Contract Pricing:

DOD Management of Contractors With High-Risk Cost-Estimating Systems

NSIAD-94-153: Published: Jul 19, 1994. Publicly Released: Aug 18, 1994.

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Louis J. Rodrigues
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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) efforts to ensure that high-risk contractors reduce the government's vulnerability to contract overpricing, focusing on the: (1) extent to which contractors are correcting significant cost-estimating system deficiencies; (2) actions DOD contracting officers are taking to encourage contractors to improve their cost-estimating systems; and (3) adequacy of DOD controls to ensure that deficiencies are timely corrected.

GAO found that: (1) contractors' performance in correcting their significant cost-estimating system deficiencies has been mixed; (2) 11 of 30 high-risk DOD contractors have significant uncorrected deficiencies that have been outstanding an average of 3.8 years; (3) the failure to timely correct estimating deficiencies creates a variety of problems for DOD, including increased costs and delays in contract awards; (4) although DOD contracting officers take various actions to encourage contractors to correct cost-estimating deficiencies, contracting officers do not use the most stringent measures available, such as reducing progress payments or recommending nonaward of future contracts; (5) even when contractors have long-standing estimating system deficiencies, the Defense Logistics Agency (DLA) does not attempt to determine the reasons for delays in correcting the deficiencies or ensure that contractors and DOD contracting officers are taking all appropriate actions to correct them; and (6) DLA oversight of contracting officers is important, since they have considerable latitude in deciding how to obtain corrective action and DOD does not specify criteria used to determine timeliness of corrective actions.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: DLA/DCMC has taken steps to increase oversight of defense contractor cost estimating systems deficiencies.

    Recommendation: The Secretary of Defense should direct the Director of DLA to implement procedures to ensure that significant cost-estimating system deficiencies are corrected more expeditiously. Such procedures should include the implementation of routine followup by DLA district offices and headquarters to determine why long-standing deficiencies have not been corrected, and the establishment of specific frames as to when contracting officers are required to seek guidance about using more severe remedies that are already available and when higher level management must become involved in finding solutions to such significant deficiencies.

    Agency Affected: Department of Defense


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