Defense Contractors' Overhead Costs

GAO discussed the Department of Defense's (DOD) system for preventing the payment of unallowable overhead costs to defense contractors. DOD, through its administrative contracting officers (ACO's) and the Defense Contract Audit Agency (DCAA), routinely negotiates annual overhead agreements with contractors to determine the indirect costs allowable for reimbursement. Overhead negotiations are based on the allowability criteria established in the Federal Acquisition Regulations and are not easily resolved because of ambiguities in the regulations and different contracting officers interpretations of the regulations. GAO found that there were numerous cases where DCAA was challenging significant amounts it considered unallowable, but ACO's overruled DCAA and allowed a large percentage of the costs. GAO also found that ACO's are not documenting their actions and are reluctant to negotiate costs on an item-to-item basis, because an agreement of a total figure allows contractors to discuss costs such as advertising, promotions, and consultants in negotiations. GAO believes that the appropriate sections of federal regulations should be clarified to eliminate ambiguities that allow wide divergence of opinion and ACO's should be required to negotiate and settle costs that DCAA questions as unallowable on a item-by-item basis.