Contract Management

Recent legislation requires the Defense Department (DOD) to conduct a demonstration program to evaluate the feasibility of using private contractors to identify overpayments DOD has made to vendors. GAO reviewed the program and found that the contractor has identified overpayments of $19.1 million and is working to identify additional overpayments. This magnitude of overpayments would likely not have been identified by the Defense Finance and Accounting Service without the demonstration program. However, government efforts to collect these overpayments have been slow--only about $1.9 million has been recovered--largely because the recovery process stopped for eight months while the Defense Supply Center in Philadelphia reviewed vendors' complaints. Although the Defense Supply Center has concluded that the government's claims are valid, it has yet to issue letters notifying vendors of the final decision about the amounts owed.

GAO noted that: (1) the methods used by the Profit Recovery Group International (PRGI) to perform recovery auditing resulted in the identification of $19.1 million in overpayments, as of August 14, 1998, and efforts to identify additional amounts continue; (2) however, recoveries of overpayments amounted to only $1.9 million, in large part, because vendors took issue with some of the overpayments identified by PRGI; (3) this caused the recovery process to virtually stop for 8 months while the Defense Supply Center, Philadelphia reviewed the merits of the vendors' issues; (4) the Defense Supply Center, Philadelphia has concluded that the claims of overpayment are valid, but it has not yet notified vendors of the final decision regarding their indebtedness; (5) of $19.1 million in overpayments, $12.4 million was related to cash discounts not taken or received or deducted at the wrong rate, $2.2 million related to most favored customer terms not received, $1.3 million related to duplicate payments made, and $1.2 million related to credits for returned merchandise not taken; (6) as of August 14, 1998, according to PRGI, it had audited about 80 percent of the $7.2 billion audit base; (7) the fact that the overpayments were made 4 to 6 years before audit recovery began also made overpayment identification or recovery challenging; (8) documentation was difficult to retrieve for both PRGI and vendors, and sometimes it was not available; (9) PRGI also had considerable difficulty identifying duplicate payments because the needed information was not retained in the Defense Finance and Accounting Service payment files; (10) according to PRGI, even though its contract was awarded in September 1996, it was slow to begin audit work because of delays in obtaining Defense Finance and Accounting Service computerized payment files and the time PRGI needed to understand DOD's procurement and payment processes; (11) PRGI has made recommendations to the Defense Finance and Accounting Service and the Defense Supply Center, Philadelphia to reduce future overpayments, but none have been implemented; (12) PRGI identified about $1.8 million in overpayments that were outside the scope of its contract, either because they were not within the fiscal year 1993-95 contractual review period or because they involved other government agencies; and (13) neither the Defense Finance and Accounting Service or the Defense Supply Center, Philadelphia chose to pursue payment recovery or inform the other government agencies of the overpayments so that they could pursue recovery and take steps to avoid future overpayments.

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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