Overhead Costs

GAO's review of the overhead cost submissions of E-Systems, Inc., a large defense contractor, revealed about $120,000 in unallowable costs out of $16 million in general and administrative transactions. The costs included personal use of company cars, public relations efforts, chartered aircraft flights, and legal expenses. GAO also found another $2.8 million in questionable charges, mainly because E-Systems did not keep or was unable to provide enough documentation for GAO to determine the allowability of the questioned costs. GAO also considered more than $39,000 in travel costs to be excessive. The Defense Contract Audit Agency (DCAA) has also questioned E-Systems' overhead costs. DCAA has concluded, and GAO agrees, that E-Systems' internal controls for identifying and segregating unallowable costs did not guarantee that only allowable costs were included in the company's overhead cost submissions.

GAO found that: (1) $120,000 of the contractor's $16 million in overhead costs represented unallowable costs for personal use of automobiles, public relations, travel, and legal services; (2) the contractor did not adequately document $2.8 million in questionable costs or excessive travel costs; (3) DCAA questioned $4.6 million in overhead costs in its last three annual audits of the contractor and its two affiliates; (4) the contractor's internal controls were inadequate for detecting and segregating unallowable costs because of its lack of formal written guidance and poor recordkeeping; (5) although the risk of submitting unallowable costs was minimized by the contractor's experience in voucher processing and cost submission, employee turnover could heighten the risk in the future; (6) the actual amount of overcharges to the government depended on the ratio of defense versus commercial contracts, since the costs were included in the contractor's total overhead pool and allocated among its contracts; and (7) undetected unallowable costs could affect fixed-priced contract negotiations.