Overhead Costs:

Unallowable and Questionable Costs Charged by E-Systems, Inc.

NSIAD-94-113: Published: Mar 28, 1994. Publicly Released: Mar 28, 1994.

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Pursuant to a congressional request, GAO reviewed a Department of Defense contractor's general and administrative expenses for 1989 through 1992, focusing on: (1) its unallowable costs; (2) the Defense Contract Audit Agency's (DCAA) contractor audits; and (3) the contractor's internal controls for detecting and segregating unallowable costs.

GAO found that: (1) $120,000 of the contractor's $16 million in overhead costs represented unallowable costs for personal use of automobiles, public relations, travel, and legal services; (2) the contractor did not adequately document $2.8 million in questionable costs or excessive travel costs; (3) DCAA questioned $4.6 million in overhead costs in its last three annual audits of the contractor and its two affiliates; (4) the contractor's internal controls were inadequate for detecting and segregating unallowable costs because of its lack of formal written guidance and poor recordkeeping; (5) although the risk of submitting unallowable costs was minimized by the contractor's experience in voucher processing and cost submission, employee turnover could heighten the risk in the future; (6) the actual amount of overcharges to the government depended on the ratio of defense versus commercial contracts, since the costs were included in the contractor's total overhead pool and allocated among its contracts; and (7) undetected unallowable costs could affect fixed-priced contract negotiations.

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