DOD Contract Management:

Overpayments Continue and Management and Accounting Issues Remain

GAO-02-635: Published: May 30, 2002. Publicly Released: Jul 1, 2002.

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Since GAO reported on Department of Defense (DOD) contractor overpayments in 1994, additional reports have been issued highlighting billions of dollars of overpayments to Defense contractors. In December 2001, Congress amended Title 31 of the United States Code to require a federal agency with contracts totaling over $500 million in a fiscal year to have a cost-effective program for identifying payment errors and for recovering amounts erroneously paid to contractors. DOD contractors' responses to GAO's survey indicate that they have millions of dollars of overpayments on their records and that they are continuing to refund overpayments-- about $488 million in fiscal year 2001. DOD has taken actions to address problems with contractor overpayments. In addition to its contract audit functions and as part of a broad based program to assist the Defense Contract Management Agency (DCMA) and the Defense Finance and Accounting Service (DFAS), the Defense Contract Audit Agency (DCAA) is auditing at least 190 large DOD contractors to identify overpayments and ensure that contractors have adequate internal controls for prompt identification and reporting of overpayments. Although DOD has several initiatives to reduce overpayments, it still does not yet have basic administrative control over contractor debt and underpayments because its procedures and practices do not fully meet federal accounting standards and federal financial system requirements for the recording of accounts receivable and liabilities. As a result, DOD managers do not have important information for effective financial management, such as ensuring that contractor debt is promptly collected.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and has implemented several initiatives designed to improve its ability to identify and collect contract overpayments. DOD developed several specific new control procedures for detecting and preventing overpayments. DOD also continued to rely on recovery audits to help ensure that contractors have adequately identified and reported overpayments that occurred during the contract. To help improve collections, DOD instituted new performance measures to encourage and monitor the timely collection of overpayments.

    Recommendation: The Under Secretary of Defense Comptroller in coordination with the Under Secretary of Defense for Acquisition, Technology, and Logistics should implement an internal control, as now required by 31 U.S.C. 3561, to identify and collect overpayments to contractors, regardless of contract payment type.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  2. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and has taken steps designed to improve the timeliness of its recognition of receivables and payables. DOD issued a new Concept of Operations (CONOPs) for Accounts Receivable in August 2003. The CONOPs established new procedures for recording detailed accounts receivable information using field level systems such as the Demand Letter Tracking System and the Contract Debt System. The new CONOPS also requires that accounts receivable reports be periodically reconciled with field site records. In addition to the CONOPs, DOD established a working group to improve the quality of internal accounts receivable reports and conducted data calls to identify the true value of outstanding accounts receivable. This effort resulted in the identification of more than $1.1 billion in accounts receivable that had previously not been included accounting records. To improve accounts payable, DOD revised its Contract Pay desk procedures in 2003 to provide instructions to field staff for researching and resolving contractor underpayments. DOD also developed two new tools in 2005 for identifying amounts to be included as accounts payable using field level system information. One of these tools identifies payments made for less than the invoiced amount. The second identifies payments scheduled to be paid for less than the invoiced amount. The revised guidance and improved record-keeping will allow DOD to promptly identify, record and resolve liabilities due to underpayments.

    Recommendation: The Under Secretary of Defense Comptroller in coordination with the Under Secretary of Defense for Acquisition, Technology, and Logistics should reevaluate DCMA, DOD Comptroller, and DFAS established procedures and controls and revise them as needed to ensure prompt recognition and recording of receivables and potential liabilities stemming from DOD's contract management and payment processes, according to federal accounting standards and financial management system requirements.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  3. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and established a working group with the objective of improving DOD's reporting and management of accounts receivable. The working group's efforts led to the development of better management tracking reports and new performance metrics for monitoring the timeliness of collections of receivables, including those associated with disputed demand letters. DOD also made improvements to its procedures for analyzing the root causes of overpayments and underpayments by assigning reason codes to refunds from contractors, performing customer outreach, and developing other tools to identify problems and implement solutions.

    Recommendation: The Under Secretary of Defense Comptroller in coordination with the Under Secretary of Defense for Acquisition, Technology, and Logistics should develop and maintain more comprehensive and complete records on contractor refunds and underpayments to better measure and monitor (1) the timeliness of all collections, including checks and offsets, (2) the resolution of demand letter disputes, (3) the causes of overpayments and underpayments, (4) the resolution of overpayments and underpayments and the need for corrective actions, and (5) compliance with policies and procedures.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

 

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