GAO 

United States Government Accountability Office

Report to the Committee on Oversight 

and Government Reform, House of 

Representatives 

CONTRACT 

MANAGEMENT 

Extent of Federal 

Spending under CostReimbursement 

Contracts Unclear and 

Key Controls Not 

Always Used 

September 2009 

GAO-09-921 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2009

CONTRACT MANAGEMENT 

Extent of Federal Spending under CostReimbursement Contracts Unclear and Key Controls

Highlights of GAO-09-921, a report to the Not Always Used 

Committee on Oversight and Government 

Reform, House of Representatives 

View GAO-09-921 or key components.

For more information, contact John Needham 

at (202) 512-4841 or needhamJK1@gao.gov. 

Federal agencies obligate billions 

of dollars annually using costreimbursement contracts. This type 

of contract involves high risk for 

the government because of the 

potential for cost escalation and 

because the government pays a 

contractor’s costs of performance 

regardless of whether the work is 

completed. As such, costreimbursement contracts are 

suitable only when the cost of the 

work to be done cannot be 

estimated with sufficient accuracy 

to use fixed-price contracts. 

Agencies may use this contract 

type only if certain conditions are 

met. At your request, GAO assessed 

(1) the extent of agencies’ 

obligations under these contracts, 

(2) the rationales for using this 

contract type, (3) determinations 

that contractors’ accounting 

systems are adequate for 

determining costs applicable to the 

contracts, and (4) procedures for 

monitoring contractor cost 

controls. GAO analyzed federal 

procurement data and contract 

files and interviewed contracting 

and other government officials. 

What GAO Recommends

GAO is making recommendations 

to the Office of Federal 

Procurement Policy (OFPP) 

regarding how contracts are coded 

in the government’s procurement 

database and aimed at encouraging 

timely analysis to determine if a 

transition can be made to a 

contract with a firmer pricing basis. 

OFPP agreed with the 

recommendations. The other 

agencies in GAO’s review generally 

agreed with the findings in the 

report or had no comments.

The complete picture of the government’s use of cost-reimbursement 

contracts is unclear. From fiscal years 2003 through 2008 federal obligations 

under cost-reimbursement contracts were reported to have increased $16 

billion, to $136 billion, which represented a decrease in the total percentage of 

federal obligations over the 6-year period, from 34 percent to 26 percent. 

However, the overall downward trend is misleading. A significant increase has 

been reported for obligations using the “combination” contract type, a 

category that based on GAO’s analysis of 2008 data, includes many contracts 

with cost-reimbursement obligations that are not recorded as such. According 

to OFPP, a decision was recently made to eliminate the use of “combination” 

as a Federal Procurement Data System-Next Generation contract type, 

effective for all new contract awards starting in fiscal year 2010. In addition, 

GAO found billions of dollars for which the contract type had been coded as 

“missing” in fiscal year 2008. 

Agencies’ rationales for using cost-reimbursement contracts were difficult to 

determine because contracting officers frequently did not document—even in 

acquisition plans—why they chose to use this contract type. The current 

requirement for such documentation is minimal, but recent legislation (not yet 

implemented in the Federal Acquisition Regulation) requires that acquisition 

plans address the rationale. Of the 92 contracts and orders GAO reviewed, 

about 30 percent did not include any documentation. The supporting 

documentation GAO did find generally did not explain why a costreimbursement contract for the specific requirement was selected. GAO also 

found little evidence that agency officials are analyzing contracts’ pricing 

history and requirements to determine if they can transition to a contract type 

with firmer pricing, even though experience may provide a basis for doing so. 

Of the 92 contracts and orders GAO reviewed, about half had any evidence 

that, at least within 4 years before contract award, contractors’ accounting 

systems had been deemed adequate to determine costs applicable to the 

contract. Twenty contract files had no evidence that the contractors’ 

accounting systems were determined adequate and 20 other contract files 

contained determinations that had been made either many years before award 

or after the contract was awarded. Inadequate accounting systems, or 

accounting systems that had not been deemed adequate for many years, may 

result in the government making improper payments to contractors. 

GAO found a range of procedures for monitoring contractor cost controls at 

the agencies in its review. Procedures at the civilian agencies generally call for 

program officials to review contractor invoices. At the Department of 

Defense, cost surveillance depends on contractor-reported earned value 

management data, supplemented with audits for the purpose of testing 

whether invoiced costs are allowable. GAO’s prior work has raised concerns 

about the effectiveness of these audits. 
Page i GAO-09-921 

Contents 

Letter 1

Background 4 

Full Picture of Agencies’ Use of Cost-Reimbursement Contracts Is 

Unclear 8 

Agencies Purchase a Range of Services under Contracts Coded as 

Cost-Reimbursement 12 

Rationale for Using Cost-Reimbursement Contracts Is Often Not 

Clear, and Analysis Is Not Conducted to Determine if Contract 

Type with Firmer Pricing Is Warranted 14 

Agencies Do Not Always Ensure That Contractors’ Accounting 

Systems Are Adequate for Determining Costs Applicable to 

Contracts 22 

Various Procedures for Cost Surveillance Require Effective 

Implementation to Avoid Improper Payments 28 

Conclusions 34 

Recommendations for Executive Action 34 

Agency Comments and Our Evaluation 35 

Appendix I Scope and Methodology 38 

Appendix II Comments from the National Aeronautics and Space 

Administration 42 

Appendix III Comments from the Department of Health & Human 

Services 43 

Appendix IV GAO Contact and Staff Acknowledgments 47 

Tables 

Table 1: Agencies Reviewed and Percentages of CostReimbursement Obligations Reported in Fiscal Year 2007 2 

Table 2: Contract Types 4 

 Cost-Reimbursement Contracting 
Table 3: Areas of Overlap between Top 15 Categories Reported as 

Cost-Reimbursement Contract Type and as Combination 

Contract Type, Fiscal Year 2005 through July 13, 2009 10 

Table 4: Ten Largest Procurement Categories Reported as Using 

Cost-Reimbursement Contracts in Fiscal Year 2008 12 

Table 5: Examples of Goods and Services Procured with CostReimbursement Contracts at the 10 Agencies in Our 

Review 13 

Table 6: Examples of Rationales Used to Show Why CostReimbursement Contracts Were Awarded 16 

Table 7: Adequacy of Contractors’ Accounting Systems 25 

Figures 

Figure 1: Cost and Combination Type Contracts as a Percentage of 

Total Obligations, Fiscal Years 1999 to 2008 9 

Figure 2: DOD Procedures for Process and Approval of Interim 

Invoices 31 

Page ii GAO-09-921 Cost-Reimbursement Contracting
Abbreviations 

AHRQ Agency for Healthcare Research and Quality 

COR Contracting Officer’s Representative 

DCAA Defense Contract Audit Agency 

DCMA Defense Contract Management Agency 

DOE Department of Energy 

EVM Earned Value Management 

FAR Federal Acquisition Regulation 

FFP Firm Fixed Price 

FPDS-NG Federal Procurement Data System-Next Generation 

GAO Government Accountability Office 

IRS Internal Revenue Service 

IT Information Technology 

NASA National Aeronautics and Space Administration 

NIH National Institutes of Health 

NSF National Science Foundation 

OFPP Office of Federal Procurement Policy 

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Page iii GAO-09-921 Cost-Reimbursement Contracting
Page 1 GAO-09-921 

United States Government Accountability Office

Washington, DC 20548 

 

September 30, 2009 

The Honorable Edolphus Towns 

Chairman 

The Honorable Darrell Issa 

Ranking Member 

Committee on Oversight and Government Reform 

House of Representatives 

Federal agencies obligate more than $100 billion annually using costreimbursement contracts. This type of contract is considered high risk for 

the government because of the potential for cost escalation and because 

the government pays a contractor’s costs of performance regardless of 

whether the work is completed. As such, cost-reimbursement contracts 

are suitable only when the cost of the work to be done cannot be 

estimated with sufficient accuracy to use any type of fixed-price contract. 

To mitigate risk and help ensure that the best interests of the government 

are served when entering into a cost-reimbursement contract, agencies 

may use this contract type only if the contractor’s accounting system is 

adequate for determining costs applicable to the contract. This helps 

prevent situations where contractors bill the government for unallowable 

costs. Appropriate government surveillance is also required to provide 

reasonable assurance that the contractor is using efficient methods and 

effective cost controls. At your request, we reviewed the federal 

government’s use of cost-reimbursement contracts and 

• identified agencies’ reported obligations under these contracts, 

• determined what agencies are buying using cost-reimbursement contracts, 

• assessed contracting officers’ rationales for using this contract type and 

whether analysis is being conducted to determine whether a different 

contract type is warranted based on experience with the requirement, 

• determined whether contractors’ accounting systems had been deemed 

adequate for determining costs applicable to the contracts, and 

• identified agencies’ procedures for surveillance of contractor cost 

controls. 

To select the agencies included in our review, we analyzed costreimbursement contract actions and dollars obligated as reported in the 

 Cost-Reimbursement Contracting 
 

Federal Procurement Data System-Next Generation (FPDS- NG).1 Fiscal 

year 2007 FPDS-NG data were the latest available at the time we selected 

the agencies for review, but we subsequently obtained data on costreimbursement obligations for fiscal year 2008 and included those data in 

our trend analysis. Based on the fiscal year 2007 data, we grouped 

agencies into one of three categories: 

• agencies whose obligations under cost-reimbursement contracts were less 

than 20 percent, 

• agencies whose obligations were from 20 to 50 percent, and 

• agencies whose obligations were 51 percent or higher. 

We reviewed contract files for 10 randomly selected contracts or orders 

(orders are used to procure goods or services from an established 

contract) from each of 10 agencies that fell in the second and third 

categories, with two exceptions. We reviewed only one contract at the 

Corporation for National and Community Service and at the Department 

of the Treasury’s Alcohol and Tobacco Tax and Trade Bureau, as those 

contracts accounted for the totality of those agencies’ reported costreimbursement contracts in fiscal year 2007. In all, we reviewed 92 

contracts or orders issued under cost-reimbursement contracts. We tested 

the reliability of the FPDS-NG data by comparing basic reported 

information (such as contract number, contract type, and awarding 

activity) to information in the contract or order files. Table 1 shows the 

agencies where we conducted the file reviews and the percentages of 

reported fiscal year 2007 obligations using cost-reimbursement contracts 

or orders. 

Table 1: Agencies Reviewed and Percentages of Cost-Reimbursement Obligations 

Reported in Fiscal Year 2007 

Department/agency 

Reported percentage of 

cost-reimbursement 

obligations

Department of the Air Force/Aeronautical Systems Center 33

Corporation for National and Community Service 35

Department of the Treasury/Internal Revenue Service 36

Department of the Navy/Navy Strategic Systems Program 39

 

1

 FPDS-NG contains detailed information on contract actions and identifies, among other 

data, the contract types used by federal agencies in procuring goods and services. 

Page 2 GAO-09-921 Cost-Reimbursement Contracting
 

Department/agency 

Reported percentage of 

cost-reimbursement 

obligations

Environmental Protection Agency/Cincinnati Procurement 

Operations Division 

45

National Aeronautics and Space Administration/Glenn 

Research Center 

81

National Science Foundation 81

Department of Health and Human Services/Agency for 

Healthcare Research and Quality 

87

Department of Energy 90

Department of Defense/Defense Microelectronics Activity 97

Department of the Treasury/Alcohol and Tobacco Tax and 

Trade Bureau 

100

 Source: GAO analysis of FPDS-NG data. 

We supplemented our file reviews by interviewing the cognizant 

contracting officials and personnel responsible for surveillance of 

contractor costs. We identified surveillance procedures at the agencies in 

our review but, because of time constraints, did not assess compliance 

with those procedures for the 92 contracts and orders. In addition, we 

interviewed agency procurement policy representatives and heads of 

contracting activities for 10 agencies from the first category cited above, 

which had reported a very high use (95 percent or more) of fixed-price 

contracts, to determine the reasons for their low use of costreimbursement contracts. We reviewed relevant sections of the Federal 

Acquisition Regulation (FAR), implementing agency policies and 

regulations, our Standards for Internal Control in the Federal 

Government,

 2 and past GAO reports. In determining whether the 

contractors’ accounting systems had been deemed adequate before 

contract award, we used a period of 4 years, which is the outermost time 

frame in Defense Contract Audit Agency (DCAA) policy, as being “current” 

for auditing an accounting system that has a significant impact on 

government contract costs. We sought any evidence in the contract file 

that the contracting officer had made a determination of the adequacy of a 

contractor’s accounting system and, where there was no evidence, we held 

discussions with the contracting officer. 

 

2

 GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999). 

Page 3 GAO-09-921 Cost-Reimbursement Contracting
 

We conducted this performance audit from July 2008 to September 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. Appendix I provides more detail on our 

scope and methodology, as well as a listing of the 10 agencies with 

reported high use of fixed-price contracts. 

Federal agencies can choose among three main contract types to procure 

goods and services: fixed-price, time-and-materials, and costreimbursement. Each contract type comes with a different level of cost or 

performance risk for the government, as shown in table 2. 

Background 

Table 2: Contract Types 

Government Contractor Risk to... 

Fixed-price 

Pays fixed price even if actual total cost of product or service falls short of or 

exceeds the contract price. May also pay an award or incentive fee related to 

performance. 

Provides an acceptable 

deliverable at the time, place, and 

price specified in the contract. 

Contractor 

Time-and-materials 

Pays fixed per-hour labor rates that include wages, overhead, general 

administrative costs, and profit; government might reimburse contractor for other 

direct costs, such as travel and materials costs. Contracts include a ceiling price 

that the contractor exceeds at its own risk. Government is not guaranteed a 

completed end item or service within the ceiling price. 

Makes good faith effort to meet 

government’s needs within the 

ceiling price. 

Government 

Cost-reimbursement 

Pays contractor’s allowable costs incurred, to the extent prescribed by the 

contract. Also may pay a fee, which may be related to performance. Contracts 

include an estimated total cost for purposes of obligating funds and a ceiling that 

the contractor exceeds at its own risk (unless approved by the contracting 

officer).Government is not guaranteed a completed end item or service within the 

estimated cost. The FAR prohibits the use of cost-reimbursement contracts to 

acquire commercial items. 

Makes good faith effort to meet 

government’s needs within the 

estimated cost. 

Government 

Source: GAO analysis of the FAR, Defense Federal Acquisition Regulation Supplement, and DOD Contract Pricing Guide. 

Different types of cost-reimbursement contracts can be used, based on 

whether incentives, award fees, or other arrangements can be used to 

Page 4 GAO-09-921 Cost-Reimbursement Contracting
 

motivate contractor efforts and discourage contractor inefficiency and 

waste. Some of these types, and their limitations, follow.3

• Cost-sharing contracts: The contractor receives no fee and is reimbursed 

only for an agreed-upon portion of its allowable costs. A cost-sharing 

contract may be used when the contractor agrees to absorb a portion of 

the costs, in the expectation of substantial compensating benefits. 

• Cost-plus-incentive-fee contracts: An objective relationship can be 

established between the fee earned and performance results, such as 

actual costs or delivery dates. This contract type provides for an initially 

negotiated fee to be adjusted later by a formula based on the relationship 

of total allowable costs to total target costs. 

• Cost-plus-award-fee contracts: Objective incentive targets are not feasible 

and judgmental standards, such as quality and technical ingenuity, can be 

applied. A potential fee is intended to provide an incentive for excellence 

in such areas as quality, timeliness, technical ingenuity, and cost effective 

management; award of the fee is a unilateral decision made solely by the 

government. We have reported on agencies’ use of cost-plus-award-fee 

contracts, finding in some cases that award fees had been paid to 

contractors regardless of acquisition outcomes.4

• Cost-plus-fixed-fee contracts: These contracts provide for payment to the 

contractor of a negotiated fee that is fixed at contract inception. The fixed 

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. This contract 

type permits contracting for efforts that might otherwise present too great 

a risk to contractors, but it provides the contractor only a minimum 

incentive to control costs. Cost-plus-fixed-fee contracts are suitable, for 

example, when contracting for research or preliminary exploration or 

study, and the level of effort required is unknown. 

Cost-reimbursement contracts are suitable only when uncertainties 

involved in contract performance do not permit costs to be estimated with 

sufficient accuracy to use a fixed-price contract. The two major reasons 

for the inability to accurately estimate costs are (1) the lack of knowledge 

 

3

 See FAR Subpart 16.3 and Subpart 16.4 for more details on these contract types’ 

descriptions and applications. 

4

 GAO, Federal Contracting: Guidance on Award Fees Has Led to Better Practices but Is 

Not Consistently Applied, GAO-09-630 (Washington, D.C.: May 29, 2009); NASA 

Procurement: Use of Award Fees for Achieving Program Outcomes Should Be Improved, 

GAO-07-58 (Washington, D.C.: Jan. 17, 2007); and Defense Acquisitions: DOD Has Paid 

Billions in Award and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 

(Washington, D.C.: Dec. 19, 2005). 

Page 5 GAO-09-921 Cost-Reimbursement Contracting
 

of the work needed to meet the requirements of the contract, for example, 

under research contracts, which necessarily involve substantial 

uncertainties, and (2) the lack of cost experience in performing work, such 

as the development of a weapon system because manufacturing 

techniques and specifications are not stable enough to warrant contracting 

on a fixed-price basis. We have reported that during weapon system 

development, the Department of Defense (DOD) often asks prime 

contractors to develop cutting-edge systems and awards costreimbursement contracts for the work. Because the government often 

does not perform the up-front analysis needed to determine whether its 

needs can be met by the contract requirements, significant cost increases 

can occur under the contracts as the scope of requirements changes or 

becomes better understood. As of fiscal year 2007, for example, DOD 

anticipated reimbursing the prime contractors on the Joint Strike Fighter 

and Future Combat Systems programs nearly $13 billion more than 

initially expected.5

Cost-reimbursement contracts involve significantly more government 

oversight than do fixed-price contracts, which means the government 

incurs additional administrative costs on top of what it is paying the 

contractor. For example, the government must determine that the 

contractor’s accounting system is adequate for determining costs related 

to the contract and update this determination periodically. In addition, 

contractor costs need to be monitored—known as cost surveillance—to 

provide reasonable assurance that efficient methods and effective cost 

controls are used. 

Congress has taken action to increase oversight of these contracts, for 

DOD specifically as well as governmentwide. The John Warner National 

Defense Authorization Act for Fiscal Year 2007 called for the Secretary of 

Defense to modify DOD’s regulations to require at Milestone B (approval 

for major acquisition programs to enter the engineering and manufacturing 

development phase) documentation of the basis for the contract type. 

Before approving the use of a cost-type contract for development, the 

Milestone Decision Authority must execute a written determination that 

among other things, the program is so complex and technically challenging 

that it would not be practicable to reduce program risk to a level that 

 

5

 GAO, Defense Acquisitions: Assessments of Selected Weapon Programs, GAO-08-467SP 

(Washington, D.C.: Mar. 31, 2008). 

Page 6 GAO-09-921 Cost-Reimbursement Contracting
 

would permit the use of a fixed-price type contract.6 Further, the 

conference report accompanying the act stated that DOD should reduce 

program risk to the point that the use of a fixed-price contract for a major 

acquisition program may be appropriate. 

In addition, the Duncan Hunter National Defense Authorization Act for 

Fiscal Year 2009 called for revisions to the FAR, to include guidance on 

(1) when and under what circumstances cost-reimbursement contracts are 

appropriate, (2) the acquisition plan findings necessary to support 

decisions to use cost-reimbursement contracts, and (3) the acquisition 

workforce resources necessary to award and manage cost-reimbursement 

contracts.7

 The FAR revisions were required by July 11, 2009, but as of 

September 28, 2009, had not been implemented. This act also states that 

within 1 year after these revisions are promulgated, the inspector general 

for each executive agency shall review the use of cost-reimbursement 

contracts by the agency for compliance with these regulations and must 

include the results of the review in the inspector general’s next semiannual 

report.8

Finally, in a March 2009 memorandum on government contracting issued 

to the heads of departments and agencies, President Obama noted that 

excessive reliance by the federal government on cost-reimbursement 

contracts “creates a risk that taxpayer funds will be spent on contracts 

that are wasteful, inefficient, subject to misuse, or otherwise not well 

designed to serve the needs of the Federal Government or the interests of 

the American taxpayer.” The President directed the Office of Management 

and Budget to develop guidance to assist agencies in “reviewing, and 

creating a process for ongoing review of, existing contracts in order to 

identify contracts that are wasteful, inefficient, or not otherwise likely to 

meet the agency’s needs, and to formulate appropriate corrective action in 

a timely manner.” In this regard, on July 29, 2009, the Office of 

Management and Budget sent a memorandum to the heads of departments 

 

6

 This provision was implemented in the Defense Federal Acquisition Regulation 

Supplement and was effective January 24, 2008. DFARS 234.004. 

7

 Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, Pub. L. No. 110-

417, § 864. 

8

 This requirement applies only to those executive agencies that awarded costreimbursement contracts or issued orders (under contracts previously awarded) of at least 

$1 billion in the fiscal year proceeding the fiscal year in which the assessments and reports 

were submitted. 

Page 7 GAO-09-921 Cost-Reimbursement Contracting
 

and agencies requiring agencies to reduce high-risk contracting 

authorities, such as cost-reimbursement contracts. The memorandum 

requires agencies to reduce by 10 percent the share of dollars obligated in 

fiscal year 2010 under new contract actions that are awarded with highrisk contracting authorities. 

The complete picture of the government’s use of cost-reimbursement 

contracts is unclear. From fiscal years 2003 through 2008, federal 

obligations under cost-reimbursement contracts were reported to have 

increased by $16 billion, from $120 billion to $136 billion.9

 When viewed as 

a percentage of total reported federal obligations, this represented a 

decrease over the 6-year period, from 34 percent to 26 percent.10 However, 

this decrease is misleading for several reasons, including a significant 

increase in agencies’ reported obligations under the “combination” 

contract type, which includes cost-reimbursement obligations, and 

contradictory guidance in the FPDS-NG user manual, which could result in 

misreporting of contract type. Further, although contract type is a data 

element field required in FPDS-NG for all awards, we found billions of 

dollars reported as missing a contract type (i.e., no specific contract type 

was indicated) or indicating “other” as the contract type. The contract type 

field displays the type of contract that applies to the particular 

procurement. It is incumbent on the contracting officers and agencies to 

ensure the accuracy of all information submitted. 

Full Picture of 

Agencies’ Use of CostReimbursement 

Contracts Is Unclear 

Significant Increase in 

“Combination” Contract 

Type Belies Reported Use 

of Cost-Reimbursement 

Contracts 

Combination contracts, one of the contract type fields in FPDS-NG, are 

those where two or more contract types are used, such as in different line 

items in one contract action. Agencies have recently reported a significant 

increase in obligations under this contract type, from less than 1 percent 

($1.3 billion) of total government obligations in fiscal year 2004 to almost 8 

percent ($39 billion) in fiscal year 2008. DOD obligations accounted for 

$34 billion, or 87 percent, of this amount. 

Figure 1 depicts the reported trends in the percentage of total obligations 

under cost-reimbursement contracts and under combination contracts. 

 

9

 This amount is in constant fiscal year 2008 dollars. 

10 In order to use consistent data through the time period, we only included actions over 

$25,000. 

Page 8 GAO-09-921 Cost-Reimbursement Contracting
 

Figure 1: Cost and Combination Type Contracts as a Percentage of Total 

Obligations, Fiscal Years 1999 to 2008 

Cost contracts

Combination contracts

0

10

20

30

40

50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Percentage

Source: GAO analysis of FPDS-NG data.

Year

We analyzed fiscal year 2008 FPDS-NG obligations coded as combination 

contracts and found that half of the $39 billion was obligated under 

contracts that had at least some cost-type actions, and about a quarter of 

this amount ($9 billion) went to contracts that had 50 percent or more 

cost-type obligations. These obligations were not recorded as costreimbursement in FPDS-NG. 

Further illustrating the potential overlap between combination and costreimbursement contract types, we found that contracts coded as 

combination are used to procure similar items as those coded as costreimbursement. Our examination of the 15 categories of items most often 

procured under both cost-reimbursement and combination contract types 

over the past several years showed substantial overlap. Table 3 depicts the 

top 15 categories in both contract types and the 11 categories that are the 

same, from fiscal year 2005 to July 13, 2009, the most current data 

available at the time of our analysis. 

Page 9 GAO-09-921 Cost-Reimbursement Contracting
 

Table 3: Areas of Overlap between Top 15 Categories Reported as CostReimbursement Contract Type and as Combination Contract Type, Fiscal Year 2005 

through July 13, 2009 

Category reported as cost-reimbursement 

Category also reported 

as combination 

Defense systems research and development X 

Professional services X 

Operate government-owned buildings X 

Management support services X 

General healthcare services X 

Space research and development 

Maintenance, repair, and rebuild of equipment X 

Automated data processing and telecommunications X 

Other research/development X 

Aircraft/airframe structure components X 

Defense (other) research and development X 

Motor vehicles, cycles, and trailers 

Space vehicles 

Guided missilesa

General science/technology research and development X 

Source: GAO analysis of FPDS-NG data. 

a

Guided missiles was the 16th category reported under the combination contract type. 

Because many of the combination contracts include cost-type obligations, 

those contracts coded as cost-reimbursement do not portray the full 

picture of the government’s use of cost-reimbursement contracting. FPDSNG does not delineate what contract types comprise those coded as 

combination, for example, whether they are cost-plus-award-fee and costplus-incentive-fee contracts, or a mix of fixed-price and labor-hour line 

items. 

We also identified conflicting definitions in the FPDS-NG user manual, 

which agency officials use as guidance when entering contract information 

into the database, that further complicate efforts to identify obligations 

under cost-reimbursement contracts. For contracts composed of more 

than one contract type, instructions direct agencies to “identify the type 

with greater contract value.” For example, if a contract has both costreimbursement and fixed-price portions but the fixed-price portion of the 

contract makes up 55 percent of the expected contract value, the contract 

would be coded as fixed-price. However, the very next page of the user 

Page 10 GAO-09-921 Cost-Reimbursement Contracting
 

manual describes combination contracts as awards “where two or more 

contract types apply.” It is not clear, then, whether contracts with more 

than one contract type should be coded as the contract type representing 

the preponderance or as combination contracts. 

According to a response to a draft of this report by the Office of Federal 

Procurement Policy (OFPP), a change was recently approved to FPDS-NG, 

anticipated to be effective for all new contracts awarded in fiscal year 

2010, that will eliminate “combination” as a contract type. 11 Contracts 

containing more than one contract type will be coded as the contract type 

representing the preponderance of obligations. With the elimination of the 

combination contract type option, the conflicting user manual definitions 

we identified will be removed. 

Missing Contract Types 

and Obligations Using 

“Other” Contract Type 

Contribute to Lack of 

Clarity about Extent of 

Cost-Reimbursement 

Obligations 

Although FPDS-NG guidance states that contract type is a required field 

for all contracts, we found that billions of dollars in obligations are either 

missing a contract type (i.e., no contract type was reported) or the 

contract type is indicated as “other.” In fiscal year 2008, over $10 billion in 

obligations was reported as missing a contract type and $4.3 billion was 

reported as “other.” In addition, some very large contracts that had been 

previously labeled as cost-reimbursement were subsequently coded as 

missing a contract type in fiscal year 2008. For example, six Navy 

contracts with missing contract types had been coded in prior years as 

predominately cost-reimbursement; in total these contracts accounted for 

over $2 billion. Additionally, FPDS-NG guidance prohibited the use of the 

“other” category as a contract type beginning in fiscal year 2009, but we 

found contracts in fiscal year 2009, with obligations of $1.3 billion, that 

were still using this category. OFPP, in its response to a draft of this 

report, explained that contracts previously designated as “other” retain 

that designation when modifications to those contracts are subsequently 

made. We queried FPDS-NG and verified that the fiscal year 2009 

obligations for the “other” contract type were all modifications to 

contracts awarded earlier than fiscal year 2009. In its response, OFPP 

noted that agencies have the ability to self-correct the contract type 

 

11 The OFPP Administrator is statutorily required to provide for and direct the activities of 

the computer-based Federal Procurement Data System (including recommending to the 

Administrator of General Services a sufficient budget for such activities), which is located 

in the General Services Administration, in order to adequately collect, develop, and 

disseminate procurement data. 41 U.S.C. § 405(d)(4)(A). 

Page 11 GAO-09-921 Cost-Reimbursement Contracting
 

selection on modifications and stated that it would discuss with agencies 

the burden associated with making such changes on a voluntary basis 

(such as for modifications to contracts that were recently awarded and 

may not expire for a number of years). 

 

For contracts coded strictly as cost-reimbursement in FPDS-NG, the 

largest procurement categories in fiscal year 2008 were defense systems 

research and development, professional services, and the operation of 

government-owned buildings.12 The 10 largest procurement categories 

reported as using cost-reimbursement contracts in fiscal year 2008 are 

listed in table 4. 

Table 4: Ten Largest Procurement Categories Reported as Using CostReimbursement Contracts in Fiscal Year 2008 

Agencies Purchase a 

Range of Services 

under Contracts 

Coded as CostReimbursement 

Procurement 

Obligations 

(in billions) Percentage 

Defense systems research and development $17.50 13

Professional services 14.80 11

Operation of government-owned buildings 14.50 11

Management support services 7.80 6

General healthcare services 7.10 5

Space research and development 6.50 5

Maintenance, repair, and rebuild of equipment 6.00 4

Automated data processing and telecommunications 5.80 4

Other research and development 5.70 4

Other 50.30 37

Total reported cost-reimbursement obligations $136.00 100

Source: GAO analysis of FPDS-NG data. 

Note: These data do not include contract actions coded as “combination,” “other,” or “missing,” which 

could include cost-reimbursement obligations. 

Contracts included in our sample make clearer the range of services 

agencies are procuring under cost-reimbursement contracts. Table 5 

 

12 Operation of government-owned buildings is a FPDS-NG designation. The designation 

includes federally funded research and development centers, such as the Department of 

Energy’s Fermi National Accelerator Center, which conducts high-energy physics research. 

The buildings at these research centers are government owned and contractor operated. 

Page 12 GAO-09-921 Cost-Reimbursement Contracting
 

provides examples of the goods and services procured with costreimbursement contracts at the 10 agencies in our review. 

Table 5: Examples of Goods and Services Procured with Cost-Reimbursement 

Contracts at the 10 Agencies in Our Review 

Agency Item or service procured 

Corporation for National and 

Community Service 

Administration of Health Benefits Program 

Department of the Air 

Force/Aeronautical Systems Center 

Software upgrade on C-17 aircraft 

Department of Energy Management and operation of research 

laboratory 

Department of Health and Human 

Services/Agency for Healthcare 

Research and Quality 

Medical survey data collection 

Department of the Navy/Navy 

Strategic Systems Program 

Technical engineering support services in the 

area of nuclear survivability analysis 

Department of the Treasury/Internal 

Revenue Service 

Development, modernization, and enhancement 

of E-filing system 

Department of Defense/Defense 

Microelectronics Activity 

Study and analysis to define basic requirements 

for an A-10 multifunction color display upgrade 

Environmental Protection 

Agency/Cincinnati Procurement 

Operations Division 

Analytical lab support to ensure drinking water 

quality 

National Aeronautics and Space 

Administration/Glenn Research 

Center 

Turbine pump assembly design and development 

for Ares I 

National Science Foundation Labor, supplies, materials, and support for the 

planning and science services of the Integrated 

Ocean Drilling Program 

Source: GAO review of agency contract files. 

By contrast, the 10 agencies in our review that reported very high use—95 

percent or more—of fixed-price contracts procure goods and services for 

which the requirements are known and research and development is not 

required, and that are available commercially and have substantial pricing 

Page 13 GAO-09-921 Cost-Reimbursement Contracting
 

histories on which to base fixed prices.13 For example, officials from the 

Department of Justice’s Bureau of Prisons told us they procure items for 

prison operation and maintenance, as well as goods needed to regularly 

operate these facilities, such as food and inmate clothing. The Department 

of Agriculture’s Agricultural Marketing Service officials said that they 

purchase janitorial services, and Defense Commissary Agency officials 

said they purchase goods, such as groceries, which are sold in 

commissaries throughout the world. Other examples of procurements by 

those agencies that had a very high use of fixed-price contracts include 

fuel, pharmaceutical products, ammunition, office supplies, clothing, and 

information technology (IT) equipment, according to officials. 

Contracting officials frequently did not document contract files to show 

why they awarded cost-reimbursement contracts. The documentation we 

did find, for the most part, used boilerplate language; was short, vague, 

and repetitive; and did not show why a cost-reimbursement contract was 

selected. In three cases, documentation in contract files stated that 

funding unavailability was a reason cost-reimbursement contracts, rather 

than fixed-price contracts, were awarded. We also found little evidence at 

the agencies we reviewed that contracting officers are analyzing contract 

pricing history or requirements to determine if experience under the 

contract could provide a basis for firmer pricing. 

Rationale for Using 

Cost-Reimbursement 

Contracts Is Often 

Not Clear, and 

Analysis Is Not 

Conducted to 

Determine if Contract 

Type with Firmer 

Pricing Is Warranted 

 

13According to FPDS-NG, the U.S. Marshals Service was one of the agencies reporting very 

high use of fixed-price contracts. However, during discussions with agency officials, we 

discovered that a significant number of the agency’s contracts were actually labor-hour 

contracts (a type of a time-and-materials contract) that had been miscoded in FPDS-NG as 

fixed-price contracts because of the mistaken belief that the fixed labor rate in labor-hour 

contracts makes them fixed-price. U.S. Marshals Service officials told us that they have 

taken steps to correct these coding errors. We found a similar issue at other government 

agencies in our recent review of time-and-materials contracts. See GAO, Contract 

Management: Minimal Compliance with New Safeguards for Time-and-Materials 

Contracts for Commercial Services and Safeguards Have Not Been Applied to GSA 

Schedules Program, GAO-09-579 (Washington, D.C.: June 24, 2009). 

Page 14 GAO-09-921 Cost-Reimbursement Contracting
 

Although a formal determination and findings is no longer required to 

justify a cost-reimbursement contract (as is the case for using time-andmaterials contracts), contracting officers are generally required to include 

in the contract file documentation to show why a particular contract type 

was selected.14 The FAR does not contain details as to what this 

documentation is to entail. Along these lines, a regulatory change is in 

process to implement a recent congressional direction that acquisition 

plans set forth the findings necessary to support a decision to use costreimbursement contracts. Standards for Internal Control in the Federal 

Government also state that for an agency to manage its operations, it must 

have relevant, reliable, and timely information relating to internal events. 

From a management standpoint, that information should be recorded and 

available to help ensure that this contract type is used only when suitable. 

Setting forth a full and specific explanation showing why a costreimbursement contract was selected for award could, for example, 

provide agency personnel and their managers with helpful information as 

they consider awarding future contracts or exercising options on an 

existing contract. 

Little Documentation 

Available Showing Why 

Contracting Officers Use 

Cost-Reimbursement 

Contracts 

Of the 92 contract files we reviewed, we found that 28, or 30 percent, 

contained no documentation showing why a cost-reimbursement contract 

was selected for award, including in the acquisition plans. Contracting 

officers frequently could not provide an explanation for its absence, were 

unaware of the need for documentation, or stated that they inherited the 

contract from contracting officers who had retired or otherwise left the 

agency. In one case, the contracting officer told us that the decision to use 

a cost-type contract was not reduced to a specific document in the file but 

resulted from discussions. In another case, the contracting officer noted 

that it was intuitive that the contract was not appropriate for a fixed-price 

arrangement. 

For those contracts that did contain documentation, it was often brief, 

vague, and repetitive. For example, National Aeronautics and Space 

Administration (NASA) contracting officers use a boilerplate template on 

 

14 A formal determination and findings had been required before using cost-reimbursement 

contracts; see, e.g., 48 C.F.R. § 16.301-3(c) (1993). However, this requirement was repealed 

by the Federal Acquisition Streamlining Act of 1994, Pub. L. No. 103-355, §§ 1021 and 1071. 

The act’s legislative history indicated that such determinations were unnecessary in light of 

the acquisition planning requirements of the FAR. See H. Report 103-545, part 2, § 1021, p. 

83; Hearing before the Committee on Armed Services, U.S. Senate, April 26, 1994, S. Hrg. 

103-578, p. 330. 

Page 15 GAO-09-921 Cost-Reimbursement Contracting
 

which they select the appropriate justification, without setting forth the 

facts and explanation of why this contract type was selected. NASA’s 

template includes the following choices for why a cost-reimbursement 

contract should be awarded: 

• The level of complexity is moderate to high and performance uncertainties 

cannot be sufficiently identified or their cost impacts reasonably 

estimated. 

• Changes during performance are: likely _____, unlikely_____, or have an 

average chance of occurring _____. 

The Environmental Protection Agency also uses standard language, not 

specific to the procurement at hand, to document its rationale for why it 

awarded a cost-reimbursement contract. For example, two contract files 

contained the statement, “these activities are non-routine, complex in 

nature, and specific requirements have not been completely defined.” Two 

other contract files had the following language: “due to the uncertainties 

involved in the performance of this contract, costs cannot be estimated 

with sufficient accuracy to use any type of fixed-price contract.” 

Table 6 contains representative examples of rationales we found to be 

brief and not clearly tied to the individual procurements. 

Table 6: Examples of Rationales Used to Show Why Cost-Reimbursement Contracts Were Awarded 

Agency What was procured Documented rationale 

Corporation for National and 

Community Service 

Administration of Health Benefits 

Program 

Uncertainties involved in contract performance do not 

permit costs to be estimated with sufficient accuracy to 

use any type of fixed-price contract. 

Department of the Air 

Force/Aeronautical Systems Center 

Predator Primary Data Link SecureCommunications Upgrade Contract type and performance incentives were 

appropriate to motivate the contractor in the subcontract 

management area and as an on-time delivery incentive. 

Department of Energy Enhancement of the department’s 

credibility regarding its activities 

related to hydrologic, environmental, 

atmospheric, and soil sciences and 

human health issues at the Nevada 

Test Site 

A fixed-price type of arrangement is not appropriate 

because the uncertain duration and specific nature of the 

work requirements. 

Department of Health and Human 

Services/Agency for Healthcare 

Research and Quality 

Support of the HIV Research 

Network 

There are uncertainties involved in contract performance 

that do not permit costs to be estimated with sufficient 

accuracy to use a fixed-price contract. The work to be 

performed is such that it is not feasible to devise 

predetermined objective incentive targets applicable to 

cost, technical performance, or schedule. 

Page 16 GAO-09-921 Cost-Reimbursement Contracting
 

Agency What was procured Documented rationale 

Department of the Navy/Navy 

Strategic Systems Program 

Systems tactical engineering 

support and test engineering 

support to deployed systems for 

MK5 and MK6 guidance program 

The exact nature of this procurement effort cannot be 

established in advance with the certainty required for a 

firm fixed-price contract nor can the cost of the work be 

accurately forecasted to permit the undertaking of such 

work for a fixed price. 

Department of the Treasury/Internal 

Revenue Service 

Support services for Automated 

Collection System Support 

The work and nature of the services to be performed and 

the uncertainties involved in the contract performance are 

such that cost of performance cannot be estimated with 

sufficient reasonableness to permit use of any type of 

fixed-price contract. 

Department of Defense/Defense 

Microelectronics Activity 

Tracking analysis and track 

integration 

Reasonable and firm performance objectives and 

schedules that have not been firmly established and the 

amount of effort required is not fully known. 

Environmental Protection 

Agency/Cincinnati Procurement 

Operations Division 

Support and development of 

BASINS (Better Assessment 

Science Integrating Point and 

Nonpoint Sources) 

Because of uncertainties involved in the performance of 

this contract, costs cannot be estimated with sufficient 

accuracy to use any type of fixed-price contract. 

National Aeronautics and Space 

Administration/Glenn Research 

Center 

Aeronautics communications and 

education support 

Level of complexity is moderate to high and performance 

uncertainties cannot be sufficiently identified or their cost 

impacts reasonably estimated. Changes are likely. 

National Science Foundation Meeting planning, logistical, and 

administrative support services 

We have selected this type of contract because of the 

uncertainties of requirements. 

Source: GAO review of agency contract files. 

The Navy Strategic Systems Program, in addition to the standard language 

showing why it selected cost-reimbursement contracts, provided us with a 

briefing explaining that a primary reason for using cost-reimbursement 

contracts is the emphasis this office places on the safety, reliability, 

quality, and readiness of the nuclear weapons it procures. Shifting too 

much risk to the contractor, the Navy states, would increase the risk that 

safety, reliability, quality, and readiness could be compromised because, 

when problems are encountered, contractors are motivated not to lose 

money and to look for ways to cut costs. Cutting costs can translate to 

performance degradations that may not surface until years later. Navy 

officials also told us that cost-reimbursement contracts for nuclear 

weapons are cost-effective because the high technical risk of what is being 

procured would expose contractors to great financial risk with a fixedprice contract, causing contractors to mitigate such risk with proposals 

that would be prohibitively expensive. 

One contract file in our review did include a more specific rationale for 

using a cost-reimbursement contract type. A memorandum in a NASA 

contract file justified the use of a cost-reimbursement contract to procure 

traveling wave tubes, a component of electronic equipment. The 

memorandum stated that “because of the high breakage rate which occurs 

Page 17 GAO-09-921 Cost-Reimbursement Contracting
 

during fabrication of Traveling Wave Tubes, a fixed-price contract would 

be too costly for the government. Consequently, a cost-type contract is the 

chosen method of procurement.” 

Funding Availability 

Sometimes Drove Decision 

to Use CostReimbursement Contracts 

In some cases, we found that it was not necessarily uncertainty about 

requirements that drove the selection of a cost-reimbursement contract, 

but rather uncertainties about funding availability. Some contracting 

officers told us that cost-reimbursement contracts could be modified more 

easily than fixed-price contracts as more funding became available (if, for 

example, funding was made available on a periodic basis instead of at the 

beginning of the fiscal year), whereas fixed-price contracts were required 

to be fully funded up front. For example, a contracting officer at the 

National Science Foundation (NSF) noted that as a result of the 

ambiguities of the services provided and the funding available each year, a 

fixed-price contract was not possible for the procurement. However, the 

contracting officer said that even if there were no ambiguities regarding 

the services to be awarded, if funding availability was incremental and 

uncertain then the contract would be awarded on a cost-reimbursement 

basis. At the Internal Revenue Service (IRS), one of the contract files we 

reviewed contained documentation stating the following: 

“The customer did not have sufficient funding available to structure the 

task order and obligate the funding under a firm fixed price (FFP) 

structure. As a result, a Cost Plus Fixed Fee ... was awarded. The 

customer estimated their requirement at $8.1 million; however, they were 

only able to provide $2.1M at the time of award. After initial award, four 

(4) additional increments of funds were provided to incrementally fund 

this requirement in the first year. Given our continuous cycle of 

Continuing Resolutions each Fiscal Year, our use of Cost Reimbursement 

contract vehicles are the most practical awards.” 

In our view, the perceived ease of adding funding under costreimbursement contracts as funding is made available is not a correct 

assumption. Under a cost-reimbursement contract, an agency is required 

to obligate the estimated costs (or ceiling) established in the base year 

contract for the required services or products at the time of award. When 

modifications are approved increasing the original funding ceiling in the 

contract award, the increased costs are charged to the appropriation 

current at the time of the modification. It is true that modifications of 

fixed-priced contracts can be charged against the funding available at the 

time of the original contract award, depending upon the type of contract 

modification. However, agencies must obligate the ceiling amount under a 

Page 18 GAO-09-921 Cost-Reimbursement Contracting
 

cost-reimbursement contract based upon a reasonable estimate of costs 

for providing the service or product. Agencies cannot simply limit the 

amount of a recorded obligation by stating that the contract is limited to 

an amount of funding available for the contract or stating that the contract 

will be incrementally funded if those amounts are different than the 

estimated ceiling costs.15

At the Air Force Aeronautical Systems Center, we found that the 

availability of research and development funds—as opposed to 

procurement—was a reason for awarding a cost-reimbursement contract. 

The price negotiation memorandum for one contract we reviewed stated 

that “The Government directed the contractor to bid the effort as firm 

fixed price. (The contractor) submitted a firm fixed price in response .... 

The Government later changed direction ... in order to use FY07 3600 

funds.”16 There was no additional indication in the contract file as to the 

reason the decision was made to switch to a cost-reimbursement contract. 

We were unable to discuss the reason for switching with the contracting 

officer because the contracting officer had left the agency. 

Agency Officials Are Not 

Conducting Analysis to 

Determine Potential to 

Transition to Contract 

Types with Firmer Pricing 

The FAR does not specifically require a transition plan from a costreimbursement contract to one with firmer pricing. However, the FAR 

states that in the course of an acquisition program, a series of contracts, or 

a single long-term contract, changing circumstances may make a different 

contract type appropriate in later periods than that used at the outset. In 

particular, contracting officers should avoid the protracted use of a costreimbursement contract after experience provides a basis for firmer 

pricing,17 for example, by transitioning part or all of the requirements to a 

fixed-price contract. Information important to such an effort would 

include a contracting officer’s analysis of the contract’s pricing history and 

the results of program offices revisiting the government’s requirements to 

determine whether they can be better defined. In this regard, on July 29, 

 

15 See B-317139, June 1, 2009. In some circumstances, services contracted under costreimbursement contracts and other types of contracts may be charged to funding available 

during subsequent fiscal years. This may depend upon whether the services are severable 

or nonseverable. See id. 

16 The designation “3600 funds” is the Air Force designation for budget authority 

appropriated for research and development. The record is not clear as to why research and 

development and not procurement funds were available. 

17 FAR Subpart 16.103(b). 

Page 19 GAO-09-921 Cost-Reimbursement Contracting
 

2009, the Office of Management and Budget issued a memorandum 

requiring agencies to reduce high-risk contracting instruments, such as 

cost-reimbursement contracts. Using fiscal year 2008 as a baseline, the 

memorandum states that agencies should aim to reduce by at least 10 

percent the combined share of dollars obligated through new contracts in 

fiscal year 2010 that (1) are awarded noncompetitively, receive only one 

bid in response to a solicitation or a request for quote, or both; (2) are 

cost-reimbursement contracts; or (3) are time-and-materials and laborhour contracts. To meet this goal, the memorandum states that agencies 

might plan for the migration of work from cost-type to fixed-price 

contracts as requirements become better defined. 

We did not assess whether an agency’s decision to use a costreimbursement contract was the most appropriate choice of contract type 

during our review, but we generally found no evidence that agency 

officials assessed, for example, the contract’s pricing history or 

requirements under the contracts we reviewed to determine whether there 

was a basis for firmer pricing, even when the contracts had been in place 

for several years. For example, NSF awarded a $2.8 million costreimbursement contract in 2007 to collect and analyze data for a survey of 

science and engineering research facilities. NSF has been conducting the 

survey since 1986 and noted in its acquisition plan that methodological 

studies have been performed during each cycle to improve the design and 

processes for subsequent cycles. However, the documentation showing 

why the agency selected a cost-reimbursement contract, rather than one 

with firmer pricing, was vague, stating that the survey tasks include 

“analysis work involving several uncertainties, and sufficient room during 

the collection process for variegated opportunities to revise and improve 

on survey methods, creating additional areas of uncertainty.” Although 

contracting officers are to consider the cost-reimbursement contracts’ 

pricing history, there was no evidence in the contract file that this 

occurred—or that the program office had revisited requirements—to 

determine whether there was a basis to convert to a contract type with 

firmer pricing. In another example, the Agency for Healthcare Research 

and Quality (AHRQ) awarded a contract to collect data for its annual 

Medical Expenditure Panel Survey. The contract, awarded in 2002 with 

options extending through 2008, was worth over $128 million with the 

options included. The same contractor had performed this survey since 

1996, but the contract file contained no evidence regarding why a costreimbursement contract continued to be used, despite having at least 6 

years of data regarding costs and requirements. 

Page 20 GAO-09-921 Cost-Reimbursement Contracting
 

We found cases where leadership had encouraged movement away from 

cost-reimbursement contracts, largely by focusing on the program offices’ 

role in establishing firmer requirements. An IRS contracting office, for 

example, recently established a contract review board to review the use of 

cost-reimbursement contracts supporting a multibillion-dollar IT 

modernization program that has been in place for over 20 years.18 Costreimbursement contracts had initially been determined to be in the 

government’s best interest because IRS was unable to define its 

requirements sufficiently to allow for fixed-price contracts. According to 

IRS officials, over time cost-reimbursement contracts and orders 

continued to be awarded and issued for this program because it was 

easier. In effect, maintaining the status quo became the way contracting 

was done. Officials told us that the partnership between the contracting 

and program office was weak; one contracting officer told us that a source 

selection was conducted, the acquisition plan written, and proposal 

evaluation made without any input from the contracting officer. In January 

2008, new leadership at this IRS contracting office established a contract 

review board to review and approve procurements proposed as costreimbursement contracts. The IRS Director, Office of Information 

Technology Acquisition, told us that the review board represented a 

significant paradigm shift from how business was conducted. In one case, 

the board stopped a planned sole-source, cost-reimbursement order from 

being awarded in favor of a competitive, firm-fixed-price task order. The 

order was awarded for approximately $9.5 million—about half of the 

government estimate and $15 million less than what the contractor 

requested as a sole-source provider. 

We also found two additional cases where agencies had contracted for IT 

services on a firm, fixed-price basis. While we recognize that IT services 

vary significantly in terms of complexity, in these cases contracting 

officials had made a concerted effort to work with the program offices to 

define requirements such that vendors could submit offers on a fixed-price 

basis. Procurement officials at the District of Columbia’s Pretrial Services 

Agency19 and the Department of Agriculture’s Farm Services Agency—two 

 

18 A February 2009 Department of the Treasury Inspector General for Tax Administration 

report found that IRS contract files lacked justification for cost contracts. It also found that 

IRS had a predisposition to use cost-reimbursement contracts and made little effort to 

convert follow-on work to less risky contract types. 

19 The District of Columbia Pretrial Services Agency was designated a federal agency in 

2000. 

Page 21 GAO-09-921 Cost-Reimbursement Contracting
 

agencies with high proportions of fixed-price contracts—noted that IT 

services contracts were among their largest obligations under fixed-price 

contracts. Both of the agencies were successful at implementing these 

contracts as fixed-price contracts because their technical personnel (i.e., 

officials in their program offices) were required to separate and define 

their IT contract requirements into specific, measurable deliverables. The 

head of contracting activity at the Farm Services Agency told us that it was 

“a long road” to get the program office on board with this approach, as the 

office had preferred cost-reimbursement contracts for IT services in the 

past, but that the effort paid off in terms of savings as well as a greater 

likelihood that the government would get the deliverables it expected. This 

official emphasized that a key to the agency’s success was including its 

technical personnel in the contracting process. 

Cost-reimbursement contracts are to be used only when the contractor’s 

accounting system is adequate for determining costs applicable to the 

contract. This determination is critical because it helps assure the 

government that the contractor has systems in place to accurately and 

consistently record accumulated costs and bill for allowable costs. If 

accounting systems are not deemed adequate, problems can arise when 

costs are accumulated during contract performance.20 Contracting officers 

have a number of methods available to them to make this determination. 

One method is to rely upon assessments of accounting systems prepared 

by DCAA for prior contracts. The FAR does not specify a time frame 

within which an accounting system needs to be determined adequate to be 

used as a basis to award a new cost-reimbursement contract. As such, for 

the purposes of this review, we used a period of 4 years, which is the 

outermost time frame in DCAA policy, as being “current” for auditing an 

accounting system that has a significant impact on government contract 

costs. 

Agencies Do Not 

Always Ensure That 

Contractors’ 

Accounting Systems 

Are Adequate for 

Determining Costs 

Applicable to 

Contracts 

Another method by which contracting officers can determine if an 

accounting system is adequate is to perform a pre-award survey of a 

 

20 The contractor has until the time performance begins to meet the accounting system 

requirement. For purposes of this report, we equate this to the time the contract was 

awarded. 

Page 22 GAO-09-921 Cost-Reimbursement Contracting
 

prospective contractor’s accounting system.21 According to the FAR, 

determining that an accounting system is adequate as part of a pre-award 

survey includes a determination of whether it is in accordance with 

generally accepted accounting principles and whether it provides for 

• a proper segregation of direct costs from indirect costs, 

• an identification and accumulation of direct costs by contract, 

• a logical and consistent method for the allocation of indirect cost to 

intermediate and final cost objectives, 

• an accumulation of costs under general ledger control, 

• a timekeeping system that identifies employees’ labor by intermediate or 

final cost objectives, 

• a labor distribution system that charges direct and indirect labor to the 

appropriate cost objectives, and 

• an interim (at least monthly) determination of costs charged to a contract 

through routine posting of books of account. 

The contracting officer is responsible for verifying that the contractor has 

an adequate accounting system.22 For most of the contracts we reviewed, 

this verification was based on a DCAA opinion stemming from its review 

of the contractor’s accounting system and related internal control policies 

and procedures, but the opinion can also be rendered by an independent 

 

21 FAR 53.301-1408, FAR Form 1408; FAR 9.106-4. An agency’s determination of whether a 

contractor has an adequate accounting system is part of a responsibility determination of a 

prospective awardee, that is, determining that the firm has the ability or capacity to 

perform the contract. FAR 9.103; 9.104-1(e). The contractor has until the time performance 

begins (i.e., when the contractor begins the work) to meet the accounting system 

requirement. For purposes of this report, we equate this to the time the contract was 

awarded. In making this responsibility determination, a contracting officer can request a 

pre-award survey from DCAA of a prospective contractor’s accounting system, but is only 

required to do so when the information on hand or readily available is not sufficient to 

make this determination. FAR 9.106-1(a); FAR 9.105-1(b)(2). DCAA normally issues a 

Standard Form 1408 “Pre-award Survey of Prospective Contractor—Accounting System” 

(FAR 53.301-1408). To complete this form, the audit scope should be limited to obtaining an 

understanding of the prospective accounting system’s design to determine whether the 

design is acceptable for accumulating costs under a government contract; it is not 

necessary to conduct an in-depth evaluation of the overall accounting system. DCAA 

Contract Audit Manual, section 5-202.a; DCAA Information for Contractors, section 2-

301.1.a. 

22 Particularly for large dollar value contracts, an administrative contracting officer may be 

assigned to handle contract administration as opposed to contract award. In the case of 

DOD, Defense Contract Management Agency personnel are typically assigned as the 

administrative contracting officers. 

Page 23 GAO-09-921 Cost-Reimbursement Contracting
 

accounting firm or other designated entity.23 According to the DCAA 

Contract Audit Manual, each relevant accounting or management system 

that has a significant impact on government contract costs should be 

audited on a cyclical basis, that is, every 2 to 4 years, depending on a 

documented risk assessment of experience and current audit risk. 

Regular accounting system reviews are necessary to help ensure that 

changes to the contractor’s accounting practices are considered by the 

government and evaluated for compliance with government contract cost 

principles. Over the period of a contract, the contractor’s cost structure or 

accounting procedures can change because of multiple factors, such as 

changing the criteria for capitalizing or depreciating assets, applying 

different indirect cost allocation bases, or merging of a contractor’s 

various operating segments. By continuing to pay a contractor without 

taking into account these changes, the government risks paying for 

unallowable costs. The contracting officer takes into account DCAA’s 

opinion, or that of the designated entity, but retains the ultimate authority 

for determining whether the contractor’s accounting system is adequate. 

As an example of what can occur when the determination of adequacy is 

not made or the contractor’s accounting systems are not deemed 

adequate, in August 2007, a contractor disclosed to the Air Force that it 

had periodically overbilled on the Joint Strike Fighter Systems 

Development and Demonstration cost-reimbursement contract since its 

inception. The amount overbilled was about $267 million. In this case, 

DCAA had rendered the opinion that the contractor’s accounting system 

was “inadequate in part.” The contractor reimbursed the Air Force for the 

amount overbilled and paid an additional $28 million in interest. 

Timely Accounting System 

Approval in 52 Cases 

Reviewed; 13 Others 

Approved After Award 

Of the 92 contract files we reviewed, only 52 (about 57 percent) had any 

evidence that contractors’ accounting systems had been deemed adequate 

in a current time frame (within 4 years or less) before contract award. 

Other accounting systems had been deemed adequate either after award or 

not at all. Where the contract files contained no evidence of an adequacy 

determination, we interviewed the cognizant contracting officers to 

confirm the lack of evidence. Table 7 depicts the results of our analysis of 

contract files and discussions with contracting officers. 

 

23 Although DCAA plays a critical role in DOD contractor oversight, it also performs audit 

services for other federal agencies, on a fee-for-service basis. 

Page 24 GAO-09-921 Cost-Reimbursement Contracting
 

Table 7: Adequacy of Contractors’ Accounting Systems 

Contracts/orders 

Status of accounting system adequacy Number Percent

Number of 

contractor 

accounting 

systemsa

Determined adequate in current time frame before 

award 

52 57 40

Determined adequate before award but not in 

current time frame 

7 8 6

Determined adequate after contract award 13 14 11

No evidence of accounting system adequacy preor post-award 20 22 20

Total 92 100b

Source: GAO analysis based on contract file data and interviews with agency officials. 

a

Several contractors had multiple contracts, orders, or both but only one accounting system. 

b

Numbers do not add to 100 because of rounding. 

Thirteen contract files in our sample indicated that contractor accounting 

systems were determined adequate after contract award; the contracts 

were awarded before any determination that the accounting systems were 

adequate for determining cost. For example, the Department of Energy 

(DOE) awarded a contract in October 1996, but the accounting system was 

not determined to be adequate until July 1998, more than 2 years after the 

contract was awarded. 

Approval for Seven 

Accounting Systems 

Occurred More Than 4 

Years Prior to Award 

Seven of the contract files we reviewed revealed that accounting systems 

were not determined adequate before award within current time frames. 

For example, NASA awarded a contract with an estimated value of more 

than $205 million (with options) in April 2005. However, the contractor’s 

accounting system was last determined to be adequate on a prior contract 

in August 1998, more than 7 years before the award of the current 

contract.24 In another example, at the Defense Microelectronics Activity, 

 

24 DCAA reported on December 3, 2004, that the contractor’s accounting system was 

adequate, based on its August 24, 1998, audit, rather than work preformed within 4 years of 

contract award. 

Page 25 GAO-09-921 Cost-Reimbursement Contracting
 

DCAA found a contractor’s accounting system to be inadequate in part.25

The contractor took corrective action, resolving some of the deficiencies 

to DCAA’s satisfaction; the Defense Contract Management Agency 

(DCMA) found that the remaining deficiencies were not material to 

government contracts and concluded that the contractor’s accounting 

system was adequate. A previous determination, based on a DCAA 

opinion, that the contractor’s accounting system was adequate, was made 

by DCMA in 2001—5 to 6 years before the orders we reviewed were 

issued. 

No Evidence of 

Accounting System 

Adequacy for 20 Contracts 

We found no evidence, either pre- or post-award, of determinations that 

the contractors’ accounting systems were deemed adequate for 20 of the 

contracts we reviewed (with a total value of more than $1.4 billion, not 

including option periods). This means that contracting officers obligated 

funds without knowing whether the contractors had accounting systems 

capable of billing the government properly. These 20 contracts were from 

the following agencies: 

• NSF - 4 contracts 

• NASA - 2 contracts 

• Air Force Aeronautical Systems Center - 3 contracts 

• Corporation for National and Community Service - 1 contract 

• AHRQ - 10 contracts 

Contracting officials confirmed the lack of evidence in the contract files. 

However, most could not provide an explanation for why this was the 

case, or were not aware of their responsibility for ensuring that contractor 

accounting systems are determined adequate for cost-reimbursement 

contracts. Some said that they inherited the contracts from contracting 

officers who retired or otherwise left the agency. Further, a DCMA official 

incorrectly told us that the contractor’s accounting system is presumed to 

be adequate unless it is otherwise documented that the accounting system 

is not adequate. 

Four of these contract files contained opinions by DCAA that the 

accounting systems were inadequate in part. According to DCAA internal 

control criteria, an inadequate in part opinion meant that one or more 

 

25 A DCAA inadequate in part opinion meant that one or more significant deficiencies 

affected parts of the accounting system. By contrast, a DCAA inadequate opinion means 

one or more significant deficiencies render the entire accounting system unreliable. 

Page 26 GAO-09-921 Cost-Reimbursement Contracting
 

significant deficiencies existed that affected parts of the accounting 

system. Such an opinion required the contractor to take corrective action 

and could require DCAA to review contractor invoices. For example, one 

of the Air Force Aeronautical Systems Center contracts we reviewed 

showed that DCAA found the contractor’s accounting system to be 

inadequate in part. According to the administrative contracting officer, the 

inadequate in part opinion was significant enough to preclude the 

contractor from direct billing the Defense Finance and Accounting System 

for payment and required the contractor to submit invoices to DCAA for 

review and approval before payment could be made to the contractor. On 

December 19, 2008, DCAA issued audit guidance stating that it will no 

longer report inadequate in part opinions. Audit reports that report any 

significant deficiencies or material weaknesses will include an opinion 

that the system is inadequate. 

At AHRQ, none of the contract files we reviewed contained documentation 

stating that the contractors’ accounting systems had been deemed 

adequate for determining costs applicable to the contracts at any time. 

Three of these contract files contained memos from the former AHRQ 

senior staff accountant stating that although his review did not consider 

the adequacy of the contractors’ financial capability or their accounting 

systems, nothing came to his attention to preclude an award on this basis. 

The contracting officers told us that they had relied on the National 

Institutes of Health’s (NIH) negotiation of indirect cost rates for these 

contracts. But according to the NIH Director of Financial Advisory 

Services, this indirect rate negotiation does not satisfy the FAR 

requirement that a contractor’s accounting system is deemed adequate for 

determining costs applicable to its contracts.26

 

26 An indirect cost is a cost a contractor incurs for a common or joint objective that cannot 

be specifically identified, in its entirety, with a particular cost objective. Typical indirect 

costs include the costs of operating and maintaining facilities, equipment, and grounds and 

administrative salaries and supplies. Indirect cost rates are negotiated to ensure that only 

the portion of those indirect costs needed to support the contract is reimbursed to the 

contractor. 

Page 27 GAO-09-921 Cost-Reimbursement Contracting
 

Various Procedures 

for Cost Surveillance 

Require Effective 

Implementation to 

Avoid Improper 

Payments 

For the agencies in our review, we found a range of cost surveillance 

procedures. Cost surveillance procedures under cost-reimbursement 

contracts are intended to help ensure that the contractor is performing 

efficiently and effectively and that the government pays only for allowable, 

allocable, and reasonable costs applicable to the contract. Lack of 

adequate cost surveillance can lead to overpaying the contractor. The 

civilian agency procedures call for program officials to review contractors’ 

invoices. DOD procedures do not include invoice review by program 

offices, but rely on monthly reviews of contractors’ costs and a project 

management tool called Earned Value Management (EVM), supplemented 

by periodic DCAA audits. Whether cost surveillance is done by reviewing 

invoices or by the methods used by DOD, the key is effective 

implementation to help avoid improper payments or overbilling. 

Cost Surveillance 

Procedures at Civilian 

Agencies 

Procedures in the civilian agencies in our review generally call for 

contracting officers’ representatives (COR) to examine contractor 

invoices. CORs are appointed by the contracting officer to assist in the 

technical monitoring or administration of a contract. Invoice reviews help 

to ensure that the goods and services for which the government is being 

billed were actually received, the amounts billed are allowable, and the 

government is not incurring claimed costs that are inadequately 

supported. Agency officials outlined the steps in the cost surveillance 

process as follows. 

• The program office directs work to be done, consistent with the contract’s 

statement of work. 

• How the work is done, together with the time and cost required to do the 

work, is proposed by the contractor and, upon approval by the program 

office, becomes a work request. Work requests describe the work to be 

done, the labor categories needed, and the hours required by each labor 

category to complete the work. 

• As invoices are submitted, the CORs are supposed to reconcile the 

invoices to the work requests to ensure that the government only pays for 

the completed work authorized by the work requests. 

Some CORs told us that they also pay attention to the labor categories 

charged to ensure that the contractor is billing for the level of expertise 

actually used to do the work and the hours worked. Once an invoice is 

reconciled, payment is made. Should a contractor experience technical 

problems, which may cause cost overruns, the COR must determine if the 

technical problems are legitimate before the government will approve 

continued work and invoices for payment. 

Page 28 GAO-09-921 Cost-Reimbursement Contracting
 

The efficacy of invoice review depends on an agency’s policies and 

procedures and the diligence and expertise of the COR in implementing 

them. Another factor is the time CORs have available to devote to 

oversight duties. We have reported that CORs are often assigned these 

oversight functions as an additional duty.27 In addition, we reported in 2007 

that DOE was not adequately reviewing invoices for a multibillion-dollar 

cost-reimbursement contract to design and construct the Hanford waste 

treatment plant, risking hundreds of millions of dollars in improper 

payments.28 Instead, DOE relied primarily on DCAA’s review and approval 

of the contractor’s financial systems and on the contractor’s review and 

approval of subcontractor charges. DOE’s heavy reliance on others, with 

little oversight of its own, exposed the hundreds of millions of dollars it 

spent annually on the project to an unnecessarily high risk of improper 

payments. In September 2008, DOE amended its acquisition guide to hold 

contracting officers responsible for ensuring that contract invoices are 

properly reviewed and analyzed before any payment is made to 

contractors. 

DOD Reliance on 

Contractor-Provided 

Program Management 

Data May Be Inadequate if 

Required Audits Are Not 

Conducted to Supplement 

Cost Surveillance 

At DOD, procedures for monitoring contractor costs depend in large part 

on the EVM system—a tool that presents contractor-provided data to 

measure the value of work accomplished in a given period compared to 

the planned value of work scheduled and the actual cost of work 

accomplished—supplemented with audits for the purpose of testing 

whether invoiced costs are allowable.29 DOD policy dictates that CORs 

shall not be delegated authority to approve invoices (as this is the role of 

DCAA and administrative contracting officers), but they may review 

contractor billings to determine whether the hours billed and labor mix 

are commensurate with the work performed. CORs and program officials 

responsible for surveillance for the DOD contracts in our sample told us 

that they rely on contractor-provided monthly reports and EVM data to 

perform cost surveillance. EVM data do not provide surveillance of 

 

27 GAO, Contract Management: Opportunities to Improve Surveillance on Department of 

Defense Service Contracts, GAO-05-274 (Washington, D.C.: Mar. 17, 2005). 

28 GAO, Hanford Waste Treatment Plant: Department of Energy Needs to Strengthen 

Controls over Contractor Payments and Project Assets, GAO-07-888 (Washington, D.C.: 

July 20, 2007). 

29 The Office of Management and Budget mandates use of EVM for capital assets (Circular 

A-11, part 7) and for new, major IT projects, ongoing IT development projects, and highrisk projects (OMB Memorandum M-05-23, Aug. 4, 2005). 

Page 29 GAO-09-921 Cost-Reimbursement Contracting
 

specific contract costs, as would be presented in an invoice, but are 

intended to alert program managers to potential problems with cost or 

schedule overruns sooner than a review of contract expenditures (such as 

an invoice review) alone would.30 At the same time, however, the EVM 

data’s level of detail at the contract and order level can be much less than 

that of an invoice—where the specifics in terms of labor categories, travel, 

and equipment would be reflected. 

Therefore, analysis of EVM data alone does not satisfy FAR requirements 

for cost surveillance under cost-reimbursement contracts. In addition to 

the key control discussed above—determining that the contractor’s 

accounting system is adequate—the EVM data must be supplemented with 

audits for the purpose of testing whether invoiced costs are allowable. 

DOD has two main sets of procedures in place to do this, one for when the 

contractors are approved for direct billing and one for when they are not. 

Direct billing allows approved contractors to send their invoices directly 

to the Defense Finance and Accounting Service for payment, without 

invoice review by either DCAA or the COR. DCAA is required to perform 

annual review of paid invoices. In addition, for contractors approved for 

direct billing, DCAA performs incurred cost audits and conducts “floor 

checks” at contractor facilities to test the reliability of such things as 

employee time records and job classifications. To be eligible to participate 

in the direct billing program, contractors must meet certain criteria, such 

as having an adequate accounting/billing system and related internal 

controls, as determined by DCAA. If a contractor is not eligible to 

participate in the direct billing program, the contractor must submit all 

cost-reimbursement interim invoices to DCAA for approval for provisional 

payment. DCAA then submits them to the Defense Finance and 

Accounting Service for payment. Figure 2 depicts these various 

procedures. 

 

30 An example would be a contract that calls for 4 miles of railroad track to be laid in 4 

weeks at a cost of $4 million. After 3 weeks of work, only $2 million has been spent. An 

analysis of planned versus actual expenditures suggests that the project is running under 

its estimated costs. However, an earned value analysis reveals that the project is in trouble 

because even though only $2 million has been spent, only 1 mile of track has been laid and, 

therefore, the contract is only 25 percent complete. Given the value of work done, the 

project will cost the contractor $8 million ($2 million to complete each mile of track), and 

the 4 miles of track will take a total of 12 weeks to complete (3 weeks for each mile of 

track) instead of the originally estimated 4 weeks. 

Page 30 GAO-09-921 Cost-Reimbursement Contracting
 

Figure 2: DOD Procedures for Process and Approval of Interim Invoices 

Invoices are sent directly to DFAS

for payment

Continued participation in direct bill 

program based on DCAA ongoing 

surveillance

DCAA determines adequacy of 

accounting system every 2 to 4 years

depending on risk

Approved for direct billing program

DCAA reviews selected invoices

DCAA sends approved invoices to

DFAS for payment

DCAA determines adequacy of 

accounting system every 2 to 4 years

depending on risk

Not approved for direct billing program

Contractor

DCAA reviews contractor vouchers to

form a conclusion on the adequacy

of the contractor’s procedures

for preparing cost-reimbursement

claims

DCAA performs

annual testing of

paid invoices

Source: GAO, based on review of DCAA Contract Audit Manual.

DCAA reviews contractor 

vouchers to form a

conclusion on whether 

continued reliance can be 

placed on the contractor's

internal controls for 

preparation of 

cost-reimbursement 

claims

The effectiveness of DOD’s cost surveillance process depends, to a large 

extent, on the adequacy of these DCAA procedures. Our recent work has 

raised concerns in this regard.31 For example, rather than documenting the 

population of invoices, preparing sampling plans, and testing a random 

(statistical) sample, as should be done, auditors generally used a 

nonrepresentative selection of invoices in deciding the number of invoices 

 

31 GAO, DCAA Audits: Widespread Problems with Audit Quality Require Significant 

Reform, GAO-09-468 (Washington, D.C.: Sept. 23, 2009). 

Page 31 GAO-09-921 Cost-Reimbursement Contracting
 

they would review and the extent of testing they would perform to support 

conclusions in their work. For example, we found that for one contractor 

that generated $1.1 billion in annual billings to the government, the DCAA 

auditor only reviewed 3 invoices totaling $88,000 out of 222 invoices 

submitted for payment from March 2003 through February 2004, tested the 

first invoice selected, and performed limited testing on the remaining 2 

invoices. Despite this limited testing, DCAA prepared a memorandum for 

the record, stating that “continued reliance can be placed on the 

contractor’s procedures for the preparation of interim vouchers 

(invoices)” and “the contractor has met the criteria for continued 

participation in the direct billing program.” Also, we recently testified that 

allegations that certain audits at three locations did not meet professional 

standards were substantiated.32 Specifically, contractor officials and the 

DOD contracting community improperly influenced the audit scope, 

conclusions, and opinions in three cases, a serious independence issue. At 

two DCAA locations, we found evidence that (1) working papers did not 

support reported opinions, (2) DCAA supervisors dropped findings and 

changed audit opinions without adequate evidence for their changes, and 

(3) sufficient audit work was not performed to support audit opinions and 

conclusions. 

In our review, we found an additional example of what can happen when 

adequate cost surveillance is not in place. NSF awarded a $1.1 billion, 10-

year 5-month cost-reimbursement contract (with options) for logistic and 

operational support for the U.S. Antarctic Program. As discussed in a 

series of NSF Office of Inspector General audit reports, DCAA found that 

the contractor was billing indirect costs as direct costs, billing over the 

negotiated ceiling limitations, and not providing supporting 

documentation for other costs. To compound these issues, NSF had not 

determined that the contractor’s accounting system was adequate for 

determining costs applicable to its contract. In November 2007, an 

independent auditor reported that NSF had significant weaknesses in its 

contract monitoring policies and procedures, meaning that the agency did 

not know whether the costs it was paying the contractor were allowable 

and reasonable. NSF officials acknowledged the weaknesses and have 

begun to take corrective action. 

 

32 GAO, DCAA Audits: Allegations That Certain Audits at Three Locations Did Not Meet 

Professional Standards Were Substantiated, GAO-08-993T (Washington, D.C.: Sept. 10, 

2008). 

Page 32 GAO-09-921 Cost-Reimbursement Contracting
 

As a final example of inadequate cost surveillance, in January 2009, the 

DOE Inspector General reported weaknesses in a contractor’s internal 

audit, which DOE relies on to help ensure that contractors’ costs charged 

to DOE are allowable under the terms of the contract.33 For fiscal year 

2007, the contractor had expended and claimed over $1.4 billion. The 

Inspector General found that the contractor’s internal audit during fiscal 

year 2007 was not satisfactory in several material respects. Specifically: 

• Procurements were not properly approved, but the contractor’s internal 

audit management permitted the contractor to provide approvals 3 years 

after the fact. Questioned costs associated with the procurements were 

omitted from the contractor’s audit report. 

• The contractor’s internal audit manager encouraged the omission of 

information that confirmed improper labor cost allocations. 

• After the completion of audit testing, the contractor’s internal audit 

management directed the modification of the testing attribute related to 

independent receipt of procured goods and services, an action that caused 

some of the questioned costs to be excluded from reporting. 

As a consequence, DOE managers at the Savannah River Site were not 

provided with the information necessary to fully comprehend the 

materiality of, or to address and resolve, internal control weaknesses. The 

contractor did not agree with all of the Inspector General’s findings, but 

did acknowledge weaknesses and indicated that it planned to address 

them.34

 

33 In 1992, DOE implemented the Cooperative Audit Strategy to maximize audit coverage of 

facility contractors. As part of that strategy and as required by contract, each contractor is 

to maintain an internal audit function acceptable to DOE. In turn, the DOE Office of 

Inspector General is supposed to assess the contractor’s internal audit staff’s qualifications, 

independence, and workpapers, and test the work performed by the contractor’s internal 

audit staff. Department of Energy, Office of Inspector General Office of Audit Services, 

Audit Report: Washington Savannah River Company, LLC, Internal Audit Function, 

DOE/IG-0811 (Washington, D.C., January 2009). 

34 In technical comments on a draft of this report, submitted to us on September 28, 2009, 

DOE’s Assistant Secretary for Environmental Management stated that the department uses 

a variety of mechanisms, not just internal audits, to ensure that contractors’ costs charged 

to DOE are allowable. The Assistant Secretary noted that the DOE Inspector General 

report we cite represents an example of an internal control specifically required by the 

Cooperative Audit Strategy. According to the official, DOE managers at the Savannah 

River Site investigated the questioned costs identified by the Inspector General and found 

that the costs were allowable, but DOE acknowledges the internal control weaknesses and 

has increased the level of oversight in this area. 

Page 33 GAO-09-921 Cost-Reimbursement Contracting
 

Cost-reimbursement contracts are appropriate when contracting for 

requirements that involve substantial uncertainties, but they require 

careful management to protect the government’s interests. At a macro 

level, careful management is enabled by good information. Current 

reporting in FPDS-NG, specifically regarding the combination contract 

type and billions of dollars with missing contract types, does not provide 

decision makers with adequate visibility into the government’s use of costreimbursement contracts. Further, while the FAR cautions against the 

protracted use of cost-reimbursement contracts after experience provides 

a basis for firmer pricing, it does not set forth procedures or provide 

guidance for doing the analysis needed to make this determination. We 

found little evidence that agency officials are analyzing whether such a 

transition can be made. While recent congressional and executive branch 

actions are intended to help ensure that cost-reimbursement contracts are 

used only when appropriate, they have yet to take full effect. 

We recommend that agency officials take the following four actions to 

address the cost-reimbursement contract issues we found. 

To help ensure that analysis is conducted to determine whether to 

continue using cost-reimbursement contracts when experience may 

provide a basis to transition to firmer pricing, we recommend that the 

Administrator of OFPP take steps to amend the FAR. Specifically, we 

recommend that the Administrator require procedures for contracting 

officers (in conjunction with the requiring activity) to analyze, before the 

award of a new contract or at other appropriate times during a contract’s 

period of performance, the agency’s requirement and determine if its 

experience with a procurement provides a basis for firmer contract 

pricing. The results and findings of this analysis should be documented in 

the contract file. If the analysis indicates that a basis for firmer pricing 

does exist, the procedures should require consideration, modification, and 

implementation, if feasible, of an acquisition plan to transition to a 

contract type with firmer pricing. 

Conclusions 

Recommendations for 

Executive Action 

To help clarify reporting requirements in FPDS-NG to provide a clearer 

picture of the extent to which various contract types, including costreimbursement, are being used, we recommend that the Administrator of 

OFPP 

• implement controls in FPDS-NG to preclude information from 

being entered without a contract type being identified, that is, 

eliminate the “missing” contract type option and 

Page 34 GAO-09-921 Cost-Reimbursement Contracting
 

• reconcile the conflicting instructions in the FPDS-NG user manual 

for coding combination contracts versus coding based on the 

preponderance of contract type. 

We also recommend that the Secretary of Health and Human Services 

direct the Director of AHRQ to provide guidance to the agency’s 

contracting staff to ensure that they are aware of their responsibility to 

ensure that contractors’ accounting systems have been deemed adequate 

before awarding cost-reimbursement contracts. 

We requested comments on a draft of this report from OFPP, the 

Departments of Defense, Energy, Health and Human Services, and 

Treasury; NASA; the Environmental Protection Agency; NSF; and the 

Corporation for National and Community Service. In comments provided 

via e-mail, OFPP agreed with the recommendations directed to it. The 

response stated that OFPP would work with the FAR Council to address 

the issue of setting forth procedures for determining whether analysis may 

indicate a basis for firmer contract pricing based on contract pricing 

history and requirements. OFPP also stated that version 1.4 of FPDS-NG 

(with a projected launch of February 2010) will make the selection of a 

contract type mandatory, so that new contract awards will no longer be 

coded as missing a contract type. Finally, OFPP stated that a decision was 

recently made, while our report was at OFPP for comment, to make 

changes to FPDS-NG to eliminate the “combination” contract type as an 

option for new contracts starting in fiscal year 2010. Modifications made to 

contracts awarded prior to fiscal year 2010 may still show “combination” 

as the contract type, as contract type is inherited from the base contract 

award; however, agencies have the ability to self-correct the contract type 

selection at any time, and the retroactive contract type selection will flow 

from the base contract to all modifications. 

Agency Comments 

and Our Evaluation 

A final recommendation to OFPP, which was in our draft report, has been 

removed based on new information. This recommendation had to with 

obligations coded as “other” contract type in fiscal year 2009. OFPP stated 

that agencies are prevented from selecting “other” as a contract type for 

new procurements awarded after September 30, 2008, but that this 

contract type may still occur on modifications made after that date. We 

analyzed fiscal year 2009 FPDS-NG information and confirmed that the 

obligations coded as “other” were modifications to existing contracts. 

OFPP noted that, as with the “missing” contract type, agencies have the 

ability to self-correct the “other” contract type on modifications to existing 

contracts. OFPP stated that it will discuss with agencies the burden 

Page 35 GAO-09-921 Cost-Reimbursement Contracting
 

associated with making these changes on a voluntary basis, such as when 

making modifications to contracts that were recently awarded and may 

not expire for a number of years. 

In written comments, reprinted in appendix II, NASA stated that the report 

provides a balanced view of the issues related to the use of costreimbursement contracts. The Department of Health and Human Services 

(HHS) also provided written comments, included in appendix III, agreeing 

with our recommendation directed to it. HHS stated that, in response to 

our findings, the Office of Acquisition Management and Policy issued a 

departmentwide notice to remind contracting staff of the need to ensure 

the adequacy of contractors’ accounting systems before award of a costreimbursement contract. HHS also stated that it would emphasize the 

importance of documenting the basis for cost-reimbursement contracts in 

acquisition plans and further encourage contracting officers to assess the 

viability of transitioning from cost-reimbursement contracts to more 

definite contract types. Finally, HHS provided additional information on 

AHRQ’s contract for its annual Medical Expenditure Panel Survey. 

The Departments of Defense, Energy, and Treasury provided technical 

comments which we incorporated as appropriate. The Environmental 

Protection Agency, NSF, and the Corporation for National and Community 

Service had no comments on the report. 

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

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

report date. We will then send copies of this report to interested 

congressional committees; the Secretaries of Defense, Energy, Health and 

Human Services, and the Treasury; the Administrators of the 

Environmental Protection Agency, NASA, and OFPP; the Director of NSF; 

and the Chief Executive Officer of the Corporation for National and 

Community Service. The report also will be available at no charge on 

GAO’s Web site at http:///www.gao.gov. 

Page 36 GAO-09-921 Cost-Reimbursement Contracting
 

If you or your staff have any questions about this report or need additional 

information, please contact me at (202) 512-4841 or needhamjk1@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this report. Staff 

John K. Needham, Director 

acknowledgments are provided in appendix IV. 

Acquisition and Sourcing Management 

Page 37 GAO-09-921 Cost-Reimbursement Contracting
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To determine the extent to which federal agencies are using costreimbursement contracts, we extracted and analyzed, from the Federal 

Procurement Data System-Next Generation (FPDS-NG), costreimbursement coded contract actions and dollars obligated by agencies 

for fiscal years 2003 to 2007. In some cases, agency data are reported to 

FPDS-NG at component levels; in other cases, the entire agency reports as 

a whole. We also extracted and analyzed from FPDS-NG contract actions 

coded as “combination,” “other,” and “missing” for fiscal years 1999 

through 2008. 

To determine what agencies are buying using cost-reimbursement 

contracts, we analyzed FPDS-NG data for fiscal year 2008. We also 

analyzed the statements of work for the contracts and orders in our 

sample. 

To determine agencies’ rationales for using cost-reimbursement contracts, 

whether contracting officers had deemed contractor accounting systems 

adequate for determining costs applicable to the contracts, and 

procedures for surveillance of contractor cost controls, we took the 

following steps. Based on FPDS-NG data for fiscal year 2007, we grouped 

the agencies and their components into three categories based on their 

reported obligations under cost-reimbursement contracts. Category 1 

comprises agencies that reported obligating less than 20 percent of their 

total obligations in fiscal year 2007 under cost-reimbursement contracts. 

Category 2 comprises agencies with reported cost-reimbursement 

obligations of 20 to 50 percent. Category 3 comprises agencies with costreimbursement obligations of 51 percent and higher. We reviewed the files 

of 10 randomly selected contracts or orders, with obligations of at least $1 

million, from 5 of the category 2 and 6 of the category 3 agencies, with two 

exceptions. We reviewed only one contract at the Corporation for National 

and Community Service and at the Department of the Treasury’s Alcohol 

and Tobacco Tax and Trade Bureau, as those contracts accounted for the 

totality of those agencies’ reported cost-reimbursement contracts in fiscal 

year 2007. 

In all, we reviewed 92 contracts or orders at the agencies listed below. 

Agencies were selected based on location and their reported use of costreimbursement procurements.1

 

1

 Percentages have been rounded. 

Page 38 GAO-09-921 Cost-Reimbursement Contracting 
Appendix I: Scope and Methodology 

• Category 2: 

• Corporation for National and Community Service, Washington, D.C. – 

35 percent 

• Department of the Air Force, Aeronautical System Center, WrightPatterson Air Force Base, Dayton, Ohio – 33 percent 

• Department of the Navy, Navy Strategic Systems Program, Arlington, 

Virginia – 39 percent 

• Department of the Treasury, Internal Revenue Service, National 

Procurement Office, Oxon Hill, Maryland – 36 percent 

• Environmental Protection Agency, Cincinnati Procurement Operations 

Division, Cincinnati, Ohio – 45 percent 

• Category 3: 

• Department of Defense, Defense Microelectronics Activity, McClellan, 

California – 97 percent 

• Department of Health and Human Services, Agency for Healthcare 

Research and Quality, Rockville, Maryland – 87 percent 

• Department of Energy, multiple sites in several states2 – 90 percent 

• Department of the Treasury, Alcohol and Tobacco Tax and Trade 

Bureau, Washington, D.C. – 100 percent 

• National Aeronautics and Space Administration, Glenn Research 

Center, Cleveland, Ohio – 81 percent 

• National Science Foundation, Arlington, Virginia – 81 percent 

Our review of the contract files focused on whether the files contained 

documentation providing the rationales for awarding cost-reimbursement 

contracts and evidence that the contractors’ accounting systems were 

adequate for determining costs applicable to their contracts. We also 

reviewed the sections of the Federal Acquisition Regulation (FAR) and 

implementing agency policies and regulations that stipulate the 

requirements that need to be met before a cost-reimbursement contract is 

to be used. We interviewed a recognized expert from academia with 

experience with this contract type. To supplement file reviews, we 

interviewed agency contracting officers, contract specialists, or both to 

determine how they documented their rationales for awarding costreimbursement contracts. 

As a data reliability check, for the 11 agencies in our review we also 

identified cost-reimbursement contracts coded in FPDS-NG as buying 

 

2

 We did not conduct file reviews at the Department of Energy since there were multiple 

locations. Program officials provided copies of requested information from contract files. 

Page 39 GAO-09-921 Cost-Reimbursement Contracting
Appendix I: Scope and Methodology 

commercial items. We did this because the FAR prohibits the use of costreimbursement contracts to acquire commercial items, as commercial 

items can be procured with a contract type other than a cost contract on 

the open market. FPDS-NG reported that 3 of the agencies had at least one 

cost-reimbursement contract coded as buying a commercial item. For 

these contracts, we obtained explanations for the coding from agency 

officials. In all cases, agency officials explained, to our satisfaction, that 

the coding was in error. For example, FPDS-NG showed that 12 costreimbursement contracts at the Air Force’s Aeronautical System Center 

were used to procure commercial items. Center officials explained that the 

coding was incorrect because of a glitch in the implementation of a new 

computerized contract writing system, which has subsequently been 

corrected. A review of the contracts showed that they should have been 

coded as fixed-price or time-and-materials contracts, not costreimbursement contracts, as reported to FPDS-NG. 

Further, we conducted interviews with agency procurement policy 

representatives and heads of contracting activities for 10 agencies with 

very high reported use (95 percent or more) of fixed-price contracts to 

determine the reasons for their low use of cost-reimbursement contracts. 

One of the agencies that we identified as having reported a high use of 

fixed-price contracts in fiscal year 2007, the Department of Justice’s U.S. 

Marshals Service, was dropped from this part of our review because we 

found that many of its contracts had been miscoded. Although the U.S. 

Marshals Service had reported 95 percent of its obligations as fixed price, 

discussions with contracting officials revealed that many of their 

obligations should have been coded as labor-hour contracts and not as 

fixed-price contracts. U.S. Marshals Service officials told us that they have 

taken steps to correct these coding errors in FPDS-NG. 

The remaining nine agencies, together with the percentage of their fiscal 

year 2007 obligations using fixed-price contracts, are presented below. 

• Court Services and Offender Supervision Agency, Pretrial Services 

Agency, Washington, D.C. – 99.8 percent 

• Department of Agriculture, Agricultural Marketing Service, Washington, 

D.C. – 99.9 percent 

• Department of Agriculture, Farm Service Agency, Washington, D.C. – 98 

percent 

• Department of Agriculture, Agricultural Research Service, Washington, 

D.C. – 98 percent 

• Department of Defense, Defense Commissary Agency, Fort Lee, Virginia – 

100 percent 

Page 40 GAO-09-921 Cost-Reimbursement Contracting
Appendix I: Scope and Methodology 

• Department of Defense, Defense Logistics Agency, Fort Belvoir, Virginia – 

98 percent 

• Department of the Interior, Office of Surface Mining Reclamation and 

Enforcement, Washington, D.C. – 97 percent 

• Department of Justice, Federal Prison System, Washington, D.C. – 97 

percent 

• General Services Administration, Public Buildings Service, Washington, 

D.C. – 98 percent 

Finally, to identify agencies’ procedures for surveillance of contractor 

costs, we reviewed contract files and documents maintained by 

surveillance officials for each contract and order in our review. We also 

reviewed agency cost surveillance procedures, relevant parts of the 

Defense Contract Audit Agency’s contract audit manual and our Cost 

Estimating and Assessment Guide,

3

 which provides information on 

practices for ensuring credible cost estimating, including earned value 

management. In addition, we interviewed contracting officers and the 

personnel responsible for the surveillance. 

Where appropriate, we supplemented our analysis with reviews of prior 

GAO reports, agency inspector general reports, and recent statutory and 

regulatory actions pertaining to cost-reimbursement contracts. 

We conducted this performance audit from July 2008 to September 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

 

3

 GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009). 

Page 41 GAO-09-921 Cost-Reimbursement Contracting
Appendix II: Comments from the National Appendix II: Comments from the National Aeronautics and Space Administration 

Aeronautics and Space Administration 

Page 42 GAO-09-921 Cost-Reimbursement Contracting 
Appendix III: Comments from the Department Appendix III: Comments from the of Health & Human Services 

Department of Health & Human Services 

Page 43 GAO-09-921 Cost-Reimbursement Contracting
Appendix III: Comments from the Department 

of Health & Human Services 

Page 44 GAO-09-921 Cost-Reimbursement Contracting
Appendix III: Comments from the Department 

of Health & Human Services 

Page 45 GAO-09-921 Cost-Reimbursement Contracting
Appendix III: Comments from the Department 

of Health & Human Services 

Page 46 GAO-09-921 Cost-Reimbursement Contracting
Appendix IV: 

A

GAO Contact and Staff 

cknowledgments 

Page 47 GAO-09-921 

Appendix IV: GAO Contact and Staff 

Acknowledgments 

John K. Needham (202) 512-5274 or needhamjk1@gao.gov 

In addition to the contact named above, Michele Mackin, Assistant 

Director; Julie Hadley; Daniel Hauser; Julia Kennon; LeAnna Parkey; 

Kenneth Patton; Matthew Shaffer; and Sylvia Schatz made key 

contributions to this report. 

 Cost-Reimbursement Contracting 

GAO Contact 

Acknowledgments 

(120759) 
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