Contract Pricing

Despite laws and regulations designed to protect the government from contract overpricing, Defense Contract Audit Agency (DCAA) reports issued in fiscal years 1987-90 identified $3 billion in defective pricing. Even though DCAA audits report substantial defective pricing, many contracts and subcontracts, especially those involving lower dollar values, are never audited. In addition, subcontract proposals are overstated by millions of dollars partly because prime contractors often fail to adequately evaluate subcontractor proposals before contract negotiations, as required by the Federal Acquisition Regulation. Prime contractors then negotiate lower subcontract prices after contracting with the government. DCAA reports identifying contractor cost-estimating systems deficiencies are not always clear about the need to correct these deficiencies. Further, many DCAA reports do not recommend disapproval of contractors' estimating systems when DCAA finds them to contain major deficiencies. DCAA's use of operational audits, which have proven useful in identifying inefficient contractor operations, has decreased. GAO summarized this report in testimony before Congress; see: Contract Pricing: Recurring Issues and the Role of the Defense Contract Audit Agency, by Paul F. Math, Director of Research, Development, Acquisition, and Procurement Issues, before the Subcommittee on Legislation and National Security, House Committee on Government Operations. GAO/T-NSIAD-92-34, May 6 (20 pages).

GAO found that: (1) between fiscal year (FY) 1987 and FY 1990, DCAA conducted 8,333 defective pricing audits, identifying $2.1 billion in defective prime contract pricing and $880 million in defective subcontract pricing; (2) DCAA found defective pricing in 41 percent of the audited prime contracts and in 43 percent of the audited subcontracts, with the smaller subcontracts having a higher percentage of defective pricing; (3) in FY 1990, DCAA devoted about 10 percent of its field office staff resources to defective pricing, compared with about 7 percent in FY 1987; (4) DCAA assesses the risk for defective pricing in selecting contracts to audit, and in FY 1990 audited all fixed-priced contracts of more than $10 million; (5) although DCAA recently modified its risk assessment procedures and is giving increased attention to contracts under $10 million, it still does not audit a substantial number of contracts; (6) subcontracts are often overstated by millions of dollars, and prime contractors do not always adequately evaluate subcontract bids before contract negotiations and wait to but negotiate lower subcontract costs after contract award; (7) DCAA reviews of 101 contractors found that 83 had subcontract estimating deficiencies requiring corrective action; (8) DCAA reports on contractors' estimating systems did not always demonstrate the need to correct identified deficiencies; and (9) although operations audits have helped to identify contractor inefficiencies, DCAA has decreased the number of operations audits it performs.