Overhead Costs: Unallowable and Questionable Costs Charged by Government Contractors

GAO discussed the overhead costs of 8 Department of Defense (DOD) contractors, focusing on charges for alcoholic beverages, personal use of automobiles and boats, travel, business meetings, and entertainment. GAO noted that: (1) all 8 contractors included unallowable and questionable costs totalling about $7.4 million in the their overhead claims; (2) the contractors included $289,000 in costs for alcoholic beverages and personal use of company automobiles and boats even though these costs are expressly unallowable under DOD acquisition regulations; (3) one contractor charged $19,300 for two chartered aircraft rather than the lowest standard commercial airfare for the flights; (4) two contractors claimed about $383,000 for annual business meetings held at resorts outside of the United States; (5) DOD acquisition regulations specifically prohibit contractor charges for entertainment costs involving social activities, sporting events, and shows, but contractors include such charges, contending that they are allowable expenses for maintaining employee morale and welfare; (6) to combat the problem of unallowable costs, DOD began requiring contractors to certify that their overhead claims excluded unallowable costs and Congress legislated penalties for unallowable costs, but the problem continues; (7) DOD should clarify the regulations for selected types of overhead costs, explore innovative approaches to reimbursing contractor overhead costs, and increase the purchase of commercial products; and (8) DOD contractors must stress that unallowable costs are not acceptable and pay more attention to identifying and excluding such costs from their overhead claims.