Contract Pricing:

DCAA's Methodology Change in Identifying 'High Risk' Contractors

NSIAD-92-183: Published: Jun 2, 1992. Publicly Released: Jun 8, 1992.

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Pursuant to a congressional request, GAO reviewed the impact that Defense Contract Audit Agency (DCAA) changes had on procedures for designating contractors as high risk.

GAO found that: (1) under fiscal year (FY) 1991 DCAA procedures, the number of contractors showing high risk in at least one comparable risk factor increased from 65 in FY 1991 to 96 in FY 1992, a 48-percent increase; (2) in FY 1992, DCAA changed its procedures for assessing contractor risk by dropping suspected irregular conduct as an evaluation and adding accounting system deficiencies and the amount of recommended price adjustments as factors; (3) DCAA also increased the number of levels of risk to four, provided specific criteria for determining the appropriate level of risk, and changed the way it determined whether a contractor should be designated as high risk; (4) using the revised procedures, only 10 contractors were designated as high risk, an 85-percent decrease from the 65 contractors designated as high risk in FY 1991; (5) the averaging calculation of the new procedure was a major reason for the decrease in the number of high-risk contractors from FY 1991 to FY 1992; and (6) contractors that are not designated as high risk may be subject to less defective pricing audit coverage, since the extent of defective pricing audit coverage is determined by the contractors' overall risk ranking and the dollar value of the contracts subject to audit.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD revised its procedures so that contractors rated high risk for estimating deficiencies and high risk for historic patterns of defective pricing would not be excluded from the high risk list because of a low score on accounting systems. GAO preliminary review of the fiscal year 1993 high risk list shows this change is having the desired effect.

    Recommendation: The Secretary of Defense should direct the Director, DCAA, to revise its FY 1992 procedure for designating contractors as high risk to ensure that those contractors that historically have posed a great risk of defective pricing are included in the group of contractors that, for audit purposes, DCAA designates as high risk.

    Agency Affected: Department of Defense


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