B-118662 March 22, 1965

B-118662: Mar 22, 1965

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These excess payments permitted the contractors to have interest-free use of Government funds for extended periods of time. The Post Office Department did not recover the excess progress payments until they were offset against payments to the contractors upon substantial completion of the required work. The excess payments were the result of failure by the contractors and by Department personnel to adhere to the percentage restrictions regarding progress payments contained in the contracts. 000 in progress payments to five contractors was in excess of the amounts allowed by the Department's progress payment regulations. These excess payments were also recovered by offset against subsequent payments due the contractors.

B-118662 March 22, 1965

The Honorable John W. McCormack Speaker of the House of Representatives

Dear Mr. Speaker:

Our review of the Post Office Department's administration of progress payment provisions contained in certain contracts disclosed that contractors engaged in the fabrication and installation of mail-handling equipment and the manufacture of nonmechical equipment for the Post Office Department, during the period July 1960 to May 1962, received progress payments totaling about $2.4 million in excess of limitations provided by the contracts. These excess payments permitted the contractors to have interest-free use of Government funds for extended periods of time. The Post Office Department did not recover the excess progress payments until they were offset against payments to the contractors upon substantial completion of the required work. The excess payments were the result of failure by the contractors and by Department personnel to adhere to the percentage restrictions regarding progress payments contained in the contracts.

We noted also that examinations by the Department's internal auditors of the financial records and data relating to other contracts with progress payment provisions showed that about $850,000 in progress payments to five contractors was in excess of the amounts allowed by the Department's progress payment regulations. These excess payments were also recovered by offset against subsequent payments due the contractors.

Progress payments in excess of established limitations resulted in additional costs to the Government by increasing borrowed-fund needs. We estimate that the Government's interest costs for the $2.4 million excess progress payments disclosed in our review were about $48,000. Our computations show also that if these funds had been obtained through the commercial banking system the con tractors would have incurred interest charges of about $77,000. The internal auditors did not determine the period during which each excess payment disclosed in their review was outstanding or the additional interest costs to the Government resulting from these excess payments.

The contracts reviewed by us, and those reviewed by the internal auditors, contained no specific provision for the payment of interest by the contractors on progress payments requested and received in excess of the amounts provided for the contracts, and the Department has not attempted to collect interest costs from the contractors. However, the contracts provided, directly or by reference to the Department's regulations, that in no event could the aggregate amount of progress payments exceed 60 percent of the total contract price. We believe that this provisions in effect prohibited contractors from requesting and accepting progress payments which they should have known exceeded this limitation.

We are therefore recommending that the Department negotiate with the contractors concerned for the recovery of the additional interest costs incurred by the Government as the result of excess progress payments. We are also recommending that, if the Post Office Department is not successful in its negotiations with the contractors, information on these excess progress payments be submitted by the Post Office Department to the Department of Justice for determining whether further action by the Government is warranted.

We also suggested that the Postmaster General initiate action to amend the Department's progress payment procedures to provide for the collection of interest on any excess progress payments for the period of the overpayment.

The Department informed us that it currently had no special problems in this area and believed that any requirement for such a provision should apply to all agencies governed by the Federal Procurement Regulations. We therefore suggested that the Administrator of General Services amend the regulations which govern progress payments and are applicable to all executive agencies subject to the Federal Procurement Regulations, to provide for the collection of interest on any excess progress payments at a rate to be specified in each contract, for the period of the overpayment.

We have been informed by the General Services Administration that it plans to issue a new section of the Federal Procurement Regulations in the near future to cover this matter. The revised regulations would provide for the charging of interest on unpaid indebtedness computed from the date of demand in the event of the money has been paid and received by common mistake and would provide for the charging of interest from the date of the overpayment only in those instances where the overpayment was due to the willful misrepresentation or gross negligence of the contractor. We do not agree with this position. We believe that the Government should not have to prove that overpayments were due to either willful misrepresentation or gross negligence in order to collect interest from the date of overpayment.

We are therefore recommending to the Administrator of General Services that the Federal Procurement Regulations be revised to require that all contracts containing a provision for progress payments include a clause requiring that interest be assessed, effective from the date of overpayment, on excess progress payments resulting from any improper action of the payee--such as requests for payments contrary to contract terms or resulting from the use of incorrect, incomplete, or uncurrent data by the contractor--which results in the contractor's obtaining progress payments to which it is not entitled. We believe that the rate of interest charged on excess progress payments should be high enough, probably 6 percent, so that there will be no inducement to the contractor to use overpayments as a means of financing.

This report is being sent to the Congress because we believe that it illustrates the need for changes in the Federal Procurement Regulations to prevent the incurring of unnecessary interest costs on excess progress payments received by contractors.

This report is also being sent today to the President of the Senate, Copies are being sent to the President of the United States, the Postmaster General, and the Administrator of General Services.

Sincerely yours,

Joseph Campbell Comptroller General of the United States