Contract Pricing:

Subcontracts Are Significant in Prime Contract Defective Pricing

NSIAD-92-131: Published: May 28, 1992. Publicly Released: Jun 4, 1992.

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Pursuant to a congressional request, GAO evaluated the adequacy of controls for preventing fraud, waste, and mismanagement in Department of Defense (DOD) subcontracts and analyzed defective pricing audits performed by the Defense Contract Audit Agency (DCAA) to determine how much of the total amount of defective pricing reported by DCAA audits was related to subcontracts.

GAO found that: (1) almost half of the $2.1 billion of all prime contract defective pricing DCAA identified in fiscal years (FY) 1987 through 1990 was related to overstated subcontract prices that were overpriced by prime contractors; (2) subcontract prices were overstated by about $970 million, consisting of $669.5 million in direct subcontract costs and $300.4 million in prime contractor overhead and profit; (3) subcontract costs were the most frequently overstated category of direct costs, and about 80 percent of DCAA prime contract defective reports showed that defective pricing was caused when the prime contractor overstated subcontract costs; (4) the total amount of overstated subcontract prices was an estimated $1.85 billion, including the $880 million reported by DCAA in subcontract defective pricing and an estimated $970 million of overstated subcontract prices in prime contract defective pricing audits; and (5) the estimated $1.85 billion represents about 63 percent of the total defective pricing identified by DCAA in FY 1987 through 1990, which shows the significant relationship between overstated subcontract prices and defective pricing.

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