Contract Pricing:

Defense Subcontract Cost-Estimating Problems Are Chronic and Widespread

NSIAD-91-157: Published: Mar 28, 1991. Publicly Released: May 22, 1991.

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Pursuant to a congressional request, GAO evaluated the Defense Contract Audit Agency's (DCAA) assessments of contractor estimating systems, focusing on: (1) subcontractor cost estimates; (2) corrections to subcontract estimating deficiencies; and (3) Department of Defense (DOD) administrative contracting officers' enforcement against contractors that did not comply with the revised cost-estimating regulation. GAO also conducted a case study on DOD vulnerability to excessive costs due to subcontract estimating problems.

GAO found that: (1) 83 of 101 contractors that DCAA assessed had subcontract estimating deficiencies that required corrective action; (2) prime contractors failed to adequately conduct or disclose subcontract evaluations, and their bids did not consider likely vendor reductions; (3) 64 of the 83 contractors failed to correct previously identified deficiencies in a timely manner; (4) DOD lacked adequate controls to ensure compliance with regulations on subcontract pricing; (5) DOD administrative contracting officers used sanctions infrequently; and (6) its case study showed overpricing that was equivalent to 75 percent of the amount negotiated in the prime contract.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Based on its evaluation of the 42 contractors with inadequate estimating systems, DOD has taken a number of actions to ensure that those systems will provide accurate, complete, and timely information. DOD does not believe this problem supports designating subcontract pricing as a material internal control weakness.

    Recommendation: The Secretary of Defense should designate subcontract pricing as a material internal management control weakness in accordance with the Federal Managers' Financial Integrity Act of 1982 (FMFIA). This designation would increase the public accountability of DOD managers and motivate them to establish or strengthen controls in an area where significant overpayments have occurred.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The Defense Logistics Agency issued directives to the commanders of the Defense Contract Management districts highlighting the problems pointed out in the GAO reports and requiring the commanders to become personally involved in ensuring that DOD regulations are followed and that contractors take action to correct deficiencies and inform higher-level management if corrections are not made.

    Recommendation: The Secretary of Defense should encourage stronger use of all existing regulatory sanctions to bring about improvements in contractor estimating systems and protect against fraud, waste, and mismanagement.

    Agency Affected: Department of Defense


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