Contracting officers typically delegate to DCMC responsibility for administering contracts when they require delivery or supply of centrally managed military- or agency-unique items or services. Such contracts can range in size from small purchases (under $25,000), which are typically completed within a few months, to multibillion dollar weapon systems development and production contracts that take years to complete. In January 1991, DOD established DFAS to assume responsibility for DOD finance and accounting. DFAS’ Columbus Center pays contracts administered by DCMC. For fiscal year 1995, these contract payments amounted to 37 percent of the dollars, and 5 percent of the invoices paid by DOD. The Center’s computer system contained contract administration and financial data on about 376,000 contracts as of September 1995. The financial data in the Center’s payment system is not, however, the official accounting record for the contracts. Rather, approximately 190 accounting stations maintain the official accounting records. The Center had 1,440 employees, who processed 1.2 million invoices and disbursed $61 billion in fiscal year 1995. The Center makes two basic types of contract payments—delivery payments and financing payments. About two-thirds of all payments are delivery payments for goods and services; the balance is financing payments. Financing payments are made on both cost reimbursement and fixed-price contracts as contractors incur costs and submit billings. Financing payments on fixed-priced contracts—called progress payments—are later credited against delivery payments when items are delivered, a process called progress payment liquidation. The type of payment made will affect how the transaction is processed. DOD recognizes it has serious, long-standing problems in correctly disbursing billions of dollars in payments and providing reliable accounting information. DOD identified this as a high-risk area in its February 1996 Federal Managers’ Financial Integrity Act report. We have also identified DOD contract management, including contract payments, as a high-risk area. We identified three key factors that contribute significantly to problems in DOD’s payment process. These three factors are: nonintegrated computer systems that require data to be entered manually and often with information that is erroneous or incomplete, multiple documents that must be matched before contractors are paid, and payment information that is allocated among numerous accounting categories. Although there may be other factors contributing to DOD’s payment problems, such as the complexity of contracting requirements for major weapon systems, our review indicated that addressing the three factors is key to DOD’s ability to improve payment accuracy and reduce costs. These factors increase costs by increasing manual data input, invoice research, contract reconciliation, and manual payment processing. Figure 1 illustrates that a large portion of the Columbus Center’s reported invoice processing cost are consumed by these functions. For fiscal year 1995, the Center reported that it cost an average of $87 to process a contract invoice, $44 of which was direct labor. Manual entry of contract data into the payment system adds significantly to processing costs. Generally, other DOD activities, such as purchasing and accounting, provide most of the data to DFAS (see fig. 2). However, because DOD’s payment system is not integrated with DOD’s procurement and accounting systems, much of the data they generate cannot be electronically transferred to the payment system and must be manually entered from hard copy documents. Even when data is electronically transmitted, it often is incomplete or inaccurate. Furthermore, because of a perceived high error rate of electronic transmissions, many DFAS data clerks enter data manually, according to DOD. Because the systems are not integrated, the payment process is highly paper dependent. According to a file room supervisor at the Columbus Center, the Center files about 25,000 loose contract documents a week. A consulting firm’s study noted that the Center’s paper dependent workflow has frequently led to misrouted and misplaced paper documents. This condition delays payments and further increases processing costs. According to DOD, it made a decision in 1995 to implement the government and industry standard for electronic transmissions to eliminate the manual data entry of contract data into its accounting and payment systems. The Center is testing the use of these transmissions in some of its divisions. However, manual entry may still be required in certain situations, such as contracts with special clauses. Before making payments, Columbus Center employees match a number of documents to ensure the payments are in accordance with the purchase order and that funds are available to cover payments. For both delivery and finance payments, Center employees match at least the purchase order, the invoice, and the obligation records contained in the Center’s payment system. For delivery payments, they also match to the receiving document. Although time consuming, matching is intended to ensure that items ordered were received and that funds have been obligated and are available to make the payment. According to DOD officials, the matching to obligation records is performed to avoid violating the Anti-Deficiency Act. Among other things, that act provides that a government employee may not make an expenditure (payment) exceeding the amount in an appropriation or fund available for that purpose. When a contract is signed, an obligation is recorded, which essentially reserves sufficient appropriated funds until payments become due. Center employees match an invoice to contract obligations recorded in the Center’s payment system to verify the availability of funds before making a payment. The obligation records used by Center employees, however, are not DOD’s official accounting records. For payments over $5 million, the Center is also required to verify funding availability in the official accounting records maintained at the accounting stations. The Center tries to pay invoices automatically, and it did so for about half of its payments in fiscal year 1995. However, if Center employees are unable to verify or match payment data to its records (invoices, purchase orders, receiving documents, Center obligation records, or accounting station records), they are required to research discrepancies before making payment. An inability to match payment data causes Center employees to manually process payments, which can cost up to seven times more than an automated payment. Mismatches can also cause the Center to have to reconcile a contract—an extensive and costly process that can take from several hours to years. For example, on a contract valued at $1.2 billion, the Center’s and the accounting station’s disbursement records differed by $12 million. In addition, both the Center’s and the accounting station’s records differed from the contractor’s records. The Center and a public accounting firm engaged by the Center have spent about 5 years off and on attempting to reconcile this contract. While the costs for reconciling this contract were not available, DOD paid the public accounting firm about $8.6 million in fiscal year 1996 for contract reconciliation support on numerous contracts. Efforts to resolve mismatches through invoice research, contract reconciliation, and manual processing account for about 57 percent of average payment costs. About one-third of the Center’s contract payment personnel are dedicated to invoice research and contract reconciliation. DOD uses a “long line of accounting” to accumulate appropriation, budget, and management information for contract payments. For all contracts, the buying activity assigns a two-character code called an accounting classification reference number (ACRN) to each accounting line containing unique information. The Center allocates payments to ACRNs in an attempt to ensure that the payments comply with the requirements of the Anti-Deficiency Act. Figure 3 is an example of an accounting line—the type and quantity of information varies among the services. Contracts can be assigned anywhere from 1 to over 1,000 ACRNs. A contract with numerous ACRNs may involve extensive data entry, increasing the chance for errors and manual payment processing. Manual payment processing costs an average of $15 per ACRN, according to a consulting firm’s study. According to a DFAS official, contracts with 10 or more ACRNs are more likely to have payment problems. Our review showed that of the 217,000 active contracts, about 3 percent have 10 or more ACRNs, but they account for 77 percent of the total value, as shown in table 1. When buying activities assign numerous ACRNs, payment allocations to the ACRNs can be time consuming and may not provide useful or reliable management information. For example, in one case we reviewed, a single payment on a contract with many ACRNs took 6 to 8 hours to process. The contractor, required to bill by ACRN, took 487 pages to assign $2.1 million in costs and fees to 267 ACRNs. Ten of the ACRNs cited by the contractor had insufficient obligation balances to cover the payment, according to the Center’s records. The remaining 257 ACRNs corresponded to 8 annual appropriations covering from 1 to 5 fiscal years and included Army, Air Force, and general defense funds. Of the 257 transactions processed, 38 were for less than $10, and some involved debits or credits for pennies. Unresolved discrepancies, such as insufficient funds on some ACRNs, have persisted for about 3 years, and the contract is currently scheduled for reconciliation. The contractor believes the contract was underpaid by about $2.6 million, as of September 1996. Even for a simple purchase, assigning numerous ACRNs can cause extensive and costly rework, and provide information of questionable management value. For example, a $1,209 Navy contract for children’s toys, candy, and holiday decorations for a child care center was written with most line items (e.g., bubble gum, tootsie rolls, and balloons) assigned a separate ACRN. A separate requisition number was generated for each item ordered, and a separate ACRN was assigned for each requisition. In total, the contract was assigned 46 ACRNs to account for contract obligations against the same appropriation. To record this payment against the 1 appropriation, the Center had to manually allocate the payment to all 46 ACRNs.