Contract Pricing

Still plagued by billions of dollars in contract overpricing despite laws and regulations to prevent it, the Pentagon needs to crack down harder on companies with a history of significant defective pricing or chronic cost-estimating problems. During fiscal years 1987-91, the Defense Contract Audit Agency (DCAA) discovered defective pricing totaling more than $3.6 billion, much of which was linked to subcontracts. Small-dollar contracts involve a particularly high risk of defective pricing. For example, the amount of defective pricing found in audits of subcontracts of $100 million or more averaged 2.9 percent of the subcontract value. In contrast, defective pricing in contracts of less than $10 million averaged 11.2 percent of the subcontract value. While levels of defective pricing continued an upward trend during fiscal years 1987-91, peaking in 1990 at more than $896 million, the frequency with which DCAA spotted defective pricing steadily declined. Defective pricing tends to be concentrated among a relatively small number of contractors--about six percent of these companies accounted for 80 percent of the defective pricing over the five-year period. Refer to our related reports: GAO/NSIAD-92-138, GAO/NSIAD-92-173, GAO/NSIAD-92-183, GAO/NSIAD-92-187.

GAO found that: (1) almost half of the $2.1 billion of all prime contract defective pricing DCAA identified in fiscal years (FY) 1987 through 1990 was related to overstated subcontract prices that were overpriced by prime contractors; (2) subcontract prices were overstated by about $970 million, consisting of $669.5 million in direct subcontract costs and $300.4 million in prime contractor overhead and profit; (3) subcontract costs were the most frequently overstated category of direct costs, and about 80 percent of DCAA prime contract defective reports showed that defective pricing was caused when the prime contractor overstated subcontract costs; (4) the total amount of overstated subcontract prices was an estimated $1.85 billion, including the $880 million reported by DCAA in subcontract defective pricing and an estimated $970 million of overstated subcontract prices in prime contract defective pricing audits; and (5) the estimated $1.85 billion represents about 63 percent of the total defective pricing identified by DCAA in FY 1987 through 1990, which shows the significant relationship between overstated subcontract prices and defective pricing.