Defense Contracting: Use of Undefinitized Contract Actions Understated and Definitization Time Frames Often Not Met
Published: 2007-06-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: To meet urgent needs, the Department of Defense (DOD) can issue undefinitized contract actions (UCA), which authorize contractors to begin work before reaching a final agreement on contract terms. The contractor has little incentive to control costs during this period, creating a potential for wasted taxpayer dollars. Pursuant to the House of Representatives report on the National Defense Authorization Act for Fiscal Year 2007, we assessed (1) the level of insight DOD has into its use of UCAs, (2) how and when DOD is using UCAs, (3) whether DOD is definitizing UCAs in a timely fashion, and (4) whether contracting officers are documenting the basis for negotiated profit or fee. GAO reviewed 77 randomly-selected contracts at seven locations and interviewed DOD officials.
section_title: What GAO Found
paragraphs: DOD faces a potentially large gap in its data and thus does not know the extent to which it is using UCAs. DOD's reported obligations for UCAs increased from $5.98 billion in 2001 to $6.53 billion in 2005. However, the government's procurement system does not identify undefinitized task or delivery orders or undefinitized contract modifications. In light of DOD's reported increase in its use of task and delivery orders in recent years, the data gap could be large. Because DOD decentralizes oversight of its UCAs, the department would have to manually obtain data from each of its local commands in order to obtain a complete picture. The local commands GAO visited performed oversight of their UCAs to varying degrees. DOD is generally using UCAs to rapidly fill urgent needs, as permitted, in a variety of circumstances. Local managements' message to the contracting community is to not use a UCA unless absolutely necessary, but this message is emphasized differently from one location to another. GAO found 10 instances in the 77 UCAs we reviewed where UCAs could have been avoided with better acquisition planning. For example, one UCA for the continuation of ongoing services was awarded the day after the previous contract expired. DOD did not meet the definitization time frame requirement of 180 days after award on 60 percent of the 77 UCAs reviewed. The most common reasons for the delays were untimely receipt of an adequate proposal from the contractor, acquisition workforce shortfalls, and changing requirements. GAO also found that DOD tends to obligate the maximum amount of funding permitted--up to 50 percent of the not-to-exceed amount--immediately at award of UCAs. As a result, contractors may have little incentive to quickly submit proposals. In addition, since DOD does not track whether it meets the Federal Acquisition Regulation requirement to definitize letter contracts (one type of UCA) before 40 percent of the work is complete, GAO was unable to assess compliance with this requirement. Contracting officers are not documenting, as required, the basis for the profit or fee prenegotiation objective and the profit or fee negotiated. As such, it is unclear whether the costs incurred prior to definitization are considered when computing the profit rates or fee amounts. For the 40 fixed-price contracts GAO reviewed, profit ranged from 3 to 17 percent, and for the 37 cost-type contracts in our sample, fees ranged from 4 to 15 percent. Generally the rate was applied equally over the entire contract term, including the undefinitized period.

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 contract terms and conditions, including price. Such  agreements are called undefinitized contract actions (UCA). The terms and  conditions of UCAs are generally required to be definitized within   180 days, before more than 50 percent of the estimated contract price is  obligated, or before more than 40 percent of the work is completed,  whichever occurs first. Although UCAs may be necessary to support  urgent needs, these actions are not a desirable form of contracting. The  government bears the majority of the cost and risk during the  undefinitized period. The government risks paying increased costs during  this period because the contractor has little incentive to control costs,  creating a potential for wasted taxpayer dollars. Therefore, DOD needs to  ensure that it is using UCAs only when necessary and that these contract  actions are then negotiated as quickly as possible.
The House of Representatives report on the National Defense  Authorization Act for Fiscal Year 2007 required us to review whether DOD  is properly using UCAs and negotiating them on time. Accordingly, we  assessed (1) the level of insight DOD has into its use of UCAs, (2) how and  when DOD is using UCAs, (3) whether DOD is definitizing UCAs in a  timely fashion, and (4) whether contracting officers are documenting the  basis for negotiated profit or fee.
For the purposes of this report, we define UCAs as including letter  contracts, undefinitized task and delivery orders, and undefinitized  contract modifications (that is, modifications that significantly expand or  otherwise change the scope of the work). To determine the level of insight  DOD has into its use of UCAs, we analyzed information from the DOD  DD350 procurement database and interviewed senior-level acquisition  officials. We also met with officials from the Office of Management and  Budget’s Office of Federal Procurement Policy (OFPP) to discuss the data  available for oversight of UCAs. OFPP is responsible for collecting,  developing, and disseminating government procurement data. The most  significant governmentwide data collection tool is the Federal  Procurement Data System-Next Generation (FPDS-NG). To identify how  and when DOD is using UCAs and whether DOD is definitizing these  actions in a timely manner, we reviewed a randomly selected sample of   77 UCAs from the six military locations that awarded the majority of  dollars for letter contracts during fiscal years 2004 and 2005 and one non  military defense agency that issued several UCAs during that time period.  The specific locations selected for our review were    Air Force: Aeronautical Systems Center and Warner Robins Air    Army: Aviation and Missile Command and TACOM Life Cycle    Navy: Naval Air Systems Command and Naval Sea Systems Command,    National Geospatial-Intelligence Agency.
For purposes of this report, we refer to these seven locations as the local  commands.
At each location, we reviewed contract files and interviewed officials from  the local acquisition office as well as the contracting officers responsible  for the UCAs we reviewed and selected program office officials. We also  reviewed relevant federal and defense acquisition regulations regarding  the appropriate use of and definitization requirements for UCAs. In  addition, we interviewed representatives from four companies who  entered into UCAs with either military services or the National Geospatial- Intelligence Agency. Appendix I provides details on our scope and  methodology and Appendix II lists the contracts and orders we reviewed.  We conducted our work from August 2006 through April 2007 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: DOD is increasingly relying on contractor services to accomplish its  missions. In fiscal year 2006, DOD awarded more than $294 billion in  contracts. Despite this huge investment in buying goods and services, our  work and the work of the DOD Inspector General (IG) has found that  DOD’s spending sometimes is inefficient and not managed effectively. Too  often, requirements are not clearly defined; rigorous price analyses are not  performed, and contractors’ performance is not sufficiently overseen. In  fact, we have identified overall DOD contract management as a high-risk  area for the past several years.
When a requirement needs to be met quickly and there is insufficient time  to use normal contracting vehicles, federal regulations permit the use of a  UCA. UCAs are binding commitments used when the government needs  the contractor to start work immediately and there is insufficient time to  negotiate all of the terms and conditions for a contract. UCAs can be  entered into via different contract vehicles, such as a letter contract   (a stand-alone contract), a task or delivery order issued against a pre- established umbrella contract, or a modification to an already established  contract.
The FAR and the Defense Federal Acquisition Regulation Supplement  (DFARS) govern how and when UCAs can be used. The regulations also  establish requirements as to how quickly UCAs must be definitized.  Although each regulation contains two criteria, they are not the same. The  FAR states that a letter contract needs to be definitized within 180 days  after the award date or before 40 percent of the work is complete,  whichever occurs first. While the DFARS includes the 180-day time frame,  it addresses all UCAs (including undefinitized task and delivery orders and  contract modifications) and adds a requirement to definitize before more  than 50 percent of funds are obligated. It does not mention the 40 percent  of work completed. Under FAR and DFARS respectively, a waiver of the  180-day requirement can be granted for extreme circumstances or when  the agency is supporting a contingency or peacekeeping operation. The  definitization time frame can also be extended an additional 180 days  when a qualifying proposal is received from the contractor. The contractor  does not receive profit or fee during the undefinitized period, but can  recoup it once the contract is definitized.
Under UCAs, the government risks paying unnecessary costs. For  example, in a September 2006 report on contracts in support of Iraq  reconstruction, we found that the timeliness of definitization can affect the  government’s costs. We reported that DOD contracting officials were  more likely to adhere to the Defense Contract Audit Agency’s advice  regarding the disposition of questioned and unsupported costs when  negotiations were timely and occurred before contractors had incurred  substantial costs under UCAs. On the other hand, contracting officials  were less likely to remove questioned costs from a contract proposal when  the contractor had already incurred these costs during the undefinitized  period. Similarly, the DOD IG found that untimely definitization of  contracts transfers additional cost and performance risk from the  contractors to the government.
Contractors should bear an equitable share of contract cost risk and  receive compensation for bearing additional risk based on the degree of  risk assumed. Costs that have already been incurred on an unpriced  action, such as a letter contract, have virtually no cost risk associated with  them. As such, when negotiating profit with the contractor, the  government may attribute a zero risk factor to the undefinitized period.
section_title: DOD Does Not Know the Full Extent of Its UCA Usage
paragraphs: DOD faces a potentially large gap in its data and thus does not know the  extent to which it is using UCAs. The federal procurement data system is  only able to identify UCAs that are awarded via letter contracts.  Undefinitized task or delivery orders, as well as contract modifications,  are not identified. DOD also lacks high-level oversight of its UCA activity  since UCA monitoring has been delegated to the local commands, with  upward reporting no longer required. At the local commands we visited,  monitoring of UCAs varied in both detail of information and frequency of  review.
subsections: section_title: Data on UCAs Are Incomplete
paragraphs: DOD understates its UCA usage due to a potentially significant gap in data.  Because the government’s federal procurement data system—managed by  the Office of Federal Procurement Policy—only identifies letter contracts  as undefinitized at award and does not identify undefinitized task or  delivery orders or contract modifications, DOD does not know the extent  of its UCA activity.
As figure 1 shows, DOD’s reported obligations for letter contracts have  increased from $5.98 billion in fiscal year 2001 to $6.53 billion in fiscal year  2005. These obligations for letter contracts as a percentage of DOD’s total  obligations remained 4 percent or less during this time period.
At the same time, DOD’s task and delivery order obligations have  increased significantly, as shown in figure 2.
A DOD senior acquisition official stated that if DOD wanted to know the  amount obligated under undefinitized task and delivery orders, it would  have to ask for the information from all of the local commands. According  to information maintained at the local commands we visited, most have  issued some undefinitized task or delivery orders. As table 1 illustrates,  one command obligated over $500 million in UCA orders during the 2-year  period we reviewed.
section_title: DOD Lacks Centralized Oversight of UCAs
paragraphs: UCA oversight takes place at local commands, without any centralized  reporting at the DOD headquarters or military services levels. Although  UCA oversight was centralized in the past, a senior DOD acquisition  official told us that DOD does not believe that UCA usage is a significant  concern, given that letter contracts have represented no more than 4  percent of DOD’s total obligations over the past several years. As such,  DOD relies on its local commands to oversee the use of UCAs and inform  upper management if any issues arise.
The Air Force is the only military service that has a reporting requirement  for UCA activity. A June 2002 policy requires commands to report to the  headquarters acquisition office on UCAs that have remained undefinitized  for more than 1 year. However, the acquisition office has not received any  reports on delinquent UCAs, despite the fact that we found 9 UCAs that  had remained undefinitized for over 1 year at the two Air Force commands  we visited. An official from one of the commands told us it reported one of  its delinquent UCAs, but, according to an Air Force headquarters  acquisition official, it was never received. Since the reporting of delinquent  UCAs is by a manual self-reporting system, it is possible that other  delinquent UCAs have gone unreported.
The local commands we visited performed oversight of their UCA usage to  varying degrees. All of the military locations had some sort of reporting of  UCA activity to the local acquisition management on a regular basis,  ranging from monthly to quarterly reporting. The local commands also  varied in whether all UCAs were tracked versus only those that remain  undefinitized after the 180-day time frame. We found that the National  Geospatial-Intelligence Agency was not tracking or monitoring its DOD  UCAs, even though its acquisition regulation requires a monthly report on  UCA activity. After we raised this issue, National Geospatial-Intelligence  Agency officials stated that they will begin monitoring their UCA activity.
section_title: UCAs Used to Quickly Fill Needs in a Variety of Circumstances
paragraphs: DOD is using UCAs to rapidly fill needs in a variety of circumstances,  many of which are directly or indirectly related to the war in Iraq. The  message from management at the locations we visited is to limit the use of  UCAs. However, this message seems to have resonated to different  degrees with the frontline acquisition staff who requested and awarded the  UCAs we reviewed. In some instances, inadequate acquisition planning  drove the need for the UCA.
subsections: section_title: UCAs Are Awarded for a Variety of Goods and Services
paragraphs: The UCAs we reviewed were for a range of goods and services—from  providing immediate support to the warfighter in theater to procuring long  lead items to keep weapon system program schedules on time. The  military services’ commands awarded about half of the UCAs we reviewed  for support of war efforts and one third to meet schedules on production  contracts. In one instance, a UCA was awarded to immediately provide  body armor on combat vehicles already in use in operations in the Middle  East. In another, a UCA was awarded to obtain a jamming system that was  needed to avoid grounding F-15 aircraft. The National Geospatial- Intelligence Agency awarded over half of the UCAs we reviewed for  immediate intelligence needs and about half to avoid disruptions of  services it was receiving under expiring contracts.
Table 2 provides a summary of the reasons presented by the contract files  and discussed with the contracting officers specifically for the 77 UCAs we  reviewed.
Poor acquisition planning is not an appropriate reason to award a UCA.  However, for 10 of the UCAs we reviewed, the government may have been  able to prevent the use of a UCA with better planning. These included, for  example, 4 UCAs issued to procure long lead items that could have been  contracted for earlier. The requirement for long lead items is typically  established early in a program and is normally provided advanced funding  in the annual budget process, which should provide sufficient time to  acquire the items through normal acquisition procedures. Other  inadequate planning situations included 4 UCAs—1 at the Naval Sea  Systems Command and 3 at the National Geospatial-Intelligence Agency— that we believe could have been prevented by the program office. In each  instance, the requirement was known in a significant amount of time  before the UCA was issued. These situations ranged from late issuance of  the request for proposals (which had been planned earlier) to awards that  were issued quickly to avoid disruptions in services (which could have  been anticipated). For example, one National Geospatial-Intelligence  Agency UCA for the continuation of ongoing services was awarded the day  after the services from the prior contract ended. The agency should have  been able to reasonably estimate the requirement and prices in advance  based on the terms and work of the ongoing contract, which were already  known. The remaining three inadequate planning situations were due to  circumstances that were beyond the control of the program office. For  example, a Navy UCA was issued because the senior acquisition executive,  external to the program office, delayed the approval of the program’s  acquisition plan. Furthermore, one UCA added requirements that  expanded the work beyond what was originally planned. Specifically, the  National Geospatial-Intelligence Agency awarded a UCA to quickly obtain  aerial data from the regions affected by hurricanes, but subsequently  augmented it to establish a permanent facility that had been planned for  some time. Several contracting officers across DOD expressed concern  that program office staff need training on the appropriate use of UCAs  because they do not always seem to be aware of the risks that these  contract actions pose to the government.
section_title: Local Command Policies Generally Focus on Limiting UCAs
paragraphs: The “tone at the top” provided by the local commands we visited is to not  use UCAs unless absolutely necessary. However, this message is  emphasized differently from one location to another and has only recently  come about in some locations. For example, an April 2000 Naval Air  Systems Command memorandum says that the use of UCAs is to be kept  to the “absolute minimum” and that they should not be used if the  requirements are not fully defined. On the other hand, the National  Geospatial-Intelligence Agency allowed its contracting officers to use  UCAs without the need for higher-level approval until a May 2006  memorandum elevated the approval authority to the senior procurement  executive.
Representatives from the four companies we spoke with use UCAs with  DOD to different degrees—ranging from considering UCAs to be a “normal  part of business” to rarely using UCAs in recent years. One company said  that its UCAs are mostly used for short duration work needed to maintain  critical schedules in the development or production processes of other  contracts. Another company recently entered into several indefinite  delivery/indefinite quantity contracts with the government so that UCAs  could be avoided in that area of work.
section_title: DOD is Often Not Meeting Definitization Time Frame Requirements
paragraphs: DOD did not meet the definitization time frame requirement of 180 days  after award for over half the UCAs we reviewed. This situation places the  government at risk of paying increased costs, thus potentially wasting  taxpayers’ money. On average, the UCAs we reviewed were definitized  more than 2 months past the required period, with 16 remaining  undefinitized for a year or more. While DOD regulations allow up to half of  the funding to be provided before definitization, we found that DOD tends  to obligate this maximum amount of funding immediately at award—a  practice that could provide a disincentive for the timely definitization of  the UCA. In addition, DOD does not monitor its compliance with the FAR  requirement to definitize letter contracts when 40 percent of the work is  complete.
subsections: section_title: Most UCAs Were Not Definitized within Required Time Frames
paragraphs: Sixty percent of the UCAs we reviewed—46 of 77—were not definitized  within the 180-day time frame required by FAR and DFARS. Table 3 shows  the number of days elapsed before the UCAs were definitized.
We found 16 UCAs that took more than a year to definitize, with the  longest taking over 600 days. Each location we visited had at least 1 UCA  in effect for over a year. In addition, we found no discernable relationship  between the dollar value or contract type of the UCAs and the length of  time it took to definitize. Approximately the same proportion of small and  large dollar value UCAs were definitized in less than 180 days as were  definitized in more than 180 days. Likewise, the final contract type did not  appear to influence the timeliness of definitization. Approximately the  same proportion of UCAs with final contract types of fixed-price and cost- type were definitized in less than 180 days as were definitized in more than  180 days.
We also identified a number of UCAs that met provisions that allow an  extension or waiver of the 180-day definitization requirement. FAR and  DFARS allow an additional 180-day extension of the definitization time  frame from the date a qualifying proposal (one that is complete and  auditable) is received from the contractor. Our review showed that  definitization occurred during this extended time frame in only 7 of the   36 cases. Two UCAs were permitted waivers of the 180-day requirement  since they were in support of contingency operations, pursuant to a  September 2003 Air Force memorandum waiving the time frame for  actions related to Operation Iraqi Freedom.
Figure 3 illustrates the average time frames and the range of days that  lapsed before definitization.
section_title: Delays in Definitization Occur for a Variety of Reasons
paragraphs: Contracting officials provided more than a dozen reasons for not  definitizing UCAs within the original 180-day time frame. Based on our  review of the contract files and discussions with contracting and program  officials, the most common reasons for the delays were (1) delays in  obtaining a qualifying proposal from the contractor, (2) acquisition  workforce shortages that led to overly heavy workloads, and   (3) complexity of requirements at award of the UCA or changing  requirements after award. In many cases, multiple reasons contributed to  the definitization delay. Some of the longest delayed definitizations  occurred because of a combination of the three reasons stated above.
Table 4 provides a summary of the number of instances each reason was  provided as an explanation of the delay.
Contracting officers stated that delays in obtaining a qualifying proposal  were sometimes caused by the program office’s changing requirements.  Many contracting officials stated the government’s requirement was  inadequately described when the UCA was awarded or was subsequently  changed after award once the requirement was better understood.  Contractor representatives and contracting officers noted that it is difficult  for a contractor to timely submit an adequate proposal when the  government is unsure about the specifications of the product or service it  requires. Officials at two companies noted that they attempt to submit  qualifying proposals on time, but must redo them—sometimes multiple  times—to reflect the government’s revised requirements.
In addition to timeliness of proposals and changing requirements,  shortfalls in the government’s acquisition workforce were another key  reason for definitization delays. This issue was manifest in different ways,  including inadequate numbers of contracting officials, the heavy workload  of the Defense Contract Audit Agency, which is frequently called upon to  perform audits of the proposal’s pricing structure, and, in four cases,  contracting officials who did not perform their duties to definitize the  UCAs. Some contracting officers commented that UCAs require twice the  work that a normal contract award does, because in essence they go  through the contracting process twice—once for the undefinitized period  and once for the definitized period. Problems with acquisition staff or  workloads at the commands resulted, in some instances, in a UCA  remaining undefinitized until someone turned attention to it. Some  contracting officers told us that their focus is on getting the UCA awarded;  after that, they often must turn to other pressing awards so that following  up on definitizations becomes less of a priority. We also found one  situation where a UCA simply fell through the cracks because it dropped  off the local reporting system due to a computer error. In one case, the  contracting officer awarded a UCA but took another job before it was  definitized, and the contracting officer who inherited it was not aware for  some time that it had not been definitized; thus, no one acted on it for over  a year.
section_title: UCAs Are Usually Awarded with Maximum Obligations Allowed
paragraphs: Most of the UCAs we reviewed were awarded with the maximum  obligations allowed. Specifically, 60 of the 77 UCAs—78 percent—were  obligated with approximately 50 percent or more of the not-to-exceed  price at award. As a result, contractors may have less incentive to hasten  the submission of qualifying proposals and agencies have little incentive to  demand their prompt submission, since funds are available to proceed  with the work, leading to a protracted negotiation process. One  contracting officer obligated a smaller percentage initially, but as time  went by and various issues arose that slowed definitization, he raised the  obligated amount little by little until it reached 50 percent. In hindsight, he  said it would have been easier to just obligate the 50 percent at the  beginning. Company officials said that the minimum amount needed to  begin work under a UCA depends on the circumstances of the work.  Officials from all four companies told us they usually receive 50 percent of  the not-to-exceed price at award.
While we found some evidence of monitoring the percentage of funds  obligated, in accordance with the DFARS requirement to definitize UCAs  before 50 percent of the funding is obligated, none of the commands we  visited act proactively to ensure the obligations do not exceed this  maximum amount. As a result, DOD is at risk of increasing the potential  that it is paying additional unnecessary costs during the undefinitized  period. The monitoring that does occur, at three local commands we  visited, is not effective in ensuring compliance with the requirement  because no alerts are generated if a UCA goes beyond the maximum  obligations before definitization. An official at one command that does not  monitor this requirement stated that the command does not do so because  it is the responsibility of the contracting officer to ensure it is met.
section_title: Requirement to Definitize Before 40 Percent of Work Is Completed Is Not Tracked
paragraphs: DOD is not monitoring compliance with the FAR requirement to definitize  letter contacts when 40 percent of the work is complete. None of the local  commands we visited had procedures in place to track this provision.  Officials at two commands were not familiar with the requirement. As  such, we were unable to assess whether DOD is in compliance with this  requirement.  Many contracting officers stated that the amount of work  completed before definitization could not readily be determined because  under a UCA there is no established baseline against which to measure the  percentage of work completed. Policy officials at several locations we  visited also stated that the FAR requirement would be difficult to  implement.  Based on our findings, a DFARS case was initiated in April  2007 to clarify defense acquisition regulations.
section_title: Little Insight into Whether Reduced Risk Is Taken into Account when Negotiating Profit or Fee
paragraphs: Contracting officers are not usually documenting, when applicable,  whether profit or fee is adjusted for work performed by the contractor at a  lower level of risk during the undefinitized period. All UCAs are essentially  cost-reimbursement contracts until definitized, as contractors are  reimbursed for all incurred costs that are reasonable, allocable, and  allowable during the undefinitized period. This contract type places the  greatest cost risk on the government. When the UCA is definitized, the  ultimate contract type is determined. Our sample included a variety of  final contract types, including firm-fixed-price, cost-plus-award-fee, cost- plus-incentive-fee, and cost-plus-fixed-fee. Each contract type includes  either profit (fixed-price contracts) or fee (cost-type contracts) for the  contractor. During the undefinitized period, however, profit or fee is not  paid. The profit rate or fee is derived at definitization and then applied  across the entire period of performance, including the undefinitized  period. “When the final price of a UCA is negotiated after a substantial portion of the  required performance has been completed, the head of the contracting activity  shall ensure the profit allowed reflects (a) Any reduced cost risk to the contractor  for costs incurred during contract performance before negotiation of the final  price; and (b) The contractor’s reduced cost risk for costs incurred during  performance of the remainder of the contract.”
When costs have been incurred prior to definitization, contracting officers  are to generally regard the contract type risk to be in the low end of the  designated range. If a substantial portion of the costs have been incurred  prior to definitization, the contracting officer may assign a value as low as  0 percent, regardless of contract type.
Table 5 shows the range of profit and fee rates negotiated at definitization  for the UCAs we reviewed. We did not assess the reasonableness of the  profit or fee percentages determined by the contracting officers.
We found that these adjustments to profit or fee were usually not  documented in the price negotiation memorandum, a contract document  that sets forth the results of the negotiations and contains the contracting  officer’s determination that the negotiated price is fair and reasonable.  Specifically, the memorandums for only 14 of the 77 UCAs we reviewed  discussed how the negotiated profit or fee was affected by the UCA. As a  result, for the majority of the UCAs we reviewed, no determination can be  made whether the costs incurred during the undefinitized period were  considered when the allowable profit or fee was determined. Similarly, in  a 2004 report, the DOD IG found that contract records did not contain  evidence that allowable profit factors, such as the reduced cost risk, were  considered in the final profit rate awarded to the contractor. It was also  not evident that already incurred costs were taken into account when  determining profit.
The majority of the contracting officers responsible for the UCAs we  reviewed acknowledged that they are required to document how the shift  in risk associated with the undefinitized period was accounted for in  determining the profit or fee calculated for negotiations.
section_title: Conclusions
paragraphs: UCAs are a necessary tool for DOD to use to meet urgent contracting  needs, but DOD must ensure that their use is limited to appropriate  circumstances. Even when UCAs are used appropriately, increased  management attention is needed regarding definitization time frames so  the government’s position during subsequent negotiations is not overly  weakened. Existing regulations and guidance governing UCAs are not  always understood or followed. Actions are needed to strengthen  management controls and oversight of UCAs; otherwise the department  will remain at risk of paying unnecessary costs and potentially excessive  profit rates.
section_title: Recommendations for Executive Action
paragraphs: To improve oversight of UCAs, we recommend that  the Administrator of the Office of Management and Budget’s Office of  Federal Procurement Policy assess whether the Federal Procurement  Data System-Next Generation data fields need to be modified to require  coding that will identify undefinitized task and delivery orders and  undefinitized contract modifications, and  the Secretary of Defense issue guidance to program and contracting  officials on how to comply with the FAR requirement to definitize  when 40 percent of the work is complete.
To help ensure that UCAs are definitized in accordance with regulations,  we recommend that the Secretary of Defense take the following two  actions:    put in place a reporting channel to headquarters that includes  information on UCAs in place for 180 days or more and that outlines  plans and time frames for definitization, and    supplement acquisition personnel on an as-needed basis to quickly  definitize UCAs once they are awarded.
To mitigate the risks of paying increased costs under UCAs, we  recommend that the Secretary of Defense set forth supplemental guidance  to accomplish the following two actions:    direct contracting officers, where feasible, to obligate less than the  maximum allowed at UCA award to incentivize contractors to expedite  the definitization process, and    specify that the effect of contractor’s reduced risk during the  undefinitized period on profit or fee be documented in the price  negotiation memorandum or its equivalent.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD and the Office of Federal  Procurement Policy for comment. In written comments, DOD concurred  with our findings and recommendations and noted actions underway that  are directly responsive. The department’s comments are reproduced in  appendix III. The Office of Federal Procurement Policy provided oral  comments, stating that it had no concerns regarding our recommendation  to add a data field in FPDS-NG that would identify undefinitized task and  delivery orders and contract modifications at award. Such data are needed  to provide DOD (and other agencies) more complete information on  UCAs, which can then be used to improve oversight of their use.
Although DOD concurred with our recommendation to issue guidance  addressing the FAR definitization requirement, in its comments, DOD  stated that our reference to the FAR requirements for UCA definitization  schedules did not consider the difference in requirements for DOD that are  specified in the U.S. Code. However, our report does address those  differences. DOD also stated that the Defense Acquisition Regulation  Council has initiated a DFARS case, based upon our discussions during  this review, to clarify that DOD contracting officers should use the DOD  definitization schedule criteria. DOD agreed that the need for enhanced  oversight of UCAs is appropriate and said it will consider requiring the  military departments to enhance oversight of UCAs and to provide  periodic reports, with remediation plans, for those past the definitization  time frames. The Department also published two notices in the Federal  Register on May 22, 2007, seeking public comments on current DOD  contract financing and funding policies, including the weighted guidelines  that are used to determine appropriate profit or fee based on an  assessment of contractor risk.
We are sending copies of this report to the Secretary of Defense, the  Director of the Office of Management and Budget, the Administrator of the  Office of Federal Procurement Policy, and other interested congressional  committees. We will also make copies available to others upon request. In  addition, the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you have any questions about this report or need additional information,  please contact me at (202) 512-6986 or calvaresibarra@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. Key contributors to this report  were Michele Mackin, Assistant Director; R. Eli DeVan; Lily Chin; Matthew  T. Drerup; Victoria Klepacz; John Krump; Jean K. Lee; and Lynn Milan.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the level of insight the Department of Defense (DOD) has  into its use of undefinitized contract actions (UCA), we interviewed DOD  senior-level acquisition officials and service-level acquisition officials to  identify any additional policies specifically addressing the use of  undefinitized contract actions at the locations selected for our review. We  analyzed information from DOD’s procurement system (DD350) and local  commands for undefinitized contract actions from fiscal year 2001 through  fiscal year 2005. We also reviewed the relevant sections of the Federal  Acquisition Regulation and the Defense Federal Acquisition Regulation  Supplement, as well as service-level guidance pertaining to the use of  undefinitized contract actions.
To identify how and when DOD is using UCAs and whether DOD is  definitizing these actions in a timely manner, we reviewed a random  sample of undefinitized contract actions from six military commands and  one non military defense agency. While undefinitized contract actions may  include letter contracts, task or delivery orders, and contract  modifications, only letter contracts are recorded by DD350 in a manner  that allowed GAO to identify them as undefinitized at the time of award.  Therefore, the specific locations for our review were selected based on the  total dollar value and volume of letter contracts issued during fiscal years  2004 and 2005 by various DOD buying organizations as recorded in the  DD350 system. On the basis of this data, we selected the two commands  with the largest dollar volume of letter contracts within each of the three  military services (Air Force, Army, and Navy). As such, the six military  locations represented over 75 percent of the total dollars awarded for  letter contracts during the period. We also selected the non military  defense agency with the largest number of letter contracts. The specific  locations selected for our review were:  Aeronautical Systems Center, Dayton, Ohio  Warner Robins Air Logistics Center, Warner Robins, Georgia  TACOM Life Cycle Management Command, Warren, Michigan  Aviation and Missile Command, Huntsville, Alabama  Naval Sea Systems Command, Washington, D.C .  Naval Air Systems Command, Patuxent River, Maryland  National Geospatial-Intelligence Agency, Washington, D.C.
To include other types of undefinitized contract actions in our review, we  requested a listing of task and delivery order and contract modifications  issued as undefinitized contract actions during fiscal years 2004 and 2005  from each of the seven locations that we planned to visit. This request was  necessary because these types of undefinitized actions are not identified in  the federal procurement data system. We then established a population of  undefinitized contract actions at each location and selected a random  sample of contract actions to review. Not every location could provide us  with a listing of other undefinitized contract actions prior to our site visit,  and in some cases there were an insufficient number of such actions to  meet our sampling needs. In such cases we reviewed additional letter  contracts selected at random to achieve similar sample sizes at each  location. A total of 77 undefinitized contract actions were sampled for this  review. The six Army, Navy, and Air Force contracting organizations that  we selected for our review initiated 70 of the undefinitized contract  actions that we reviewed. The National Geospatial-Intelligence Agency  initiated 7 of the undefinitized contract actions that we reviewed.  Observations made from our review cannot be generalized to the entire  population of undefinitized contract actions issued by DOD.
We omitted undefinitized contractual actions for foreign military sales,  purchases that did not exceed the simplified acquisition threshold, special  access programs, and congressionally mandated long lead procurement  contracts since these actions are not subject to compliance with the  definitization requirements we were reviewing. We also excluded all  undefinitized task orders issued under basic ordering agreements. The  majority of pricing and contract terms are established under basic  ordering agreements, leaving few terms and conditions to be definitized  after award when orders are issued under this type of contract.
At each location, we reviewed contract document files and interviewed  officials from the local program office as well as the cognizant contracting  officers. In a few cases the contracting officer could not speak to the  reasons for definitization delays because that officer was not involved with  the award or definitization of the UCA selected for our review. We relied  on data provided to us by DOD and the buying commands we visited,  which we verified where practical. For example, in determining the length  of time to definitize the sampled actions, we verified the data reported in  DD350 by tracing the reported award and definitization dates to the  contract file documentation. We also verified contract obligation and not- to-exceed amounts reported in DD350 by reviewing contract file  documentation available in hard copy at the sites we visited and  electronically from DOD’s Electronic Data Access Web-based system.
To obtain insight into the issues surrounding the use of UCAs from a  contractor’s point of view, we interviewed representatives from four  companies who entered into undefinitized contract actions with one or  more of the buying organizations that were selected for this review.
We conducted our work from August 2006 through April 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Undefinitized Contract Actions Reviewed
subsections: section_title: Common crypto appliqué for F-15 aircraft
section_title: Appendix III: Comments from the Department of Defense