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-92-131, GAO/NSIAD-92-138, GAO/NSIAD-92-173, GAO/NSIAD-92-183.

GAO found that: (1) DOD has taken substantive efforts to correct about 70 percent of the estimating system deficiencies reported by the Defense Contract Audit Agency (DCAA) for the 11 contractors reviewed; (2) while DOD took corrective action on most of the deficiencies, the actions tended to be concentrated at 6 of the 11 contractors; (3) some corrective actions resulted from contractors' initiatives, and, in other cases, contracting officers took active roles in ensuring that contractors corrected estimating deficiencies; (4) over half of the corrective actions were not timely; (5) delays were due, in part, to an absence of aggressive and proactive measures by contracting officers, including failure to follow regulatory guidance on the resolution of estimating system deficiencies; (6) for two contractors, corrective actions on six estimating deficiencies were delayed because DOD did not promptly evaluate the contractors' corrective action plans; (7) uncorrected estimating deficiencies can result in millions of dollars in overpricing; and (8) DOD has taken steps to help reduce the time required to correct estimating deficiencies and strengthen its oversight, including directing local managers to become personally involved in the resolution process, establishing monitoring systems to track deficiencies until they are corrected, and revising selected procedures that contribute to delays in resolving deficiencies.