Contract Pricing

In reviewing overhead costs submitted by six defense contractors, GAO discovered that contractors did not identify and exclude all unallowable costs, as required. For example, in addition to nearly $1 million in costs questioned by the Defense Contract Audit Agency, GAO noted another $2 million in unallowable or questionable overhead costs. Federal regulations governing entertainment, employee morale and welfare, and business meeting costs are so vague that they are being interpreted broadly by some of the contractors GAO reviewed. Limited transaction testing--tracing expenditures back to supporting documentation and evaluating their allowability--of contractor overhead cost submissions by the Defense Contract Audit Agency may have also contributed to unallowable or questionable costs going unchecked. In GAO's view, transaction testing is a key step to ensuring that contractor internal controls are excluding unallowable costs from bills submitted to the Defense Department.

GAO found that: (1) the six contractors, with annual government sales ranging between $11 million and $107 million, lacked the volume of government business to justify the permanent oversight that the Defense Contract Audit Agency (DCAA) maintains at large defense contractors; (2) the six contractors included about $2 million in expressly unallowable or questionable costs in their overhead submissions; (3) DCAA did not question any overhead costs for 4 of the 6 contractors; (4) undetected unallowable costs could affect the extent of overcharges and the negotiation of fixed-price contracts; (5) contractors included unallowable or questionable costs for expenses involving alcoholic beverages, personal use of automobiles and a boat, advertising and trade shows, employee dependent scholarships, business meetings, entertainment and employee morale, pension expenses, and other inadequately supported costs; (6) the contractors' internal control systems were not identifying and excluding significant amounts of unallowable or questionable costs from their overhead submissions; (7) the Federal Acquisition Regulation (FAR) lacked sufficient clarity regarding the allowability of many costs included in overhead submissions; and (8) DCAA performed limited transaction testing of contractors' overhead submissions and did not fully comply with audit planning and evidential matter policy.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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