Unallowable Costs and Penalties

NSIAD-94-204R: Published: Jul 6, 1994. Publicly Released: Jul 6, 1994.

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Pursuant to a congressional request, GAO reviewed the extent to which the Department of Defense (DOD) uses the penalty provision in the DOD Authorization Act of 1986 to deter defense contractors from submitting unallowable and questionable cost claims. GAO noted that: (1) the information that the Defense Contract Management Command (DCMC) collected on the use of penalties was limited; (2) a more complete and better organized system for collecting and analyzing penalty information would be cost beneficial as a basis for DCMC oversight; and (3) a more formal system for maintaining penalty data could help DCMC manage DOD contracting officers' use of the penalty provision.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD agrees that a more organized system should be established to record and maintain penalty information regarding unallowable costs. Toward that end, a new system is being developed that will record the amount of penalty recommended by the Defense Contract Audit Agency and the amount assessed by the administrative contracting officer. As part of system implementation, the Defense Logistics Agency (DLA) will amend the semiannual report on open contractor overhead negotiations to track the penalties relative to the contractors. For contractors whose overhead rates are determined through audit, DLA will establish a mechanism to record those penalties, as reflected on the annual report.

    Recommendation: In view of continuing congressional concerns over unallowable overhead cost submissions and the use of penalties, the Commander, DCMC, should establish a more organized system to record and maintain penalty information and use Defense Contract Audit Agency data to verify the completeness of the data collected.

    Agency Affected: Department of Defense: Defense Contract Management Command


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