DOD Procurement

During the six months ending in April 1993, the Defense Finance and Accounting Service in Cleveland, Ohio, processed $751 million in checks from defense contractors. GAO researched checks totaling $392 million and found that $305 million were returned contract overpayments. Most of these payments resulted because the Columbus Center either (1) paid contractors' invoices without recovering progress payments or (2) made duplicate payments. Overpayments also occurred for a variety of other reasons, including government contractual errors and contractor errors. Virtually all the overpayments GAO examined were detected by the contractors rather than by the government. For $240 million of the $340 million in overpayments, government records were adequate to pinpoint when the overpayments occurred. GAO determined that these overpayments remained outstanding an average of 108 days from the date of overpayment to the date of refund, with about 40 percent of the overpayments outstanding for more than 90 days. Using a 6.5-percent interest rate, GAO estimated the interest cost on the $240 million at $2.3 million. In some cases, contractors planned to return overpayments but were told to hold the money until the contract could be reconciled and a demand letter issued. The Defense Department (DOD) is trying to bolster internal controls designed to prevent overpayments and more rapidly detect such payments when they occur. DOD officials also said that DOD is attempting to streamline complex regulatory policies and procedures and that a high-level council has been established to oversee major financial management changes.

GAO found that: (1) the Defense Finance and Accounting Service (DFAS) received in one six-month period $751 million from defense contractors; (2) $305 million of the refunds represented overpayments to contractors, most of which occurred because DFAS paid invoices without recovering progress payments or made duplicate payments; (3) almost all of the overpayments were detected by the contractors and returned without DFAS issuing a demand letter; (4) DFAS uses its contract reconciliation process to detect overpayments, but it has not reconciled most contracts; (5) DFAS often instructs contractors to withhold refunds until it reconciles the contract and issues a demand letter, which gives contractors a 30-day grace period to refund the overpayment; (6) DOD contract payment records are sufficient in most cases to detect overpayments; (7) the overpayments remained outstanding for an average of 108 days at a cost of $2.3 million in foregone interest; (8) DFAS believes the overpayments were partially caused by the rapid consolidation of payment processing to one center and the loss of experienced personnel which overloaded the center's ability to process payments; and (9) DOD is strengthening its internal control procedures to prevent and rapidly detect contractor overpayments by streamlining complex regulatory policies and procedures and establishing a high-level oversight council for financial management changes.