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-92-187.

GAO found that: (1) under fiscal year (FY) 1991 DCAA procedures, the number of contractors showing high risk in at least one comparable risk factor increased from 65 in FY 1991 to 96 in FY 1992, a 48-percent increase; (2) in FY 1992, DCAA changed its procedures for assessing contractor risk by dropping suspected irregular conduct as an evaluation and adding accounting system deficiencies and the amount of recommended price adjustments as factors; (3) DCAA also increased the number of levels of risk to four, provided specific criteria for determining the appropriate level of risk, and changed the way it determined whether a contractor should be designated as high risk; (4) using the revised procedures, only 10 contractors were designated as high risk, an 85-percent decrease from the 65 contractors designated as high risk in FY 1991; (5) the averaging calculation of the new procedure was a major reason for the decrease in the number of high-risk contractors from FY 1991 to FY 1992; and (6) contractors that are not designated as high risk may be subject to less defective pricing audit coverage, since the extent of defective pricing audit coverage is determined by the contractors' overall risk ranking and the dollar value of the contracts subject to audit.

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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