Improvements Needed in DOD Procedures To Prevent Reimbursement of Unallowable Costs on Government Contracts

NSIAD-85-81: Published: May 7, 1985. Publicly Released: May 7, 1985.

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GAO reviewed final overhead cost settlements with defense contractors to determine the extent to which questionable costs were allowed.

GAO found numerous instances where administrative contracting officers (ACO) allowed costs that the Defense Contract Audit Agency (DCAA) questioned. Overall, 53 percent of the costs questioned by DCAA were allowed as overhead by ACO. GAO believes that: (1) the discrepancies are caused by varying interpretations of certain ambiguous provisions in the Federal Acquisition Regulation (FAR); and (2) contractors continue to claim reimbursement for unallowable costs, such as advertising and promotional expenses, because ACO often agree to compromise cost settlements that do not address specific cost items. Certain changes have been proposed to FAR that specify the circumstances under which advertising and public relations costs are allowable.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On April 9, 1986, FAR was amended to comply with the requirements of P.L. 99-145. The amendment introduced areas and an important concept by stating that costs which are made unallowable under public relations and advertising are not made allowable under other sections. Conversely, costs made unallowable under other FAR sections are not made allowable under any other subsection.

    Recommendation: The Secretary of Defense should direct the Defense Acquisition Regulatory Council to coordinate with the Civilian Agency Acquisition Council to amend FAR section 31.205 to state that all costs made specifically unallowable under any subsection of FAR 31.205 are not allowable under any other subsections of FAR 31.2.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: On August 5, 1985, the Deputy Secretary of Defense assigned responsibility for final indirect cost rate determinations for all contractor locations to DCAA. Overhead settlements will be based on audit determination procedures rather than contracting officer determination procedures. The Deputy Secretary directed that new guidelines be developed and FAR be modified to implement this directive.

    Recommendation: The Secretary of Defense should direct ACO to negotiate, settle, and document costs questioned as unallowable by DCAA on overhead claims on an item-by-item basis.

    Agency Affected: Department of Defense


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