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Highlights

To meet urgent needs, the Department of Defense (DOD) can issue undefinitized contract actions (UCA), which authorize contractors to begin work before reaching a final agreement on contract terms. The contractor has little incentive to control costs during this period, creating a potential for wasted taxpayer dollars. Pursuant to the House of Representatives report on the National Defense Authorization Act for Fiscal Year 2007, we assessed (1) the level of insight DOD has into its use of UCAs, (2) how and when DOD is using UCAs, (3) whether DOD is definitizing UCAs in a timely fashion, and (4) whether contracting officers are documenting the basis for negotiated profit or fee. GAO reviewed 77 randomly-selected contracts at seven locations and interviewed DOD officials.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Office of Federal Procurement Policy To improve oversight of UCAs, the Administrator of the Office of Management and Budget's Office of Federal Procurement Policy should assess whether the Federal Procurement Data System-Next Generation data fields need to be modified to require coding that will identify undefinitized task and delivery orders and undefinitized contract modifications.
Closed - Implemented
OFPP has implemented this recommendation by making a change to the Federal Procurement Data System-Next Generation (FPDS-NG) that will allow for the identification of undefinitized orders and modifications as undefinitized at award. In April 2008, FPDS-NG item 6B was renamed from "Letter Contract" to "Undefinitized Action" and its coding values have changed: Code A--Letter Contract--is to be used for a letter contract or any funding modification to a letter contract prior to definitization; Code B--Other Undefinitized Action--is to be used for unpriced (undefinitized) purchase/delivery/task orders, unpriced modifications, and funding modifications to these types of actions; Code X--NO--is to be used to indicate that the action is neither a Letter Contract nor an Other Undefinitized Action. This change was publicized in the May 2008 update of the FPDS-NG Data Dictionary. OFPP, who maintains FPDS-NG, confirmed that this change should allow DOD and other agencies to track undefinitized actions, and that it was made in response to the GAO recommendation.
Department of Defense To improve oversight of UCAs, the Secretary of Defense should issue guidance to program and contracting officials on how to comply with the FAR requirement to definitize when 40 percent of the work is complete.
Closed - Implemented
In commenting on the report, DOD concurred with the recommendation and said it will issue guidance to clarify the appropriate criteria. An AT&L guidance memo was issued August 29, 2008. It reminds employees to definitize Undefinitized Contract Actions (UCAs) in accordance with DFARS 217.74, which states that a UCA should be definitized before 180 days or 50% of the funding is obligated. The guidance memorandum does not discuss definitizing before 40% of the work is complete as FAR requires. As indicated in DOD's comments on the report, a DFARS case (2007-D011) was opened to amend DFARS to make reference to the FAR requirement. DFARS case 2007-D011 was published as a final rule on June 8, 2010. It amended the DFARS to clarify the definitization requirements for letter contracts. The rule specifies that letter contracts will be definitized using the DFARS requirements at 217.7404-3(a) instead of the requirements at FAR 16.603-2(c)(3). As a result, because DOD issued specific guidance clarifying the criteria thereby partially implementing our recommendation, we are closing this recommendation as implemented.
Department of Defense To help ensure that UCAs are definitized in accordance with regulations, the Secretary of Defense should put in place a reporting channel to headquarters that includes information on UCAs in place for 180 days or more and that outlines plans and time frames for definitization.
Closed - Implemented
In commenting on a draft of the report, DOD concurred with the recommendation and said that enhanced oversight is appropriate and it will consider requiring the military departments to provide periodic reports of over-age UCAs with remediation plans. On August 29, 2008, an AT&L guidance memorandum was issued that specified new semi-annual reporting requirements for UCAs valued at over $5 million that fail to meet required timelines for definitization or fail to comply with regulatory limitations on the obligation of funds or on profit or fee. The first reports were due in October 2008.
Department of Defense To help ensure that UCAs are definitized in accordance with regulations, the Secretary of Defense should supplement acquisition personnel on an as-needed basis to quickly definitize UCAs once they are awarded.
Closed - Not Implemented
In commenting on a draft of the report, DOD concurred with the recommendation. However, in an August 1, 2008, status update meeting, a DOD official stated that DOD organizations have more work to do than they can, so it is hard to tell them to implement this recommendation. The official expected that the new reporting requirement will result in focusing oversight on the backlogs.
Department of Defense To mitigate the risks of paying increased costs under UCAs, the Secretary of Defense should set forth supplemental guidance to direct contracting officers, where feasible, to obligate less than the maximum allowed at UCA award to incentivize contractors to expedite the definitization process.
Closed - Implemented
In commenting on a draft of the report, DOD concurred with the recommendation and said it is studying changes to its contract financing and funding policies. An AT&L guidance memo was issued August 29, 2008. It states that Contracting Officers should avoid obligating the maximum permissible funding at the time of Undefinitized Contract Action (UCA) award. It instructs Contracting Officers to assess the contractor's spend plan for the undefinitized period, and obligate funds only in an amount consistent with the contractor's requirements for the undefinitized period.
Department of Defense To mitigate the risks of paying increased costs under UCAs, the Secretary of Defense should set forth supplemental guidance to specify that the effect of contractor's reduced risk during the undefinitized period on profit or fee be documented in the price negotiation memorandum or its equivalent.
Closed - Implemented
In commenting on a draft of the report, DOD concurred with the recommendation and said it is studying changes to its private sector profit/fee policies. An AT&L guidance memo was issued August 29, 2008. It reminds Contracting Officers to use a contract risk factor in the low end of the designated range when calculating profit/fee in the negotiation of a UCA in order to account for the lower risk for the contractor prior to definitization. The guidance states that Contracting Officers must document the risk assessment in the contract file.

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