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. 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. 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.