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. The following five reports deal with various aspects of this problem.

GAO found that: (1) for both prime contract and subcontract audits, DCAA identified defective pricing totalling $3.67 billion for fiscal year (FY) 1987 through FY 1991; (2) DCAA reported that defective pricing increased from $574.5 million in FY 1987 to $896.6 million in FY 1990, although defective pricing declined to $730.7 million in FY 1991; (3) subcontract defective pricing increased from $264.2 million in FY 1990 to $484 million in FY 1991, which accounted for 66.2 percent of the defective pricing DCAA reported; (4) for FY 1987 through FY 1991, subcontract audits accounted for 16.2 percent of all contract dollars DCAA audited, while subcontract defective pricing accounted for 37.1 percent of the total defective pricing DCAA found; (5) smaller subcontracts presented a more significant risk of defective pricing than did larger subcontracts; (6) the frequency with which DCAA identified defective pricing has declined steadily, from 48.9 percent in FY 1987 to 21.1 percent in FY 1991; (7) the $165.9-million decrease in defective pricing reported by DCAA between FY 1990 and FY 1991 was primarily due to changes in the total dollar value of the contracts DCAA audited and the frequency with which DCAA found defective pricing; and (8) defective pricing was a more significant problem for a relatively small number of contractors, since less than 3 percent of the contractors accounted for 80 percent of the defective pricing reported by DCAA in FY 1991.