Contract Management:

Fixing DOD's Payment Problems Is Imperative

NSIAD-97-37: Published: Apr 10, 1997. Publicly Released: May 12, 1997.

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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) efforts to improve its contract payment practices, focusing on: (1) the factors contributing to payment errors and increased costs; (2) DOD's efforts to improve its payment system; and (3) payment practices of commercial companies that DOD might adopt.

GAO noted that: (1) it is imperative that DOD achieve cost-effective control over its payment process; (2) otherwise, it continues to risk hundreds of millions of dollars in potential overpayments and other financial management and accounting control problems; (3) further, improving the efficiency of the payment process would save additional millions of dollars annually in reduced processing costs; (4) the following factors contribute significantly to problems and increased costs in DOD's payment process: (a) nonintegrated computer systems that require manual entry of data that are erroneous or incomplete; (b) multiple documents that must be matched before contractors are paid; and (c) payments that require allocation among numerous accounting categories; (5) improving DOD's payment system will not be an easy or quick undertaking; (6) it will require continued top management attention and support for many years to come; (7) while DOD is taking some steps to address its payment problems, when and to what degree they will effectively correct its problems remains to be seen; (8) further, DOD's actions do not go far enough in addressing the factors GAO identified as contributing to payment problems; (9) for example, DOD has yet to decide on how to minimize transferring existing erroneous data to the new automated system; (10) moreover, it also plans to continue to match multiple documents and allocate payments across numerous accounting categories; (11) GAO's review indicated that DOD might benefit from further examining best practices of commercial organizations that have reengineered their contract payments process; (12) the organizations GAO visited have focused on a long-term effort of continual improvements with contract payments viewed as an integral part of the acquisition process; and (13) in general, these organizations have combined technological improvements with streamlined processes to improve service and reduce costs.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Defense Finance and Accounting Service (DFAS) has been working with other DOD organizations to identify what minimum level of detail is required to be included on the contract. Policy was published on May 8, 1998, that defines the required breakdown of funding on contracts. DFAS will work with military departments' buying activities and contractors to develop various alternative methods for the collection of cost data.

    Recommendation: The Secretary of Defense should direct the DOD Comptroller and the Under Secretary of Defense for Acquisition and Technology, as part of their improvement strategy, to thoroughly evaluate the information requirements of the user, procurement, and accounting communities in terms of their potential impact on the payment process and on the process' ability to produce useful information, in order to reduce the amount of detail accounting placed on the payment center.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DFAS has taken actions to encourage customers to use lower cost alternatives, but it has not assessed its overall pricing structure to reflect the cost of servicing contracts. Incentive rates were offered in fiscal year 1999 to encourage the use of electronic commercial technologies. These technologies have the potential, according to DOD, to generate significant savings for both DFAS and its customers. DFAS systems (MOCAS and SAMMS) offer reduced rates for electronic invoicing by the vendor (versus hardcopy invoicing).

    Recommendation: The Secretary of Defense should direct the DOD Comptroller and the Under Secretary of Defense for Acquisition and Technology, as a part of their improvement strategy, to evaluate whether the pricing structure that the Columbus Center uses to charge its customers for accounting services needs to better reflect the cost of servicing contracts, particularly where the customer requires costly detailed expenditure information.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: The contract reconciliation policy has been revised. Volume 10, Chapter 20 of the DOD Financial Management Regulation, which contains the policy, was published in May 2001.

    Recommendation: The Secretary of Defense should direct the DOD Comptroller and the Under Secretary of Defense for Acquisition and Technology, as a part of their improvement strategy, to establish a DOD-wide policy for closing out existing contracts that cannot be reconciled because accurate and complete data are lacking. Such a policy should take into account such factors as the age and complexity of the contract, the dollar value of the discrepancy, and the possibility of multiple errors.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: According to DOD, its purchase card program management office has been chartered. The web site is http://purchasecard.sarda.army.mil. In addition, using the receiving report as the contractor's invoice has become part of a larger DOD initiative to implement paperless contracting. An integrated process action team was established to analyze receiving report issues.

    Recommendation: The Secretary of Defense should direct the DOD Comptroller and the Under Secretary of Defense for Acquisition and Technology, as a part of their improvement strategy, to explore increased opportunities for using best practices, including streamlined payment techniques, such as purchase cards. Twenty-one percent of Defense Contract Management Command administered contracts paid by the Columbus Center were $2,500 or less. In addition, consider eliminating the requirement to match payments to invoices, where appropriate, such as when the existence of a receiving report may constitute sufficient evidence that a payment is owed.

    Agency Affected: Department of Defense

 

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