DOD Contract Management: Overpayments Continue and Management and Accounting Issues Remain
Published: 2002-05-30T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: Since GAO reported on Department of Defense (DOD) contractor overpayments in 1994, additional reports have been issued highlighting billions of dollars of overpayments to Defense contractors. In December 2001, Congress amended Title 31 of the United States Code to require a federal agency with contracts totaling over $500 million in a fiscal year to have a cost-effective program for identifying payment errors and for recovering amounts erroneously paid to contractors. DOD contractors' responses to GAO's survey indicate that they have millions of dollars of overpayments on their records and that they are continuing to refund overpayments-- about $488 million in fiscal year 2001. DOD has taken actions to address problems with contractor overpayments. In addition to its contract audit functions and as part of a broad based program to assist the Defense Contract Management Agency (DCMA) and the Defense Finance and Accounting Service (DFAS), the Defense Contract Audit Agency (DCAA) is auditing at least 190 large DOD contractors to identify overpayments and ensure that contractors have adequate internal controls for prompt identification and reporting of overpayments. Although DOD has several initiatives to reduce overpayments, it still does not yet have basic administrative control over contractor debt and underpayments because its procedures and practices do not fully meet federal accounting standards and federal financial system requirements for the recording of accounts receivable and liabilities. As a result, DOD managers do not have important information for effective financial management, such as ensuring that contractor debt is promptly collected.

section_title: Letter
paragraphs: Since we reported on Department of Defense (DOD) contractor  overpayments in 1994, we have issued additional reports highlighting  billions of dollars of overpayments to Defense contractors.  As a result of  these and other reports, there has been increasing congressional interest in  recovering overpayments made to contractors.  In December 2001, this  interest led to the Congress amending Title 31 of the United States Code to  require a federal agency with contracts totaling over $500 million in a fiscal  year to have a cost-effective program for identifying payment errors and for  recovering amounts erroneously paid to contractors.
You requested that we update our previous reviews to determine whether  DOD’s problems with overpayments continue.  Specifically, we determined  (1) whether overpayments and underpayments to contractors have  continued, (2) what actions DOD has taken to address payment  discrepancies with contractors, and (3) whether the Defense Finance and  Accounting Service (DFAS) properly accounts for and collects amounts  due from contractors and accounts for amounts the government owes  contractors.
Amounts due the government from DOD contractors can arise from  (1) improper payments made because of progress payment liquidation  errors, contractor billing errors, and other processing errors and  (2) contract administration actions, such as item price adjustments,  changes in delivery schedules, and changes in the quantities ordered, all of  which can occur after valid payments have been made on a contract.  The  Federal Acquisition Regulation (FAR) refers to any amounts due the  government resulting from these actions as contractor debt or  overpayments.  However, not all of these overpayments could  appropriately be considered improper payments.  Specifically, those  resulting from contract administration actions were correct when made,  but due to subsequent changes, the excessive portion of the payment is to  be immediately pursued and promptly collected.
To accomplish our objectives, we (1) surveyed 183 DOD contractors, as  agreed to with your staff, similar to the approach we took in our 1995  report on contractor payment problems, (2) assessed DFAS data on  contractor refunds, (3) obtained the status of DOD corrective actions on  our previous recommendations, and (4) reviewed the management of and  accounting for overpayments and underpayments.  We focused our work at  DFAS Columbus, which was also the area of emphasis in prior audit reports  on DOD contractor payment problems, because it is the largest, centralized  DFAS disbursing activity—disbursing $78 billion of contract payments to  DOD contractors in fiscal year 2001.  To effectively use audit resources, the  Defense Contract Audit Agency (DCAA), as part of its contract audits at  high-risk contractors, tested the validity of selected contractor survey  responses for us.
Our scope and methodology are described in more detail in appendix I.   We  did not fully assess the reliability of the underlying data in the contractors’  responses or the data we obtained from DFAS Columbus.  We reviewed and  discussed DCAA’s work at selected contractor locations where it  performed follow-up work for us.  We requested comments on a draft of  this report from the Secretary of Defense or his designee.  We received  written comments from the Under Secretary of Defense Comptroller and  have reprinted the comments in this report.  We performed our work from  August 2001 through April 2002 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: DOD’s contract administration and payment processes involve numerous  organizations, including 23 DFAS offices; the contractors that perform  work and bill the government; the Defense Contract Management Agency  (DCMA), which administers most of DOD’s largest procurement contracts;  military components’ project and contracting offices; and DCAA, which  reviews contractors’ records, internal controls, and billing systems.  The  contract administration and payment processes have been described in our  prior reports.  If DCMA administers a contract, DFAS Columbus makes  payments using the Mechanization of Contract Administration Services  (MOCAS) system, and DOD refers to the disbursements as “contract pay.”   In fiscal year 2001, DFAS Columbus disbursed about $78 billion for over  300,000 contracts managed in MOCAS.  Contracts that DCMA does not  administer are paid using other systems at the DFAS offices. DOD refers to  these contract disbursements as “vendor pay.”  The Navy’s shipbuilding and  repair contracts are viewed as vendor pay because they are not managed by  DCMA or paid by DFAS Columbus using MOCAS.  In fiscal year 2001, DFAS  processed over 10 million vendor pay invoices, valued at over $59 billion.   Large contractors with numerous DOD contracts and locations can receive  both contract pay and vendor pay.  Effective April 1, 2001, DFAS contract  pay and vendor pay management were consolidated at DFAS Columbus.
Contract payments involve payments for the delivery of goods and services  and financing payments.  Financing payments include (1) progress  payments to cover a contractor’s costs as they are incurred during the  construction of facilities or the production of major weapons systems and  (2) performance-based payments that are based on the accomplishment of  particular events or milestones—typically used on production contracts.   When contractors deliver items and submit invoices for the delivered  items, DFAS Columbus deducts financing payments from the prices of the  delivered items, or “liquidates” the financing payments, based on a  predetermined liquidation rate.  Liquidation rates may be adjusted when  costs are higher or lower than projected.  Contract modifications can often  occur due to changes in liquidation rates, quantities ordered, and  production schedules.  These modifications and other contract  administration actions are managed by DCMA through coordination with  the contractors.
Our prior reports on contractor overpayment problems have highlighted  that (1) Defense contractors were refunding hundreds of millions of dollars  to DFAS Columbus each year, (2) DFAS Columbus had made overpayments  due to duplicate invoices and paid invoices without properly and  accurately recovering progress payments, (3) contract administration  actions had resulted in significant contractor debt or overpayments,  (4) DOD and contractors were not aggressively pursuing the timely  resolution of overpayments or underpayments when they were identified,  (5) DFAS Columbus did not have statistical information on the results of  contract reconciliation, and (6) DOD has ongoing actions to address  contractor payment problems.
DFAS Columbus can identify overpayments during contract reconciliation  or can be notified of an overpayment by a contractor or DCMA.  When  DFAS Columbus becomes aware of an overpayment, its Accounts  Receivable Branch is to issue an initial demand letter to the contractor and  works with the entitlement divisions, which process and pay invoices, to  collect amounts due the government by initiating an “offset” that reduces  the amount paid on invoices in process.  The Accounts Receivable Branch  also maintains the detailed records on the accounts receivable.  The  contract reconciliation function deals with contracts being closed out as  well as active contracts needing partial audits to resolve prior and current  payment problems, such as overpayments, underpayments, and invoice  deficiencies.  Since the mid-1990s, DFAS Columbus has contracted with a  major accounting firm to help reconcile and close out thousands of  contracts.  When an amount exceeding $600 is due to the government and  is not collected within 90 days, the debt is supposed to be transferred to  DFAS’s central Debt Management Office (DMO) for further collection  actions that can include referring debts to the Defense Criminal  Investigative Service or the U.S. Treasury’s centralized debt collection  programs.
Within the last 6 months, three key actions have been taken to address  governmentwide issues on improper payments.  As previously stated, in  December 2001, the Congress amended Title 31 of the United States Code  to require an agency with contracts totaling over $500 million to have a  cost-effective program for identifying payment errors and for recovering  amounts erroneously paid to contractors.  The resources for implementing  the recovery program can include the agency, other federal departments or  agencies, and the private sector.  As of March 2002, the Office of  Management and Budget had not issued implementing guidance on this  law.  Another key action was our issuance of an executive guide, in  October 2001, that discusses strategies and control activities, such as  recovery auditing, contract audits, and data mining, to identify and correct  improper payments.  The third action, in response to our recommendation,  was a change in the FAR, effective February 19, 2002, which added a  paragraph to the “prompt payment” clause of contracts that requires a  contractor to notify the contracting officer if the contractor becomes aware  of an overpayment and to request instructions for disposition of the  overpayment.
section_title: Overpayments and Underpayments Continue
paragraphs: Defense contractors’ responses to our survey indicated that they have  millions of dollars in overpayments and underpayments on their records,  and based on DFAS Columbus records, they are continuing to refund  overpayments.  According to the contractors, a primary reason for these  payment discrepancies was progress payment liquidation errors.   Contractors usually did not include contractor debt arising from contract  administration actions in the overpayments amounts they reported.   However, according to DFAS Columbus records, contract administration  actions were the primary reason for the $488 million that contractors  refunded in fiscal year 2001.  Contractor refunds are likely to continue  because of DOD’s complex contract management and payment processes.   Also, even when payment discrepancies are identified, they are not always  promptly resolved.
subsections: section_title: Contractors Reported Overpayments and Underpayments but Extent of Them Is Uncertain
paragraphs: Based on information from our surveys, business units of 67 contractors  reported that they had about $62 million of overpayments and about $176 million of underpayments in their records as of September or October  2001.  We sent surveys to 497 business units of 183 contractors, and at least  249 of the business units of 120 contractors responded.  The business units  of the remaining 53 contractors that responded did not report any  overpayments or underpayments in their records.  Appendix II provides the  details of our survey results and appendix III contains the survey.
As shown in table 1, which summarizes the results of the survey, 34 of the  largest contractors did not respond to the survey.  The 10 largest  contractors—according to their reported annual billings—that responded  to our survey reported about 86 percent of the total overpayments and 78  percent of the total underpayments reported by all of the contractors.  One  Boeing contract alone accounted for $27 million of underpayments due to  contract funding issues.  Contractors cited DFAS progress payment  liquidation errors as a primary reason for the overpayments and  underpayments.  Contractors usually did not include contractor debt  arising from contract administration actions in the overpayment amounts  they reported.  However, as discussed later in this report, contract  administration actions are the primary source of contractor refunds.  Most  of the contractors reported that demand letters had not been issued for the  overpayments in their records but that they planned to return about 29  percent of the overpayments by check or offset.  For the remaining 71  percent of the overpayments, contractors did not indicate any planned  actions.  According to DCAA, it plans to ensure that all of the overpayments  are properly handled.
These survey results cannot be used to determine the extent of  overpayments and underpayments in contractor records at a point in time.   Specifically, the results cannot be projected to a universe of DOD  contractors even if all contractors had reported because the surveyed  contractors were not randomly selected.  Further, our analysis of  contractors’ responses showed inaccuracies in their reporting.  For  example, at least 3 contractors included information on contract payments  to federal agencies other than DOD and even to nonfederal entities.  At  least 1 contractor reported overpayments that had been refunded the  government and, therefore, should not have been reported because they  were not outstanding overpayments.  We also observed that contractors  were not consistent in reporting actions taken on overpayments.  Out of at  least 588 reported overpayments, contractors indicated in their responses  that they had notified DOD of 251 overpayments.  At the same time,  contractors reported that they had not notified DOD of 236 overpayments.   For the remaining 101 overpayments, contractors did not provide any  indication one way or the other.
Based on factors such as contractor size, geographic location, and amount  of reported payment discrepancies, we selected, in coordination with  DCAA, 27 contractor locations involving 24 companies to test the validity  of contractors’ responses.  The selected business units reported  $58 million, or 94 percent, of the total reported overpayments and  $126 million, or 71 percent, of the total reported underpayments.  We  provided our survey results to DCAA for these business units, and its  auditors found that 10 of the contractor locations underreported  overpayments by $57.2 million and underreported underpayments by $58.0 million.  DCAA stated that the remaining 17 locations had reported  accurately.  According to DCAA, 5 contractors are primarily responsible for  these large differences and most of the differences are due to contractors’  billing weaknesses and erroneous reporting of unpaid invoices.  Appendix  IV summarizes the DCAA results.  At these same 10 contractor locations,  DCAA also found that (1) differences in application of liquidation rates and  weaknesses in contractor billing systems were primary reasons for both  overpayments and underpayments and (2) unpaid invoices over 30 days old  were another primary reason for underpayments.  Such results  demonstrate the need for recovery audit programs, such as DCAA’s  contractor overpayment and underpayment audits to identify payment  errors, recover erroneous payments, and identify payments due to the  contractor.
During its follow-up to our surveys, DCAA also found that contractors are  reluctant to return overpayments on a contract when underpayments on  the same contract result in a net underpaid status.  For example, 1 of the  largest DOD contractor’s records showed a contract with millions of  dollars of overpayments and underpayments that resulted in a $1.8 million  net underpaid status.  According to the contractor’s records, some of these  overpayments had occurred in 1997 and had not been resolved.  As of  September 30, 2001, the contract was in reconciliation, and, as of February  2002, these payment discrepancies had not been resolved.   According to  DCAA officials, they decided, after consulting with DFAS, that settlement  of any overpayments and underpayments would be deferred until contract  reconciliation is complete and the final contract amount is settled.   DCAA  officials stated that the contractor had basic internal controls for  overpayments, and DCAA is assisting the reconciliation through its project  on audits of contractor-prepared reconciliations.
In responses to our survey, contractors also included overpayments and  underpayments associated with contracts paid through vendor pay.  For  example, at least 28 contractors, including 3 major shipbuilding and ship  repair contractors, reported overpayments and underpayments associated  with vendor pay.  These 3 major shipbuilding contractors, alone, reported  overpayments of almost $9.4 million and underpayments of about $0.5 million.  According to a response from 1 shipbuilding contractor,  overpayments and underpayments that occur on a contract are not  resolved until contract closeout, which could be several years later.   Another vendor pay contractor reported about $12 million of  underpayments primarily due to underpaid invoices.  For contractors  indicating receipt of vendor pay, we could not accurately eliminate the  vendor pay discrepancies from the total amounts reported by the  contractors because (1) not all contractors provided sufficient and  consistent detailed information and (2) we did not validate all of the  responses.  Nevertheless, we asked DFAS Columbus to compare its records  to the contractor responses for 106 contracts, and DFAS Columbus told us  it did not make the payments on 42 of the contracts because they were  vendor payments.
Although our prior reports placed more emphasis on contract pay than  vendor pay, recent DOD Office of Inspector General (IG) audits also have  identified weak internal controls in vendor pay systems and overpayments  to contractors.  For example, in October 2001 and March 2002, the DOD IG  reported that the Computerized Accounts Payable System, a vendor pay  system used by DFAS Kansas City and DFAS Indianapolis, did not have  proper internal controls to detect and prevent improper payments, and that  DFAS had made at least $13 million of duplicate payments.  As a result,  recovery audits and recovery activities that are now required by 31 U.S.C.  3561 could be used to improve the management of contract payments  associated with both “contract pay” and “vendor pay.”
section_title: Contractor Refunds Primarily due to Contract Administration Actions but Improper Payments Also Occurred
paragraphs: From fiscal years 1994 through 2001, DOD contractors have refunded over  $6.7 billion to DFAS Columbus.  However, as shown in table 2, DFAS  Columbus records showed that contractor refunds dropped to about  $488 million in fiscal year 2001 from $901 million in fiscal year 2000.  Of the  $488 million in refunds, DFAS Columbus collected $449 million by  contractors submitting checks and the remaining $39 million through  offsets.  However, the level of refunds could be greater because contracting  officers often collect funds from the contractors by offsets that are agreed  to during contract negotiations, and DFAS might not be notified.  Since  DFAS keeps track of only those offsets it processes, its records would not  have the number of refunds due to these other offsets handled directly by  DCMA and the contractors.
DFAS Columbus records showed that about $360 million, or 80 percent of  the $449 million in checks sent to the government in fiscal year 2001, was  due to DCMA contract administration actions and the remaining  $89 million, or 20 percent, was due to payment problems.  This is consistent  with what we have previously reported.  For example, in February 2001,  we reported that 77 percent of $351 million in excess payments was  primarily related to contract administration actions, and, in July 1999, we  reported that about 78 percent of the contractor refunds was due to  contract administration and other actions outside of DFAS’s control.
In tracking contractor refunds due to payment problems, DFAS Columbus  distinguishes between refunds with issued demand letters and refunds  without demand letters—or unsolicited refunds.  According to DFAS  Columbus records, refunds due to payment problems were caused  primarily by DFAS processing errors, including improper progress payment  liquidations.  We reviewed 12 unsolicited contractor refunds valued at  about $24.2 million, or 83 percent of the total $29.2 million in unsolicited  contractor refunds during the months of October 2000, March 2001, and  August 2001.  Our review revealed that 6 of the overpayments were due to  progress payment liquidation errors and 6 were duplicate payments caused  by contractor billing errors along with DFAS weaknesses in detecting and  avoiding overpaying in these situations.  Some examples follow.
In September 2000, Textron Systems refunded $8,194,856 because of a  DFAS error in liquidating progress payments.  In August 2000, Textron  billed a net amount of $2,739,301, based on contract delivery price of  $10, 957,205, of which $8,217,904 should have been liquidated.  However,  DFAS paid $10,934,158 in August 2000.
In July 2001, Boeing refunded $5,527,922 due to the incorrect liquidation  of progress payments on two invoices.  DFAS overpaid one invoice by  $2,077,922 and another invoice by $3,450,000 because it used an  incorrect liquidation rate.
In March 2001, Northrup Grumman refunded $1,855,788 for a duplicate  payment.  DFAS first paid this amount in September 1999 for an invoice  submitted in August 1999, and it paid the same amount again in January  2000.  DFAS documentation did not indicate what allowed the invoice to  be processed twice.  The unsolicited refund was about 15 months after  the overpayment.
In August 2001, the Eagle Support Services Corporation refunded  $958,339 because it had received two payments for the same invoice.   The contractor submitted an electronic invoice on June 28, 2001, which  DFAS paid on July 10, 2001.  However, the contractor had earlier  submitted a hard copy invoice on June 11, 2001, which DFAS paid on  July 18, 2001.  DFAS processed each invoice because the invoices had  different shipment numbers.
DOD contract management, payment, and accounting processes are  complex and remain at risk of contractor debt arising from contract  administration actions and overpayments caused by payment and billing  errors.  We reported in January 1998 that DOD’s contract management  and payment process involves numerous organizations that share data  using both manual and automated means that are not integrated.  Since  then, DOD has implemented more electronic sharing of contract  information and invoicing to reduce manual processes.  However, in  December 2000 and April 2001, the DOD IG reported that additional  controls were needed in electronic document sharing and interchange to  ensure security of the data.  In addition, DFAS personnel told us that  contract and invoicing information still must be manually entered into  MOCAS.  For example, contracts with special payment instructions need to  be processed manually because they are an exception to the MOCAS  automatic payment process.
One effect of the overall complex process is that DFAS Columbus can  sometimes issue demand letters that it later cancels due to subsequent  contractor, contracting officer, or DFAS actions to correct or otherwise  resolve the basis for the debt.  In fiscal year 2001, DFAS Columbus canceled  $37.5 million of demand letters.  A few examples follow.
Lucent Technologies almost received a duplicate payment of $1,397,200  when the contractor submitted invoices to DFAS Omaha in October  2000 and DFAS Columbus in December 2000 for the same amount.   DFAS Omaha, the originally designated contract payment office, paid  the first invoice.  Subsequently, DFAS Columbus became the payment  office, and the contractor resubmitted the invoice to DFAS Columbus,  which initiated payment.  However, DFAS Columbus identified the  duplicate payment, issued a demand letter, and then canceled the  demand letter when it stopped the electronic funds transfer payment  before it was processed by the contractor’s bank.
In April 2001, DFAS issued a demand to Lockheed Martin for a  $2,755,244 debt that occurred in September 1997 when a contracting  officer issued a contract modification reducing the contract amount.  An  April 1998 audit of the contract identified that the wrong accounting line  was cited in this modification, which created a debt.  Even though the  contracting officer was notified of the mistake at that time, no action  was taken until DFAS issued the demand letter.  In May 2001, a  contracting officer prepared another contract modification to cite the  correct accounting line, which eliminated the debt. DFAS then canceled  the demand.
A demand to Litton Systems Advanced, Inc. for a $2,124,022  overpayment was canceled when the contractor sent an invoice with the  amount reduced for the overpayment.
The entire contract management and payment process, which has been  described in our prior reports, is further complicated by how progress  payments are accounted for in contract records, a method that can  ultimately create (1) differences in contractor and DFAS Columbus records  and (2) future payment and contract reconciliation problems.  In April  1997, we reported that contract payment problems can occur when DFAS  Columbus liquidates progress payments because of payment allocations to  an accounting classification reference number on a contract that have little  relationship to the work performed.  If payment allocations must be made  using a different process than the MOCAS automated process, especially  when contracts have special payment instructions, the risk of error  increases.  As mentioned earlier in this report, contractors responded that  progress pay liquidation errors were a major reason for overpayments.   This is consistent with our October 1995 report indicating that according  to DFAS Columbus analysis the most frequent cause of an overpayment  was the incorrect recovery of progress payments.  DFAS Columbus data on  fiscal year 2001 overpayments showed that progress payment liquidation  problems were one cause of the overpayments, but that the primary  reasons were contract modification and invoice processing errors.
section_title: Overpayments Likely to Be Identified by Contract Reconciliation
paragraphs: Even though contractors or contracting officers identify many  overpayments, the DFAS Columbus contract reconciliation function is also  likely to identify many overpayments.  Of the 2,512 demand letters issued  by DFAS Columbus in fiscal year 2001, its records showed that contract  reconciliation had identified overpayments associated with 1,115 demand  letters, valued at about $83.4 million.  Its records also showed that the  contractor or a contracting officer had initiated the remaining 1,397  demand letters, valued at about $43.8 million.  The contract reconciliation  process is intended to identify and correct imbalances between (1) the  contractor’s invoiced amounts and recorded amounts paid in MOCAS,  (2) contract obligation and disbursement balances in DFAS accounting  records and MOCAS, and (3) the contract obligation amount and MOCAS  obligation and disbursement amounts.  The contract reconciliation  function at DFAS Columbus deals not only with contracts that are  candidates for closure but also those contracts needing partial audits to  resolve prior payment problems and correct deficiencies so that DFAS  Columbus can pay current invoices.
As shown in table 3, at fiscal year-end, the number of contracts waiting for  reconciliation had averaged about 2,300 for the past 7 years.  However,  during the year, the number of contracts going through reconciliation can  be much greater.  For example, in fiscal year 2001, DFAS Columbus  processed over 8,100 contracts through reconciliation.  As of September 30,  2001, DFAS Columbus had 3,249 contracts waiting for some level of  reconciliation, a higher level than in the prior 6 years.  Based on prior year  results, contract reconciliation will likely identify millions of dollar of  overpayments needing resolution.
As shown in table 4, of the 3,249 contracts awaiting reconciliation, as of  September 30, 2001, 575 had been in this status for over 360 days, while  1,523 of the contracts had been awaiting reconciliation for 90 days or less.   This is fewer than what we reported in July 1999 when over 900 of 2,453  contracts had been in reconciliation for over a year.  Included in the  contracts awaiting reconciliation are contracts for some of the largest  contractors included in our survey.  For example, 3 of the largest DOD  contractors that responded to our survey—Lockheed Martin, Raytheon,  and Boeing—had 205, 191, and 119 contracts, respectively, waiting for  reconciliation as of August 31, 2001.  In addition, 1 of the large contractors  that did not respond to our survey had 56 contracts in reconciliation at  DFAS Columbus.  As noted later in this report, DCAA is auditing contractor- prepared reconciliations at these large contractors, and DFAS uses the  audit results in completing the contract closeout process.
The error-prone nature of the contract management and payment process  is illustrated by over 15,000 contracts in fiscal years 2000 and 2001  combined that have gone through some level of reconciliation at DFAS  Columbus.  Contract provisions often change, affecting deliveries, progress  payment liquidation rates, and indirect cost rates, which creates excess  payments after invoices have been paid.  As we reported in January 1998,  MOCAS records may differ from the accounting office records because  contract information, such as modifications, may not have been properly  and consistently processed by all locations.  DFAS and contractors can  process invoices in different sequences resulting in discrepancies in how  progress payments are liquidated.  As a result, many contracts can require  some type of reconciliation more than once during their life.   DFAS  Columbus contract reconciliation results for fiscal year 2001 indicated that  the majority of payment problems identified during research were due to  payment system errors and erroneous processing of contract  modifications.
section_title: Overpayments Are Not Always Recovered Promptly
paragraphs: We also have previously reported that overpayments are not always  recovered promptly.  As mentioned in prior reports, such delays can cost  the government in lost interest charges and use of the funds.
According to DFAS Columbus records, even though it had collected almost  $85.7 million in fiscal year 2001, problems remain with the timely recovery  of overpayments.  For example, of the 546 overpayments, including  voluntary contractor refunds, for which DFAS Columbus had recorded in  its records both the check receipt date and the date the overpayment was  identified, only 75 were refunded within 30 days, with 294 being refunded  after 90 days.  Moreover, 360 additional refunds did not have the dates  necessary to determine the timeliness.  Further, as of August 2001, DFAS  Columbus accounts receivable records showed that about $26 million out  of $54.8 million total receivables, or 47 percent, had been outstanding for  over 90 days.  Of those outstanding for over 90 days, about $18.8 million  had not been resolved for over a year because contractors had disputed  these receivables—also discussed later in this report.  We reviewed 11 files  for these old accounts receivable and some examples follow.
In November 1997, DFAS Columbus issued a demand letter to  McDonnell Douglas for $2,294,454.  The contractor disputed the demand  and, in March 1998, the contract was submitted to audit.  As a result of  the audit, the demand was reduced to $27,904.  However, DFAS did not  issue a demand for the reduced amount.   In May 2000, DFAS decided to  update the audit on the contract.  As of December 2001, over a year   after the second audit, the recorded receivable was still $2,294,454  because the DFAS Columbus Accounts Receivable Branch had not been  informed of the audit results.
In August 1996, DFAS Columbus issued a demand letter to Hughes  Aircraft for $2,032,113.  DFAS subsequently issued a second demand  letter in September 1996. The contractor disputed the demand but did  not provide sufficient detail to support the dispute so that an audit could  resolve the dispute.  In January 1997, DFAS Columbus asked the  contractor for additional information, and the contractor responded that  the problem might be with several different progress payment and  liquidation rates on the contract.  As of December 2001, the account  receivable file showed that no action had been taken.
In September 1999, DFAS Columbus issued a demand letter for  $3,886,567 to Raytheon because of a duplicate payment that had  occurred in 1995.  The contractor disputed the demand and provided  evidence that it had sent a check for $3,137,200 for the debt in August  1995.  However, according to DFAS Columbus, this left a balance due of  $749,369.  In November 1999, DFAS issued a demand letter for this new  balance due, and Raytheon disputed the remaining amount of the debt.   As of December 2001, the $749,369 demand had not been resolved.
After we shared our concerns about aged disputes with DCAA, it attempted  to resolve these receivables as part of its recovery audit effort.  As of this  report’s date, DCAA is still in the process of examining contractor data to  determine the validity of the debt.  DFAS inattention to resolving these  disputed receivables and determining their validity could result in  potentially overstated accounts receivable balances.  Further, contract  closeout problems, which we reported on in July 2001, can be  exacerbated when payment discrepancies are not promptly resolved.  We  reported that DFAS had made $615 million of illegal and improper  adjustments to closed appropriation accounts, and these adjustments  included $9.9 million of overpayments that had been improperly  redistributed to open appropriation accounts after the original accounts  were closed.
section_title: DOD Initiatives to Manage and Reduce Overpayments
paragraphs: In response to our prior recommendations, DOD has taken both short-term  actions and established long-term initiatives to address long-standing  contract payment problems that result in overpayments and  underpayments.  Some of the short-term actions appear to be having some  positive results.  However, the success of the longer-term initiatives, which  are more critical to resolving underlying problems in the contract payment  systems and processes, is uncertain.
In the short term, DFAS, DCMA, and DCAA, in coordination with the DOD  Comptroller, have initiatives to (1) audit major DOD contractors to identify  overpayments and evaluate their internal controls for identifying and  reporting overpayments and (2) reconcile and close out old contracts.   Specifically, in August 2001, DCAA agreed to assist DFAS in addressing  excess payments to contractors, debt collection, invoice payment  instructions, contract reconciliation, and professional development.   Subsequently, in November 2001, DCAA began audits on overpayments and  related contractor internal controls for identifying and promptly reporting  overpayments.  Its plan is to complete audits at 190 contractors in fiscal  year 2002.  As of March 2002, the number of contractors to be audited had  increased to 195.  As part of this effort, DCAA is also examining some of the  aged (over 90 days old) accounts receivable in dispute according to DFAS  Columbus records.
As of January 2002, DCAA had completed audits of overpayments at 46  contractors and identified over $22.7 million of overpayments.  From  additional special audits of progress payments, DCAA identified about  another $27.3 million of overpayments, most of which were promptly  resolved.  These results illustrate what can be accomplished from  programs to identify payment errors and recover erroneous payments.   DCAA officials stated that they would continue overpayment audits until  contractors’ controls ensure prompt identification and reporting of  overpayments to DOD.  While DCAA efforts could be viewed as a type of  recovery activity, DOD does not have an overall recovery audit program  that includes all types of contract payments.  DCAA also has been involved  with the contract reconciliation of old contracts at large contractors to  facilitate contract closeout and the transition to the new systems intended  to replace MOCAS.
DCMA, in response to DOD overpayment issues, has issued additional  guidance to its contracting officers.  For example, in April 2000 and  November 2001, it issued memorandums on the identification and recovery  of overpayments and excess progress payments, respectively.  These  memorandums emphasized the need for contracting officers to be alert to  situations in which contractor debt is incurred and to immediately issue  demand letters.  Further, in a response to our February 2001  recommendation, DCMA stated that it is using DFAS Columbus  information on refunds to identify and evaluate possible systemic contract  administration problem areas.
DFAS Columbus, in response to prior reported deficiencies, has  implemented practices to provide better oversight of the reasons for  overpayments and the results from contract reconciliation.  For example, it  established a central-tracking database to categorize reasons for contractor  refunds.  This database identifies different types of possible DFAS  Columbus errors and the types of contract administration actions creating  the contractor debt.  In addition, DFAS Columbus has been tracking  contract reconciliation results to identify reasons for the payment  problems identified during reconciliation.  Although DFAS Columbus  personnel easily provided us summary and detailed information from these  databases, the information had not been summarized and incorporated into  performance management indicators.
An additional DFAS Columbus effort, initiated in May 2000, is to identify  and monitor the potential for duplicate payments.  Monthly reports,  including one on causes of duplicate payments, are prepared for each of  the three entitlement sections at DFAS Columbus and summarized for  management review.  According to the duplicate payment report for the  first quarter of fiscal year 2002, DFAS Columbus had avoided making about  $181.7 million of duplicate payments that had been identified as a result of  the new procedures.  DFAS Columbus has also issued several operating  procedures to improve payment processing.
The success of DOD’s implementation of new systems to address the root  causes of contract administration and payment problems is uncertain.   DOD is planning on full implementation of the Standard Procurement  System (SPS) and the Defense Procurement Payment System (DPPS) to  improve contract management and payment processes by replacing  MOCAS, which has been used since 1968.  SPS is intended to be DOD’s  single, standard system to support contracting functions and interfacing  with financial management functions, such as payment processing.   However, in July 2001, we reported that (1) full implementation of SPS  has been delayed 3-1/2 years, (2) DOD had not justified the continued  investment in SPS, (3) SPS modules to manage the large weapons systems  procurements had not yet been implemented, and (4) the DOD IG had  found that the system lacked critical functionality and users were generally  dissatisfied with the system.
DPPS is intended to be DOD’s standard contract payment system.   However, DPPS implementation at DFAS Columbus has been delayed over  2 years—from August 2001 to October 2003.  According to DPPS program  officials, the implementation of DPPS is not dependent on the full  implementation of SPS.  Nevertheless, the DOD IG concluded in its  September 2001 report that DPPS would not fully eliminate disbursement  and contract accounting problems because DFAS, in order to comply with  special payment instructions, will need to continue making manual  payments for which there is a greater risk of errors being made.
section_title: Management and Accounting Control Issues Remain
paragraphs: Despite DOD’s initiatives and accomplishments in addressing overpayment  problems, DOD does not yet have fundamental control over contractor  debt and underpayments because its procedures and practices do not fully  meet federal accounting standards, federal financial system requirements,  and its own accounting policy.  Further, DOD managers do not have the  performance measures needed to assess compliance with policies and  procedures and the extent of overpayment and underpayment problems at  a point in time.  Specific examples follow.
Federal accounting standards, federal financial system requirements,  and DOD’s accounting policy call for the prompt and accurate recording  of accounts receivable upon completion of the event that entitles  collection of the amount.  These standards and requirements specify  that an amount be estimated if the exact amount is unknown at the time  the claim is established.  However, contractor debt arising from contract  administration actions usually is not recorded as an accounts receivable  when the debt is established in the contract or its modification—the  event that entitles DOD to collect an amount from the contractor.   Instead, the DFAS Columbus Accounts Receivable Branch records an  account receivable after it has been notified of the debt and it or DCMA  has issued a demand letter.  Contractors often refund amounts from  contract administration actions, as well as from payment and billing  errors, without DCMA or DFAS Columbus issuing demand letters.   Together, these factors would tend to mask the extent of overpayment  problems and result in overpayments not being known or promptly  addressed.
Federal financial system requirements and DOD accounting policy also  stipulate that accounts receivable are to be aged for monitoring and  controlling collection.  DOD accounting policy specifies that accounts  receivable are to be aged into 10 groups, ranging from 1 to 30 days  delinquent to over 3 years delinquent.  Even though DFAS Columbus  tracks the number of accounts receivable in dispute, its Accounts  Receivable Branch, which collects overpayments and maintains the  detailed accounting records to support collection activities, does not  routinely age accounts receivable according to DOD accounting policy  to help manage and monitor the timely resolution of the accounts.
DOD policies require that a receivable be recorded within the same  month discovered in order to be recorded timely and that contractor  debts be promptly collected.  However, DOD does not have adequate  performance measures on the timeliness of collection efforts for  contractor debt once it has been identified.
Federal accounting standards also specify that accounts payable and  other liabilities will be recorded when the potential for the liability is  first recognized.  Such liabilities include estimates of work completed  for facilities and equipment or requests for progress payments for items  constructed or manufactured to contract specifications.  DFAS  Columbus does not maintain detailed records on underpayment  liabilities or accounts payable after the contractors notify it of the  underpayments, even though the underpayments could be for millions  of dollars and take months to resolve.
As a result, DOD managers do not have appropriate management control of  accounts receivable and accounts payable and other liabilities stemming  from its contract administration and payment processes.  Aside from the  high risk that these accounting records could be misstated at the end of an  accounting period, failure to instill these disciplines magnifies the level of  effort required to later identify and collect these amounts.
subsections: section_title: Contract Administration Events That Create an Account Receivable Are Not Recorded When They Occur
paragraphs: DFAS Columbus does not usually record an accounts receivable when the  debt is first created by a contract administration action.  Instead, it only  tracks the checks from contractors when they are received and the offsets  of contractor invoices after they have been completed.  DOD policies and  procedures require the contracting officer to issue a demand letter to a  contractor when an overpayment is identified and to send a copy of the  demand letter to DFAS Columbus where it is recorded as an accounts  receivable.  When contract administration actions are implemented  through contract modifications or other signed agreements, these  documents recognize that a repayment will result from the action and the  amount owed is identified or can be readily calculated.  However, DCMA  and DFAS do not always issue demand letters for contractor debt based on  contract administration actions because the debt could be resolved  promptly and issuing a demand letter would involve additional effort.
While federal accounting standards require that such events be recognized  as accounts receivable, DFAS cannot recognize the receivable unless it is  promptly notified of contractor debt.
In fiscal year 2001, DFAS Columbus records showed that contractors  refunded about $360 million due to contract administration actions, but the  Accounts Receivable Branch only recorded about $127 million of accounts  receivable based on issued demand letters that included duplicate  payments and other payment errors.  This comparison shows that  established procedures are not always followed.  Additionally, we  reported in February 2001 that contracting officers do not consistently  issue demands for payment when contract changes are negotiated even  though the amount usually is known or can be calculated.  As a result,  significant amounts of contactor debt arising from contract administration  actions are not being recorded when they first occur as accounts receivable  for financial management control and reporting.  A further result, discussed  later, is that DOD cannot fully measure the timeliness of contractor debt  collection so that problems can be identified and effective solutions  implemented prior to final contract reconciliation.
Effective February 19, 2002, the FAR was amended to add a paragraph to  the recommended “prompt payment” clauses of contracts requiring the  contractor to notify the contracting officer if it becomes aware of a  duplicate payment or an overpayment on an invoice.  By its terms,  however, this requirement does not apply to overpayments due to errors in  financing payments or contract administration actions.  With few  exceptions, the contracting officer should include this clause in contracts.   A similar revision to the FAR contract financing clauses would ensure that  all contractor debt would be promptly identified, reported, and collected.   The Office of Federal Procurement Policy is currently reviewing for  approval and publication revisions to the FAR financing clauses that will  require contractors to notify the government if they become aware of  overpayments arising from financing payments.  Adequate implementation  of these procedures along with prompt contracting officer action could  facilitate the proper and complete recording of accounts receivable by  DFAS.
section_title: Accounts Receivable Were Not Aged
paragraphs: DFAS Columbus is a primary DFAS activity involved in collecting  contractor debt and maintaining the detailed accounting records to support  collection activities.  However, its Accounts Receivable Branch did not  routinely age its accounts receivable records, stemming from DOD’s  contract management and payment process, as required by DOD’s  accounting policy.  The DFAS “Concept of Operations for Recording and  Reporting Receivables Due From the Public” effectively exempts DFAS  Columbus from this requirement because all receivables that are not  collected in 90 days are supposed to be sent to DMO.  DFAS Columbus  procedures also specify that any debt in excess of $600 that has not been  resolved after two demand letters be transferred to DMO.  However, DFAS  Columbus personnel told us that when a contractor disputes the first or  second demand letter the debt would not normally be transferred to DMO  because the validity of the debt has not been established.  Even though  DFAS Columbus maintained information on the number of accounts  receivable in dispute each month, the disputed amounts were not routinely  aged.  As we discussed earlier, about 47 percent of the receivables were  over 90 days old.  As of August 2001, over $23.5 million of the $35.1 million  of demand letters in dispute had been outstanding for months, even years,  and, therefore, had not been transferred to DMO.
As a result of the policy exemption and DFAS Columbus not aging its  accounts receivable, DFAS did not have proper control over receivables  due from contractors.  In fiscal year 2001, DFAS Columbus issued demand  letters for about $127 million.  However, as shown in table 5, the amounts in  dispute averaged about $33.8 million, or almost 60 percent of the total  monthly receivables, during the year.
In May 2001 and June 2001, the DOD IG and we reported that even when  debts were transferred to DMO, collection of the debts was not being  effectively and proactively pursued.  In its comments to our report, DOD  indicated that it took immediate actions to monitor and improve debt  collection in DMO.  However, we did not assess the status and effectiveness  of these actions for this report—we limited our review to those accounts  receivable that had not been transferred to DMO as of August 2001.
section_title: Lack of Performance Measures on Timeliness of Collection Efforts
paragraphs: DOD also does not have adequate performance measures to monitor how  timely contractor debt is collected once it is identified.  For example,  DCMA does not include the timeliness of contracting officers’ actions on  overpayments as a key performance measure, and DCMA officials stated  that statistics on demand letters issued by contracting officers are not kept.   FAR and DCMA’s procedures require the contracting officer to take prompt  action on contractor debt.  However, the contracting officer might not  always take immediate action to collect the overpayment due a large  workload or oversight.  For example, during its follow-up at 1 major  contractor, DCAA found that the contractor had reported to its contracting  officer a $59,346 overpayment in June 1998 and a $144,504 overpayment in  March 2001.  The contractor assumed that these amounts would be  collected by an offset, but DOD did not take actions to collect these  amounts until after our survey.  In January 2002, the $144,504 was collected  through offsets and a refund check.  In December 2001, the $59,346 had  only been partially collect through offset and $21,913 was still outstanding  at the time of DCAA’s review in February 2002.  In addition, the DFAS  Columbus refund records lack key data, such as dates of contract  modifications or credit memorandums, needed to measure the timeliness  of collection for most refunds of contractor debt arising from contract  administration actions.  Our review of the documentation for 15 contract  administration refunds, valued at $62.3 million, found that (1) 5 of them did  not have enough information to determine whether the funds were  collected timely, (2) 2 were collected within 30 days from the time an  amount due the government was identified, and (3) 8 were collected in over  30 days—1 in over 90 days and another in over a year.
Even for the offsets that DFAS Columbus processes, it tracks them  separately from the other refunds, does not measure the timeliness of  collection, or does not always identify the reason for the overpayment.  Our  review of 15 offsets from January, February, and June 2001 found that 12 of  them took over 30 days to fully collect the debt and reasons for the debt  were not always identified.  Two examples follow.
On February 21, 2001, United Technologies agreed to DFAS Columbus  taking offsets to collect $8,607,568 of overpayments.  Three offsets were  taken to collect the full amount—the initial offset occurred on February  24, 2001, and the third offset occurred on March 23, 2001.  The recording  of these offsets in the contract accounting records was completed on  April 6, 2001, or 44 days later.  DFAS Columbus records also did not  indicate a reason for the overpayment.
In November 1999, Viasat, Inc. first contacted DCMA about $2,605,889 it  owed the government due to a change in contract terms.  The contractor  contacted DCMA again in October 2000 to discuss an offset.  DCMA  provided DFAS Columbus a credit voucher on November 13, 2000, and  DFAS processed the voucher on December 18, 2000.  However, DFAS  Columbus did not complete the offset until January 29, 2001—97 days  after the contractor expressed interest in an offset.  DFAS Columbus  records did not indicate a reason for the time involved to complete the  offset.
In its contractor overpayment audits, DCAA also is examining contractor  records on refunds and offsets.  According to DCAA, preliminary results  from its contractor audits indicate that (1) not all amounts due the  government are promptly returned and (2) contractor controls over offsets  are weak because the contractors lack supporting documentation and  DFAS is not always notified of offsets that occur.  As a result, contractor  and DFAS accounting records may not agree for certain contracts, and  DOD lacks complete information on the amount of refunds being collected.
section_title: Inadequate Monitoring of Underpayments
paragraphs: DOD also is unable to fully measure and monitor underpayments and the  timeliness of their resolution.  Even though DFAS Columbus maintains data  on unpaid contractor invoices, it could not provide us any other  information on contractor underpayments.  According to DFAS Columbus  officials, they do not maintain detailed records on underpayments because  contractors usually notify them promptly about underpayments, which is  not always the case with overpayments.  Yet, the contractors that  responded to our survey indicated that they had over $176 million of  underpayments in their records at the end of fiscal year 2001.  According to  federal accounting standards and financial system requirements, such  information on underpayments should be routinely recorded and  maintained in accounts payable or other liability records.  In February  2001, we reported that for the 39 contractors we reviewed, all of the fiscal  year 1999 unresolved underpayments had been unresolved for over 180  days.  Without complete detailed accounting records on payables, DFAS  Columbus is unable to adequately monitor the resolution of  underpayments, and the amount of payables reported by DFAS Columbus  could be understated at the end of an accounting period.   Further, any  problems with unresolved underpayments could hinder prompt resolution  of overpayments.
section_title: Conclusions
paragraphs: Survey results, DCAA audits, and DFAS Columbus data indicated that  contractor debts resulting from contract administration actions as well as  payment problems exist for all DOD contract payments—contract pay as  well as vendor pay.  Further, resolution of contractor debt has not always  been timely.  DOD has taken short-term actions, including increased  contract audits focusing on overpayments that are achieving immediate  results.  However, its longer-term initiatives rely on new automated systems  that have not been implemented to address many of the existing problems  in DOD’s contract management and payment processes.  The success of  these systems is uncertain because of the problems in functionality, costs,  and significant delays that the DOD IG and we have reported on.  Until  these contract management and payment processes are improved, DOD’s  risk of contractor overpayments, regardless of cause, and underpayments  will continue.  Accordingly, development and implementation of an internal  control to identify and recover contractor debt, which is now required by  31 U.S.C. 3561, will be important.
DOD could have better management control of all types of contractor debt,  regardless of cause, and underpayments by establishing procedures calling  for (1) accounts receivable and liabilities to be recorded in accounting  records according to federal accounting standards and federal financial  system requirements and (2) mechanisms to hold staff and management  accountable for doing so.  The accounting records could then provide more  comprehensive performance measures for DOD managers to monitor the  timely collection of all amounts due the government and resolution of  underpayments.  Such measures could, in turn, result in more effective  financial management and help reduce contract reconciliation and closeout  problems in the future.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Under Secretary of Defense Comptroller in  coordination with the under Secretary of Defense for Acquisition,  Technology, and Logistics     implement an internal control, as now required by 31 U.S.C. 3561, to  identify and collect overpayments to contractors, regardless of contract  payment type;  reevaluate DCMA, DOD Comptroller, and DFAS established procedures  and controls and revise them as needed to ensure prompt recognition  and recording of receivables and potential liabilities stemming from  DOD’s contract management and payment processes, according to  federal accounting standards and financial management system  requirements; and   develop and maintain more comprehensive and complete records on  contactor refunds and underpayments to better measure and monitor  (1) the timeliness of all collections, including checks and offsets, (2) the  resolution of demand letter disputes, (3) the causes of overpayments  and underpayments, (4) the resolution of overpayments and  underpayments and the need for corrective actions, and (5) compliance  with policies and procedures.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report, which are  reprinted in appendix V.  DOD concurred with the report’s  recommendations.
In its comments, DOD emphasized that it supports the requirement for an  audit recovery program, was taking actions consistent with such a program  before the enactment of 31 U.S.C. 3561, and will comply with future Office  of Management and Budget guidance.  In addition, DOD stated that (1) DFAS has implemented several additional internal controls in its  contractor entitlement and payment process to identify erroneous  payments for recovery and minimize future erroneous payments, (2) new  MOCAS procedures are being developed and implemented to reduce  progress payment liquidation differences, and (3) its contract audit  resources are being better used to detect overpayments.  DOD also stated  that its financial management guidance on recording accounts receivable  and payable and account aging is consistent with the federal accounting  standards, but to improve compliance requires consideration of the  existing processes, factors establishing claims or obligations, and ways to  manage efficiently and cost effectively.  Further, DOD stated that to  improve compliance, (1) DOD is developing new performance indicators  on accounts receivable, overpayments, and aging, (2) DFAS is reviewing  and revising its procedures in this area, and (3) DFAS Columbus plans to  modify its accounts receivable processes to measure the timeliness of  collections for amounts due and is working with contractors and DCAA to  reduce the number and age of disputes.
DOD also provided detailed technical comments that we incorporated into  the report as appropriate.
As you requested, unless you publicly announce its contents earlier, we  plan no further distribution of this report until 30 days from the issue date.   At that time, we will send copies of this report to interested congressional  committees.  We also will send copies of this report to the Secretary of  Defense; the Under Secretary of Defense for Acquisition, Technology, and  Logistics; the Under Secretary of Defense Comptroller; the Director of the  Defense Finance and Accounting Service; and the Director of the Office of  Management and Budget.  We will make copies available to others upon  request, and the report will also be available on GAO’s home page at  http://www.gao.gov.
If you have any questions regarding this report, please contact me at (202)  512-9505 or David Childress at (202) 512-4639.  Key contributors to this  report are Jean Lee, Harold Reich, Alan Steiner, and Gary Wiggins.
section_title: Scope and Methodology
paragraphs: To determine the number and value of overpayments and underpayments  in selected DOD contractors’ records at end of fiscal year 2001, we  surveyed 183 DOD contractors.  Appendix II has a complete list of these  contractors.  We identified the top 100 DOD contractors and the top 100  small business DOD contractors based on total dollar value of fiscal year  2000 contract actions recorded in the Federal Procurement Data System  (FPDS).  After identifying the contractors, we used DOD’s Central Contract  Registry (CCR) to identify contractor business units, their addresses, and  points of contact.  Contractors must be in CCR to receive payments, and  contractors are responsible for maintaining the data in the registry.  About  54 percent of the large DOD contractors had multiple business units.  For  example, Lockheed Martin, Raytheon, and Boeing had 114, 100, and 61  business units, respectively.  Accordingly, we contacted officials at many of  the contractors for help identifying the appropriate addresses to which the  questionnaires should be sent so that the appropriate finance units would  receive them.  The appropriate finance units for our survey were those that  handle the billings and maintain accounts receivables; some business units  for which we had addresses do not maintain these records.  We did not  send surveys to all of the 200 contractors as listed in FPDS because 1 of  them was classified, 7 of the small businesses were also included in the top  100 contractors, 3 contractors’ names could not be matched to those in  CCR, and 5 contractors listed in FPDS had merged with other  contractors—for example, Boeing had merged with McDonnell Douglas— or were business units of major contractors already listed.
We subsequently mailed 497 surveys to business units of 183 DOD  contractors requesting the total overpayments and underpayments in their  records as of September 30, 2001, and specific detail on individual  overpayments and underpayments equal to or over $1,000.  The survey is  similar to the one we used in our 1995 report.  A copy of our final survey is  in appendix III.  We either telephoned or sent follow-up reminders to  business units.  In response to our mailings and follow-up, we received 249  survey responses from business units of 58 large contractors and 62 small  business contractors.  However, some of the responses we received did not  include all of the business units from the contractor, and others indicated  that another business unit would have the information.  Twenty-two  mailings were returned as undeliverable.  The 249 business units that  responded to our survey reported on overpayments and underpayments  associated with over 600 contracts.  The findings from our survey apply  only to the contractor business units that responded and cannot be  projected to any others.
We coordinated with DCAA, as part of its ongoing recovery audits, for its  auditors to test the validity of the contractors’ responses on 27 business  units in our survey.  These units reported about $58 million, or 94 percent,  of the total reported overpayments, and about $126 million, or 71 percent,  of the total reported underpayments.  We and DCAA selected the business  units to visit based on a combination of factors, including geographic  location, size of the contractor, the amount of reported payment  discrepancies, and the nonreporting of payment discrepancies with  significant annual billings.  We also visited DCAA offices to discuss the  agency’s audit results in verifying overpayments and underpayments  reported for 9 of the 27 contractor locations.
To determine the status of DOD corrective actions, we obtained and  reviewed fiscal year 2000 and 2001 data collected by DFAS Columbus on  contractor refunds, offsets, and reasons for the refunds.  In addition, we  obtained data on the number of contracts in reconciliation at the end of  fiscal year 2001, the number of contracts that had been partially or  completely reconciled in fiscal years 2000 and 2001, and the reasons for  payment problems that DFAS Columbus had identified during  reconciliation.  We did not verify the data provided.
We also obtained and evaluated fiscal year 2001 accounts receivable  balances, which represented demand letters issued by DFAS Columbus.  To  identify some of the conditions and reasons for overpayments, we selected  58 of the highest dollar transactions from the 3 months in fiscal year 2001  with the highest balances for accounts receivable cancellations, transfers,  collections made through offsets, and unsolicited refunds.  The  transactions selected represented about 80 percent of the total dollar value  of the group for that month.  In addition, we obtained a detailed list of all  accounts receivable over 90 days old as of August 2001 and reviewed the  highest dollar value transaction in each year from 1996 through 2001.  To  further assess the timeliness of collections, we analyzed data in DFAS  Columbus records on refunds due to payments errors and attempted to  determine the collection time for 15 contract administration action refunds  in fiscal year 2001.
Further, we obtained information on performance measures, certain DFAS  Columbus procedural changes, and the planned implementation of DPPS.   We also discussed payment problems and corrective actions with DFAS  Columbus and DCMA officials.  We reviewed prior GAO and DOD IG  reports on contract payment problems, applicable laws and FAR sections,  federal accounting standards and financial system requirements, the DOD  Financial Management Regulation, DCMA policies and procedures  contained in its “One Book,” and DFAS Columbus procedures regarding  accounts receivable, contractor refunds, and contract reconciliation.
We requested comments on a draft of this report from the Secretary of  Defense or his designee.  We received comments from the Under Secretary  of Defense Comptroller and have reprinted these comments in appendix V.   We conducted our review from August 2001 through April 2002 in  accordance with U.S. generally accepted government auditing standards.
section_title: List of Contractors We Surveyed and Results
paragraphs: Contractor names and fiscal year 2000 contract actions are from the  Federal Procurement Data System.  Dollars of overpayments and  underpayments are from survey responses received before February 2002.
Fiscal year 2000 contract actions (dollars in thousands) 452,513 Fiscal year 2000 contract actions (dollars in thousands) 214,447 Fiscal year 2000 contract actions (dollars in thousands) 77,744 Fiscal year 2000 contract actions (dollars in thousands) 41,002 Fiscal year 2000 contract actions (dollars in thousands) 27,913 Fiscal year 2000 contract actions (dollars in thousands)
Units that reported these amounts are now General Dynamics Decision Systems, Inc.
Responses indicated that these companies no longer have DOD contracts.
Surveys were returned due to invalid addresses.
section_title: Contractor Survey
paragraphs: Fax to: Harold D. Reich      Or        Get Email format from  (213) 830-1180                        (reichh@gao.gov)
Any questions should be directed to Harold Reich at (213) 830-1078 (reichh@gao.gov) or Eric Johns at (213) 830-1154 (johnse@ gao.gov) in our Los Angeles Field Office or Al Steiner in our Washington, D.C. office at (202) 512-9332 (steinera@gao.gov). 1. We are requesting information on the single business unit at the address listed below, unless you find an Attachment 3 in your survey.  If you have an Attachment 3 your response should be an aggregate response for all listed and confirmed business units, or any units you might add, for which you handle accounts receivable and payable. (Please make any corrections to address in this space)
Please provide the name and telephone number of a contact in the accounting and financial unit for us to contact if additional information is needed: NAME OF CONTACT:                                                                                         EMAIL ADDRESS:                                        .
PHONE  NUMBER: (______)  ______  -  ____________ If your business unit is a subsidiary of a parent company, please list the name, DUNS number, and address of the parent business.
PARENT COMPANY:__________________________________________ DUNS: ______________________________ 4. Does your business unit prepare contract billings and maintain accounts receivable for contracts with the DOD? [NOTE: If we have called you to make other arrangements, please proceed directly to question 5 as we already have the information for this question.]  Yes  (GO TO QUESTION 5)
No  (READ INSTRUCTION IN BOX BELOW.)
STOP – If you answered “No” to question 4 above, please do not continue but return this request in the enclosed envelope after supplying the information requested in this box.
Please do not forward to the business unit that does your billings and maintains your accounts receivable. Instead, please provide the name and address for the business unit that maintains your accounts receivables so we can verify that the unit has been included in the initial mailing of this data request. (List below the name and address of the business unit that maintains your accounts receivable: CONTACT PERSON:                                                                           PHONE: 5. From your accounts receivable and payable ledgers, or other appropriate accounting record, provide total gross dollar amounts of existing overpayments and underpayments (billed amounts versus payments received) for all DOD contracts as of September 30, 2001 (or if September 30 is impracticable, please specify the “as of “ date you have used). Overpayments should exclude advance payments.  The total underpayments extracted should exclude 1) billings less than 30-days old on the "as of" date for the information provided (this excludes billings for which payments are not delinquent), and 2) claims, accounts under dispute, and unbilled receivables on long-term contracts.  However, we expect overpayments or underpayments caused by incorrect liquidation of progress payments to be included in the summary totals provided in response to this question.
Gross Overpayment Dollar Amount: _______________________________ Gross Underpayment Dollar Amount: _____________________________ As of date used: _____________________ MM / DD / YYYY 6. For each overpayment exceeding $1,000, please provide the following information on the Schedule for Contract Overpayments  (Attachment I): contract number, the amount of the overpayment, the date the overpayment was identified: action you have taken (i.e., notified DCMA and/or DFAS, adjustments by check, offset, or no action); indicate whether you received a demand letter for the overpayment, and the potential cause for each payment.
If you are unable to provide this detail contract information, please briefly explain why it is not available: 7.  For each underpayment exceeding $1,000, please provide the following information on the Schedule For Contract Underpayments (Attachment II): contract number, the amount of underpayment, the date the underpayment was identified; notification and the action you have taken; and the potential cause for the underpayment.
If you are unable to provide this detail contract information, please briefly explain why it is not available: 8. List the most recent annual dollar amount of gross contract billings to DOD by this business unit.
GROSS DOLLAR AMOUNT OF BILLINGS TO DOD:              $____________________________ 9.Please include any additional information or specific comments and issues concerning your DOD contract payment experiences that you believe we should consider.
Please retain any work sheets or records used to prepare this response.
Thank you for your prompt response.
The information requested regarding the business unit reporting is intended to identify the unit providing the information.  Please make any appropriate changes to the name and address of your business unit (Question 1). Please provide the name, telephone number, and email address of a contact person (Q2) who could best respond to our technical questions about the information you provide.  Also identify the parent company of this business unit (Q3) providing the name, DUNS number, and mailing address.
Q4.  The accounting and finance unit that maintains the accounts receivable and related billing accounts for contracts with DOD should respond to this data request.   We intended to send this data request to the business units that are listed in the CCR and could maintain accounts receivable and billing records.  If your unit does not maintain these records, please provide the name, address of the business unit and a contact with phone number who maintains your accounts receivable for DOD contracts, but do not forward this request to that unit.
Q5.  From your accounts payable and receivable ledgers or other appropriate accounts that include information by individual billing numbers (invoices and vouchers), please provide the total gross dollar amounts of overpayments and underpayments (including unpaid bills) for all DOD contracts billed directly to the government as of September 30, 2001.  If the information is not available as of this date, provide the information for a date as close as practicable and specify the date used.  The total underpayments extracted should exclude billings less than 30-days old on the "as of" date for the information provided (this excludes billings for which payments are not delinquent).  Please ensure that you do not consider (1) advance payments as overpayments and (2) claims, amounts under dispute, and unbilled receivables on long-term contracts as underpayments.
The amounts listed in response to question 5 should provide a point-in-time measurement of total underpayments and overpayments as shown by contractor records and include the effects of incorrectly liquidated progress payments.  We recognize that the payment status for DOD contracts will change after the "as of" date.
Q6.  Following the instructions below, please complete the Schedule for Contract Overpayments(Attachment I).
Enter the contract number, amount of the overpayment, and date on which  the overpayment  was identified.  Provide this information for individual contract overpayments exceeding $1,000. Do not include advance payments.  Round dollar amounts to the nearest dollar.
If  you  have  notified  DOD  of  the  overpayment,  specify  which  DCMA  and/or  DFAS  office  you contacted and the date you notified them. Check if you have made payment by check, made plans to offset against another payment, or if no action has been taken. If a demand letter was received from DOD for the overpayment, please indicate the date of the letter and which DCMA or DFAS office sent it. For the potential cause, please provide a brief description—i.e., contract modification-scope change, contract modification-price adjustment, contract modification-other, duplicate payment, recording error, etc.
Q7.Following the instructions below, please complete the Schedule for Contract Underpayments(Attachment II).
Enter the information indicated for individual contract underpayments exceeding $1,000.  Round dollar amounts to the nearest dollar. If  you  have  notified  DOD  of  the  underpayments,  specify  which  DCMA  and/or  DFAS  office  you contacted and the date you notified them. Or if no action taken, check column f. For  the  potential  cause,  please  provide  a  brief  description—i.e.,  progress  payment  calculation error,  prices  not  updated,  recording  error,  lost  inventories,  contract  modification  not  processed, etc.
Q8.  State the volume of business your business unit has with DOD as measured by total gross billings         to DOD for your most recent year ending date.  Please include the ending date (month and year) for           the total billings listed.
Business Units Handle By Your Accounts Receivable and Payable Office INSTRUCTIONS:  Through review of the Central Contract Registry (CCR), or by prior contact with your company, we have indications that your business unit maintains the accounts receivable and payable for each of the units listed below.  Please confirm that you do maintain accounts for each of these business units by 1) crossing out any units not maintained, and 2) adding the name and address of any additional units for which you maintain these accounts.  Your survey response should be an aggregate response for all the confirmed business units.
subsections: section_title: O
section_title: Summary of Results from DCAA Visits to 28 Contractor Locations
paragraphs: DCAA auditors found that 17 contractor locations did not have any  differences or the differences were immaterial based on their review of  contractors’ records and comparison to their survey responses.   Shown  below are 10 contractor locations with material differences identified by  DCAA and the primary reasons for the differences.  In addition, DCAA  auditors visited 1 contractor—SAIC—that did not respond to the survey,  and they found $259,194 of overpayments and $2,002,243 of underpayments  in the contractor’s records. differences Primary reasons for differences ($319,025) Overbilled costs were not reported ($997,141) Unpaid invoices not reported (6,946,813) Unanalyzed overpayments were  (7,672,885) Unanalyzed underpayments  were not reported; unpaid  invoices not reported  (30,432,643) Unanalyzed overpayments were  (16,554,214) Unanalyzed underpayments  not reported; outstanding payment  variances and contract  administration adjustments not  reported  (37,833) Not identified (876,695) Unpaid invoices not reported— only reported invoices with  partial payments (12,688,525) Contractor failed to report  (83,694) Not identified overpayments; inappropriate  accounting for labor and material  transfers (4,028,327) Overpayments over 1 year old  (22,612,605) Underpayments over 1 year  old were not reported; unpaid  invoices not reported—only  reported invoices with partial  payments (75,103) Not identified (631,577) Underpayments on certain  contracts were not reported (2,666,281) Overpayments on certain contracts  were not reported; overpayments  and underpayments netted for  reporting (10,386,620) Underpayments on certain  contracts were not reported ($57,185,791) ($58,040,558)
The contractor is now Volvo Aero Services and no longer has DOD contracts.
section_title: Comments from the Department of Defense
subsections: section_title: GAO’s Mission
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subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs