Defense Contract Pricing

Many GAO audit reports have spotlighted the effect of management failures in the federal government--waste, inefficiency, and even scandal. Political leaders have been forced to spend too much time reacting to surprises like the Department of Housing and Urban Development debacle rather than doing the work the agencies were created to do. GAO began its high-risk program to identify those high-dollar government programs most vulnerable to fraud, waste, abuse, and mismanagement. This report is part of the program's high-risk series of reports, which examine the federal government's efforts to identify and correct problems in 17 especially vulnerable areas, fall into three main categories: lending and insuring, contracting, and accountability. Many of the root causes of the problems afflicting these government programs are traceable to the absence of fundamental processes and systems. GAO urges that future congressional oversight focus on the agency reports and audited financial statements required by the Chief Financial Officers Act, agency management's progress in correcting material weaknesses in program internal control and accounting systems, and federal agency efforts to develop and implement performance standards. The Comptroller General summarized the high-risk series in testimony before Congress; see: Government Management--Report on 17 High-Risk Areas, by Charles A. Bowsher, Comptroller General of the United States, before the Senate Committee on Governmental Affairs. GAO/T-OCG-93-2, Jan. 8, 1993 (22 pages).

GAO found that: (1) DOD found $3.67 billion in overcharges in defense contracts in fiscal years 1987 through 1991, of which 37 percent was due to subcontractors' overcharges; (2) DOD required major contractors to establish adequate cost-estimating systems and include subcontract price evaluations in their contract proposals; (3) despite strengthened regulations and emphasis on subcontract pricing, overcharges due to inflated subcontractor estimates continued; (4) DOD oversight of contract pricing was inadequate, and corrective actions were insufficient; (5) the Defense Contract Audit Agency was unaware of 88 percent of the subcontracts because prime contractors were not required to provide lists of their subcontractors; (6) contracting officers did not adequately review contractors' actions and enforce compliance; (7) the DOD audit follow-up system did not provide accurate and complete information on many high-risk contractors' cost-estimating systems; and (8) DOD could ensure fair and reasonable profits for defense firms if it established a financial reporting system that provides information comparing defense and nondefense contract costs.