Defense Acquisition:

Guidance Is Needed on Payments for Conditionally Accepted Items

NSIAD-98-20: Published: Dec 12, 1997. Publicly Released: Dec 12, 1997.

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Louis J. Rodrigues
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GAO reviewed the Air Force's procedures for payment to contractors for work not completed at the time of delivery, focusing on whether: (1) this situation occurred in other programs; and (2) additional guidance was needed to avoid paying contractors for work not done at the time of delivery.

GAO noted that: (1) its review of four selected Air Force, Army, and Navy acquisition programs showed that each of the services accept items conditionally; (2) however, federal and Department of Defense (DOD) regulations do not provide guidance to contracting officers for determining amounts to be withheld from payments in these cases; (3) there is no consensus among Office of the Secretary of Defense and service officials as to what policy should govern payments at the time of conditional acceptance; (4) some officials agreed that the amount withheld should reflect the estimated cost and profit associated with the work to be done by a contractor after delivery while others indicated that contracting officers should have discretion to withhold whatever amount they determine appropriate; (5) the extent of service guidance ranged from the Army providing no guidance to standard Air Force and Navy contract clauses that leave determining the amount to be withheld to the contracting officer's discretion; (6) such guidance does not ensure that the amount withheld reflects the estimated cost and profit to correct known deficiencies and perform other incomplete work; (7) as a result, it lacks the safeguards necessary to reduce the government's risk of financial exposure and is inconsistent with the policy of paying only for completed work; (8) GAO's review of the four selected acquisition programs showed that when items were conditionally accepted, each of the services paid contractors the billing price, assuming 100-percent completion, less some amount for nonconforming or unfinished work; (9) in general, the amounts withheld were less than the costs to correct known deficiencies and complete unfinished work and resulted in contractors being paid for work that had not been performed at the time of conditional acceptance; (10) for example, the estimated price to correct known deficiencies and complete unfinished work on two C-17 production contracts exceeded the amounts withheld by about $61 million, based on the contractor's cost estimates, or $127 million based on the cost estimates used by the Defense Contract Management Command in administering the contract; (11) the Hunter Unmanned Aerial Vehicle program accepted five systems with six conditional waivers for which no money was withheld; (12) program officials told GAO that they believed the contractor would correct the deficiencies; and (13) the program office was not able to provide an estimate of the potential cost of this work.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The FAR Secretariat opened case 98-002 dealing with the issue. The FAR Council gave its final approval in mid-September 1999. FAR Circular 97-14 will include the change GAO recommended to DFARS. The FAR was amended effective November 23, 1999.

    Recommendation: The Secretary of Defense should amend the DOD Federal Acquisition Regulation Supplement to require that, when conditionally accepting nonconforming items, amounts withheld be at least sufficient to cover the cost and related profit to correct deficiencies and complete other unfinished work. If the contracting officer determines that withholding a lesser amount is in the best interests of the government, such a determination should be properly documented and justified in the contract files.

    Agency Affected: Department of Defense


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