Defense Contracting: Use of Undefinitized Contract Actions Understated and Definitization Time Frames Often Not Met

OFPP has implemented this recommendation by making a change to the Federal Procurement Data System-Next Generation (FPDS-NG) that will allow for the identification of undefinitized orders and modifications as undefinitized at award. In April 2008, FPDS-NG item 6B was renamed from "Letter Contract" to "Undefinitized Action" and its coding values have changed: Code A--Letter Contract--is to be used for a letter contract or any funding modification to a letter contract prior to definitization; Code B--Other Undefinitized Action--is to be used for unpriced (undefinitized) purchase/delivery/task orders, unpriced modifications, and funding modifications to these types of actions; Code X--NO--is to be used to indicate that the action is neither a Letter Contract nor an Other Undefinitized Action. This change was publicized in the May 2008 update of the FPDS-NG Data Dictionary. OFPP, who maintains FPDS-NG, confirmed that this change should allow DOD and other agencies to track undefinitized actions, and that it was made in response to the GAO recommendation.

In commenting on the report, DOD concurred with the recommendation and said it will issue guidance to clarify the appropriate criteria. An AT&L guidance memo was issued August 29, 2008. It reminds employees to definitize Undefinitized Contract Actions (UCAs) in accordance with DFARS 217.74, which states that a UCA should be definitized before 180 days or 50% of the funding is obligated. The guidance memorandum does not discuss definitizing before 40% of the work is complete as FAR requires. As indicated in DOD's comments on the report, a DFARS case (2007-D011) was opened to amend DFARS to make reference to the FAR requirement. DFARS case 2007-D011 was published as a final rule on June 8, 2010. It amended the DFARS to clarify the definitization requirements for letter contracts. The rule specifies that letter contracts will be definitized using the DFARS requirements at 217.7404-3(a) instead of the requirements at FAR 16.603-2(c)(3). As a result, because DOD issued specific guidance clarifying the criteria thereby partially implementing our recommendation, we are closing this recommendation as implemented.

In commenting on a draft of the report, DOD concurred with the recommendation and said that enhanced oversight is appropriate and it will consider requiring the military departments to provide periodic reports of over-age UCAs with remediation plans. On August 29, 2008, an AT&L guidance memorandum was issued that specified new semi-annual reporting requirements for UCAs valued at over $5 million that fail to meet required timelines for definitization or fail to comply with regulatory limitations on the obligation of funds or on profit or fee. The first reports were due in October 2008.

In commenting on a draft of the report, DOD concurred with the recommendation and said it is studying changes to its contract financing and funding policies. An AT&L guidance memo was issued August 29, 2008. It states that Contracting Officers should avoid obligating the maximum permissible funding at the time of Undefinitized Contract Action (UCA) award. It instructs Contracting Officers to assess the contractor's spend plan for the undefinitized period, and obligate funds only in an amount consistent with the contractor's requirements for the undefinitized period.

In commenting on a draft of the report, DOD concurred with the recommendation and said it is studying changes to its private sector profit/fee policies. An AT&L guidance memo was issued August 29, 2008. It reminds Contracting Officers to use a contract risk factor in the low end of the designated range when calculating profit/fee in the negotiation of a UCA in order to account for the lower risk for the contractor prior to definitization. The guidance states that Contracting Officers must document the risk assessment in the contract file.