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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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. 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.