Defense Contracting: DOD Has Enhanced Insight into Undefinitized Contract Action Use, but Management at Local Commands Needs Improvement
Published: 2010-01-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: To meet urgent needs, DOD can issue undefinitized contract actions (UCA), which authorize contractors to begin work before reaching a final agreement on contract terms. Such actions are considered to be a risky contract vehicle for the government because contractors lack incentives to control costs during this period. Defense regulations provide that the government determination of contractors' allowable profit or fee should reflect any reduced cost risk. Pursuant to the 2008 National Defense Authorization Act, GAO assessed whether DOD actions taken as required by the act have (1) improved departmental insight and oversight of UCA use and (2) resulted in local commands meeting DOD's standards for documenting the basis for negotiating the contractor profit or fee, definitization timelines, and obligation amounts. GAO reviewed relevant DOD regulations and policies, and contract files for 83 randomly-selected UCAs totaling $6.1 billion at eight local commands. The findings from this contract file review can not be generalized across DOD.
section_title: What GAO Found
paragraphs: DOD has taken several actions since August 2008 to enhance departmental insight into and oversight of UCAs; however data limitations hinder its full understanding of the extent to which they are used. DOD issued policy that requires centralized, semi-annual reporting of undefinitized actions to gain insight in UCA use, including information on reason for award, obligation amounts at award, and definitization timelines. Over time, reporting requirements have evolved as DOD has taken steps to clarify guidance on the types of contract actions to be reported. DOD has also required components to submit management plans to describe actions taken for improved UCA use. Although these actions have helped enhance insight and oversight of UCA use, not all UCAs are included in the reports. Of the 24 UCAs GAO reviewed that should have been included in the April 2009 semi-annual report, 8 actions valued at $439 million were unreported by the local commands to DOD. Implementation of DOD's recent policies and guidance on the use of UCAs has varied at the local commands GAO visited and the associated management standards were not fully met. For the 66 UCAs GAO reviewed that were eventually definitized, contracting officers generally did not document their consideration of cost risk to the contractor during the undefinitized period of work as required. In 34 cases, the weighted guideline worksheets were not used when required, nor any other documentation of how any reduced cost risk during the undefinitized period of performance was considered in determining the negotiation objective. This was particularly the case for cost-plus-award fee contracts where defense regulations are not clear about how any cost risks are to be considered and documented. Even for the remaining 32 cases in which weighted guideline worksheets were used, the contracting officers' basis for risk calculations were often not clear due to limitations of the weighted guideline documentation. Other management standards were not always met. Only 41 UCAs--about 50 percent of the actions GAO reviewed--met the 180-day definitization requirement. Moreover, 66 of the 83 UCAs GAO reviewed were awarded with obligations near or above the 50 percent maximum.

section_title: Letter
paragraphs: To meet urgent needs, the Department of Defense (DOD) can authorize  contractors to begin work and incur costs before reaching a final  agreement on the contract terms and conditions—known as an  undefinitized contract action (UCA). This type of contract, however,  poses risk to the taxpayer as contractors lack incentives to control costs  while contract terms and conditions are negotiated and definitized. UCAs  are generally required to be definitized within 180 days or before more  than 50 percent of the estimated contract price is obligated, whichever  occurs first. DOD must ensure that UCAs are used only when necessary  and that it negotiates the contract terms and conditions as quickly as  possible. According to defense regulations, since the cost risk to the  contractor may be low during the undefinitized period, compensation  should be adjusted to reflect any reduced cost risk. The department  reported $18 billion in potential obligations for undefinitized actions  exceeding $5 million, during fiscal year 2008.
In June 2007, we reported that DOD did not know the extent to which it  was using UCAs and identified the need to improve DOD’s (1) oversight of  UCAs, (2) ability to meet required definitization time frames, and              (3) contracting officer documentation of the basis for negotiating  contractor profit or fee. In January 2008, these findings were reflected in  Section 809 of the National Defense Authorization Act (NDAA) for fiscal  year 2008. The act requires DOD to issue guidance that would include                       (1) circumstances in which it is appropriate for DOD to use UCAs,            (2) procedures for ensuring compliance with definitization timelines and  obligation amounts, (3) procedures for compliance with regulatory  limitations on profit or fee with respect to costs incurred prior to  definitization, and (4) reporting requirements for UCAs that fail to meet  required timelines for definitization or regulatory limitations on the  obligation of funds or on profit or fee.
In August 2008, the department issued a policy memorandum on UCA  oversight and management, which required DOD components to report  semi-annually on contract actions with an estimated value exceeding        $5 million to the Office of the Under Secretary of Defense for Acquisition,  Technology & Logistics (OUSD (AT&L)), Defense Procurement and  Acquisition Policy. In addition, the memorandum advised DOD  components to obligate funds for the undefinitized period consistent with  the contractor’s requirements for the anticipated undefinitized period and  to comply with existing Defense Federal Acquisition Regulation  Supplement (DFARS) policy on UCA use. The act also required us to  assess the extent to which DOD’s guidance resulted in improvements to its  insight and use of UCAs. Accordingly, we assessed whether actions taken  by DOD have (1) improved departmental insight and oversight of UCA use;  and (2) resulted in local commands meeting DOD’s UCA management  standards for documenting the basis for negotiating the contractor profit  or fee, definitization time lines and obligation percentages, and the  circumstances in which UCAs are used.
To identify and assess the actions DOD has taken to improve departmental  insight and oversight, we reviewed relevant DOD policy memoranda,  federal and defense acquisition regulations, and proposed changes to  DFARS; and interviewed senior-level acquisition officials. We selected  eight local commands and developed and reviewed a random selection of  83 contract actions reported as UCAs and valued at a total of $6.1 billion.  The findings from this contract file review can not be generalized across  DOD but are illustrative of UCA use. We compared information from those  contract actions to DOD’s semi-annual reports and local commands’ UCA  reports. We selected four of the local commands based on their placement  within the top 50 percent of the total dollar value of UCAs issued over  $100,000 during fiscal year 2008. We selected the remaining four  commands based on (1) significant UCA use according to the military  services, (2) geographic location, and (3) the history of UCA use. For the  purposes of this report we refer to the following eight locations as the  local commands.
Tank-automotive and Armaments Command Contracting Center,    Rock Island Contracting Center, Rock Island, Illinois    Naval Sea Systems Command, Washington, D.C.     Naval Inventory Control Point, Philadelphia, Pennsylvania  303rd Aeronautical Systems Wing (Reconnaissance Systems Wing),  Wright-Patterson Air Force Base, Ohio   516th Aeronautical Systems Wing (Mobility Systems Wing), Wright- Patterson Air Force Base, Ohio    Missile Defense Agency, Redstone Arsenal, Alabama     United States Special Operations Command, MacDill Air Force Base,  We selected the 83 UCA contract actions from UCAs reported in the  Federal Procurement Data System-Next Generation (FPDS-NG) as  awarded during fiscal year 2008 and the first 5 months of 2009.  We  determined that the FPDS-NG data were sufficiently reliable for the  purposes of this review by comparing the information in FPDS-NG with  UCA information from other sources, such as the Electronic Data Access  program, DOD’s semi-annual reports, local command reports, and  information in the contract files.
To determine whether DOD’s recent actions have resulted in local  commands meeting UCA management standards, we reviewed relevant  policies and guidance to identify the standards for documenting the basis  for negotiating contractor profit and fee, timeliness of definitization,  obligation amounts at the time of contract award, and the circumstances  that justify the use of a UCA. We then reviewed contract files for the 83  contract actions in our selection and compared the relevant  documentation to the management standards. At each local command we  discussed the circumstances for each UCA with contracting officials.
We conducted this performance audit from March 2009 to January 2010 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 that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives. Appendix I provides details on our scope  and methodology, appendix II lists the contract actions we reviewed, and  appendix III lists contract actions we reviewed that were unreported in  DOD’s April 2009 semi-annual report.
subsections: section_title: Background
paragraphs: GAO designated DOD contract management as a high-risk area in 1992.  The lack of well-defined requirements, the use of ill-suited business  arrangements, and the lack of an adequate number of trained acquisition  and contract oversight personnel contribute to unmet expectations and  schedule delays and place the department at risk of potentially paying  more than necessary. In fiscal year 2009, DOD spent nearly $384 billion on  contracts. In response to our prior recommendations and congressional  direction, DOD has recently emphasized the need to improve its insight  and management of UCAs.
When a requirement needs to be met quickly and there is insufficient time  to use normal contracting vehicles, defense regulations permit the use of  an undefinitized contract action. These can be quickly entered into, but at  a later date, the contract’s final price and other terms must be agreed upon  by the contractor and government, a process known as definitizing the  contract. UCAs can be entered into via different contract vehicles, such as  a letter contract (an undefinitized stand-alone contract), a task or delivery  order issued against a pre-established umbrella contract, an order against  a basic ordering agreement, or a modification for additional supplies or  services to an existing contract.
UCAs are considered risky contract vehicles for the government. Our prior  work and a DOD Inspector General report found that undefinitized  contracts transfer additional cost and performance risks from contractors  to the government because contracting officers normally reimburse  contractors for all allowable costs they incur. With all allowable costs  covered, contractors bear less risk and have little incentive to control  costs. The government also risks incurring unnecessary costs as  requirements may change before the contract is definitized. Contractors  and the government should bear an equitable share of contract cost risk.  UCAs shift much of the burden of cost risk onto the government during  the undefinitized portion of the contract. Because the cost risk to the  contractor may be reduced during this undefinitized period, compensation  should be priced accordingly and negotiations should reflect any reduced  cost risk to the contractor in determining the government’s profit or fee  objective, according to defense regulations.
DOD’s acquisition organization consists of several levels including  department, service or agency, and local contracting commands or  activities where acquisition policy and oversight take place. At the  departmental level, the Under Secretary of Defense for Acquisition,  Technology and Logistics is responsible for supervising and establishing  policy for all DOD matters relating to procurement and acquisition policy  through the Office of Defense Procurement and Acquisition Policy. At the  component or agency level, each military service has its own senior  acquisition executives and acquisition offices that are to establish  contracting policies and conduct oversight of the local contracting  commands or activities for each service. The defense agencies and  combatant commands, such as the Missile Defense Agency and the U.S.  Special Operations Command, also have procurement or contracting  directorates within their organization that are to perform similar functions  as the service senior acquisition executives in terms of establishing policy  and conducting oversight. Within each military service there are numerous  local contracting commands or activities that provide contracting support  to many service acquisition and operational commands.
section_title: DOD Steps to Enhance Insight and Oversight of UCAs Are Hampered by Incomplete Data
paragraphs: DOD has taken a number of steps aimed at enhancing its insight into and  oversight of UCA use among the components and local commands;  however, data limitations hinder its full understanding of the extent to  which UCAs are used. DOD implemented a policy in August 2008 to  require centralized periodic reporting of UCA information and related  management plans to the Defense Procurement and Acquisition Policy  office within OUSD (AT&L). The department’s reporting requirements  have evolved over time to include other types of contract actions that  should be reported and DOD has instituted contract peer reviews for  contracts above $1 billion, which may include UCAs. Although these steps  have helped increase insight into UCA use, information gaps remain. For  instance, we found DOD’s centralized reporting did not include 8 of 24  UCAs we reviewed that should have been reported in the April 2009 semi- annual report.
subsections: section_title: DOD Has Implemented Policies and Proposed Changes to Enhance UCA Insight and Oversight
paragraphs: DOD has instituted policies and proposed additional changes intended to  enhance its departmental insight and oversight of UCA use. See Figure 1  for the recent changes to policies and guidance intended to increase  insight and oversight of the use of UCAs.
DOD’s August 2008 policy memorandum established centralized semi- annual reporting for UCAs with a not-to-exceed price above $5 million to  the OUSD (AT&L) Defense Procurement and Acquisition Policy.  According to DOD, the purpose of this centralized reporting is to enhance  departmental insight into and management of UCAs. Starting October 31,  2008, undefinitized contract actions were required to be reported if the  contract action’s not-to-exceed value was above $5 million and it was  undefinitized at any point during a 6-month reporting period— either April  through September, or October through March. These semi-annual reports  are to include data on the reason for award, not-to-exceed amounts,  obligation amounts, date of scheduled definitization, days past  definitization deadline, and date the qualifying proposal is received. DOD  finalized its October 2009 semi-annual report December 22, 2009.
In addition to semi-annual reporting, the August 2008 policy memorandum  also required each DOD component to update and submit a UCA  management plan, each April and October, along with the semi-annual  report as a way to improve oversight of UCA use. These management  plans are required to describe the actions taken by DOD components to  help ensure  appropriate use,  timely definitization,    minimum obligation at time of award (consistent with the contractor’s  requirements for the undefinitized period),  appropriate recognition and documentation of the contractor’s  reduced risk during the undefinitized period in the profit and fee  negotiations, and    milestones for completing planned actions.
In October 2009, DOD updated its detailed guidance to clarify that UCAs to  be recorded in the semi-annual report include undefinitized contracts  awarded for foreign military sales, congressionally mandated long-lead  procurement items, initial spares, special access programs, and  contingency operations. A Defense Procurement and Acquisition Policy  official also told us that once UCAs over $100 million are definitized,  components must also submit the weighted guidelines worksheets along  with their semi-annual report. Weighted guideline worksheets are an  organized and structured approach to establish and document a  prenegotiation objective for profit or fee based on an assessment of  contractor risk. In preparing government estimates where profit is  negotiated as an element of price, a reasonable profit shall be negotiated  or determined for each procurement action, according to defense  regulations. Requiring the worksheets to be submitted is intended to  provide departmental insight into whether or not contracting officers are  documenting their assessment of the contractor’s reduced risk when  determining profit or fee negotiation objectives. Although we were told  that weighted guidelines are to be submitted for UCAs over $100 million  once definitized, we could not find documentation of this requirement in  the UCA management Procedures, Guidance, and Instructions. On  December 23, 2009, the department revised DFARS procedures, guidance,  and instruction to require military departments and defense agencies to  submit, with their semi-annual reports, a copy of the record of weighted  guidelines for each definitized UCA with a value of $100 million or more.
DOD also has finalized one amendment to DFARS and has proposed two  additional changes which will affect how UCAs are managed within DOD.  In July 2009, DFARS was amended to codify the changes communicated in  the August 2008 policy memorandum. Also, in July 2009, DOD proposed a  change to clarify that the existing DFARS requirement that letter contracts  be definitized within 180 days or before more than 50 percent of the not-to- exceed amount is obligated will apply rather than Federal Acquisition  Regulation (FAR) policy. Finally, although unpriced change orders are  not UCAs, DOD has proposed a change to DFARS in recognition of the  need for increased insight into and oversight of unpriced change orders to  require that unpriced change orders be managed and overseen in a manner  consistent with UCAs.
DOD’s recent peer review process initiative may also improve DOD’s  insight into and oversight of UCAs. Under the peer review process,  contracts above $1 billion are to be reviewed by senior DOD officials at  three points prior to contract award and then periodic post-award reviews.  This peer review process is intended to increase departmental awareness  of the significant events occurring with contracts valued at $1 billion or  more across DOD. According to a DOD official, at least one UCA contract  has been selected as part of the peer review process.
section_title: Centralized Reporting Is Incomplete
paragraphs: Despite DOD’s efforts to collect information on UCAs, not all UCAs were  in the most recent semi-annual report. For example, we found that of the  83 contract actions we reviewed, 24 met DOD’s criteria for being included  in the April 2009 semi-annual report—those contracts that exceeded         $5 million between October 1, 2008, and March 31, 2009. However, only 16  of them were actually reported in April 2009, leaving 8 contract actions  valued at $439 million unreported. For example, because the Naval Sea  Systems Command’s (NAVSEA) local list of undefinitized actions was not  complete, the local command was not aware it missed four UCAs valued at  $153 million in its submission to the Defense Procurement and Acquisition  Policy office for the April 2009 semi-annual report. Also, at the Tank-  automotive and Armaments Command (TACOM), we reviewed 4  undefinitized actions valued at $286 million that were not included in the  semi-annual report. According to TACOM officials, 2 actions valued at  $271 million went unreported because local officials did not report actions  that were definitized during the reporting period despite DOD’s  requirements to include them. The other 2 contract actions, valued at $15  million, were overlooked. In contrast, all of the 16 contract actions in our  selection at the U.S. Special Operations Command and the Army’s Rock  Island Contracting Center were included in local reports and reported to  DOD for the April 2009 semi-annual report as required.
DOD’s reporting requirements are still in flux as it takes steps to gain  insight into and oversight of UCA use. For example, when DOD introduced  the new reporting requirements in its August 2008 policy memorandum,  UCAs over $5 million were required to be reported, but there was some  confusion at the local commands as to what type of contract action this  requirement applied. DOD released detailed guidance to commands for  their use in time for the October 2009 report specifying that contract  actions exempt from definitization and obligation limitations, such as  foreign military sales and long-lead procurement items, were to be  included in the semi-annual report. In addition, the proposed July 2009  amendment to DFARS is intended to increase DOD’s insight of unpriced  change orders by requiring these contract actions to be reported semi- annually and managed in a manner consistent with UCAs. According to  DOD, unpriced change orders pose similar risks as UCAs, therefore,  increased insight and oversight are warranted. While reporting of unpriced  change orders is not yet required, we identified nine unpriced change  orders, within the 83 contract actions we reviewed, with a not-to-exceed  value totaling $499 million, which would fit DOD’s proposed reporting  criteria. Five of these—totaling $231 million—at the Aeronautical Systems  Center are being tracked locally similarly to UCAs with regard to approval,  obligation, and definitization requirements, but these were not included in  DOD’s semi-annual reporting. Another unpriced change order awarded by  the Missile Defense Agency for $14 million is also tracked according to  local command policies but was not included in DOD semi-annual  reporting. In contrast, we found three unpriced change orders, totaling  $254 million at the Rock Island Contracting Center, that were tracked  similarly to UCAs at the local level and reported to DOD.
Notwithstanding the inaccurate data and evolving refinement of UCA  reporting requirements, DOD has begun to use its semi-annual UCA report  to oversee the extent to which local commands are using UCAs. For  example, based on increased use reported in the April 2009 semi-annual  report, the Director, Defense Procurement and Acquisition Policy, visited  the Aeronautical Systems Center in September 2009 to better understand  the situation there, reemphasize the importance of UCA management, and  discuss ideas for how the contracting center can improve.
section_title: Local Commands Are Generally Not Meeting DOD’s Management Standards
paragraphs: Despite DOD’s recent UCA management policy, guidance, and instructions  designed to improve their use, implementation varied at local commands  we visited and the management policy standards were not fully met.  DOD’s August 2008 policy designed to improve UCA management  reemphasized requirements governing their use, including:  allowable profit during the undefinitized period when determining the  government’s objective for profit or fee,    documenting any reduced cost risk and profit or fee determinations in    definitization time frames, and    obligation limits.
For 66 of the 83 UCAs we reviewed that were definitized, contracting  officers generally did not document the profit or fee negotiation objective  or consideration of reduced cost risk to the contractor during the  undefinitized period of work as required. In addition, the 180-day  requirement for UCA definitization was not met in half the UCAs we  reviewed. Furthermore, despite DOD policy to limit obligations to the  planned work during the anticipated undefinitized period, the local  commands typically obligated at or near the maximum amount  permitted—up to 50 percent of the not-to-exceed amount—immediately at  award of UCAs. Despite the risks involved, we also found situations when  the government may have been able to avoid the use of undefinitized  contract actions.
subsections: section_title: Commands Varied in How They Implemented DOD’s Policy Designed to Improve UCA Management
paragraphs: The local commands we visited managed their UCA use to varying  degrees. All of the locations used some sort of local management report to  track information about the contracts awarded. A majority of the locations  reported UCA awards and status to local acquisition management  regularly ranging from weekly to monthly. Local commands also varied in  the dollar threshold amounts requiring higher-level approval, such as the  head of contracting authority rather than a division chief or department  head, for their use of UCAs. For example, the Rock Island Contracting  Center, TACOM Contracting Center, U.S. Special Operations Command,  and Missile Defense Agency require management approval at the highest- level, i.e, the head of contracting activity, within the command for all  UCAs regardless of price, while other commands only require management  approval at the highest level for UCAs above a $10 million threshold.
The local commands we visited also emphasized key aspects of UCA  management standards to varying degrees. Some commands appear to  have increased their focus in one of the areas identified in the August 2008  policy. For example, the Rock Island Contracting Center has decreased  the 180-day requirement for definitization to 150 days. According to local  command officials, if 150 days from UCA award is surpassed, management  expects continuous updates on the status of definitization. Table 1  compares UCA management policies for the commands we visited.
section_title: Mandatory Consideration of Incurred Cost Prior to Contract Definitization Is Not Typically Documented in the Contract File
paragraphs: According to DOD regulations, contracting officers are required to  consider any reduced cost risk to the contractor for costs incurred before  negotiation of the final price. Further, contracting officers must document  this risk assessment in the contract files. Sixty-six of the 83 contract  actions we reviewed were definitized and should have documented a risk  assessment in their contract file and used the weighted guideline  worksheet or an alternative method to determine allowable profit or fee  for negotiation purposes.
About half of the cases we reviewed—34 of 66—did not use the weighted  guidelines or document any consideration of cost risk to the contractor  during the undefinitized period when establishing profit or fee negotiation  objectives. Instead, we found these contracting officers based their profit  or fee negotiation objectives on previously negotiated rates under  contracts for similar work or other factors. None of these included the  required consideration of any reduced cost risk to determine whether the  contractor’s proposal included fair and reasonable prices. For example, in  12 cost-plus-award-fee contract actions, the contracting officers used the  base and award fee structure in contracts previously awarded for similar  work, or in one case, accepted the contractor’s proposal when  determining their negotiation fee objectives prior to contract  definitization. However, DOD’s contract pricing reference guide notes that  automatically applying predetermined profit or fee percentages without  regard to the unique circumstances of the immediate negotiation is  inconsistent with government profit or fee goals. Although not required to  use a weighted guidelines worksheet for cost-plus-award-fee contracts,  contracting officers are still required to consider and document any  reduced cost risk borne by the contractor during the undefinitized period.  For these contract actions we did not see evidence in the contract file that  there was consideration of any reduced cost risk. However, in one case a  contracting officer was aware of the requirement to document and  consider reduced cost risk, but did not know how to account for any  reduced cost risk because defense regulations do not provide a procedure  for how to consider any reduced cost risk for cost-plus-award-fee type  contracts.
In the remaining 32 of 66 UCAs we reviewed, the contract files included  weighted guideline worksheets, but it was not always clear whether the  contracting officers considered any reduced cost risk to the contractor  during the undefinitized period as a factor when determining allowable  profit or fee as required. Because of the weighted guideline worksheet  design it did not show the contracting officer’s basis for risk calculations  or indicate the reason for assigning a particular contract-type risk value.  The contract-type risk value reflects the relative risk to the government  associated with the specific contracting method. Therefore, we also  reviewed the contract files for documentation of a risk assessment. In 15  of these 32 contract files, we found no risk assessment documentation in  the file that provided a rationale for the values assigned to the contract- type risk in the weighted guidelines worksheet, making it difficult to verify  what consideration, if any, the contracting officer made for incurred costs.
In addition, within these 15 files the contracting officers did not  acknowledge the requirement to ensure that the profit or fee negotiation  objectives reflected any reduced cost risks to the contractor.
In the remaining 17 of the 32 contract files, the contracting officers’  rationale for their decisions on the assigned contract-type risk value and,  when applicable, their consideration of incurred costs during the  undefinitized period, were documented in the contract file. Contracting  officers are required to use the contract-type risk value in the weighted  guidelines worksheet to reflect any reduced contractor cost risk during  the undefinitized period. A higher contract-type risk value represents a  higher risk to the contractor. For example, a contracting officer may  assign a fixed-price type contract a value ranging from zero to six, while a  cost-plus type contract will range from zero to two. If costs have been  incurred prior to definitization, the contracting officer should account for  the shift in risk from the government to the contractor by assigning a  contract-type risk value that is typically lower than the normal range.  According to the department’s August 2008 UCA policy, contracting  officers should generally regard the contract-type risk to be in the low end  of the designated range when costs have been incurred prior to  definitization. Further, if a substantial portion of the cost has been  incurred prior to definitization, contracting officers may assign a value as  low as zero, regardless of contract-type.
In 8 of these 17 contracts, contracting officers reduced the allowable profit  or fee negotiation objectives based on costs incurred by the contractor  during the undefinitized period. For example, in a firm-fixed-price UCA  awarded by the Navy for compact solid state antennas, the contracting  officer used the weighted guidelines worksheet to assign low contract-type  risk values based upon incurred and projected costs resulting in a lower  profit objective than normal values would have calculated. In the  remaining 9 cases, the contracting officers considered making an  adjustment but indicated a reduction to the contractor profit or fee  negotiation objectives was not warranted. For example, in a cost-plus- incentive-fee UCA awarded by the Air Force to develop and test a Global  Hawk sensor package, the contracting officer acknowledged the  requirement to consider any reduced cost risk to the contractor during the  undefinitized period, but determined the government shared responsibility  for the definitization delay. Therefore, the contracting officer assigned a  normal contract-type risk value for this contract.
Despite DOD policy guidance, our analysis of the 32 UCAs that used the  weighted guideline worksheets indicated that the contract-type risk  factors were skewed toward the middle and high end of the DFARS  designated ranges, indicating higher risk for the contractors. In the  absence of documentation of the contracting officers’ analysis, we were  unable to determine why the contract risk types were arrayed toward the  middle and high end of the designated ranges. Our analysis indicated that  contracting officers tended to assign middle and high values for fixed- price contracts rather than cost reimbursement contracts. Figure 2 shows  the distribution of the contract-type risk values assigned for those UCA  contract files containing weighted guideline worksheets.
section_title: UCAs Were Not Definitized within Required Time Frames
paragraphs: Local commands we visited did not meet the 180-day requirement in the  federal and defense regulations for 51 percent of the UCAs we reviewed.  We have previously reported that this situation places the government at  risk of paying increased costs, thus potentially wasting taxpayers’ money.  Table 2 shows the number and percentage of UCAs we reviewed that were  not definitized within the 180-day requirement.
We found 24 contract actions that took more than 180 days to be  definitized, including 4 that took over a year. The longest took over         582 days to definitize. We also found 18 contract actions that were  undefinitized beyond 180 days, including one from the Aeronautical  Systems Center awarded in February 2008, which as of December 2009  had yet to be definitized after more than 645 days. Officials at the local  commands stated that they attempt to follow defense acquisition  requirements for definitization within 180 days. However, we found  increased management emphasis on definitization time frames at the Rock  Island Contracting Center. Specifically, the Rock Island Contracting  Center focused on definitizing UCAs within 150 days. Of the 12 UCAs we  reviewed at this location, 11 were definitized within the 180-day time  frame. We found no relationship between the dollar value of the contract  action and the length of time it took to definitize. Likewise, final contract- type did not appear to influence the timeliness of definitization. We found  both fixed-price and cost-reimbursable contracts that exceeded the        180-day definitization requirement.
Contracting officers cited several reasons why UCAs may not be  definitized within the 180-day time frame. The most common reasons cited  were problems with contractor and subcontractor proposals, protracted  negotiations between the government and contractor, timeliness of  government audits, and unstable requirements and funding. Several  contracting officers told us that delays were the result of a combination of  these issues.
section_title: The Majority of UCAs Were Awarded with Maximum Obligation Allowed at the Time of Award
paragraphs: Most of the contract actions we reviewed were awarded at or near the  maximum not-to-exceed price authorized under DFARS. Of the 83 UCAs  we reviewed, 66 had initial obligation amounts of 45 percent or more of  the not-to-exceed price at award. As we have noted in prior work,  contractors may have little incentive to quickly submit proposals and  agencies have little incentive to demand their prompt submission, since  funds are available to proceed with the work. Of the 66 actions that  obligated near 50 percent of the not-to-exceed price, 34—52 percent— exceeded the 180-day time frame for definitization. By limiting the amount  of funding obligated at award to reflect contractors’ requirements during  the anticipated undefinitized period, the contractor may be incentivized to  work with the government to submit proposals quickly and enter  negotiations sooner, potentially saving the government money.
Contracting officers at each of the eight commands we visited told us that  it was standard practice to obligate at or near the maximum funds allowed  when issuing the UCA. At one command we visited, one contracting  officer told us that obligating at 50 percent has become force of habit and  noted that contractors have come to expect the maximum allowed at  award. Some commands have issued guidance on assessing the  contractor’s requirement during the anticipated undefinitized period. For  example, the Aeronautical Systems Center issued guidance in July 2008  instructing contracting officers to only obligate the percentage of funds  needed by the contractor during the undefinitized period. At the  Aeronautical Systems Center, 17 of the 25 contract actions we reviewed  initially obligated 45 percent or more at award—totaling more than       $335 million—including 2 with 100 percent of funds obligated at award.  At the Missile Defense Agency, contracting officers told us they are  encouraged by the Director of Acquisition to obligate only what is needed  during the undefinitized period; however, formal instructions  implementing this policy have not been issued. Three of 5 UCAs we  reviewed at the Missile Defense Agency were obligated with 45 percent or  more at award—totaling almost $18 million—1 of which was obligated at  100 percent. Figure 3 shows the distribution of the initial obligation  percentages of the not-to-exceed amounts for the UCAs we reviewed.
Although contracting officers are authorized to obligate up to 50 percent  or more at award, we found instances where it may not have been  necessary. For example, an Aeronautical Systems Center UCA for aircraft  modernization kits obligated 50 percent at award. However, the contractor  only incurred costs equal to 2.4 percent of the not-to-exceed amount  during the 13-month undefinitized period. At the same command, a UCA to  procure ground control stations for unmanned aircraft was given approval  to obligate 100 percent at award due to the fact this equipment was  required for contingency operations. However, the contractor incurred  costs of only slightly more than 1 percent of the not-to-exceed amount  during the 11-month undefinitized period. Given the low amount of  incurred costs during the anticipated undefinitized period, obligating at or  above 50 percent may encourage extended periods of performance prior  to definitization.
section_title: UCAs Used to Purchase a Range of Goods and Services but Some Use May Have Been Avoided
paragraphs: The UCAs we reviewed were used to fill a variety of goods and services  needs, from providing immediate support to the warfighter in theater to  procuring long-lead items to keep weapon system program schedules on  time. In several cases UCAs were used to prevent a lapse in service or  allow for equipment used in contingency operations to be upgraded. In  one example, the Navy issued a UCA to fund an engineering study on  spares and repair parts to prevent the grounding of helicopters. In another,  the U.S. Special Operations Command used a UCA to expand the  ammunition capacity and add ballistic protective armor on vehicles  already in theater. In yet another example, the Army issued a UCA to  create a forward-deployed water packaging system capable of producing  7,000 bottles of water per day.
The majority of UCAs we reviewed—64 percent—were used to purchase  goods. Examples of goods acquired with UCAs include:    UCA awarded by Rock Island Contracting Center to fill ammunition  shortages for the F-15, F-16, F/A-18, and AH-1 Cobra aircraft;    UCA awarded by NAVSEA to procure five compact solid state  antennas to support the Marine Corp’s and the Army’s ground-based  network radar system; and    UCA awarded by the U.S. Special Operations Command to procure a  small armored vehicle to increase survivability, and guard forces with  increased protection.
The other UCAs we reviewed—36 percent—were used to purchase  services. Examples of services acquired with UCAs include:    UCA awarded by the Rock Island Contracting Center for basic life  support services (e.g., camps, dining facilities, waste, water, other  services/utilities) necessary to support the Logistics Civil  Augmentation Program in Iraq;    UCA awarded by TACOM for the design, development, and fabrication  of a rocket-propelled grenade active protection system for integration  onto the mine-resistant ambush-protected vehicle; and    UCA awarded by the Air Force Aeronautical Systems Center to provide  contract logistics support for unmanned aerial systems efforts known  as Predator/Reaper.
Table 3 provides a list of categories of goods and services, as reported in  FPDS-NG, procured with UCAs at the eight local commands we visited.
According to DFARS, UCAs should only be used when the negotiation of a  definitized contract is not possible to meet government requirements and  the government’s interest demands the contractor be given a binding  commitment so contract performance can begin immediately. For the 83  files we reviewed, it appeared that the use of a UCA may have been  avoided in some cases. In one example, the Air Force awarded a UCA for  $54.9 million in April 2008 for an upgrade to the Global Hawk program that  was necessary to meet the September 30, 2008, initial operational test and  evaluation deadline. However, as of November 2009, the Global Hawk  program had yet to undergo that testing and evaluation process due to  other program delays. In another example, the Army justification for  awarding a UCA for almost $50 million was to reevaluate a contractor who  was determined to be performing poorly. It was determined that rather  than using provisions in the existing contract allowing for an extension of  services, it would be best if the contract was extended for a 6-month  review period using a UCA, a contracting tool that is to be used only when  time does not permit the negotiation of a contract action and contractor  performance must begin immediately to meet the government’s  requirements.
section_title: Conclusion
paragraphs: Undefinitized contract actions can be an important tool for DOD to meet  urgent contracting needs. However, when UCAs are used the government  bears the majority of the cost risk during the undefinitized period. DOD  has issued new policies and guidance and now requires components to  report semi-annually on UCA use as well as submit updated management  plans detailing actions taken to ensure appropriate use. Such efforts are  intended to enable better departmental insight into the extent to which  UCAs are used and how to manage their use to minimize the risk to the  government. While DOD’s recent actions are a positive step and are still  evolving, clear guidance and accurate reporting are key. Further, despite  DOD’s call for increased management attention of UCA use at DOD  components, management standards and tools designed to help mitigate  UCA-related cost risk have not always been met or used. Weighted  guideline worksheets, a tool designed to help contracting officers  determine allowable profit or fee for negotiation purposes, have not been  used consistently or included with information for the semi-annual report  as required. When guidelines have been used, it was not always clear  whether contracting officers considered any reduced risk to the contractor  during the undefinitized period because the required weighted guideline  worksheet documentation, as designed, does not show the calculation and  basis for any reduced profit or fee. Also, in instances when cost-plus- award-fee contracts were awarded and weighted guidelines were not  required, guidance was not clear as to how to consider and document any  reduced risk borne by the contractor during the undefinitized period.  DOD’s sustained attention on strengthening its reporting and insight into  the extent UCAs are used and ensuring UCA management is improved at  the component level is essential to minimizing the government’s risk of  paying unnecessary costs and excessive profit or fees.
section_title: Recommendations for Executive Action
paragraphs: We recommend the Secretary of Defense take the following two actions.
To mitigate the risks of paying increased costs when using an  undefinitized contract action, revise DFARS to provide specific guidance  on how to perform an assessment of any reduced cost risk for profit or fee  during the undefinitized period for cost-plus-award-fee UCAs.
To ensure DOD officials are able to gain insight into the risk assessment  that is required to be documented in the contract file and the basis for the  government’s profit or fee negotiation objective, redesign the weighted  guidelines worksheet to explicitly show the incurred cost calculations and  a narrative description of the reason for assigning a specific contract-type  risk value.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for review and comment. In  written comments, DOD concurred with our recommendations and cited  planned actions to address them. Specifically, DOD plans to revise either  the DFARS regulations or its corresponding Procedures, Guidance, and  Instruction to provide specific guidance on how to perform an assessment  of any reduced cost risk for profit or fee during the undefinitized period  for cost-plus-award-fee UCAs. In addition, the department plans to  redesign the weighted guidelines worksheet to explicitly identify the  incurred cost calculations and justification for the assigned contract-type  risk value. The draft report also contained a recommendation for DOD to  clarify that weighted guideline worksheets are to be submitted with the  semi-annual UCA report submission for all definitized UCAs which equal  or exceed $100 million. In its written comments, DOD informed us on  December 23, 2009 they revised the DFARS Procedure, Guidance, and  Instruction 217.7405 to require military departments and defense agencies  to submit, in conjunction with their semi-annual UCA reports, weighted  guideline worksheets for each definitized UCA with a value of $100 million  or more. Because of DOD’s action on this recommendation, we have  removed it from the report. In addition, DOD provided technical  comments, which we incorporated as appropriate. The department’s  comments are included in their entirety in appendix IV.
We are sending copies of this report to the Secretary of Defense; the  Secretaries of the Air Force, Army, and Navy; the Administrator of the  Office of Federal Procurement Policy; and interested congressional  committees. In addition, the report will be made available at no charge on  GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify and assess the actions the Department of Defense (DOD) has  taken to improve departmental insight into and oversight of undefinitized  contract actions (UCA), we interviewed senior DOD and service  acquisition policy officials as well as local officials at the selected  commands to identify new policies and guidance that would affect the  amount of insight senior DOD officials have. We reviewed the August 2008  Defense Procurement and Acquisition Policy memorandum along with the  updated October 2009 guidance, which provided additional Office of the  Secretary of Defense (OSD) policy and guidance for UCAs. In addition, we  reviewed the relevant sections of the Federal Acquisition Regulation and  the Defense Federal Acquisition Regulation Supplement (DFARS), as well  as service-level guidance pertaining to the use and management of UCAs.  We also reviewed relevant proposed changes to DFARS.
To determine the accuracy of UCA information available to senior  officials, we analyzed and compared information on UCAs from the  Federal Procurement Data System-Next Generation (FPDS-NG), DOD’s  newly implemented semi-annual UCA reports, and the local acquisition  command-generated UCA reports. We noted any differences in  information among the various sources and documented those contract  actions which did not appear in DOD’s semi-annual report, but were  recorded in FPDS-NG and the local reports. We also discussed these  discrepancies with DOD officials at both the local level and OSD level to  try to understand the underlying cause of these differences.
To identify whether DOD’s recent actions have resulted in local commands  meeting DOD’s UCA management standards with regard to documenting  the basis for negotiating the contractor profit or fee, definitization time  lines and obligation percentages, and the circumstances in which UCAs  are used, we conducted a contract file review using a randomized list of  UCAs from among six military commands, one joint service combatant  command, and a defense agency. In order to choose the locations of the  contract file reviews, we analyzed UCA information from FPDS-NG for  fiscal year 2008. We used these data to compile a random selection of  UCAs.
We selected the locations for our UCA file review based on two criteria.  First, we selected one contracting command from each of the three  military services (Air Force, Army, and Navy) and one defense agency  based on its placement within the top 50 percent of total-dollar value of  UCAs issued during fiscal year 2008 as recorded in the FPDS-NG system.  Second, for comparative purposes, we selected one contracting command  from each of the three military services (Air Force, Army, and Navy) and  one defense agency that fell outside of the top 50 percent of total-dollar  value of UCAs issued during fiscal year 2008 as recorded in the FPDS-NG  system. The contracting commands in this second group were then  selected using subjective criteria which included commands with  significant UCA use recommended by the services, the command’s  geographic location, and the command’s history of UCA use. The specific  contracting commands we selected for our review were:    Tank-automotive and Armaments Command Contracting Center,    Rock Island Contracting Center, Rock Island, Illinois    Naval Sea Systems Command, Washington, D.C.     Naval Inventory Control Point, Philadelphia, Pennsylvania  303rd Aeronautical Systems Wing (Reconnaissance Systems Wing),  Wright-Patterson Air Force Base, Ohio   516th Aeronautical Systems Wing (Mobility Systems Wing), Wright- Patterson Air Force Base, Ohio    Missile Defense Agency, Redstone Arsenal, Alabama     United States Special Operations Command, MacDill Air Force Base,  Using the data provided by FPDS-NG, we established a population of  undefinitized contract actions at each location. We identified all actions  that were either coded in FPDS-NG as letter contracts or other  undefinitized actions for fiscal year 2008 and the first 5 months of fiscal  year 2009. We also identified UCAs in FPDS-NG that referenced an  undefinitized action in the description of the requirement or reason for  modification fields. Using these methods, we derived a random selection  of contract actions to review. For some commands we verified whether or  not a contract action was a UCA through DOD’s Electronic Document  Access database, a Web-based system that provides secure online access,  storage, and retrieval of contracts and contract modifications to  authorized users throughout DOD. In addition, the selections were also  checked for accuracy against lists maintained in DOD’s semi-annual report  as well as those maintained at each local command. Over 200 potential  UCAs were selected for this review. From this selection, we expected to  collect data on approximately 10 to 12 at each command we visited for a  total of 80 to 96 UCAs. In the end, we collected data on 92 UCAs from  which we eliminated 9 and analyzed the remaining 83 UCAs valued at a  total of $6.1 billion. Observations made from our review cannot be  generalized to the entire population of undefinitized contract actions  issued by DOD.
We omitted UCAs for foreign military sales, purchases that did not exceed  the simplified acquisition threshold, special access programs, and initial  spares purchases, since these actions are not subject to compliance with  the definitization requirements we were reviewing. To assess the data  reliability of FPDS-NG for the purpose of selecting locations and  identifying UCA contracts, we verified UCA information in FPDS-NG with  other data systems, such as Electronic Data Access, local command UCA  reports, the semi-annual DOD reports, and with the information recorded  in the contract files. On the basis of this, we determined that the FPDS-NG  data were sufficiently reliable for the purposes of this report.
At each location, we reviewed contract document files and interviewed  responsible contracting officials. During these interviews we asked the  contracting officials to explain the rationale for using a UCA and the  circumstances which led to the decision, as well as the events and  circumstances involved with definitizing the contract action. We also  reviewed local command UCA management policies to determine whether  they were consistent with DOD’s management standards and whether  these policies differed from one command to another.
To determine whether contracting officers considered and documented  the basis for their determination of the government’s profit or fee  negotiation objective to reflect any reduced risk to the contractor for the  undefinitized period, we analyzed the contract file documents, including  the price negotiation documentation and weighted guidelines worksheets.  We used this information to determine whether the contracting officers  considered and adjusted the contract-type risk factor using incurred cost  and projected cost information.
To determine whether UCAs were meeting definitization timelines, we  recorded data from the contract files on when the contract actions were  awarded and subsequently definitized. We aggregated these data to  determine the number of contracts definitized in less than 180 days,  definitized over 180 days, and those still undefinitized over 180 days. To  determine how DOD’s policy to limit initial obligations to only the amount  required for the undefinitized period of work was being implemented, we  recorded initial obligation amounts from the contract files. We analyzed  these data to determine how many contract actions in our review were  obligated at or near the 50 percent limit at the time of award. Finally, to  determine how and when UCAs were being used, we reviewed the  contract files and analyzed the types of requirements being filled with  UCAs and the circumstances behind the decision to use this contracting  method. We also discussed each case with the contracting officers to  obtain their rationale for using a UCA.
We conducted this performance audit from March 2009 to January 2010 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 that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Undefinitized Contract Actions Reviewed
paragraphs: CPFF - Cost plus fixed fee  CPIF - Cost plus incentive fee  FFP - Firm fixed price  FPIF - Firm fixed price incentive fee  T&M - Time-and-Materials  The Logistics Civil Augmentation Program (LOGCAP) is a program of the U.S. Army to use civilian  contractors to provide the Army with an additional means to adeuately support the current and  programmed force by performing selected services in wartime and other operations.
section_title: Appendix III: Information for UCAs Omitted from DOD’s April 2009 Semi-Annual Report
paragraphs: Appendix III: Information for UCAs Omitted  from DOD’s April 2009 Semi-Annual Report Description of goods or services  Authorized Stockage List Parts and Frag  Kit for HMMWV  Electronic Jamming Systems to Protect  against Radio-Controlled IEDs  Evolve and Maintain the Aegis Combat  System at the Platform Level for the Aegis  CG-47 and DDG-51 Ship Classes  Multi-Mission Signal Processor, Ballistic  Missile Defense Equipment, and Aegis  Weapon System Hardware Upgrades  Procurement of Software, Maintenance,  Equipment, and Documentation Necessary  to Support the Ship Self Defense System  Ship Self Defense System Kits to Support  Aircraft Carrier and Amphibious Ship  Modernization Efforts.
section_title: Appendix IV: Comments from the Department of Defense
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the individual named above, key contributors to this report  were Penny Berrier Augustine, Assistant Director; Megan Hill; Rob Miller;  Brian Smith; J. Andrew Walker; Julia Kennon; John Krump; Ken Patton;  and Bob Swierczek.