Contract Pricing:

DOD's Use of the Truth in Negotiations Act Deterrents Could Be Increased

NSIAD-94-7: Published: Oct 25, 1993. Publicly Released: Nov 26, 1993.

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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) internal controls for contract pricing, focusing on: (1) DOD use of deterrent provisions in the Truth in Negotiations Act; and (2) the interest charged on overpayments.

GAO found that: (1) in fiscal year 1992, DOD sustained 40 percent of its recommended price adjustments; (2) DOD has not recovered most overpayments because contracting officers ignore audits that do not support defective pricing determinations, and DOD settles with contractors for lesser amounts; (3) DOD has initiated actions to improve the accuracy of its contractor audits and increase recommended price adjustments; (4) DOD contracting officers have not effectively used deterrents or fully assessed interest charges and penalties on overpayments because of regulatory restrictions and differing interpretations; (5) DOD does not timely settle defective pricing cases because the lengthy settlement process places a heavy administrative burden on the government and contractors; (6) the DOD contract tracking and information system has inaccurate data due to reporting errors and lacks needed oversight and management information; and (7) the DOD Inspector General has recommended several changes to improve DOD contractor reporting.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD has taken the actions promised. However, to determine the results of these actions would require extensive followup. DOD/IG has and will continue to perform detailed followup in this area. Its latest report was in April 1994.

    Recommendation: The Secretary of Defense should more effectively implement the interest and penalty features of the act to ensure contractor compliance. More effectively implementing the act could include: (1) determining, based on an analysis of appropriate defective pricing audit reports, whether charging interest on overpayments in progress payments resulting from defective pricing is administratively feasible and would result in significant interest recovery, and if so, initiating action to revise the regulation; (2) directing contracting activities to instruct contracting officers to charge interest as stipulated in the regulations and to include internal control checks for proper interest charges during business clearance reviews; and (3) modifying DOD guidance to instruct contracting officers on the use of the penalty in determining the amount recoverable from contractors for defective pricing.

    Agency Affected: Department of Defense

  2. Status: Closed - Not Implemented

    Comments: Since the extent of defective pricing has declined significantly, the need for changes in the audit followup system may not be necessary.

    Recommendation: The Secretary of Defense should ensure that the audit follow-up system contains the data needed for oversight and management of the settlement process and that ongoing improvements to internal controls place high priority on providing complete and accurate data.

    Agency Affected: Department of Defense


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