GAO

United States General Accounting Office

Report to the Honorable 

Tom Harkin, U.S. Senate

February 2001 CONTRACT 

MANAGEMENT

Excess Payments and 

Underpayments 

Continue to Be a 

Problem at DOD

GAO-01-309

Page 1 GAO-01-309 Excess Payments and Underpayments

Contents

Letter 3

Appendixes Appendix I: Contractors Reviewed 24

Appendix II: Comments From the Department of Defense 25

Appendix III: GAO Contacts and Staff Acknowledgments 28

Tables Table 1: Excess Payments Due to Billing and Payment Errors 12

Table 2: Time Involved in Resolving Excess Payments and 

Underpayments 17

Table 3: Amount of Time Taken to Resolve Outstanding Excess 

Payments and Underpayments 20

Figures Figure 1: Sources of Excess Payments 8

Figure 2: Causes of Excess Payments Resulting From Contract 

Administration Actions 10

Figure 3: Reasons for Outstanding Excess Payments 13

Figure 4: Scope of Underpayments 16

Figure 5: Time Taken to Repay Excess Payments Resulting From 

Contract Administration Actions 18

Abbreviations

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency

DFAS Defense Finance and Accounting Service

DOD Department of Defense
Page 2 GAO-01-309 Excess Payments and Underpayments
Page 3 GAO-01-309 Excess Payments and Underpayments

United States General Accounting Office

Washington, D.C. 20548

Letr

February 22, 2001

The Honorable Tom Harkin

United States Senate

Dear Senator Harkin:

We have reported over the last several years that the Department of 

Defense (DOD) annually overpaid its contractors by hundreds of millions 

of dollars and that in some cases these excess payments were not being 

promptly returned. In response, you requested that we look at the scope of 

excess payments and underpayments. Specifically, this report examines, 

for DOD contract payments, the following issues:

• What is the amount of excess payments and what are the reasons they 

occur?

• What is the amount of underpayments and what are the reasons they 

occur?

• How quickly are excess payments repaid and underpayments resolved?

We examined the amount of excess payments and underpayments by 

looking at the amount of excess payments repaid during fiscal year 1999 

and the amount of underpayments resolved during fiscal year 1999. We also 

collected data on the amount of excess payments and underpayments 

outstanding as of the time data was collected from contractors (May 2000). 

Our review focused on large contractor business segments, that is, 

business entities receiving $125 million or more in contract payments in 

fiscal year 1999 from the Defense Finance and Accounting Service 

(DFAS)—Columbus Center.1

 We collected information from 39 contractors, 

including in our sample all 11 contractors receiving in excess of $1 billion 

in payments in fiscal year 1999 and a random selection of the remaining 

large contractors.2

 The 39 contractors in our sample received $30 billion in 

1

 Business segments were defined using DOD “cage codes.” These cage codes are used by 

DOD to track the business entities receiving payments under DOD contracts. 

2

 Because we were assisted in the data collection by the Defense Contract Audit Agency, the 

sample was stratified by region in order to distribute the workload. We excluded a classified 

entity and a Canadian entity from the population of large contractors we sampled. 
Page 4 GAO-01-309 Excess Payments and Underpayments

contract payments in fiscal year 1999, 42 percent of the $71 billion in total 

contract payments reported for that year. The results cannot be projected 

to the population of large contractors because the workload required to 

gather the data limited the number of contractors that could be examined. 

Appendix I identifies the 39 contractors covered by our sample. 

In addition to the data on large contractors, we also examined 

DFAS-Columbus data on the amount of contract payments returned by 

contractors (including both large and small contractors) in fiscal years 

1999 and 2000. We did not independently verify the data reported by DFAS. 

Because of problems with the reliability of DOD’s contract payment data, it 

is not possible to determine whether the amounts of excess payments 

reported by DFAS were complete and accurate.

We were assisted in this review by the Defense Contract Audit Agency 

(DCAA). DCAA collected data from the 39 contractors and selectively 

tested this data against contractor records. We performed follow-up visits 

at 11 contractor locations. We were solely responsible for the analysis of 

the data and development of this report. 

Except as noted above, we performed our work in accordance with 

generally accepted government auditing standards.

Results in Brief DFAS-Columbus reports that contractors repaid $670 million in fiscal

year 1999 and closer to a billion dollars—$901 million—in fiscal year 2000. 

The higher amount for fiscal year 2000 reflects the inclusion of repayments 

made through offsets of other payments ($269 million) in addition to the 

amount repaid by check ($632 million).3

 Although small in relation to total 

contract payments, these amounts represent a sizable amount of cash in 

the hands of contractors beyond what is intended to finance and pay for the 

goods and services DOD is purchasing. 

The 39 large contractors covered by our review returned excess payments 

totaling $351 million in fiscal year 1999. Seventy-seven percent of these 

excess payments stemmed from contract administration actions (such as 

finalizing the amount provided to cover overhead costs) and 18 percent 

stemmed from billing or payment errors. Most of the contract 

3

 Data on payments returned through offsets was not available for fiscal year 1999 or earlier 

years.
Page 5 GAO-01-309 Excess Payments and Underpayments

administration actions were associated with financing payments (progress 

payments) provided to support contract implementation. Repayments 

became necessary when, for example, physical progress did not keep pace 

with progress payments or when there was a decrease in the number of 

items purchased. 

Reported underpayments were less common than excess payments. Large 

contractors we reviewed reported resolving $41 million in underpayments 

during fiscal year 1999.4

 Contractors attributed most underpayments to 

payment errors made by DFAS-Columbus. DFAS errors frequently came 

about in calculating how much had been paid through progress payments 

and how much was due when the item was delivered. 

Finally, in looking at how quickly payment issues were resolved, we found 

that a substantial portion of excess payments—at least 39 percent of the 

dollars owed—were not repaid within 30 days. In addition, about 

72 percent of underpayments took more than 30 days to resolve. It may be 

reasonable to expect underpayments to take a longer time to resolve since 

they were attributed to DFAS errors that still require reconciliation by the 

contractor and the government.5

 Most excess payments, by contrast, were 

attributed to contract adjustments that have usually been agreed to by both 

the contractor and the government. 

Our recommendations focus on reducing excess payments by periodically 

assessing the reasons excess payments occur and encouraging contractors 

to refund excess payments promptly. DOD generally agreed with our 

recommendations, saying that the amount of excess payments caused by 

contract administration actions should be reduced but that these payments 

were proper at the time of disbursement and the product of routine 

contract administration. 

4

 As discussed below, underpayments may not have been fully identified. 

5

 For billing and payment errors, we measured the 30 days from the date that the payment 

was received by the contractor. For contract administration actions, we measured the

30 days from the date of the contract adjustment that implemented the contract 

administration action.
Page 6 GAO-01-309 Excess Payments and Underpayments

Background DFAS-Columbus pays contracts administered by the Defense Contract 

Management Agency (DCMA).6

 This includes most contracts for 

development and production of weapon systems (except shipbuilding 

contracts). DFAS-Columbus paid $71 billion to contractors in fiscal 

year 1999 and $72 billion in fiscal year 2000.

These types of contracts often involve financing payments. Financing 

payments cover the costs incurred, for example, in manufacturing an 

aircraft or missile. These costs take the form of equipment, material, and 

labor needed for production. Financing payments may be provided through 

progress payments7

 that reimburse contractors for most—75 percent for 

large contractors—of the costs they incur. As items covered by the contract 

are delivered, DFAS pays the remaining amount owed, deducting the 

progress payments from the price of delivered items. The rate used to 

determine the amount owed at delivery, known as the liquidation rate,8

 may 

be adjusted when costs are higher or lower than projected. Under a

fixed-price contract, this adjustment permits the contractor to receive the 

full amount due or, in the case of cost overruns, ensures that the 

government does not pay more than the agreed price. 

When the contractor submits a bill for delivery of some or all of the items 

covered by a contract, DFAS recalculates the amount owed based on its 

records of whether progress payments have been made against the 

delivered items and what liquidation rate should be applied. 

The Prompt Payment Act and the federal acquisition regulation require 

agencies to pay invoices for delivered items within 30 days. If not paid in

30 days, interest charges accrue. Requests for progress payments are not 

6

 DFAS-Columbus pays other contracts beyond those administered by DCMA. This report 

only covers payments made for DCMA-administered contracts and all references to 

DFAS-Columbus in this report are specific to these payments. 

7

 Financing payments may also be performance-based with payments based on the 

accomplishment of particular events or milestones. Financing payments, including both 

progress payments and milestone-based payments, typically apply to production contracts. 

8

 If the progress payment rate is 75 percent, the usual liquidation rate (the rate at which 

progress payments are liquidated) would also be 75 percent. The contractor would receive 

the remaining 25 percent on delivery of an item. However, an alternate rate of say 85 percent 

could be approved if costs were higher than expected. In this case, the contractor would 

receive a payment of 15 percent of the price rather than 25 percent of the price on delivery. 
Page 7 GAO-01-309 Excess Payments and Underpayments

subject to interest charges. However, DOD regulations set a target of 7 days 

for paying progress payment requests. 

DFAS-Columbus relies on the contracting officer for contract information 

necessary to make accurate and timely payments. Contract provisions 

specify key information such as the authorized progress payment rate, 

liquidation rate, and price. The DCMA contracting officer also monitors 

contract performance to ensure that amounts provided are commensurate 

with progress on the system. Contract provisions also define the ceiling 

price that is used to calculate payments when the price has not been 

negotiated (known as an undefinitized contract). Contracting officials also 

determine the indirect cost rate that is applied against direct costs, such as 

labor, to cover overhead costs.

Excess Payments 

Result From Contract 

Administration Actions 

DFAS-Columbus reports that contractors repaid $670 million in fiscal

year 1999. This amount considers only repayments made through checks, 

not those made through offsets of other contract payments. (Data on 

payments returned through offsets was not available for fiscal year 1999.) 

DFAS-Columbus data for fiscal year 2000 indicates that contractors repaid 

closer to a billion dollars—$632 million by check and $269 million through 

offsets of other payments, for a total of $901 million. 

While these amounts represent a small portion of the total amount paid to 

contractors, they represent a substantial amount of cash in the hands of 

contractors beyond what is intended to finance and pay for the goods and 

services bought by DOD. Moreover, these funds are sometimes in the hands 

of contractors for several years before it is recognized that excess 

payments have occurred. 

The 39 contractors we reviewed reported that they repaid $351 million in 

fiscal year 1999, but many stated that they could not easily identify 

amounts repaid through offsets of other payments. These contractors also 

identified $40 million in excess payments that, at the time of the contractor 

review, had not yet been repaid. However, the reported amount of 

outstanding payments does not fully capture the amounts already paid that 

may be recognized as excess payments in the future. For example, the 

indirect rate used to cover overhead costs may be estimated at the outset of 

the contract but may turn out to be higher than the actual rate determined 
Page 8 GAO-01-309 Excess Payments and Underpayments

later on.9 When this occurs, the government will have paid the contractor 

too much for indirect (overhead) costs and will be due a refund. At the time 

of our review, neither the contractor nor DOD personnel would have 

recognized the payments as excessive and reported these excess payments 

as outstanding. 

Reasons for Excess 

Payments

The large contractors we reviewed reported that 77 percent of the 

$351 million in excess payments were principally related to contract 

administration actions. These actions include, for example, adjustments in 

the amounts provided through progress payments to finance the 

production of a system. A smaller portion of excess payments was related 

to contractor billing errors and DFAS-Columbus payment errors. Figure 1 

further illustrates the sources of excess payments. 

Figure 1: Sources of Excess Payments 

9

 Changes in the indirect cost rate would affect payments for contracts where the contractor 

is reimbursed for costs or part of the price is based on actual costs. 

Unspecified

Billing and payment errors 

77 Contract administration

18

5 

Percent of dollar value for excess payments repaid in FY 1999
Page 9 GAO-01-309 Excess Payments and Underpayments

Billing and payment errors accounted for a larger share of repayment 

actions. For the 1,153 repayment actions that make up the $351 million of 

excess payments identified by contractors, 59 percent were attributed 

tocontract administration actions and 26 percent to billing and payment 

errors. No reason was specified for 15 percent of the repayment actions. 

Contract Administration Actions As shown in figure 2, reimbursements of progress payments were the 

source of more than three-fourths of the dollar value of repayments 

attributed to contract administration actions. Reimbursements of progress 

payments occurred when physical progress was not commensurate with 

the amount of financing payments or when there was a change in the 

schedule or quantity of items to be delivered. The contracting officer is 

required to monitor program progress and take prompt action when 

progress lags financing payments. In these instances, costs may be higher 

than expected and the contractor will receive less profit or even incur 

losses on the contract. When the contracting officer adjusts the liquidation 

rate to recognize a lag in progress, the new rate is applied to previous 

payments, resulting in a refund due to the government. 
Page 10 GAO-01-309 Excess Payments and Underpayments

Figure 2: Causes of Excess Payments Resulting From Contract Administration 

Actions

0

5

10

15

20

25

30

35

Percent of dollars

Progress

lags financing 

Progress payquantity or 

schedule change

Other progress 

pay

Change in

indirect cost rates

Post-award 

pricing audits

Definitized 

contract price

Other

33

20

24

2 1

4

0

5

10

15

20

25

30

35

Percent of actions

Progress

lags financing 

Progress pay-quantity 

or schedule change

Other progress pay

Change in

indirect cost rates

Post-award 

pricing audits

Definitized contract

price

Other

10

6

11

21

14

5

33

Progress pay adjustment

Other contract administration action

16
Page 11 GAO-01-309 Excess Payments and Underpayments

As shown in figure 2, some types of contract administration actions 

accounted for a substantial portion of the repayment actions but a small 

share of the excess payment dollars. For example, changes in indirect cost 

(overhead) rates accounted for 21 percent of actions but only 2 percent of 

excess payment dollars. Similarly, actions definitizing contract prices 

accounted for 14 percent of actions and 1 percent of excess payment 

dollars. 

The examples below illustrate the types of contract administration issues 

that result in excess payments.

• At one location, the DCMA contracting officer recognized that payments 

needed to be adjusted because the contractor was incurring higher costs 

than expected. However, prompt action was not taken and additional 

progress payments were allowed before changing the liquidation rate

4 months later. When the rate was changed and applied to prior 

payments, the contractor reimbursed the government for $13 million. 

About 3 months later, the DCMA contracting officer again identified a 

problem with the liquidation rate but allowed progress payments to 

continue before getting a refund of over $25 million. 

• In another case, the contractor relied on a time-phased plan for 

allocating material costs to contracts. Based on a 1998 delivery 

schedule, amounts were allocated to the contract and progress 

payments were made beginning in February 1998. In September 1998, 

the delivery schedule was extended to 1999. The contractor reallocated 

material to other contracts and, in November 1998, refunded $10 million 

of prior payments. 

• In another case, progress payments were made to finance the 

production of items used in satellite launches. However, the Air Force 

decided to defer delivery of these items and allowed the contractor to 

transfer them to commercial customers. The contractor repaid

$34 million in financing costs for these items. When production 

resumes, the contractor will again be eligible for progress payments.

• The Army expanded an existing contract for production of helicopters 

to include helicopters being purchased by the State Department. 

However, in modifying the contract, the contracting officer did not 

identify the payment office as the State Department. As a result, DFAS 

paid the contractor $21 million in progress payments. Shortly afterward, 

the problem was identified and the contractor quickly reimbursed DFAS 

for these payments. 
Page 12 GAO-01-309 Excess Payments and Underpayments

Excess Payments Also Result 

From Billing and Payment Errors

Contractors reported that $64 million in contract repayments resulted from 

billing and payments errors,10 as shown in table 1. Contractor billing errors 

accounted for the larger dollar amount but a smaller number of repayment 

actions. 

Table 1: Excess Payments Due to Billing and Payment Errors

Examples of contractor billing errors include the following cases. 

• A sizable repayment involved a contractor that billed twice for the same 

fees, resulting in excess payments of $16 million between September 

1997 and July 1999. This occurred when the contractor included award 

fees (profit) paid to a partnering company in its own costs and then 

separately billed for these same fees. The contractor did not detect the 

double billing until August 1999. The contractor refunded the excess 

payments 8 days later and took steps to prevent such billing errors in the 

future. In response, the DCMA office overseeing this contractor issued 

an alert to other offices about the potential for double billing under 

similar circumstances. 

• A smaller error occurred in a case in which the contractor overpaid its 

supplier by $1.3 million and charged that amount to the government. 

The contractor identified its error in October 1998 and repaid the 

government 42 days later—time needed, according to the contractor, for 

internal processing and approval.

10 We relied on the contractor’s assessment of whether errors were due to DFAS-Columbus 

payment errors or billing errors. We did not independently verify each transaction. However, 

we did review a small number of transactions with DFAS-Columbus officials and they 

agreed with the contractor’s classification for most of these transactions. 

Excess payments resolved in FY 1999

Type of error Total (in millions of dollars) Number of actions

Contractor billing $46.5 98

DFAS payment 17.1 198
Page 13 GAO-01-309 Excess Payments and Underpayments

Pattern for Outstanding 

Excess Payments Differs

For most excess payments that were outstanding at the time of the 

contractor reviews, the causes of the excess payments were not specified.11

For those payments where a cause was identified, contractors attributed 

most of the excess payments to DFAS errors, as shown in figure 3. 

Figure 3: Reasons for Outstanding Excess Payments 

Note: Numbers do not add to 100 percent due to rounding.

One very large payment for $29 million was outstanding at the time of the 

contractor reviews.12 The contractor attributed the problem to a DFAS 

error, but we questioned whether this is the appropriate classification of 

the payment. In this case, the contracting officer modified a contract for 

11 The contractor did not specify a reason the excess payments occurred in its response to 

DCAA.

12 Because this one large payment greatly affects the proportion of dollars attributable to 

any reason category and because we did not agree with the contractor’s identification of the 

reason as a DFAS error, we are not presenting reasons for excess payments by dollar 

amounts. 

33

2

11

53

0

10

20

30

40

50

60

70

80

90

100

DFAS payment

error

Billing error Contract change Unspecified

Percent of actions
Page 14 GAO-01-309 Excess Payments and Underpayments

production of Air Force aircraft to add manufacturing support for the 

foreign military sale of aircraft. In modifying the contract, the contracting 

officer did not reference a DOD regulation requiring that, in the case of 

foreign military sales, requests for progress payments allocate the amount 

requested by purchasing country. Contracting officials stated that the 

clause was not referenced because they did not expect progress payments 

to be requested for the manufacturing support portion of the contract—

manufacturing support was payable in increments of one-twelfth of the 

annual amount. (Contracting officials stated that progress payments will be 

expressly prohibited in a follow-on contract.) Although experienced in 

foreign military sales, the contractor did not identify its progress payment 

requests as related to foreign military sales. When no country is identified, 

DFAS-Columbus allocates progress payments to the U.S. portion of the 

contract. As a result, when the contractor submitted invoices for final 

payment against the foreign military sales portion of the contract, 

DFAS-Columbus did not deduct progress payments from the price; instead, 

it paid the full amount for manufacturing support. The contractor notified 

DFAS when the excess payments began, but payments had accumulated for 

14 months at the time of our review. Two months later, payments were 

reconciled and the contractor repaid $29 million. 

DCMA Does Not Analyze 

Reasons for Excess 

Payments

When a contractor submits a check to repay an excess payment, 

DFAS-Columbus classifies it as either a payment error or contract 

administration action. The results of DFAS’s analysis is similar to our 

own—it reports that 82 percent of the dollar value of excess payments in 

fiscal year 1999 was due to contract administration actions. When an 

excess payment is due to a payment error, it identifies the source of the 

problem to prevent future recurrence. However, DFAS does not analyze the 

causes for excess payments resulting from contract administration actions 

because these excess payments involve actions outside its control, such as 

contract price adjustments.

DCMA does not analyze the data generated by DFAS to understand the 

nature of excess payments caused by contract administration actions. Such 

an analysis would be helpful in identifying systemic problems that result in 

excess payments or in identifying problems specific to a particular 

contractor or contracting organization. Without such information, 

substantial reductions in the amounts of excess payments are unlikely. 

According to DCMA officials, they do not receive DFAS’s data on excess 

payments even though DFAS’s data is a central source of information on 
Page 15 GAO-01-309 Excess Payments and Underpayments

excess payments resulting from contract administration actions. For each 

check DFAS receives, DFAS shows the refund amount, contractor’s name, 

contract number, and the general nature of the contracting action. For 

example, a refund check may be associated with a change in the liquidation 

rate. Thus, the DFAS data would indicate the excess payment was 

associated with progress payments although the data would not indicate if 

the change is resulting from delays in delivery schedules or higher than 

expected costs. We believe that the DFAS data can be used as a tool for 

initially identifying the types and locations of contract administration 

actions that are generating excess payments and appropriately targeting 

efforts to reduce excess payments. 

Underpayments 

Attributed to Payment 

Errors

Contractors identified a smaller amount of underpayments compared to 

excess payments. Contractors covered by our review reported that they 

had resolved underpayments totaling $41 million in fiscal year 1999, as 

shown in figure 4. Contractors also reported that $15 million in 

underpayments were outstanding at the time of the review. While the dollar 

impact of underpayments is smaller, compared to overpayments, the 

resolution of these problem payments creates an administrative burden on 

DFAS, contracting officers, and contractors. Furthermore, when the 

underpayment occurs on an invoice for delivery of an item, the 

underpayment may be subject to interest charges. DFAS-Columbus reports 

that it paid $24 million in interest in fiscal year 1999 and $16 million in fiscal 

year 2000.
Page 16 GAO-01-309 Excess Payments and Underpayments

Figure 4: Scope of Underpayments 

DCMA and contractor officials stated contractors might not have fully 

reported underpayments. If a contract adjustment results in recognizing 

that the contractor is due additional monies (for example, a decrease in the 

liquidation rate due to lower-than-expected costs), the contractor will 

normally prepare an invoice for the amount owed. Officials said that 

because the amount owed is paid through a separate invoice, contractors 

might not have identified the payment as an underpayment. DCAA officials 

also stated that some contract actions—such as pricing audits—only result 

in identifying excess payments, not underpayments. 

As a result, contractors attributed most underpayments to DFAS payment 

errors—93 percent of the dollar value of underpayments resolved in fiscal 

year 1999. Three percent of underpayments resolved in fiscal year 1999 

were attributed to contractor billing errors. For underpayments 

outstanding at the time of our review, contractors did not specify a cause 

for 39 percent of the dollar value underpayments and attributed 61 percent 

to DFAS payment errors. None of the outstanding underpayments were 

attributed to contractor billing errors. 

Many of the DFAS errors came about in determining how much was due 

when the item was delivered and how much had been paid through 

0

10

20

30

40

50

60

70

80

90

0

100

200

300

400

500

600

700

Dollar amount Number of actions

$15

$41

275

205

Outstanding Resolved Outstanding Resolved

Dollars in millions Number of actions
Page 17 GAO-01-309 Excess Payments and Underpayments

progress payments. For example, one contractor reported that DFAS 

deducted progress payments for items in the contract that were not eligible 

for and had not received progress payments. The contractor reported that 

an underpayment for $123,000 occurred in August 1998. Two months later, 

DFAS completed its review and paid the contractor $123,000. 

Discrepancies also occurred when DFAS and the contractor processed 

invoices in different sequences. In preparing its invoice, the contractor may 

apply outstanding progress payments to the first invoice and show the full 

amount, without a deduction for progress payments, on later invoices. 

However, DFAS may not process the invoices in the same sequence if, for 

example, multiple invoices are submitted on the same day or within a few 

days of each other. DFAS applies progress payments to invoices as they are 

paid, until no progress payments remain. 

Some Excess 

Payments and 

Underpayments Are 

Not Resolved Promptly 

A substantial portion of excess payments was not repaid promptly. As 

shown in table 2, for the 39 contractors we reviewed, 55 percent of the 

dollar value of excess payments was repaid in 30 days or less while

39 percent was not. (Data to determine the time taken to repay was not 

available for the remaining amount.) Unless a formal demand for payment 

is made, there is no penalty or interest charged to contractors for 

repayments taking more than 30 days. 

Table 2: Time Involved in Resolving Excess Payments and Underpayments

a

Does not total 100 percent due to rounding.

Excess payments repaid in FY 

1999

Underpayments resolved in FY 

1999

Number of 

days

Percent

of dollarsa

Percent

of cases

 Percent

of dollars

Percent

of casesa

30 days or less 55 30 26 42

31-60 days 13 12 44 15

61-90 days 9 7 22 15

91-180 days 12 7 5 17

181-365 days 1806

Over 1 year 4914

Unknown 5 27 2 2

Total 100 100 100 100
Page 18 GAO-01-309 Excess Payments and Underpayments

Because most excess payment dollars—77 percent—stemmed from 

contract administration actions, it is reasonable to expect repayment 

within 30 days of the contract adjustment. These actions are normally 

implemented through modifications to the contract that are usually agreed 

to by both the contracting officer and the contractor. Thus, at the time the 

contract modification is signed, there is recognition that a repayment will 

result from the action and the amount owed is identified or can be readily 

calculated. Yet, as shown in figure 5, a substantial portion of excess 

payment dollars resulting from contract adjustments was not repaid in 

30 days.13

Figure 5: Time Taken to Repay Excess Payments Resulting From Contract 

Administration Actions 

13 By comparison, for excess payments resulting from billing and payment errors, 71 percent 

was not repaid in 30 days. At the end of 60 days, 58 percent had not been repaid. As 

discussed below, it is reasonable to expect that billing and payment errors would take 

somewhat longer, on average, to resolve.

0

10

20

30

40

50

60

70

80

90

100

30 days or less 31 - 60 days 61 and more days Unspecified

Percent of dollars

65

12

19

4
Page 19 GAO-01-309 Excess Payments and Underpayments

Contractors had different policies for refunding excess payments. Some 

had policies and procedures for identifying and refunding excess payments 

promptly. Others waited for government action before refunding. Some 

contractors would not refund excess payments if they also had unresolved 

underpayments. And some contractors preferred to offset other payments 

rather than issuing a check, a process that would take longer and is less 

visible. In August 2000, in response to our recommendation, a revision to 

the federal acquisition regulation was proposed requiring contractors to 

notify the contracting officer if the contractor becomes aware of an 

overpayment.14 Our recommendation was intended to apply to excess 

payments caused by contract administration actions as well as billing and 

payment errors. However, the proposed regulation only applies to invoice 

payments and not contract financing payments (i.e., progress payments). 

DOD has the ability to demand payment within 30 days and to impose 

interest charges if not repaid within this time. The federal acquisition 

regulation directs that the responsible official (usually the contracting 

officer) act promptly to determine the amount owed the government and 

DOD regulations require that a demand for payment be made as soon as 

this amount has been determined. Moreover, the federal acquisition 

regulation imposes interest charges for debts not paid in 30 days. Yet, 

contracting officers do not consistently issue demands for payment when 

contract changes are negotiated even though, in most instances, the 

amount owed is known or is calculable from the data used to determine the 

contract change. For example, in one case, the contracting officer 

negotiated a price reduction because certain engineering tasks were 

eliminated from the contract. After negotiating for nearly a year, agreement 

was reached and a contract modification signed reducing the contract price 

by $6.9 million. However, the contracting officer did not issue a formal 

demand for payment. The contractor did not refund the $6.9 million until 

January 1999, more than a year later and 2 years after the scope of 

engineering tasks was reduced.15

In the case of underpayments, we found that 72 percent of the dollar value 

of underpayments took more than 30 days to resolve. However, contractors 

attributed most underpayments—93 percent—to DFAS payment errors. In 

14 DOD Contract Management: Greater Attention Needed to Identify and Recover 

Overpayments (GAO/NSIAD-99-131, July 19, 1999). 

15 According to the contractor, it did not refund the money promptly because the contract 

modification was, inadvertently, not communicated to the accounting department.
Page 20 GAO-01-309 Excess Payments and Underpayments

these cases, a problem would be identified at the time the contractor 

received the payment and the process of reconciling identified 

discrepancies would begin at this point. It would therefore seem 

reasonable to expect resolution of payment errors to take longer than 

repayments arising from contract administration actions. Twenty-six 

percent of the dollar value of underpayments was resolved in 30 days and 

an additional 44 percent was resolved in 31 to 60 days. Twenty-eight 

percent took more than 60 days to resolve. Underpayments were therefore 

resolved more quickly than excess payments—58 percent of the dollar 

value of excess payments attributed to billing and payment errors took 

more than 60 days to resolve.

Payments Outstanding at 

the Time of Our Review 

Took Long Periods to 

Resolve 

The time involved for resolving excess payments and underpayments that 

were outstanding at the time of our review differed substantially from the 

time involved for cases resolved in fiscal year 1999. As shown in table 3, 

most excess payments and underpayments that were unresolved at the 

time of our review had been unresolved for at least 6 months. Some had 

been unresolved for several years. 

Table 3: Amount of Time Taken to Resolve Outstanding Excess Payments and 

Underpayments

a

Does not add to 100 percent due to rounding.

Several reasons were given for the lengthy times involved in these cases. 

DFAS officials stated that the process for resolving payment discrepancies 

could be labor-intensive and time-consuming, particularly for large 

contracts covering several years with large numbers of payments. And 

Outstanding excess payments Outstanding underpayments

Number of 

days

Percent

of dollars

Percent

of actions

Percent

of dollarsa

Percent

of actionsa

30 days or less 0 0 0 0

31-90 days 0 2 0 0

91-180 days 2 5 0 0

181-365 days 9 34 53 46

Over 1 year 83 54 39 53

Unknown 6 5 7 0

Total 100 100 100 100
Page 21 GAO-01-309 Excess Payments and Underpayments

some contractors said they do not repay excess payments if 

underpayments had also occurred. 

Conclusions The amount of excess payments repaid in fiscal year 2000—$901 million—

is small compared to the total amount paid by DFAS-Columbus. 

Nonetheless, it represents a substantial amount of financial resources paid 

to contractors beyond what is intended to support the financing of 

programs. Most of these excess payments were due to contract 

administration actions, particularly adjustments in progress payments. 

These actions largely fall under the purview of DCMA. However, DCMA 

does not review the data generated by DFAS on reasons excess payments 

occurred. Such a review is necessary if excess payments are to be reduced. 

While a sizable portion of excess payments is repaid within 30 days, a 

substantial portion is not. It is reasonable to expect that excess payments 

resulting from contract administration actions should be repaid in this time 

frame since the amount owed is identified in the contract change or can be 

calculated from the data used to develop the contract adjustment. More 

consistent application of requirements to issue demands for payment is 

needed.

Recommendations for 

Executive Action

We recommend that the Secretary of Defense

• Require that DCMA endeavor to minimize excess payments by

(1) routinely analyzing DFAS data on the reasons for excess payments 

relating to contract administration, (2) further investigating problem 

areas identified by this data, and (3) identifying and implementing 

actions to reduce the amount of excess payments caused by contract 

administration actions.

• Require, when contract administration actions result in recognition of 

an excess payment, that contracting officers compute the amount owed 

and demand payment of this amount at the time the contract is 

modified. 

Agency Comments and 

Our Evaluation

In written comments on a draft of this report, DOD partially concurred with 

the first recommendation. Specifically, DOD stated that it partially 

concurred with the need to routinely analyze DFAS data and identify 

problem areas, stating that DCMA will conduct an initial review of excess 
Page 22 GAO-01-309 Excess Payments and Underpayments

payment data generated by DFAS and determine whether routine receipt 

and analysis of this data would be meaningful. DOD agreed that the amount 

of excess payments caused by contract administration actions should be 

reduced, and it specifically concurred with the need to identify and 

implement actions to reduce these excess payments. DOD further 

commented that contract actions at times necessitate recoupment of funds 

from contractors in the normal course of contract performance and that 

these payments were proper at the time they were paid to contractors. 

DOD stated that it is misleading to call the funds recouped from 

contractors excess payments and that they only become excess payments 

if contractors delay in making repayment. 

We believe that if DCMA concludes that the DFAS data does not give it 

sufficient information to justify routine receipt of this data, it is imperative 

that DCMA identify an alternate approach for identifying actions that will 

reduce the amount of excess payments caused by contract administration 

actions. We disagree with DOD’s comments that only those amounts the 

contractor delays in repaying are really excess payments. DOD seems to be 

confusing the issue of whether a payment is proper (i.e., consistent with 

contract terms) with whether the payment is the right amount to 

accomplish its intended purpose (e.g., reimbursing the contractor for the 

actual amount of indirect costs being incurred). Some recoupment of 

payments will be necessary as a result of normal contract management, in 

part, because it is not practical to gain perfect knowledge of the exact 

amount needed to accomplish the intended purpose. We believe it is 

essential that controls are in place and timely management oversight is 

conducted so that the amount of payments recouped from contractors (i.e., 

excess payments) is kept to a minimum. The amount currently being 

recouped is too high. Further, we understand that DOD is considering plans 

to increase the progress payment rate from 75 percent to 80 percent (for 

large contractors). Such an action would increase the amount of progress 

payments going to contractors and would likely lead to an increase in 

excess payments if no actions are taken to manage progress payments 

more effectively.

With regard to the second recommendation on demanding payment of 

amounts owed, DOD agreed with the recommendation and stated that 

DCMA will improve its guidance to contracting officers to ensure they issue 

demands for payments with the execution of contract modifications.

DOD comments appear in appendix II. DOD also provided technical 

comments that we have incorporated as appropriate. 
Page 23 GAO-01-309 Excess Payments and Underpayments

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we will not distribute this report until 30 days from its 

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

congressional committees; Donald H. Rumsfeld, Secretary of Defense; and 

Mitchell E. Daniels Jr., Director, Office of Management and Budget. 

GAO contacts and staff acknowledgments to this report are listed in 

appendix III.

Sincerely yours, 

David E. Cooper, Director

Acquisition and Sourcing Management
Page 24 GAO-01-309 Excess Payments and Underpayments

Appendix I

Contractors Reviewed ApApenednxidexiIs

Lockheed Martin Corp., Marietta, Ga.

Primex Technologies Co., St. Petersburg, Fla..

United Technologies Corp., West Palm Beach, Fla.

Northrop Grumman Corp., Melbourne, Fla.

Lockheed Martin Corp., Orlando, Fla.

Allison Engine Co. Inc., Indianapolis, Ind.

Lockheed Martin Tactical, Akron, Ohio

Textron Systems Corp., Wilmington, Mass.

Hughes Arabia Limited, Malaz District, SAU

Lockheed Martin Corp., Syracuse, N.Y.

General Dynamics Defense, Pittsfield, Mass.

Sikorsky Aircraft Corp., Stratford, Conn.

Lockheed Martin Corp., Nashua, N.H.

Raytheon Co., Marlborough, Mass.

Lockheed Martin Commercial, Littleton, Colo.

Lockheed Martin Corp., Littleton, Colo.

Oshkosh Truck Corp., Oshkosh, Wis.

Raytheon Aircraft Co., Wichita, Kans.

McDonnell Douglas Corp., St. Louis, Mo.

DYN Corp/Aerospace Technology, Ft. Worth, Tex.

Stewart & Stevenson Services, Sealy, Tex.

Alliant Techsystems Inc., Hopkins, Minn.

Lockheed Martin Corp., Ft. Worth, Tex.

Raytheon Co., Tucson, Ariz.

Science Applications Intl., San Diego, Calif.

Litton Systems Inc., Woodland Hills, Calif.

Lockheed Martin Corp., Sunnyvale, Calif.

Boeing Co., Seattle, Wash.

McDonnell Douglas Corp., Huntington Beach, Calif.

McDonnell Douglas Corp., Long Beach, Calif.

Boeing North American Inc., Downey, Calif.

TRW Inc., Carson, Calif.

Lockheed Martin Corp., Baltimore, Md.

Lockheed Martin Corp., Manassas, Va.

Marconi Systems Technologies, Rockville, Md.

Boeing Sikorsky Comanche, Philadelphia, Pa.

Boeing Helicopters, Ridley Park, Pa.

United Defense LP, York, Pa.
Page 25 GAO-01-309 Excess Payments and Underpayments

Appendix II

Comments From the Department of Defense ApendxiI
Appendix II

Comments From the Department of Defense

Page 26 GAO-01-309 Excess Payments and Underpayments
Appendix II

Comments From the Department of Defense

Page 27 GAO-01-309 Excess Payments and Underpayments

Now on p. 21.

Now on p. 21.
Page 28 GAO-309 Excess Payments and Underpayments

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

GAO Contacts Dave Cooper (202) 512-4841

Karen Zuckerstein (202) 512-6785

Acknowledgments In addition to those named above, Odilon Cuero, Jack Edwards, 

Carlos Garcia, Paul Greeley, Noel Lance, Martin Lobo, Kenneth Roberts, 

and Raffaele Roffo made key contributions to this report.

We would also like to acknowledge the contributions of Barry Turner, 

Defense Contract Audit Agency, to this report.

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