1) identify the current modification in effect at the 

time of payment to ensure payments are allocated in accordance with the 

payment instructions, (2) determine the type of invoice to ensure the 

allocations are made against the correct ACRNs, for example, technical 

publications or award fee, (3) identify the current available balance 

associated with ACRNs funding the services, and (4) calculate a prorated 

balance to be distributed to each ACRN funding the services. For example, 

for one invoice totaling $350,635 on the Army contract, DFAS Columbus 

paid two contract line items and allocated the payment amounts to 23 

ACRNs in an attempt to comply with the payment instructions on the 

contract that were in effect on the payment date. This condition resulted in 

errors in the contract records when voucher examiners incorrectly 

allocated payment amounts to the wrong ACRNs.

In discussing this problem with DFAS Columbus officials, they confirmed 

our analysis that the payment instructions were complex and difficult to 

administer properly. The officials stated that when a contract contains 

payment instructions similar to the instructions presented above, DFAS 

Columbus voucher examiners must manually allocate the payment 

amounts to contract ACRNs. The officials also stated that the instructions 

on this contract were very complicated and could easily be misinterpreted 

if voucher examiners do not carefully review the payment instructions 

prior to allocating the payment amount to ACRNs on the contract. 
Page 21 GAO-03-727 DOD Contract Payments

Frequent Contract 

Modifications to Change 

Payment Instructions for Air 

Force Contract 

In March 2001, DFAS Columbus processed 1,262 transactions totaling over 

$26 million to adjust previously recorded payment allocations on the Air 

Force contract. At the time these adjustments were made, the Air Force 

had already issued 42 modifications, which changed the payment 

percentages that DFAS Columbus was required to follow to make correct 

payment allocations. Because the number and frequency of the payment 

percentages changed, DFAS Columbus did not allocate payment amounts 

to the correct ACRNs in many cases. 

The Air Force awarded a contract in October 1999 to procure engineering 

and technical services and spare parts to maintain the Army Data Link 

System. Over the next 3 years, the contract was modified numerous times 

to increase the requirements for engineering and technical services and 

spare parts, along with the necessary incremental funding amounts to 

support these requirements. As additional funds were added to the 

contract, (1) new ACRNs were added or obligation balances for existing 

ACRNs increased and (2) the payment percentages were modified to reflect 

the new obligation balances of the affected ACRNs. For example, the Air 

Force modified contract line item number 0006 for engineering services 

three times over a 2-month period to incrementally fund these services. 

Each time, the Air Force changed the ACRN payment percentages funding 

the contract line item. 

Our analysis of the contract showed that allocating payments on this 

contract has been very difficult, and voucher examiners could easily 

misinterpret the payment instructions because of the numerous contract 

modifications that changed ACRN payment percentages. These 

instructions were complex and difficult to administer because 

(1) modifications frequently changed the payment instructions and 

(2) many ACRNs were financing numerous contract line items. The 

percentages changed so frequently that DFAS Columbus voucher 

examiners could not keep track of ACRN balances in order to allocate 

payment percentages properly. Also, when many ACRNs financed 

numerous contract line items, DFAS Columbus had difficulty identifying 

how much of an ACRN’s obligation amount related to each line item. 

Therefore, many payments were not allocated in accordance with the 

current modification, and adjustments were needed to correct these 

allocations. Figure 5 illustrates the current funding structure for 3 of the 66 

contract line items on the Air Force contract.
Page 22 GAO-03-727 DOD Contract Payments

Figure 5: Contract Funding Structure for Three Contract Line Items on the Air Force 

Contract

As shown above, the relationship of CLINs to ACRNs is complex because 

there is not a one-to-one relationship. This makes it difficult for DFAS 

Columbus to accurately allocate payments to ACRNs. Because the 

contract funding structure was complex, DFAS Columbus voucher 

examiners did not properly allocate payments to the correct ACRNs. Thus, 

DFAS Columbus sent the contractor’s invoices to its contract reconciliation 

branch for payment. In addition, beginning in the fall of 2001, the 

contractor began providing a detailed payment distribution schedule with 

each invoice submitted to DFAS Columbus to assist it in properly allocating 

payments to the correct ACRNs. We found that an invoice totaling 

$94,237.18 contained 31 pages of contractor costs and billing charges for 45 

contract line items charging 56 different ACRNs. The amounts charged to 

the ACRNs by the contractor were as little as $.59 to as much as $88,107.03. 

CLIN

1016 1st Military Intelligence

Specialized Repair Activity

$55,000 (41%) into BV

$77,580 (59%) into BZ

$152,764 (55%) into BV

$124,977 (45%) into BZ

CLIN

1019 224th Military Intelligence

Specialized Repair Activity

Air Force contract

$44,996 (16%) into AJ

$100,000 (35%) into BV

$100,000 (35%) into CD

$38,212 (14%) into DK

CLIN

1018 15th Military Intelligence

Specialized Repair Activity

5 ACRN "Accounts"

Source: GAO illustration of contract funding structure contained in Air Force contract modification P00073.

AJ

S

BV

S

BZ

S

CD

S S

DK
Page 23 GAO-03-727 DOD Contract Payments

DOD Initiatives to 

Address Payment 

Allocation Problems

DOD officials acknowledged that there have been long-standing contract 

payment allocation problems that have required DFAS Columbus to 

undertake time-consuming and costly reconciliations to correct allocation 

errors. DOD has initiated a major long-term effort to develop and 

implement an enterprise architecture, which is intended to improve its 

business operations, including its acquisition and disbursement activities. 

If implemented successfully, this initiative may help correct many of the 

contract payment allocation problems. In the interim, DOD has several 

initiatives under way to address the payment allocation problems caused 

by complex contracts with confusing payment instructions. First, DFAS 

plans to bill reconciliation costs to contracting offices that contribute to 

payment allocation problems. Second, DFAS Columbus is briefing the 

DOD acquisition community on methods for presenting payment 

instructions in contracts. Finally, a DOD working group is examining 

payment allocation problems and plans to develop and implement payment 

allocation options for presenting standard payment instructions on 

contracts DOD-wide to address these problems. 

System Improvement 

Initiatives

Since 1995, DOD had been attempting to develop a new system—DPPS—to 

replace MOCAS, which was developed in the 1960s. DPPS was being 

designed to resolve DOD’s long-standing disbursement problems, 

streamline contract and vendor payment processes, and reduce manual 

interventions. However as we previously reported,14 DOD terminated 

DPPS in December 2002, after 7 years in development at a cost of over

 $126 million, because of poor program performance and increasing life 

cycle costs. DOD officials informed us that enhancements to MOCAS are 

now being considered to provide some of the automated capabilities that 

DPPS had been attempting to achieve. 

14U.S. General Accounting Office, DOD Business Systems Modernization: Continued 

Investment in Key Accounting Systems Needs to be Justified, GAO-03-465 (Washington, 

D.C.: Mar. 28, 2003).
Page 24 GAO-03-727 DOD Contract Payments

The failure of DPPS to become DOD’s standard procurement payment 

system is indicative of DOD’s long-standing inability to efficiently and 

effectively modernize its financial management and business systems. For 

example, we recently reported15 that over $300 million has been invested to 

develop several DFAS financial management systems and that DOD has not 

demonstrated that this investment will substantially improve the financial 

management information needed for decision-making and financial 

reporting purposes. To help avoid this type of result, we recommended in 

2001 that DOD develop and implement an enterprise architecture, an 

essential modernization management tool.16 

As part of its current effort to transform its business operations, DOD is 

developing a business enterprise architecture. A key area of focus is DOD’s 

acquisition and disbursement activities. As we have previously reported, 

DOD contract management has been a high-risk area within the department 

since 1992.17 To address these problems, DOD’s business enterprise 

architecture development effort is intended to (1) incorporate federal 

accounting and financial management requirements, (2) consider leading 

practices in procurement and contract payments, and (3) reengineer its 

business processes. If implemented as planned, this initiative has the 

potential to address many of the contract payment allocation problems 

discussed in this report. However, this is a long-term effort that will take 

many years to implement. 

DFAS Plans to Bill 

Contracting Offices That 

Contribute to Payment 

Allocation Problems

As pointed out earlier, the contracting offices that contributed to payment 

allocation problems have insufficient incentives to structure their 

contracts, including payment instructions, in a manner that would reduce 

payment errors and related reconciliation costs. This condition exists 

because DFAS Columbus currently bills DOD activities (for example, the 

Army) for contract pay services based solely on the number of lines of 

accounting on an invoice. DFAS Columbus officials recognized this 

shortcoming in establishing their billing rates and have informed us that 

15GAO-03-465.

16U.S. General Accounting Office, Information Technology: Architecture Needed to Guide 

Modernization of DOD’s Financial Operations, GAO-01-525 (Washington, D.C.: May 17, 

2001).

17U.S. General Accounting Office, High-Risk Series: An Update, GAO-03-119 (Washington, 

D.C.: January 2003).
Page 25 GAO-03-727 DOD Contract Payments

they plan to use a separate billing rate, based on DFAS contract 

reconciliation costs, to bill customers for reconciling, adjusting, and 

correcting contract payments beginning in fiscal year 2004. According to 

the officials, the direct billing hour rate for reconciliation services will be 

$74.55 in fiscal year 2004 and will be billed to the contracting offices 

responsible for writing the contracts that require reconciliation. According 

to the Deputy Director of DFAS Columbus’s Commercial Pay Services, 

separately billing contracting offices for the reconciliation work should 

provide an incentive to those offices to reduce the number of payment 

allocation problems that result in adjustments. In our view, this billing 

initiative should encourage contracting offices to structure contracts, 

including payment instructions, in a manner that should help reduce 

payment errors and reconciliation costs.

DFAS Columbus Briefs DOD 

Acquisition Community on 

Contract Administration, 

Payment, and Closeout 

Issues 

DFAS Columbus, in partnership with the Defense Contract Management 

Agency, is providing formal briefings to the DOD acquisition community on 

various issues related to contract administration, payment, and closeout. 

These briefings are designed to give contracting, procurement, and budget 

personnel throughout DOD better insight into the contract entitlement, 

payment, and accounting processes provided by DFAS Columbus. They 

also help to promote teamwork between DFAS Columbus and the 

acquisition community and provide an opportunity to enhance the 

communications link that is necessary for these organizations to 

interoperate efficiently and effectively. These briefings began in November 

2001 and have been provided to numerous activities across the military 

services. As of March 2003, presentations had been provided to 18 major 

acquisition organizations, such as the Army Aviation and Missile Command, 

the Navy Space and Naval Warfare Systems Command, and the Air Force 

Space and Missile Systems Center. 

Among the topics included in these briefings are methods for correctly 

presenting payment instructions in contracts. The briefing materials 

emphasize that payment instructions provide a method for assigning 

payments to the appropriate ACRNs, based on anticipated work 

performance. Specifically, the materials discuss payment instruction 

requirements for fixed price and cost reimbursement contracts and provide 

recommendations for contracting officers to consider when they develop 

payment instructions. Reference materials that provide additional 

payment instruction information, available on the Internet, are also cited in 

these briefings. 
Page 26 GAO-03-727 DOD Contract Payments

DOD Working Group 

Examines Payment 

Instruction Problems

In September 2002, DOD formed a working group18 to review contract 

payment instructions. The working group’s results were incorporated into 

a broader DOD initiative to identify needed improvements and reductions 

to procurement policies, procedures, and processes in DFARS. The 

working group completed the first phase of its work by researching the 

types of payment instructions that have caused payment allocation 

problems and developing proposed changes to DFARS. The working group 

concluded that payment allocation errors at DFAS Columbus (1) were 

often the result of problems experienced with confusing payment 

instructions and (2) were further compounded because DOD did not have 

payment allocation options for including standard contract payment 

instructions for use on DOD contracts. As illustrated earlier in this report, 

payment instructions can be unique to each contract. For example, DFAS 

Columbus made $2.4 million in payment allocation errors on the Army 

contract because the voucher examiners made errors when they manually 

applied payment amounts to ACRNs following complex, nonstandard 

payment instructions that changed several times. This makes it difficult for 

DFAS Columbus personnel—who must process the payments and make the 

adjustments manually—to properly allocate the payments to the correct 

ACRNs.

In the second phase of this effort, the working group developed proposals 

for regulatory changes to address the types of standard payment 

instructions applicable to specific contracting situations. Depending on 

their specific requirements, contracting officers would be able to choose a 

contracting option that would include the standard payment instructions 

applicable to that particular situation. For example, the working group is 

evaluating several different standard payment instructions that DOD 

contracting offices may use on contracts, including standard payment 

instructions (1) for ensuring that funds are used before they are no longer 

available for expenditure and (2) for ensuring that funds can be allocated to 

the various contract ACRNs based on the balance available on each 

contract ACRN. The group’s consensus was that such standardization 

should enable DFAS Columbus to substantially increase its level of 

automated payments.

18The working group consists of representatives from the Offices of the Under Secretary of 

Defense (Comptroller) and the Under Secretary of Defense (Acquisition, Technology, and 

Logistics), DFAS Columbus, and the Defense Contract Management Agency.
Page 27 GAO-03-727 DOD Contract Payments

During phase three, the final phase that began in May 2003, the working 

group’s proposals will be presented to the Defense Acquisition Regulations 

Council19 and other experts for review. The results from this review 

process will eventually determine whether the working group’s proposals 

will be accepted. DOD has not yet established a milestone date for 

completing the third phase of this effort and has not yet made the final 

decision to implement the options for presenting standard payment 

instructions. While the working group did not study the possibility of 

automating the standard payment instructions, it informed us that 

automating them would be the next logical step if they were implemented. 

Our analysis of the working group initiative to develop standard payment 

instructions showed that it is a good first step because it should reduce 

some of the payment allocation errors that were the result of DFAS 

Columbus voucher examiners misinterpreting contract payment 

instructions. However, even with the standard payment instructions, DFAS 

Columbus will still manually allocate payments to contract ACRNs on 

complex contracts such as the two mentioned in this report. As we 

previously stated, manual payment allocations increase the opportunity for 

errors. In order to eliminate payment allocation errors, DFAS should take 

the next step and automate the standard payment instructions so that 

DFAS Columbus can electronically process the payments with minimal 

manual intervention.

Conclusions Resolving DOD’s long-standing contract payment problems will require 

major improvements to its processes and systems. One key element of 

DOD’s efforts to improve its business operations is its effort to develop an 

enterprise architecture to guide and constrain its ongoing and planned 

investments in business systems. Another key element to resolving 

contract payment problems would be to determine whether DOD can 

reengineer the way its contracts are written, including the length of time 

covered by a contract as well as the number of modifications made to the 

contract. If successful, these efforts could result in reengineered business 

processes and financial management systems that could address many of 

DOD’s long-standing contract payment allocation problems that have 

required DFAS Columbus to undertake time-consuming and costly 

19Pursuant to DOD Instruction 5000.63, subject: Defense Acquisition Regulations System, 

July 31, 2002, the Defense Acquisition Regulations Council is responsible for developing 

fully coordinated recommendations for revisions to the FAR and the DFARS.
Page 28 GAO-03-727 DOD Contract Payments

reconciliations to correct allocation errors. However, these reengineered 

processes and systems are years from becoming reality.

In the interim, DOD is addressing some of the fundamental weaknesses 

that have resulted in billions of dollars of adjustments to correct contract 

payment allocations annually. However, DOD has not yet completed its 

work to (1) provide information to the procuring activities on the correct 

methods for presenting payment instructions on contracts, (2) develop and 

implement standardized payment instructions to be used DOD-wide, and 

(3) fully automate the payment process using these instructions. Without 

standardized and automated payment instructions, DOD will continue to 

spend millions of dollars each year to process payments manually and then 

adjust those payments. Further, DOD activities must follow existing 

regulations and procedures covering payment instructions to help ensure 

that payment data are accurately recorded against the correct obligations. 

Until DOD successfully modernizes its business operations, these interim 

steps will help avoid the inaccurate contract payment data that have 

hindered DOD’s ability to accurately account for and report on contract 

disbursements. 

Recommendations for 

Executive Action

We recommend that the Secretary of Defense direct the Under Secretary of 

Defense (Acquisition, Technology, and Logistics) to

• develop payment allocation options for presenting standard payment 

instructions in contracts containing multifunded contract line items and 

• issue guidance to the contracting community reiterating the 

requirement in DFARS that all contracts containing multifunded 

contract line items contain payment instructions and that these 

instructions be revised when additional ACRNs are added.

We also recommend that the Secretary of Defense direct the Under 

Secretary of Defense (Comptroller) to direct the Director of the Defense 

Finance and Accounting Service to 

• automate the standardized payment instructions in MOCAS once the 

standard payment instructions are adopted and

• issue guidance reiterating DFAS’s internal requirement that when a 

contract does not contain payment instructions and the contractor 

invoice does not contain payment instructions, the payments for costs 
Page 29 GAO-03-727 DOD Contract Payments

and services must be allocated to ACRNs financed on a cost 

reimbursable basis in accordance with DFAS’s desk procedures.

Agency Comments and 

Our Evaluation

DOD provided written comments on a draft of this report. In its comments, 

DOD concurred with two of the four recommendations and partially 

concurred with the remaining two recommendations. DOD’s comments 

are reprinted in appendix II. 

For the two recommendations with which it concurred, DOD stated that 

the department will issue memorandums to (1) contracting personnel 

reiterating the requirements contained in DFARS and (2) DFAS personnel 

to adhere to DFAS policies and procedures, especially as they relate to the 

lack of definitive payment instructions in the contractual documents.

Regarding the two partial concurrences, DOD stated that it would establish 

a standard section of the contract for placement of payment provisions, 

which would include any payment allocation provisions. In addition, DOD 

agreed that it would, as part of the working group effort referred to in this 

report, evaluate the feasibility of developing and automating payment 

allocation options to include in standard payment instructions. However, 

until the coordination and review process within DOD is complete, DOD 

stated that it could not commit to the development and automation of 

standard payment instructions. 

We understand that actions to develop and automate standard payment 

instructions must be coordinated with interested parties throughout DOD. 

At the same time, a clear commitment to completing this effort in a timely 

manner is critical if DOD is to resolve its long-standing problem of 

spending tens of millions of dollars each year to make tens of billions of 

dollars in adjustments to correct the payment allocation problems. When 

$1 out of every $4 in contract payment transactions continues to be for 

adjustments to previously recorded payments, decisive steps towards a 

lasting solution are essential. One concern that we have is that DOD has 

not indicated any time frame for completing the coordination and review 

process referred to in its response. As we recently testified,20 cultural 

resistance to change, military service parochialism, and stovepiped 

20U.S. General Accounting Office, Department of Defense: Status of Financial 

Management Weaknesses and Progress Toward Reform, GAO-03-931T (Washington, D.C.: 

June 25, 2003). 
Page 30 GAO-03-727 DOD Contract Payments

operations have played a significant role in previous failed attempts to 

implement management reforms at DOD. Breaking down these barriers 

will be critical to successfully reforming DOD’s contract payment 

processes and saving the millions of dollars currently spent annually on 

inefficient and inaccurate manual processes. 

In addition, DOD stated that our findings were based on a review of only 

two contracts that had known problems. DOD recommended that the 

report specifically state that, due to the nature of this review, the results 

cannot be extrapolated to other DOD contracts. The draft report already 

included such a statement. The report states that the two contracts we 

reviewed are not representative of all DOD contracts but, based on our 

experience, have characteristics similar to other complex contracts. DFAS 

Columbus provided these contracts as examples of complex contracts with 

which they had encountered problems in correctly allocating payments to 

ACRNs. We selected these two contracts so we could identify the root 

cause of payments not being properly allocated to ACRNs and to determine 

what actions DOD is taking to address the problem. We believe that the 

two contracts provide a good perspective regarding the types of serious 

problems that have long plagued DOD’s contract payment process. 

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

date. At that time, we will send copies of the report to interested 

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

Secretary of Defense; the Under Secretary of Defense (Comptroller); the 

Under Secretary of Defense (Acquisition, Technology, and Logistics); the 

Secretaries of the Army, Navy, and Air Force; and the Director of the 

Defense Finance and Accounting Service. We will make copies available to 

others upon request. In addition, the report will be available at no charge 

on the GAO Web site at http://www.gao.gov. If you or your staff have any 

questions regarding this report, please contact me at (202) 512-9505 or 

kutzg@gao.gov or Greg E. Pugnetti, Assistant Director, at (703) 695-6922 or 
Page 31 GAO-03-727 DOD Contract Payments

pugnettig@gao.gov. Major contributors to this report are acknowledged in 

appendix III.

Sincerely yours,

Gregory D. Kutz

Director, Financial Management and Assurance
Page 32 GAO-03-727 DOD Contract Payments

Appendix I

Scope and Methodology AAppenednxidexiIs

To determine the magnitude of adjustments that affected previously 

recorded payments and Defense Finance and Accounting Service (DFAS) 

Columbus’s reported cost to make these adjustments in fiscal year 2002, we 

obtained and analyzed a Mechanization of Contract Administration 

Services (MOCAS) database of contract payment transactions, including 

disbursements, collections, and adjustments, made for fiscal year 2002. We 

then determined the dollar amount and percentage of those adjustments 

that were made to previously recorded payments. We also interviewed and 

obtained cost information from DFAS officials to determine the costs for 

the DFAS Columbus commercial pay services, including the cost incurred 

by DFAS Columbus to make adjustments to previously recorded payments. 

To determine why contracts, including payment instructions, were 

complex, we reviewed applicable laws, Department of Defense (DOD) 

memorandums, regulations, administrative guidelines, policies, and 

procedures governing contract payments. These included a review of the 

key contract payment provisions provided in the Defense Federal 

Acquisition Regulation, DOD acquisition guidance, and DFAS policies. We 

also requested that DFAS Columbus provide us with several contracts that 

created problems for DFAS Columbus technicians when recording 

payments. DFAS Columbus officials provided us with 10 contracts that 

contained problems that DFAS Columbus was having with properly 

allocating payments to accounting classification reference numbers 

(ACRN), such as (1) missing payment instructions, (2) complex payment 

instructions, or (3) the contracting office changing payment instructions. 

Based on our review of contract documentation and interviews with DFAS 

Columbus officials, we selected two contracts for a detailed review to 

determine why the contracts, including payment instructions, were 

complex and caused payment allocation problems.

The two contracts selected were an Army missile contract (contract 

number DAAH01-98-C-0093) and an Air Force communications contract 

(contract number F09604-00-C-0090). In selecting these two contracts, we 

considered several factors, including (1) goods and/or services purchased, 

(2) the dollar amount of obligations and disbursements made on the 

contract, (3) the number of modifications made to the contract, (4) the 

number of ACRNs financing the contract, (5) payment provisions on the 

contract, and (6) the number of contract reconciliations performed by 

DFAS Columbus. Because contract data were constantly changing, we 

used a cutoff point of September 30, 2002, to gather, review, and analyze 

data on the two contracts.
Appendix I

Scope and Methodology

Page 33 GAO-03-727 DOD Contract Payments

To determine the key factors that caused DFAS Columbus to make 

payment adjustments for the two contracts reviewed, we obtained the 

contracts, purchase requests, contract modifications, vouchers, invoices, 

and other contract documentation. We reviewed this information and 

analyzed in detail (1) the payment instructions contained in the contract 

and contract modifications, (2) the purpose for and the number of ACRNs 

funding the contract, and (3) the number, dollar amount, and reasons for 

adjustments on the contracts. To determine why these adjustments were 

necessary, we analyzed 2 of the 67 reconciliations performed by DFAS 

Columbus (1 review for each contract), which resulted in $160 million of 

the $264 million in adjustments. 

Finally, to determine what steps DOD has taken or planned to address the 

adjustment problem, we (1) reviewed applicable DOD policies to identify 

changes in payment instruction guidance, (2) interviewed DFAS officials 

responsible for system development projects that affected MOCAS 

payments, and (3) interviewed DFAS officials on a working group formed 

to improve payment instructions. In addition, we discussed with officials 

from DFAS and the Office of the Under Secretary of Defense (Acquisition, 

Technology, and Logistics) why the contract payment instructions were so 

complex, whether they needed to be so complex, and what the officials 

were doing to address this problem.

We performed our review at the headquarters Offices of the Under 

Secretary of Defense (Comptroller) and the Under Secretary of Defense 

(Acquisition, Technology, and Logistics), Washington D.C., and DFAS, 

Arlington, Virginia; DFAS, Columbus, Ohio; Army Aviation and Missile 

Command, Redstone Arsenal, Alabama; and Air Force Materiel Command, 

Robins Air Force Base, Georgia. Our review was performed from August 

2002 through July 2003 in accordance with U.S. generally accepted 

government auditing standards, except that we did not validate the 

accuracy of (1) DFAS Columbus disbursement data pertaining to the dollar 

amount and percentage of those adjustments that were made to previously 

recorded payments and (2) the cost incurred to reconcile DFAS Columbus 

contracts. We also did not review the DOD acquisition process, including 

how contracts are written. We did analyze the payment instructions in the 

two contracts that we reviewed. We requested comments on a draft of this 

report from the Secretary of Defense or his designee. DOD provided 

written comments on July 3, 2003, which are discussed in the “Agency 

Comments and Our Evaluation” section of this report and are reprinted in 

appendix II. 
Page 34 GAO-03-727 DOD Contract Payments

Appendix II

Comments from the Department of Defense ApendxiI
Appendix II

Comments from the Department of Defense

Page 35 GAO-03-727 DOD Contract Payments
Appendix II

Comments from the Department of Defense

Page 36 GAO-03-727 DOD Contract Payments
Page 37 GAO-03-727 DOD Contract Payments

Appendix III

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Greg E. Pugnetti, (703) 695-6922

Acknowledgments Staff members who made key contributions to this report were Francine M. 

DelVecchio, Francis L. Dymond, Dennis B. Fauber, Keith E. McDaniel, and 

Harold P. Santarelli.
Page 38 GAO-03-727 DOD Contract Payments

Related GAO Products

Canceled DOD Appropriations: Improvements Made but More Corrective 

Actions Are Needed. GAO-02-747. Washington, D.C.: July 31, 2002.

DOD Contract Management: Overpayments Continue and Management 

and Accounting Issues Remain. GAO-02-635. Washington, D.C.: May 30, 

2002.

Canceled DOD Appropriations: $615 Million of Illegal or Otherwise 

Improper Adjustments. GAO-01-697. Washington, D.C.: July 26, 2001.

Financial Management: Differences in Army and Air Force Disbursing 

and Accounting Records. GAO/AIMD-00-20. Washington, D.C.: March 7, 

2000.

Financial Management: Seven DOD Initiatives That Affect the Contract 

Payment Process. GAO/AIMD-98-40. Washington, D.C.: January 30, 1998.

Financial Management: Improved Reporting Needed for DOD Problem 

Disbursements. GAO/AIMD-97-59. Washington, D.C.: May 1, 1997.

Contract Management: Fixing DOD’s Payment Problems Is Imperative. 

GAO/NSIAD-97-37. Washington, D.C.: April 10, 1997.

Financial Management: Status of Defense Efforts to Correct 

Disbursement Problems. GAO/AIMD-95-7. Washington, D.C.: October 5, 

1994.

(192069)
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