Internal Controls:

C-17 Payment Procedures Can Be Improved

GAO-01-515R: Published: May 30, 2001. Publicly Released: May 30, 2001.

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The Federal Acquisition Streamlining Act of 1994 allows the use of performance-based payment (PBP) as an alternative to other forms of contract financing. According to the Department of Defense (DOD), the paying office processed about one million invoices for 363,000 major contracts. In fiscal year 1999, only 195 of these contracts contained performance-based provisions. These contracts are so few in number because they are a relatively new form of contracting within DOD. In November 2000, however, DOD indicated that performance-based financing will be military's preferred contract financing method for future fixed-price contracts. This report reviews the C-17 aircraft production program as a case study of the business processes used to make investment expenditures during the production phase of a major weapons system. GAO chose this contract because it is mature, stable, and is performance-based rather than cost-based. GAO found internal control weaknesses in the C-17 program affecting compliance with regulations, policies, and procedures over (1) establishing withhold amounts by the Air Force contracting officer for conditionally accepted items, (2) processing by the Administrative Contracting Officer for performance-based payment requests, (3) processing by the Administrative Contracting Officer of invoices for delivered aircraft, and (4) processing of a delivery payment by the paying office at the Defense Finance Accounting Service Columbus Center on a contract containing performance-based payment provisions.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: In its response to GAO's report, DOD partially concurred with the recommendation that DOD verify delivery and payment accuracy before the ACO enters receiving report information into the paying system office system. DOD contends that the DCMA QA verification of delivery prior to the transmission of data to the ACO is sufficient. However, GAO continues to believe that the ACO is in a unique position to verify the accuracy of payment information on an invoice. DOD planned no action on this recommendation. DOD's position has not changed.

    Recommendation: To reduce the likelihood of the need for corrections at the paying office, the Administrative Contracting Officer should review the payment information as soon as possible after receiving invoices from the contractor.

    Agency Affected: Department of Defense: Department of the Air Force

  2. Status: Closed - Not Implemented

    Comments: In its response to GAO's report, DOD partially concurred with this recommendation. DOD agrees that the recommended procedures for verifying the accuracy of payment amounts for aircraft delivery are necessary, but does not agree that these are the responsibility of the ACO. GAO continues to believe that only the ACO is in a position to verify the accuracy of payment information. DOD planned no action on this recommendation. The department's position has not changed.

    Recommendation: To ensure that the paying office does not process delivery payments based on inaccurate information on the invoice, the Administrative Contracting Officer should, in accordance with the guidelines contained in the Air Force Materiel Command handbook, verify delivery of the aircraft and calculate the amount of payment. These verifications should occur before the Administrative Contracting Officer representative enters the receiving report information into the paying office system.

    Agency Affected: Department of Defense: Department of the Air Force

  3. Status: Closed - Not Implemented

    Comments: In its response to GAO's report, DOD partially concurred with this recommendation. However, DOD stated that it is acceptable to rely on the contractor to transmit payment requests because the ACO monitors payments using the payment office's payment system. While GAO agrees that this after-the-fact approach does provide some measure of compensating control, DOD has continued to experience difficulties in resolving identified payment errors. Consequently, GAO continues to believe the recommended preventive control would be the preferable approach to ensure the reliability of performance-based payment requests. DOD planned no action on this recommendation. The department's position has not changed.

    Recommendation: The Administrative Contracting Officer should transmit all PBP requests to the paying office as required by Federal Acquisition Regulation Part 32.1007.

    Agency Affected: Department of Defense: Department of the Air Force

  4. Status: Closed - Not Implemented

    Comments: In its response to GAO's report, DOD did not concur with this recommendation. DOD stated that it believed that the contracting officers withheld an amount sufficient to cover the estimated cost and related profit to correct deficiencies and complete unfinished work in accordance with the FAR. The department's position has not changed.

    Recommendation: The contracting officer should follow the requirements of Federal Acquisition Regulation Part 46.407(f) by negotiating a withhold amount that represents the full value of the unfinished work and thereby better protects the government's interests.

    Agency Affected: Department of Defense: Department of the Air Force

  5. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation that DFAS management provide instructions to staff who process delivery payments for performance-based contracts. DOD stated that the paying office will provide additional local operating procedures and DFAS will issue guidance on the importance of properly determining entitlements for performance-based payments. DFAS provided interim performance based payment guidance to their entitlement personnel in June 2001.

    Recommendation: The paying office management should provide instructions to staff who process delivery payments for PBP contracts to help ensure that they recognize these types of payments for and process them in accordance with the terms specified in the contract.

    Agency Affected: Department of Defense: Department of the Air Force

 

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