Defense Procurement

The largest contractor debt deferment of the 1980s arose from the termination of the A-12 development contract, in which the Navy demanded repayment from the McDonnell Douglas and General Dynamics Corporations of more than $1.3 billion, an amount involving progress payments for which no completed items had been accepted by the government. At the request of the contractors, the Navy agreed to defer the repayment until either the case was decided in court or a negotiated settlement was reached--neither of which has happened so far. This report reviews all contractor debt deferments granted by the Pentagon from 1980 through 1991. GAO examines the (1) criteria used in granting deferments, (2) number of deferments granted to small or disadvantaged businesses, (3) terms and conditions of the deferments, (4) policies and procedures used in managing deferments, and (5) resolution of the deferred debts. Due to a lack of adequate internal controls, the Defense Department (DOD) has no idea how many contractor debts it deferred during the 1980s, what their status is, or how much money was involved. GAO's best guess is that 93 cases with deferred debts of about $1.6 billion were open at the end of 1991. Further, once debts are deferred, DOD makes little effort to manage the accounts. Long after cases have been resolved, responsible officials do not know the status of these debts and money owed the government seems to go uncollected.

GAO found that: (1) DOD does not have adequate internal controls over contractor debt deferments; (2) DOD does not know how many debt deferments it has granted because the military services and DOD agencies do not maintain a centralized system to identify deferred contractor debts; (3) federal and defense acquisition regulations establish the criteria for granting deferments, but they permit a considerable degree of flexibility; (4) the regulations specifically mention small or financially weak contractors as being eligible for deferments, but DOD records do not identify contractors as small or disadvantaged businesses; (5) terms and conditions of DOD deferment agreements met regulatory requirements; (6) DOD management and documentation of debt deferments were deficient; and (7) responsible DOD officials are not aware of the current status of debt cases, and do not periodically review the records so that proper follow-up measures can be taken.

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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