Contract Pricing

DCAA's Audit Coverage Lowered by Lack of Subcontract Information Gao ID: NSIAD-92-173 May 29, 1992

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-92-131, GAO/NSIAD-92-138, GAO/NSIAD-92-183, GAO/NSIAD-92-187.

GAO found that: (1) DCAA was unaware of 186, or 88 percent, of the 211 subcontracts in the GAO sample; (2) in a few cases, the responsible field office did not know of any of the subcontractor's contracts or even that the subcontractor was located in the office's jurisdiction; (3) the 186 unknown subcontracts, which totalled about $189 million, represented over half of the value of the subcontracts in the GAO sample; (4) the smaller the subcontract, the less likely that DCAA was aware of it; (5) DCAA had no knowledge of about 90 percent of the subcontracts that were less than $10 million, and no knowledge of one-third of the subcontracts that were $10 million or more; (6) the data that DCAA currently use to develop its subcontract inventory are incomplete; (7) when field offices become aware of subcontracts during their audits of prime contracts, they do not routinely pass this information to the field offices with responsibility for the subcontracts; (8) being unaware of so many subcontracts increases the government's vulnerability to subcontract defective pricing, because DCAA cannot ensure that its audit resources are applied to subcontracts having the greatest risk of defective pricing; and (9) lack of awareness of so many contracts also understates the number of audits and amount of staff resources necessary to reduce the risk of defective pricing.

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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