Contract Pricing:

Unallowable Costs Charged to Defense Contracts

NSIAD-93-79: Published: Nov 20, 1992. Publicly Released: Dec 22, 1992.

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Pursuant to a congressional request, GAO reviewed the overhead cost submissions of six defense contractors to determine whether those contractors included unallowable or questionable costs in their overhead submissions.

GAO found that: (1) the six contractors, with annual government sales ranging between $11 million and $107 million, lacked the volume of government business to justify the permanent oversight that the Defense Contract Audit Agency (DCAA) maintains at large defense contractors; (2) the six contractors included about $2 million in expressly unallowable or questionable costs in their overhead submissions; (3) DCAA did not question any overhead costs for 4 of the 6 contractors; (4) undetected unallowable costs could affect the extent of overcharges and the negotiation of fixed-price contracts; (5) contractors included unallowable or questionable costs for expenses involving alcoholic beverages, personal use of automobiles and a boat, advertising and trade shows, employee dependent scholarships, business meetings, entertainment and employee morale, pension expenses, and other inadequately supported costs; (6) the contractors' internal control systems were not identifying and excluding significant amounts of unallowable or questionable costs from their overhead submissions; (7) the Federal Acquisition Regulation (FAR) lacked sufficient clarity regarding the allowability of many costs included in overhead submissions; and (8) DCAA performed limited transaction testing of contractors' overhead submissions and did not fully comply with audit planning and evidential matter policy.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Federal Acquisition Streamlining Act of 1994 (FASA) provided that costs of gifts and recreation for federal contractor employees are expressly unallowable. These same costs are also unallowable under FAR provisions regarding entertainment costs. The FAR was amended on August 16, 1995, to implement this provision of FASA and to provide that costs specifically unallowable under the entertainment cost principle are not allowable under any other cost principle.

    Recommendation: The Secretary of Defense should clarify FAR by: (1) eliminating the reference to other cost principles in the entertainment cost principle; and (2) adding a statement that costs made specifically unallowable under the entertainment cost principle are not allowable under other cost principles.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD initiated FAR case 93-11 to evaluate the cost principles to determine whether additional guidance was needed concerning allowability of business meetings at resorts.

    Recommendation: The Secretary of Defense should evaluate the cost principles to determine whether additional guidance is needed concerning the allowability of business meetings at resort locations, especially resort locations outside the United States.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: DCAA developed new audit guidance for performing incurred cost audits at nonmajor contractors. It included guidance on establishing the scope of the transaction-testing plan.

    Recommendation: The Director, DCAA, should evaluate the extent to which field offices need to spend more time in transaction testing, especially at nonmajor contractors. GAO recognizes that DCAA does not have the resources to make in-depth reviews at small contractors each year. However, DCAA should consider detailed in-depth reviews of contractors' incurred costs every 3 or 4 years. The potential for an in-depth review would act as an incentive for contractors to ensure that unallowable costs are excluded from their indirect cost submissions.

    Agency Affected: Department of Defense: Defense Contract Audit Agency

 

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