DOD Contract Payments
Management Action Needed to Reduce Billions in Adjustments to Contract Payment Records Gao ID: GAO-03-727 August 8, 2003GAO has reported that the Department of Defense's (DOD) inability to accurately account for and report on disbursements is a long-term, major problem. GAO was requested to determine (1) the magnitude of the adjustments and related costs in fiscal year 2002, (2) why contracts, including payment terms, are so complex, (3) the key factors that caused Defense Finance and Accounting Service (DFAS) Columbus to make payment adjustments, and (4) what steps DOD is taking to address the payment allocation problems.
For fiscal year 2002, DFAS Columbus data showed that about $1 of every $4 in contract payment transactions in the MOCAS system was for adjustments to previously recorded payments--$49 billion of adjustments out of $198 billion in transactions. To research payment allocation problems, DFAS Columbus reported that it incurred costs of about $34 million in fiscal year 2002. This represents about 35 percent of the total $97 million that DFAS Columbus spent on contract pay services. DFAS Columbus bills DOD activities for contract pay services based on the number of accounting lines on an invoice. Consequently, all DOD activities pay the same line rate, regardless of whether substantial work is needed to reconcile problem contracts and adjust payment records. GAO's analysis of two contracts showed that the contracts were complex because of the (1) legal and DOD requirements to track and report on the funds used to finance the contracts, (2) substantial number of modifications made on the contracts to procure goods and/or services, and (3) different pricing provisions on the contracts. GAO's review of $160 million of adjustments showed that the adjustments were made for four reasons. The Army made an error in accounting for obligations, resulting in about $127 million in payment allocation adjustments. DFAS Columbus did not follow its internal procedures for allocating payments to accounts on an Army contract containing multiple pricing provisions, resulting in about $5 million in adjustments. DFAS made over $2 million in adjustments to correct recording errors on an Army contract due to complex and changing payment instructions. The Air Force frequently changed payment instructions after payments were made on an Air Force contract, resulting in about $26 million in adjustments. DOD has initiated a major long-term effort to improve its business operations, including its acquisition and disbursement activities. If implemented successfully, this initiative may help correct many of the contract payment allocation problems. In the interim, DOD has initiatives under way to address payment allocation problems, including (1) billing DOD contracting offices for contract reconciliation services, (2) providing DOD activities information on the correct method for presenting payment instructions, and (3) establishing a working group to develop options for presenting standard contract payment instructions. While the DOD working group initiative may reduce payment allocation errors associated with misinterpreting contract payment instructions, DOD needs to automate the standard payment instructions to eliminate payment allocation errors associated with manually allocated payments.
RecommendationsOur 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.
Director: Team: Phone:GAO-03-727, DOD Contract Payments: Management Action Needed to Reduce Billions in Adjustments to Contract Payment Records
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Report to the Chairman, Committee on the Budget, House of
Representatives:
August 2003:
DOD CONTRACT PAYMENTS:
Management Action Needed to Reduce Billions in Adjustments to Contract
Payment Records:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-727] GAO-03-727:
GAO Highlights:
Highlights of GAO-03-727, a report to the Chairman, Committee on the
Budget, House of Representatives
Why GAO Did This Study:
GAO has reported that the Department of Defense‘s (DOD) inability to
accurately account for and report on disbursements is a long-term,
major problem. GAO was requested to determine (1) the magnitude of the
adjustments and related costs in fiscal year 2002, (2) why contracts,
including payment terms, are so complex, (3) the key factors that
caused Defense Finance and Accounting Service (DFAS) Columbus to make
payment adjustments, and (4) what steps DOD is taking to address the
payment allocation problems.
What GAO Found:
For fiscal year 2002, DFAS Columbus data showed that about $1 of every
$4 in contract payment transactions in the MOCAS system was for
adjustments to previously recorded payments”$49 billion of adjustments
out of $198 billion in transactions. To research payment allocation
problems, DFAS Columbus reported that it incurred costs of about $34
million in fiscal year 2002. This represents about 35 percent of the
total $97 million that DFAS Columbus spent on contract pay services.
DFAS Columbus bills DOD activities for contract pay services based on
the number of accounting lines on an invoice. Consequently, all DOD
activities pay the same line rate, regardless of whether substantial
work is needed to reconcile problem contracts and adjust payment
records.
GAO‘s analysis of two contracts showed that the contracts were complex
because of the (1) legal and DOD requirements to track and report on
the funds used to finance the contracts, (2) substantial number of
modifications made on the contracts to procure goods and/or services,
and (3) different pricing provisions on the contracts. GAO‘s review of
$160 million of adjustments showed that the adjustments were made for
four reasons:
* The Army made an error in accounting for obligations, resulting in
about $127 million in payment allocation adjustments.
* DFAS Columbus did not follow its internal procedures for allocating
payments to accounts on an Army contract containing multiple pricing
provisions, resulting in about $5 million in adjustments.
* DFAS made over $2 million in adjustments to correct recording errors
on an Army contract due to complex and changing payment instructions.
* The Air Force frequently changed payment instructions after payments
were made on an Air Force contract, resulting in about $26 million in
adjustments.
DOD has initiated a major long-term effort to improve its business
operations, including its acquisition and disbursement activities. If
implemented successfully, this initiative may help correct many of the
contract payment allocation problems. In the interim, DOD has
initiatives under way to address payment allocation problems,
including (1) billing DOD contracting offices for contract
reconciliation services, (2) providing DOD activities information on
the correct method for presenting payment instructions, and (3)
establishing a working group to develop options for presenting
standard contract payment instructions. While the DOD working group
initiative may reduce payment allocation errors associated with
misinterpreting contract payment instructions, DOD needs to automate
the standard payment instructions to eliminate payment allocation
errors associated with manually allocated payments.
What GAO Recommends:
GAO recommends that DOD
(1) develop options for presenting standard payment instructions in
contracts and (2) automate those instructions in the Mechanization of
Contract Administration Services (MOCAS) system. GAO also recommends
that DOD‘s contracting community and DFAS follow existing regulations
and procedures concerning contract payment instructions. In its
comments, DOD concurred with two recommendations and partially
concurred with two others related to developing and automating the
standard payment instructions. DOD stated that although the working
group would analyze their feasibility, until the coordination and
review process was completed, it could not commit to these actions. We
continue to believe that decisive steps towards a lasting solution are
needed to address DOD‘s long-standing contract payment problems.
www.gao.gov/cgi-bin/getrpt?GAO-03-727.
To view the full report, including the scope and methodology, click on
the link above. For more information, contact Gregory D. Kutz at (202)
512-9505 or kutzg@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DFAS Columbus Made $49 Billion of Adjustments at a Cost of about $34
Million in Fiscal Year 2002:
Contracts Were Complex Due to Legal and DOD Requirements, Contract
Modifications, and Pricing Provisions:
Reasons for DFAS Columbus Making $160 Million of Adjustments to Correct
Prior Payment Allocations:
DOD Initiatives to Address Payment Allocation Problems:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Related GAO Products:
Table:
Table 1: Reasons for $160 Million in Contract Payment Adjustments for
Two Contracts:
Figures:
Figure 1: Sample Line of Accounting on the Air Force Contract:
Figure 2: Payment Process Information Flow for the Air Force Contract:
Figure 3: Army Tactical Missile Launched from Multiple Launch Rocket
System:
Figure 4: Army Data Link System Transferring Information Collected by
Aircraft, Satellites, and Ground Stations:
Figure 5: Contract Funding Structure for Three Contract Line Items on
the Air Force Contract:
Letter August 8, 2003:
The Honorable Jim Nussle
Chairman
Committee on the Budget
House of Representatives:
Dear Mr. Chairman:
The reliability of contract disbursing data is critical to the
Department of Defense (DOD) for (1) properly accounting for and
accurately making contract payments, (2) effectively accounting for and
controlling billions of dollars in budget authority, and (3) preparing
reliable financial information on the results of operations to support
management and congressional decision making on programs, operations,
and budget requests. We have previously reported[Footnote 1] on DOD's
inability to accurately account for and report on disbursements, which
is a long-term problem that is pervasive and complex in nature. For
example, Defense Finance and Accounting Service (DFAS) Columbus fiscal
year 1999 data showed that almost $1 of every $3 in contract payment
transactions in the Mechanization of Contract Administration Services
(MOCAS) system was for adjustments to previously recorded payments--$51
billion of adjustments out of $157 billion in transactions.
You asked that we determine (1) the magnitude of adjustments that
affected previously recorded payments and DFAS Columbus's reported cost
to make these adjustments during fiscal year 2002, (2) why contracts,
including payment instructions, were so complex, (3) the key factors
that caused DFAS Columbus to make payment adjustments for the two
contracts that we reviewed in detail, and (4) what steps DOD has taken
or planned to address the adjustment problem. As agreed with your
office, we analyzed two contracts to determine how complex contracts
and related payment instructions contributed to DOD's payments not
being properly allocated to the correct obligations. In selecting these
two contracts, we worked with DFAS Columbus to identify complex
contracts for which they had encountered problems with correctly
allocating payments to obligations. Thus, the two contracts--a $565
million Army missile contract and a $49 million Air Force
communications contract--are not representative of all DOD contracts
but, based on our experience, have characteristics similar to other
complex contracts.
Our review was performed from August 2002 through July 2003 in
accordance with U.S. generally accepted government auditing standards.
We did not audit the DFAS Columbus data on disbursements, collections,
and adjustments or the costs incurred by DFAS Columbus to reconcile
contracts. Further details on our scope and methodology can be found in
appendix I. We requested comments on a draft of this report from the
Secretary of Defense or his designee. Written comments from the
Director, Defense Procurement and Acquisition Policy, Under Secretary
of Defense (Acquisition, Technology, and Logistics), are reprinted in
appendix II.
Results in Brief:
For fiscal year 2002, DFAS Columbus data showed that about $1 of every
$4 in contract payment transactions in MOCAS was for adjustments to
previously recorded payments--$49 billion of adjustments out of $198
billion in disbursement, collection, and adjustment transactions. This
is an improvement over fiscal year 1999 when reported adjustments
represented $1 of every $3 in contract payment transactions. To
research the payment allocation problems and make adjustments to
correct the disbursing and accounting records, DFAS Columbus reported
that it incurred costs of about $34 million in fiscal year 2002
primarily for hundreds of DOD and contractor staff. This represents
about 35 percent of the total $97 million in reported costs related to
the DFAS Columbus contract pay service operations. DFAS Columbus
currently bills DOD activities (for example, the Army) for contract pay
services based solely on the number of lines of accounting on an
invoice. Consequently, all DOD activities pay the same line rate,
regardless of whether substantial work is needed to reconcile problem
contracts and adjust the payment records. As a result, the contracting
offices that contributed to payment allocation problems had
insufficient incentives to reduce payment errors and associated costs.
Our analysis of the two contracts we reviewed in detail showed that the
contracts and payment instructions were complex because of a
combination of factors including the following:
* Legal and DOD requirements to track and report on the funds used to
finance the contract. For example, on the $565 million Army missile
contract, (1) 74 different accounting classification reference numbers
(ACRN)[Footnote 2] were funded by eight different appropriation
accounts and sales to three foreign countries, (2) 24 of the 74 ACRNs
were created to comply with legal requirements to report on the
appropriations used to finance the contract as well as the types of
obligations, such as personnel, supplies, and acquisition of assets,
and (3) the remaining 50 ACRNs were created to comply with DOD
requirements.
* Substantial number of contract modifications over the years that
added goods and/or services, or added or changed payment instructions.
For example, the $49 million Air Force communications contract was
modified 82 times over a 3-year period, including 73 modifications that
changed the payment instructions.
* Different pricing provisions for goods and services on the contract.
For example, the Army contract contained 25 separate contract line
items[Footnote 3]--15 were to be paid for under fixed price provisions
and 10 were to be paid for under cost reimbursable provisions.
Our analysis of $160 million of adjustments for the two contracts we
reviewed showed that 1,458 adjustment transactions were made to
reallocate payments to the correct ACRNs for four reasons: (1) the Army
made an error in accounting for obligations, resulting in about $127
million in payment allocation adjustments, (2) DFAS Columbus did not
follow its internal procedures for allocating payments to ACRNs on an
Army contract containing multiple pricing provisions when the Army
failed to provide payment instructions, resulting in about $5 million
in adjustments, (3) DFAS Columbus made over $2 million in adjustments
to correct recording errors on the Army contract due to complex and
changing payment instructions, and (4) the Air Force frequently changed
payment instructions after payments were made on the Air Force
contract, resulting in about $26 million in adjustments.
Since 1995, DOD had been attempting to develop a new system--called the
Defense Procurement Payment System (DPPS)--to resolve DOD's long-
standing disbursement problems. However, DOD terminated DPPS in
December 2002, after 7 years in development at a reported cost of over
$126 million, because of poor program performance and increasing life
cycle costs. DOD has now initiated a major long-term effort--referred
to as an enterprise architecture--to improve its business operations,
including its acquisition and disbursement activities. If implemented
successfully, this initiative may help correct many of the contract
payment allocation problems.
In the interim, DOD officials informed us they have several efforts
under way to address these types of payment allocation problems that
would help reduce adjustments made to previously recorded payments.
First, beginning in fiscal year 2004, DFAS Columbus plans to realign
its billing structure and bill contracting offices for reconciliation
services to provide them with an incentive to reduce payment errors and
related reconciliation costs. Second, DFAS Columbus, in partnership
with the Defense Contract Management Agency, visited major procuring
activities throughout DOD and provided information on the correct
methods for presenting payment instructions on contracts. Finally, in
September 2002, DOD established a working group[Footnote 4] to develop
payment allocation options for presenting standard payment instructions
on complex contracts that, if implemented, would be used throughout the
DOD contracting community. Our analysis showed that this initiative
should help reduce some of the payment allocation errors that are the
result of misinterpreted payment instructions but would not completely
eliminate payment allocation errors made by DFAS Columbus when it
manually allocates payments to contract ACRNs. In order to eliminate
payment allocation errors, DOD would need to take the next step in the
process and automate the standard payment instructions so that DFAS
Columbus can electronically process the payments with minimal manual
intervention. The working group has not completed its work and has not
yet established a completion date. Further, DOD has not yet made a
final decision to implement the payment allocation options for
presenting standard payment instructions throughout the DOD contracting
community.
We are making recommendations to the Secretary of Defense to improve
the process of properly allocating payments to correct ACRNs, including
(1) developing payment allocation options for presenting standard
payment instructions contained in contracts and (2) automating the
standardized payment instructions. We are also making recommendations
to the Under Secretaries of Defense (Acquisition, Technology, and
Logistics) and (Comptroller) to follow existing regulations and
procedures concerning contract payment instructions. In its comments on
a draft of this report, DOD concurred with two of the four
recommendations and partially concurred with the two recommendations
related to developing and automating the standard payment instructions.
DOD stated that although the working group would analyze their
feasibility, until the coordination and review process was completed,
it could not commit to these actions. DOD did not indicate any time
frame for completing the coordination and review process referred to in
its response. We continue to believe that decisive steps towards a
lasting solution in these two areas are essential to address DOD's
long-standing contract payment problems.
Background:
DFAS Columbus uses MOCAS to make contract payments for the Army, Navy,
Air Force, and other DOD organizations. In fiscal year 2002, DFAS
Columbus reported that it made about $87 billion of contract payments.
DOD, including DFAS Columbus, uses a line of accounting to accumulate
appropriation, budget, and management information for contract
payments. Figure 1 shows a line of accounting on the Air Force contract
that we reviewed.
Figure 1: Sample Line of Accounting on the Air Force Contract:
[See PDF for image]
[End of figure]
A line of accounting provides various information, such as (1)
department code (for example, those for the military services) and (2)
fiscal year and appropriation account financing the contract. For all
contracts, the contracting office assigns an ACRN to each line
containing unique accounting information in accordance with the
requirements contained in the Defense Federal Acquisition Regulation
Supplement (DFARS). Obligations[Footnote 5] are established at the ACRN
level to ensure that funds are available to cover disbursements. DFAS
Columbus allocates payment amounts to ACRNs to match contractor
payments to the corresponding obligations.
Organizations Involved in the Contract Payment Process:
DOD payment and accounting processes are complex, generally involving
separate functions carried out by separate offices in different
locations using different procurement, accounting, and payment systems.
The processes are not always integrated and require data to be entered
and sometimes reentered manually. Figure 2 shows the payment process
information flow for the Air Force contract that we reviewed.
Figure 2: Payment Process Information Flow for the Air Force Contract:
[See PDF for image]
[End of figure]
As illustrated above, the payment process information flow for the Air
Force contract began when DOD funding activities requested that the Air
Force contracting office procure engineering and technical services as
well as spare parts. The Air Force contracting office awarded the
contract and modified it to procure additional items. The Air Force
contracting office forwarded the contract and modifications to several
organizations, such as the communications contractor and DFAS Columbus
paying office. Upon receipt of the contract and modifications, the
communications contractor performed work for the DOD activities and
submitted invoices to DFAS Columbus for payment. For goods procured
under the contract, the Defense Contract Management Agency, which is
located at the contractor's site, accepted the goods on behalf of the
DOD activities and provided receiving report information to DFAS
Columbus. The communications contractor then forwarded the goods to the
DOD activities. For services provided by the contractor, the contractor
submitted vouchers for services directly to DFAS Columbus for payment.
The vouchers were subject to later audit by the Defense Contract Audit
Agency.
Before making payments to the contractor, DFAS Columbus matched the
documents--through automated and manual processes--provided by the Air
Force contracting office, the communications contractor, and Defense
Contract Management Agency to ensure that (1) items ordered were
received and (2) funds were obligated and available to make the
payments. Finally, DFAS Columbus paid the contractor, recorded the
payment data in DFAS Columbus records, and forwarded these data to the
DFAS accounting stations responsible for recording the data in the
various DOD organizations' accounting systems. When errors occurred in
allocating payments to the correct ACRNs, the DFAS Columbus contract
reconciliation branch made adjustments to correct the payment
allocations in DFAS Columbus and the applicable DFAS accounting station
records.
Description of the Army and Air Force Contracts Reviewed:
In order to identify some of the problems DFAS Columbus has experienced
in properly allocating payments to the ACRNs on contracts, we selected
an Army and an Air Force contract for a detailed review. These
contracts support two programs--the Army Tactical Missile System and
the Army Data Link System. A description of each of these programs is
presented below.
* We reviewed an Army contract (contract number DAAH01-98-C-0093) with
Lockheed Martin Vought Systems Corporation concerning the Army Tactical
Missile System. This missile system is one of a family of complementary
weapons initially developed by the Army and Air Force for engaging
enemy forces deep behind the front battle lines. The missile system was
designed to attack those forces that are in a position to have an
immediate or directly supporting impact on the close-in battle, but are
beyond the range of cannon and rocket artillery systems. It is intended
to delay, disrupt, neutralize, or destroy targets, such as second
echelon maneuver units, missile sites, and forward command posts. The
Army Tactical Missile System consists of a surface-to-surface ballistic
missile that can be launched from and controlled by the Army's Multiple
Launch Rocket System. The missile system was initially fielded with an
"antipersonnel/antimaterial warhead" for attacking stationary targets.
Since the weapon system was first fielded, the missile system has been
modified to increase its range, improve its guidance systems, and
reduce collateral damage. This missile system was used in the recent
war in Iraq. Figure 3 is a photograph of the missile system.
Figure 3: Army Tactical Missile Launched from Multiple Launch Rocket
System:
[See PDF for image]
Source: U.S. Army Aviation and Missile Command, Public Affairs Office.
[End of figure]
* We reviewed an Air Force contract (contract number F09604-00-C-0090)
with L-3 Communications to maintain the Army portion of the Army Data
Link System.[Footnote 6] The Army and Air Force developed the Army Data
Link System to transfer near-real-time targeting information collected
by aircraft, satellites, and ground stations and provides this
information to aircraft and tactical commanders on the ground in-
theater. The system consists of three major components--the Army
Interoperable Data Link, the Direct Air to Satellite Relay, and the
Reach Back Relay. The Army Interoperable Data Link provides two-way
secure direct communications between aircraft and aircraft-to-ground
stations. The Direct Air to Satellite Relay communicates data gathered
by aircraft through a secure satellite link to an in-theater ground
processing facility. The Reach Back Relay communicates data gathered
through a secure satellite link to ground processing facilities in the
continental United States. The Data Link System was also used in the
recent war in Iraq. Figure 4 shows how the communications system
transfers data.
Figure 4: Army Data Link System Transferring Information Collected by
Aircraft, Satellites, and Ground Stations:
[See PDF for image]
Source: Air Force contractor L-3 Communications.
[End of figure]
DFAS Columbus Made $49 Billion of Adjustments at a Cost of about $34
Million in Fiscal Year 2002:
For fiscal year 2002, our analysis of DFAS Columbus data showed that
about $1 of every $4 in contract payment transactions in MOCAS was for
adjustments to previously recorded payments--$49 billion of adjustments
out of $198 billion in disbursement, collection, and adjustment
transactions. This is an improvement over fiscal year 1999 when DFAS
Columbus data showed that about $1 of every $3 in contract payment
transactions (transactions for disbursements, collections, and
adjustments) in MOCAS was for adjustments to previously recorded
payments--$51 billion of adjustments out of $157 billion in
transactions. While DOD has been working on resolving these problems
for years, it has yet to correct them.
To research the payment allocation problems and make adjustments to
correct the disbursing and accounting records, DFAS Columbus reported
that it incurred costs of about $34 million in fiscal year 2002,
primarily for hundreds of DOD and contractor staff. This represented
about 35 percent of the $97.4 million that DFAS Columbus spent on
contract pay service operations. Our review showed that the specific
contracting offices that contributed to payment allocation problems
resulting in adjustments did not pay for all of the work DFAS Columbus
performed to make the adjustments. This occurred because DFAS Columbus
currently bills DOD activities (for example, the Army) for contract pay
services based solely on the number of lines of accounting on an
invoice. Consequently, all DOD activities pay the same line rate,
regardless of whether substantial work is needed to reconcile problem
contracts and adjust the payment records. As a result, the contracting
offices that contributed to payment allocation problems had
insufficient incentives to reduce payment errors and associated costs.
As discussed later in this report, DOD is taking action to change its
billing structure for DOD activities.
Contracts Were Complex Due to Legal and DOD Requirements, Contract
Modifications, and Pricing Provisions:
Our analysis of an Army and an Air Force contract showed that the
contracts and related payment instructions were complex because of a
combination of factors, including the (1) legal and DOD requirements to
track and report on the funds used to finance the contract, (2) number
of modifications made to the contract over the years that added goods
and/or services, or added or changed payment instructions for these
goods and/or services, and (3) different pricing provisions to pay for
goods and services on the contract. While we identified these three
factors as unique areas, the factors are interrelated and contributed
to the contracts containing complex payment instructions and the
difficulty DFAS Columbus had in properly allocating payment amounts to
the correct ACRNs, ultimately contributing to a high rate of
adjustments.
Legal and DOD Requirements Contribute to Complex Contracts:
In order to maintain administrative control over appropriated funds,
DOD has established a system of controls to help ensure that funds
obligated and then expended for the procurement of goods and services
were used as intended and in accordance with applicable laws and
regulations. A system of controls should be designed to help ensure
that agencies do not obligate or expend more funds than available.
However, DOD's system contributes to the complexity of the contracts.
To report on the status of its appropriated funds--including amounts
obligated and expended--DOD uses a line of accounting to accumulate
appropriation, budget, and management information. For all contracts,
the contracting office assigns a two-digit ACRN to each line containing
unique accounting information in accordance with the requirements
contained in DFARS 204.7107 (c). DFAS Columbus allocates payments to
the ACRNs to match contract payments to the corresponding obligations.
For the two contracts that we reviewed, the Army contract that was
valued at $565 million contained 74 separate ACRNs funded by 8
different appropriation accounts and sales to three foreign countries,
and the Air Force contract that was valued at $49 million contained 89
ACRNs funded by 23 different appropriation accounts. Each ACRN was
established to comply with the DFARS requirement for a separate ACRN
for each unique line of accounting. The information on the line of
accounting (1) is needed to track the obligations and disbursements
back to the DOD activity authorizing the work and (2) provides
information on the obligations and disbursement data, such as the
organizations providing the funding. While DOD created all of these
ACRNs to comply with its requirements, our analysis of the lines of
accounting showed that DOD used ACRNs to provide the information needed
to comply with legal requirements to
account for obligations by appropriation account[Footnote 7] and by
object class.[Footnote 8] On the Army contract that contained 74 ACRNs,
24 of these ACRNs--about one-third--were used by DOD to provide the
information needed to satisfy the legal requirements. Likewise, on the
Air Force contract that contained 89 ACRNs, 48 of these ACRNs--or more
than half--were used by DOD to provide the information needed to
satisfy the legal requirements. DOD accounts for each of these ACRNs
separately--in effect treating them as separate bank accounts--even
though they all fund the same contract. Each additional ACRN increases
the risk of incorrectly allocating payments to the wrong ACRN.
Frequent Contract Modifications Contribute to Complex Contracts:
While accounting requirements and related ACRNs contributed to complex
contracts, frequent contract modifications to procure additional goods
and services are another factor that contributed to complex contracts.
When DOD orders more goods and/or services than provided on the
original contract, DOD modifies the contract and pays the contractor
for the additional goods and/or services. Many times different
appropriation accounts are used to pay for these additional goods and/
or services resulting in DOD creating more ACRNs to account for the
funds. Our analysis of two DOD contracts showed that they were modified
many times over the years to procure additional goods and/or services,
as well as to add or change payment instructions. Our review found that
modifications that changed payment instructions resulted in DFAS
Columbus making adjustments to correct prior payment allocations to
ACRNs.
* In 1997, the Army contracted with Lockheed Martin Vought Systems
Corporation to produce an updated version of the Army Tactical Missile
System. The basic contract was for the procurement of 100 guided
missiles and launching assemblies for the Army missile program. The
Army program office initially obligated $14.2 million in 1997 for this
effort. As of September 30, 2002, the estimated contract value
increased to almost $565 million. Our analysis of this contract showed
that it was modified 122 times over a 5-year period to (1) increase the
number and type of missile systems ordered for the Army and three
foreign countries from 100 to 833, (2) procure over 270,000 engineering
service hours to support the production of the missile systems, and (3)
make other changes necessary to administer the contract. The Army
contracting office also issued six modifications to provide detailed
payment instructions to DFAS Columbus. According to the Administrative
Contracting Officer, the payment instructions were issued to resolve
payment allocation errors made by DFAS Columbus and to ensure that the
payments were applied to the correct ACRNs on the contract.
* Like the Army contract, the Air Force contract was also modified a
number of times to procure additional goods and services and to
administer the contract. In October 1999, the Air Force contracted with
L-3 Communications to maintain the Army portion of the Army Data Link
System. The basic contract contained a description of the engineering
and technical services and spare parts necessary to maintain the
communications system worldwide. The contract also stated that funding
for the engineering and technical services as well as miscellaneous
spare parts would be included on individual funding modifications on
this contract. As of September 30, 2002, the estimated contract value
was about $49 million. Our analysis of this contract showed that it was
modified 82 times over a 3-year period by five different procurement
contracting officers to (1) provide funding for and/or increase/
decrease the requirements for engineering and technical services and
miscellaneous spare parts to maintain the Army assets for the Army Data
Link System and (2) make other changes necessary to administer the
contract. Furthermore, 73 of the 82 modifications revised the payment
instructions.
Contract Pricing Provisions Contribute to Complex Contracts:
Our analysis of two DOD contracts showed that contract-pricing
provisions were a third factor that contributed to the complexity of
these contracts. As stated previously, the Army and Air Force
contracting offices issued many contract modifications to procure goods
and services on behalf of the military services. These modifications
included several contract line items that contained numerous goods or
services with different pricing provisions. Contract pricing provisions
can be placed into two broad categories--fixed price or cost
reimbursable. For example, the Army contract contained firm-fixed-price
provisions[Footnote 9] for procuring 833 missiles, and cost-plus-fixed-
fee[Footnote 10] and cost-plus-award-fee[Footnote 11] provisions for
procuring 270,000 engineering service hours to support the missile
production.
Our review found that contracts containing different pricing provisions
are more complex, and thus it is more difficult to properly allocate
payments to the correct ACRNs because DFAS Columbus voucher examiners
must allocate payment amounts manually, resulting in a greater
opportunity for error. When DFAS Columbus voucher examiners manually
allocate payment amounts to contract ACRNs, the voucher examiners must
ensure that the payment amounts associated with fixed price and cost
reimbursable provisions are allocated to those ACRNs funding those
payment provisions only. However, in some cases it is difficult for the
voucher examiner to readily identify these ACRNs without performing a
labor-intensive review of the contract. As a result, sometimes the
voucher examiner incorrectly applies the payment amounts to ACRNs
funding fixed price provisions instead of ACRNs funding cost
reimbursable provisions. Our review of the Army contract found that it
contained 25 separate contract line items--15 were to be paid for under
fixed price provisions and 10 were to be paid for under cost
reimbursable provisions. Similarly, the Air Force contract contained 66
separate contract line items--16 were to be paid for under fixed price
provisions and 50 were to be paid for under cost reimbursable
provisions.
Reasons for DFAS Columbus Making $160 Million of Adjustments to Correct
Prior Payment Allocations:
As stated previously, the Army and Air Force contracts that we reviewed
were complex due to a number of factors, including legal and DOD
requirements, contract modifications, and pricing provisions. These
factors contributed to the difficulty DFAS Columbus had in properly
allocating payment amounts to the correct ACRNs. As a result, payment
amounts on these contracts were not allocated to the correct ACRNs, and
DFAS Columbus made substantial adjustments to correct the payment
allocations. Our evaluation of $160 million of adjustments showed that
DFAS Columbus made these adjustments to reallocate payments to the
correct ACRNs. Table 1 summarizes the reasons for the adjustments and
provides the number and dollar amount of adjustment transactions made
to reallocate payments to the correct ACRNs.
Table 1: Reasons for $160 Million in Contract Payment Adjustments for
Two Contracts:
Reasons for the adjustments: Army contract writing system error in
accounting for contract obligations; Number of adjustment
transactions: 92; Dollar value of adjustments: (dollars in millions):
$127.2.
Reasons for the adjustments: Procedures and regulations for an Army
contract containing multiple pricing provisions were not followed;
Number of adjustment transactions: 88; Dollar value of adjustments:
(dollars in millions): 4.7.
Reasons for the adjustments: Complex and changing payment instructions
for the Army contract; Number of adjustment transactions: 16; Dollar
value of adjustments: (dollars in millions): 2.4.
Reasons for the adjustments: Frequent contract modifications to change
payment instructions for the Air Force contract; Number of adjustment
transactions: 1,262; Dollar value of adjustments: (dollars in
millions): 26.1.
Reasons for the adjustments: Total; Number of adjustment transactions:
1,458; Dollar value of adjustments: (dollars in millions): $160.4.
Source: GAO.
[End of table]
An Army Contract Writing System Error in Accounting for Contract
Obligations:
From 1998 through 2001, DFAS Columbus paid 43 invoices totaling $63.5
million for the procurement of several missile systems. DFAS allocated
these payment amounts to two ACRNs according to the payment
instructions in effect at the time of the payment. Subsequently, the
contractor submitted price reductions to the Army for certain contract
items that DFAS Columbus had previously paid. In response to the price
reductions, the Army issued a contract modification to account for the
reductions. When the Army processed this modification, the Army
contract writing system incorrectly deobligated the amount for the
missiles on the two ACRNs in error and established two new ACRNs on the
contract containing the reduced amount. As a result, in January 2002,
DFAS Columbus processed 92 adjustment transactions totaling about
$127.2 million to move payment amounts to the new ACRNs. In discussing
this problem with Army officials, they informed us that they did not
know that the system error resulted in DFAS Columbus having to do
additional work to make these adjustments. According to these
officials, the system problem that resulted in the creation of the new
ACRNs was corrected in 2001.
Procedures and Regulations for an Army Contract Containing Multiple
Pricing Provisions Were Not Followed:
From June 1999 through April 2001, DFAS Columbus paid 38 invoices
totaling about $16 million for engineering services on the Army
contract. When DFAS Columbus paid the contractor, the contract did not
contain specific payment instructions on how to allocate payment
amounts to ACRNs as required by DFARS 204.7107 (e)(3)(i). According to
this regulation, when a contract line item is funded by multiple ACRNs,
the contracting officer shall provide adequate instructions in the
contract to permit the paying office (DFAS Columbus in this case) to
accurately charge the ACRNs assigned to that contract line item.
Without these payment instructions, DFAS Columbus voucher examiners
should follow DFAS Columbus internal procedures.[Footnote 12] These
procedures require voucher examiners to prorate payment amounts across
all available ACRNs under cost reimbursable provisions when the
contract or contractor's invoice does not provide specific payment
instructions on which ACRNs should be charged. However, instead of
charging ACRNs funding cost reimbursable provisions only (engineering
services), DFAS Columbus voucher examiners manually allocated the
payment amounts to ACRNs that funded both engineering services (cost
reimbursable provisions) and missiles (fixed price provisions). As a
result, some payment amounts for engineering services were incorrectly
allocated to ACRNs funding the procurement of missiles.
According to Army contracting officials, in April 2001--almost 2 years
after DFAS Columbus paid the first invoice--the Army issued a
modification containing detailed payment instructions once it became
aware that DFAS was having difficulty in allocating payment amounts to
the correct ACRNs. These instructions were different from the payment
allocation procedures followed by DFAS Columbus. However, by that time,
DFAS Columbus had made 38 payments to the contractor for engineering
services and allocated these payments to several ACRNs. To correct
payment allocation problems associated with 7 of the previous 38
payments, DFAS Columbus processed 88 adjustment transactions totaling
about $4.7 million to reallocate previously recorded payments according
to the new instructions.
Complex and Changing Payment Instructions for the Army Contract:
DFAS Columbus also processed 16 transactions totaling about $2.4
million in adjustments to correct payment errors made by DFAS Columbus
voucher examiners when they manually applied payment amounts to ACRNs
on the Army contract. In April 2001, the Army issued a contract
modification that provided specific payment instructions to ensure that
funds were used prior to cancellation. DFAS Columbus officials told us
that these payment instructions were complex and changed several times
after the modification was first issued. For example, the following
instructions were included in contract modifications to provide payment
instructions for contract line item number (CLIN)[Footnote 13] 0030.
* Contract modification 74 dated April 2001 stated that, "Subclins
under CLIN 0030 - prorate across ACRNs BR, BS, and BT.":
* Seven months later, in November 2001, contract modification 89 added
additional payment terms for CLIN 0030 by incorporating instructions
for CLIN 0031 and instructions for contract award fees under these two
CLINs. The modification stated, "Subclins under CLIN 0030/0031 -
prorate across ACRNs BR, BS, BT, BX, BY, and CD, unless voucher
identifies award fee then prorate across ACRNs CE, CF, CG, and CH.":
* Seven months later, in June 2002, contract modification 109 provided
more payment instructions for CLIN 0030/0031. The modification noted
that, "Subclins under CLIN 0030/0031 - prorate across ACRNs BR, BS, BT,
BX, CD, CN, CT, CU, CW and DA, unless voucher identifies award fee then
prorate across ACRNs CE, CF, CG, CH and CV, or if voucher identifies
technical publications then prorate across ACRNs BY, CR, and DA.":
Our analysis of the payment instructions showed that the instructions
were complex, changed several times, and were difficult to administer
properly. We found that $2.4 million of adjustment transactions were
the result of errors made by voucher examiners. These errors occurred
because the examiners did not follow the complex, frequently changed,
and nonstandard payment instructions correctly. In order for DFAS
Columbus to properly allocate payments on CLIN 0030, our work showed
that the voucher examiner must (1) identify the current modification in
effect at the time of payment to ensure payments are allocated in
accordance with the payment instructions, (2) determine the type of
invoice to ensure the allocations are made against the correct ACRNs,
for example, technical publications or award fee, (3) identify the
current available balance associated with ACRNs funding the services,
and (4) calculate a prorated balance to be distributed to each ACRN
funding the services. For example, for one invoice totaling $350,635 on
the Army contract, DFAS Columbus paid two contract line items and
allocated the payment amounts to 23 ACRNs in an attempt to comply with
the payment instructions on the contract that were in effect on the
payment date. This condition resulted in errors in the contract records
when voucher examiners incorrectly allocated payment amounts to the
wrong ACRNs.
In discussing this problem with DFAS Columbus officials, they confirmed
our analysis that the payment instructions were complex and difficult
to administer properly. The officials stated that when a contract
contains payment instructions similar to the instructions presented
above, DFAS Columbus voucher examiners must manually allocate the
payment amounts to contract ACRNs. The officials also stated that the
instructions on this contract were very complicated and could easily be
misinterpreted if voucher examiners do not carefully review the payment
instructions prior to allocating the payment amount to ACRNs on the
contract.
Frequent Contract Modifications to Change Payment Instructions for Air
Force Contract:
In March 2001, DFAS Columbus processed 1,262 transactions totaling over
$26 million to adjust previously recorded payment allocations on the
Air Force contract. At the time these adjustments were made, the Air
Force had already issued 42 modifications, which changed the payment
percentages that DFAS Columbus was required to follow to make correct
payment allocations. Because the number and frequency of the payment
percentages changed, DFAS Columbus did not allocate payment amounts to
the correct ACRNs in many cases.
The Air Force awarded a contract in October 1999 to procure engineering
and technical services and spare parts to maintain the Army Data Link
System. Over the next 3 years, the contract was modified numerous times
to increase the requirements for engineering and technical services and
spare parts, along with the necessary incremental funding amounts to
support these requirements. As additional funds were added to the
contract, (1) new ACRNs were added or obligation balances for existing
ACRNs increased and (2) the payment percentages were modified to
reflect the new obligation balances of the affected ACRNs. For example,
the Air Force modified contract line item number 0006 for engineering
services three times over a 2-month period to incrementally fund these
services. Each time, the Air Force changed the ACRN payment percentages
funding the contract line item.
Our analysis of the contract showed that allocating payments on this
contract has been very difficult, and voucher examiners could easily
misinterpret the payment instructions because of the numerous contract
modifications that changed ACRN payment percentages. These instructions
were complex and difficult to administer because (1) modifications
frequently changed the payment instructions and (2) many ACRNs were
financing numerous contract line items. The percentages changed so
frequently that DFAS Columbus voucher examiners could not keep track of
ACRN balances in order to allocate payment percentages properly. Also,
when many ACRNs financed numerous contract line items, DFAS Columbus
had difficulty identifying how much of an ACRN's obligation amount
related to each line item. Therefore, many payments were not allocated
in accordance with the current modification, and adjustments were
needed to correct these allocations. Figure 5 illustrates the current
funding structure for 3 of the 66 contract line items on the Air Force
contract.
Figure 5: Contract Funding Structure for Three Contract Line Items on
the Air Force Contract:
[See PDF for image]
[End of figure]
As shown above, the relationship of CLINs to ACRNs is complex because
there is not a one-to-one relationship. This makes it difficult for
DFAS Columbus to accurately allocate payments to ACRNs. Because the
contract funding structure was complex, DFAS Columbus voucher examiners
did not properly allocate payments to the correct ACRNs. Thus, DFAS
Columbus sent the contractor's invoices to its contract reconciliation
branch for payment. In addition, beginning in the fall of 2001, the
contractor began providing a detailed payment distribution schedule
with each invoice submitted to DFAS Columbus to assist it in properly
allocating payments to the correct ACRNs. We found that an invoice
totaling $94,237.18 contained 31 pages of contractor costs and billing
charges for 45 contract line items charging 56 different ACRNs. The
amounts charged to the ACRNs by the contractor were as little as $.59
to as much as $88,107.03.
DOD Initiatives to Address Payment Allocation Problems:
DOD officials acknowledged that there have been long-standing contract
payment allocation problems that have required DFAS Columbus to
undertake time-consuming and costly reconciliations to correct
allocation errors. DOD has initiated a major long-term effort to
develop and implement an enterprise architecture, which is intended to
improve its business operations, including its acquisition and
disbursement activities. If implemented successfully, this initiative
may help correct many of the contract payment allocation problems. In
the interim, DOD has several initiatives under way to address the
payment allocation problems caused by complex contracts with confusing
payment instructions. First, DFAS plans to bill reconciliation costs to
contracting offices that contribute to payment allocation problems.
Second, DFAS Columbus is briefing the DOD acquisition community on
methods for presenting payment instructions in contracts. Finally, a
DOD working group is examining payment allocation problems and plans to
develop and implement payment allocation options for presenting
standard payment instructions on contracts DOD-wide to address these
problems.
System Improvement Initiatives:
Since 1995, DOD had been attempting to develop a new system--DPPS--to
replace MOCAS, which was developed in the 1960s. DPPS was being
designed to resolve DOD's long-standing disbursement problems,
streamline contract and vendor payment processes, and reduce manual
interventions. However as we previously reported,[Footnote 14] DOD
terminated DPPS in December 2002, after 7 years in development at a
cost of over $126 million, because of poor program performance and
increasing life cycle costs. DOD officials informed us that
enhancements to MOCAS are now being considered to provide some of the
automated capabilities that DPPS had been attempting to achieve.
The failure of DPPS to become DOD's standard procurement payment system
is indicative of DOD's long-standing inability to efficiently and
effectively modernize its financial management and business systems.
For example, we recently reported[Footnote 15] that over $300 million
has been invested to develop several DFAS financial management systems
and that DOD has not demonstrated that this investment will
substantially improve the financial management information needed for
decision-making and financial reporting purposes. To help avoid this
type of result, we recommended in 2001 that DOD develop and implement
an enterprise architecture, an essential modernization management
tool.[Footnote 16]
As part of its current effort to transform its business operations, DOD
is developing a business enterprise architecture. A key area of focus
is DOD's acquisition and disbursement activities. As we have previously
reported, DOD contract management has been a high-risk area within the
department since 1992.[Footnote 17] To address these problems, DOD's
business enterprise architecture development effort is intended to (1)
incorporate federal accounting and financial management requirements,
(2) consider leading practices in procurement and contract payments,
and (3) reengineer its business processes. If implemented as planned,
this initiative has the potential to address many of the contract
payment allocation problems discussed in this report. However, this is
a long-term effort that will take many years to implement.
DFAS Plans to Bill Contracting Offices That Contribute to Payment
Allocation Problems:
As pointed out earlier, the contracting offices that contributed to
payment allocation problems have insufficient incentives to structure
their contracts, including payment instructions, in a manner that would
reduce payment errors and related reconciliation costs. This condition
exists because DFAS Columbus currently bills DOD activities (for
example, the Army) for contract pay services based solely on the number
of lines of accounting on an invoice. DFAS Columbus officials
recognized this shortcoming in establishing their billing rates and
have informed us that they plan to use a separate billing rate, based
on DFAS contract reconciliation costs, to bill customers for
reconciling, adjusting, and correcting contract payments beginning in
fiscal year 2004. According to the officials, the direct billing hour
rate for reconciliation services will be $74.55 in fiscal year 2004 and
will be billed to the contracting offices responsible for writing the
contracts that require reconciliation. According to the Deputy Director
of DFAS Columbus's Commercial Pay Services, separately billing
contracting offices for the reconciliation work should provide an
incentive to those offices to reduce the number of payment allocation
problems that result in adjustments. In our view, this billing
initiative should encourage contracting offices to structure contracts,
including payment instructions, in a manner that should help reduce
payment errors and reconciliation costs.
DFAS Columbus Briefs DOD Acquisition Community on Contract
Administration, Payment, and Closeout Issues:
DFAS Columbus, in partnership with the Defense Contract Management
Agency, is providing formal briefings to the DOD acquisition community
on various issues related to contract administration, payment, and
closeout. These briefings are designed to give contracting,
procurement, and budget personnel throughout DOD better insight into
the contract entitlement, payment, and accounting processes provided by
DFAS Columbus. They also help to promote teamwork between DFAS Columbus
and the acquisition community and provide an opportunity to enhance the
communications link that is necessary for these organizations to
interoperate efficiently and effectively. These briefings began in
November 2001 and have been provided to numerous activities across the
military services. As of March 2003, presentations had been provided to
18 major acquisition organizations, such as the Army Aviation and
Missile Command, the Navy Space and Naval Warfare Systems Command, and
the Air Force Space and Missile Systems Center.
Among the topics included in these briefings are methods for correctly
presenting payment instructions in contracts. The briefing materials
emphasize that payment instructions provide a method for assigning
payments to the appropriate ACRNs, based on anticipated work
performance. Specifically, the materials discuss payment instruction
requirements for fixed price and cost reimbursement contracts and
provide recommendations for contracting officers to consider when they
develop payment instructions. Reference materials that provide
additional payment instruction information, available on the Internet,
are also cited in these briefings.
DOD Working Group Examines Payment Instruction Problems:
In September 2002, DOD formed a working group[Footnote 18] to review
contract payment instructions. The working group's results were
incorporated into a broader DOD initiative to identify needed
improvements and reductions to procurement policies, procedures, and
processes in DFARS. The working group completed the first phase of its
work by researching the types of payment instructions that have caused
payment allocation problems and developing proposed changes to DFARS.
The working group concluded that payment allocation errors at DFAS
Columbus (1) were often the result of problems experienced with
confusing payment instructions and (2) were further compounded because
DOD did not have payment allocation options for including standard
contract payment instructions for use on DOD contracts. As illustrated
earlier in this report, payment instructions can be unique to each
contract. For example, DFAS Columbus made $2.4 million in payment
allocation errors on the Army contract because the voucher examiners
made errors when they manually applied payment amounts to ACRNs
following complex, nonstandard payment instructions that changed
several times. This makes it difficult for DFAS Columbus personnel--who
must process the payments and make the adjustments manually--to
properly allocate the payments to the correct ACRNs.
In the second phase of this effort, the working group developed
proposals for regulatory changes to address the types of standard
payment instructions applicable to specific contracting situations.
Depending on their specific requirements, contracting officers would be
able to choose a contracting option that would include the standard
payment instructions applicable to that particular situation. For
example, the working group is evaluating several different standard
payment instructions that DOD contracting offices may use on contracts,
including standard payment instructions (1) for ensuring that funds are
used before they are no longer available for expenditure and (2) for
ensuring that funds can be allocated to the various contract ACRNs
based on the balance available on each contract ACRN. The group's
consensus was that such standardization should enable DFAS Columbus to
substantially increase its level of automated payments.
During phase three, the final phase that began in May 2003, the working
group's proposals will be presented to the Defense Acquisition
Regulations Council[Footnote 19] and other experts for review. The
results from this review process will eventually determine whether the
working group's proposals will be accepted. DOD has not yet established
a milestone date for completing the third phase of this effort and has
not yet made the final decision to implement the options for presenting
standard payment instructions. While the working group did not study
the possibility of automating the standard payment instructions, it
informed us that automating them would be the next logical step if they
were implemented.
Our analysis of the working group initiative to develop standard
payment instructions showed that it is a good first step because it
should reduce some of the payment allocation errors that were the
result of DFAS Columbus voucher examiners misinterpreting contract
payment instructions. However, even with the standard payment
instructions, DFAS Columbus will still manually allocate payments to
contract ACRNs on complex contracts such as the two mentioned in this
report. As we previously stated, manual payment allocations increase
the opportunity for errors. In order to eliminate payment allocation
errors, DFAS should take the next step and automate the standard
payment instructions so that DFAS Columbus can electronically process
the payments with minimal manual intervention.
Conclusions:
Resolving DOD's long-standing contract payment problems will require
major improvements to its processes and systems. One key element of
DOD's efforts to improve its business operations is its effort to
develop an enterprise architecture to guide and constrain its ongoing
and planned investments in business systems. Another key element to
resolving contract payment problems would be to determine whether DOD
can reengineer the way its contracts are written, including the length
of time covered by a contract as well as the number of modifications
made to the contract. If successful, these efforts could result in
reengineered business processes and financial management systems that
could address many of DOD's long-standing contract payment allocation
problems that have required DFAS Columbus to undertake time-consuming
and costly reconciliations to correct allocation errors. However, these
reengineered processes and systems are years from becoming reality.
In the interim, DOD is addressing some of the fundamental weaknesses
that have resulted in billions of dollars of adjustments to correct
contract payment allocations annually. However, DOD has not yet
completed its work to (1) provide information to the procuring
activities on the correct methods for presenting payment instructions
on contracts, (2) develop and implement standardized payment
instructions to be used DOD-wide, and (3) fully automate the payment
process using these instructions. Without standardized and automated
payment instructions, DOD will continue to spend millions of dollars
each year to process payments manually and then adjust those payments.
Further, DOD activities must follow existing regulations and procedures
covering payment instructions to help ensure that payment data are
accurately recorded against the correct obligations. Until DOD
successfully modernizes its business operations, these interim steps
will help avoid the inaccurate contract payment data that have hindered
DOD's ability to accurately account for and report on contract
disbursements.
Recommendations for Executive Action:
We recommend that the Secretary of Defense direct the Under Secretary
of Defense (Acquisition, Technology, and Logistics) to:
* develop payment allocation options for presenting standard payment
instructions in contracts containing multifunded contract line items
and:
* issue guidance to the contracting community reiterating the
requirement in DFARS that all contracts containing multifunded contract
line items contain payment instructions and that these instructions be
revised when additional ACRNs are added.
We also recommend that the Secretary of Defense direct the Under
Secretary of Defense (Comptroller) to direct the Director of the
Defense Finance and Accounting Service to:
* automate the standardized payment instructions in MOCAS once the
standard payment instructions are adopted and:
* issue guidance reiterating DFAS's internal requirement that when a
contract does not contain payment instructions and the contractor
invoice does not contain payment instructions, the payments for costs
and services must be allocated to ACRNs financed on a cost reimbursable
basis in accordance with DFAS's desk procedures.
Agency Comments and Our Evaluation:
DOD provided written comments on a draft of this report. In its
comments, DOD concurred with two of the four recommendations and
partially concurred with the remaining two recommendations. DOD's
comments are reprinted in appendix II.
For the two recommendations with which it concurred, DOD stated that
the department will issue memorandums to (1) contracting personnel
reiterating the requirements contained in DFARS and (2) DFAS personnel
to adhere to DFAS policies and procedures, especially as they relate to
the lack of definitive payment instructions in the contractual
documents.
Regarding the two partial concurrences, DOD stated that it would
establish a standard section of the contract for placement of payment
provisions, which would include any payment allocation provisions. In
addition, DOD agreed that it would, as part of the working group effort
referred to in this report, evaluate the feasibility of developing and
automating payment allocation options to include in standard payment
instructions. However, until the coordination and review process within
DOD is complete, DOD stated that it could not commit to the development
and automation of standard payment instructions.
We understand that actions to develop and automate standard payment
instructions must be coordinated with interested parties throughout
DOD. At the same time, a clear commitment to completing this effort in
a timely manner is critical if DOD is to resolve its long-standing
problem of spending tens of millions of dollars each year to make tens
of billions of dollars in adjustments to correct the payment allocation
problems. When $1 out of every $4 in contract payment transactions
continues to be for adjustments to previously recorded payments,
decisive steps towards a lasting solution are essential. One concern
that we have is that DOD has not indicated any time frame for
completing the coordination and review process referred to in its
response. As we recently testified,[Footnote 20] cultural resistance to
change, military service parochialism, and stovepiped operations have
played a significant role in previous failed attempts to implement
management reforms at DOD. Breaking down these barriers will be
critical to successfully reforming DOD's contract payment processes and
saving the millions of dollars currently spent annually on inefficient
and inaccurate manual processes.
In addition, DOD stated that our findings were based on a review of
only two contracts that had known problems. DOD recommended that the
report specifically state that, due to the nature of this review, the
results cannot be extrapolated to other DOD contracts. The draft report
already included such a statement. The report states that the two
contracts we reviewed are not representative of all DOD contracts but,
based on our experience, have characteristics similar to other complex
contracts. DFAS Columbus provided these contracts as examples of
complex contracts with which they had encountered problems in correctly
allocating payments to ACRNs. We selected these two contracts so we
could identify the root cause of payments not being properly allocated
to ACRNs and to determine what actions DOD is taking to address the
problem. We believe that the two contracts provide a good perspective
regarding the types of serious problems that have long plagued DOD's
contract payment process.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its date. At that time, we will send copies of the report to
interested congressional committees. We will also send copies of this
report to the Secretary of Defense; the Under Secretary of Defense
(Comptroller); the Under Secretary of Defense (Acquisition, Technology,
and Logistics); the Secretaries of the Army, Navy, and Air Force; and
the Director of the Defense Finance and Accounting Service. We will
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov] http://www.gao.gov. If you or your staff have any
questions regarding this report, please contact me at (202) 512-9505 or
[Hyperlink, kutzg@gao.gov] kutzg@gao.gov or Greg E. Pugnetti, Assistant
Director, at (703) 695-6922 or [Hyperlink, pugnettig@gao.gov]
pugnettig@gao.gov. Major contributors to this report are acknowledged
in appendix III.
Sincerely yours,
Signed by:
Gregory D. Kutz:
Director, Financial Management and Assurance:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To determine the magnitude of adjustments that affected previously
recorded payments and Defense Finance and Accounting Service (DFAS)
Columbus's reported cost to make these adjustments in fiscal year 2002,
we obtained and analyzed a Mechanization of Contract Administration
Services (MOCAS) database of contract payment transactions, including
disbursements, collections, and adjustments, made for fiscal year 2002.
We then determined the dollar amount and percentage of those
adjustments that were made to previously recorded payments. We also
interviewed and obtained cost information from DFAS officials to
determine the costs for the DFAS Columbus commercial pay services,
including the cost incurred by DFAS Columbus to make adjustments to
previously recorded payments.
To determine why contracts, including payment instructions, were
complex, we reviewed applicable laws, Department of Defense (DOD)
memorandums, regulations, administrative guidelines, policies, and
procedures governing contract payments. These included a review of the
key contract payment provisions provided in the Defense Federal
Acquisition Regulation, DOD acquisition guidance, and DFAS policies. We
also requested that DFAS Columbus provide us with several contracts
that created problems for DFAS Columbus technicians when recording
payments. DFAS Columbus officials provided us with 10 contracts that
contained problems that DFAS Columbus was having with properly
allocating payments to accounting classification reference numbers
(ACRN), such as (1) missing payment instructions, (2) complex payment
instructions, or (3) the contracting office changing payment
instructions. Based on our review of contract documentation and
interviews with DFAS Columbus officials, we selected two contracts for
a detailed review to determine why the contracts, including payment
instructions, were complex and caused payment allocation problems.
The two contracts selected were an Army missile contract (contract
number DAAH01-98-C-0093) and an Air Force communications contract
(contract number F09604-00-C-0090). In selecting these two contracts,
we considered several factors, including (1) goods and/or services
purchased, (2) the dollar amount of obligations and disbursements made
on the contract, (3) the number of modifications made to the contract,
(4) the number of ACRNs financing the contract, (5) payment provisions
on the contract, and (6) the number of contract reconciliations
performed by DFAS Columbus. Because contract data were constantly
changing, we used a cutoff point of September 30, 2002, to gather,
review, and analyze data on the two contracts.
To determine the key factors that caused DFAS Columbus to make payment
adjustments for the two contracts reviewed, we obtained the contracts,
purchase requests, contract modifications, vouchers, invoices, and
other contract documentation. We reviewed this information and analyzed
in detail (1) the payment instructions contained in the contract and
contract modifications, (2) the purpose for and the number of ACRNs
funding the contract, and (3) the number, dollar amount, and reasons
for adjustments on the contracts. To determine why these adjustments
were necessary, we analyzed 2 of the 67 reconciliations performed by
DFAS Columbus (1 review for each contract), which resulted in $160
million of the $264 million in adjustments.
Finally, to determine what steps DOD has taken or planned to address
the adjustment problem, we (1) reviewed applicable DOD policies to
identify changes in payment instruction guidance, (2) interviewed DFAS
officials responsible for system development projects that affected
MOCAS payments, and (3) interviewed DFAS officials on a working group
formed to improve payment instructions. In addition, we discussed with
officials from DFAS and the Office of the Under Secretary of Defense
(Acquisition, Technology, and Logistics) why the contract payment
instructions were so complex, whether they needed to be so complex, and
what the officials were doing to address this problem.
We performed our review at the headquarters Offices of the Under
Secretary of Defense (Comptroller) and the Under Secretary of Defense
(Acquisition, Technology, and Logistics), Washington D.C., and DFAS,
Arlington, Virginia; DFAS, Columbus, Ohio; Army Aviation and Missile
Command, Redstone Arsenal, Alabama; and Air Force Materiel Command,
Robins Air Force Base, Georgia. Our review was performed from August
2002 through July 2003 in accordance with U.S. generally accepted
government auditing standards, except that we did not validate the
accuracy of (1) DFAS Columbus disbursement data pertaining to the
dollar amount and percentage of those adjustments that were made to
previously recorded payments and (2) the cost incurred to reconcile
DFAS Columbus contracts. We also did not review the DOD acquisition
process, including how contracts are written. We did analyze the
payment instructions in the two contracts that we reviewed. We
requested comments on a draft of this report from the Secretary of
Defense or his designee. DOD provided written comments on July 3, 2003,
which are discussed in the "Agency Comments and Our Evaluation" section
of this report and are reprinted in appendix II.
[End of section]
Appendix II: Comments from the Department of Defense:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
JUL 3 2003:
DPAP/P:
Mr. Gregory D. Kutz:
Director, Financial Management and Assurance:
U. S. General Accounting Office Washington, DC 20548:
Dear Mr. Kutz:
This is the Department of Defense (DoD) response to the GAO draft
report, "DOD CONTRACT PAYMENTS: Management Action Needed to Reduce
Billions in Adjustments to Contract Payment Records, dated June 4, 2003
(GAO Code 192069/GAO-03-727).":
A general comment is that the findings contained in the enclosed report
address only two contracts. In addition, these two contracts were
selected because it was known they had significant problems. We
recommend that the report specifically state that, due to the nature of
this review, the results cannot be extrapolated to other DoD contracts.
My comments on the recommendations are enclosed. Thank you for the
opportunity to comment on the subject draft report. My point of contact
is Mr. David Capitano at 703-847-748 or david.capitano@osd.mil.
Sincerely,
Deidre A. Lee:
Director, Defense Procurement and Acquisition Policy:
Signed by Deidre A. Lee:
Enclosure: As stated:
GAO DRAFT REPORT - DATED JUNE 04, 2003 GAO CODE 192069/OSD CASE GAO-03-
727:
"DOD CONTRACT PAYMENTS: Management Action Needed to Reduce Billions in
Adjustments to Contract Payment Records":
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Acquisition, Technology, and
Logistics) to develop payment allocation options for presenting
standard payment instructions in contracts containing multi-funded
contract line items.
DOD RESPONSE: Partially Concur. DoD agrees to establish a standard
section (e.g., Section G) of the contract for placement of payment
provisions, which would include any payment allocation provisions. In
addition, DoD will, as part of the effort of the working group
referenced in the GAO report, evaluate the feasibility of developing
payment allocation options to include in standard payment instructions.
However, until the coordination and review process within DoD is
complete, DoD cannot commit to the development of such payment options.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Acquisition, Technology, and
Logistics) to issue guidance to the contracting community reiterating
the requirement in the Defense Federal Acquisition Regulation
supplement that all contracts containing multi-funded contract line
items contain payment instructions and that these instructions must be
revised when additional accounting classification reference numbers
(ACRNs) are subsequently added.
DOD RESPONSE: Concur. DoD will issue a memorandum to contracting
personnel reiterating the requirements at DFARS 204.7107(e)(3)(i).
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to direct the
Director of the Defense Finance and Accounting Service to automate the
standardized payment instructions in the Mechanization of Contract
Administration Services (MOCAS) system once the standard payment
instructions are adopted.
DOD RESPONSE: Partially Concur. The working group is evaluating the
feasibility of automating the standardized payment instructions.
However until the coordination and
review process within DoD is complete, DoD cannot commit to the
development of automated standardized payment instructions.
RECOMMENDATION 4: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to direct the
Director of the Defense Finance and Accounting Service to issue
guidance reiterating the Defense Finance and Accounting Service's
internal requirement that when a contract does not contain payment
instructions and the contractor invoice does not contain payment
instructions, the payment for costs and services must be allocated to
ACRN's financed on a cost reimbursable basis in accordance with the
Defense Finance and Accounting Service desk procedures.
DOD RESPONSE: Concur. A memorandum will be issued by the Deputy
Director, Commercial Pay Services, directing adherence to Defense
Finance and Accounting Service policies and procedures, especially as
relates to the lack of definitive payment instructions in the
contractual documents.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Greg E. Pugnetti, (703) 695-6922:
Acknowledgments:
Staff members who made key contributions to this report were Francine
M. DelVecchio, Francis L. Dymond, Dennis B. Fauber, Keith E. McDaniel,
and Harold P. Santarelli.
[End of section]
Related GAO Products:
Canceled DOD Appropriations: Improvements Made but More Corrective
Actions Are Needed. [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
02-747] GAO-02-747. Washington, D.C. July 31, 2002.
DOD Contract Management: Overpayments Continue and Management and
Accounting Issues Remain. [Hyperlink, http://www.gao.gov/cgi-bin/
getrpt?GAO-02-635] GAO-02-635. Washington, D.C. May 30, 2002.
Canceled DOD Appropriations: $615 Million of Illegal or Otherwise
Improper Adjustments. [Hyperlink, http://www.gao.gov/cgi-bin/
getrpt?GAO-01-697] GAO-01-697. Washington, D.C. July 26, 2001.
Financial Management: Differences in Army and Air Force Disbursing and
Accounting Records. [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/
AIMD-00-20] GAO/AIMD-00-20. Washington, D.C. March 7, 2000.
Financial Management: Seven DOD Initiatives That Affect the Contract
Payment Process. [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/
AIMD-98-40] GAO/AIMD-98-40. Washington, D.C. January 30, 1998.
Financial Management: Improved Reporting Needed for DOD Problem
Disbursements. [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-
97-59] GAO/AIMD-97-59. Washington, D.C. May 1, 1997.
Contract Management: Fixing DOD's Payment Problems Is Imperative.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-97-37] GAO/
NSIAD-97-37. Washington, D.C. April 10, 1997.
Financial Management: Status of Defense Efforts to Correct Disbursement
Problems. [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-95-7]
GAO/AIMD-95-7. Washington, D.C. October 5, 1994.
(192069):
FOOTNOTES
[1] See Related GAO Products at the end of this report.
[2] For all contracts, the contracting office assigns a two-digit ACRN
to each line of accounting containing unique accounting information in
accordance with the requirements contained in the Defense Federal
Acquisition Regulation Supplement (DFARS). Obligations are established
at the ACRN level to ensure that funds are available to cover
disbursements. DFAS Columbus allocates the payments to the ACRNs in an
attempt to match contractor payments to the corresponding obligations.
[3] According to DFARS 204.7103-1, contracts shall identify the items
or services to be acquired as separate contract line items.
[4] The working group consists of representatives from the Offices of
the Under Secretary of Defense (Comptroller) and the Under Secretary of
Defense (Acquisition, Technology, and Logistics), DFAS Columbus, and
the Defense Contract Management Agency.
[5] Obligations are the amounts of orders placed, contracts awarded,
services received, and similar transactions during an accounting period
that will require payment during the same, or a future, period.
[6] In prior years, the Army portion of the Army Data Link System was
part of another contract that supported both the Army and Air Force.
According to Air Force contracting officials, the Air Force separated
its portion from the Army portion of the contract because the contract
became difficult to administer due to its size. The Air Force
contracting office retained responsibility for administering both the
Army and Air Force portions of the data link systems.
[7] Several statutes and implementing regulatory requirements
established by the Secretary of the Treasury (Treasury) and the Office
of Management and Budget (OMB) require the reporting of contractual
obligations, properly recorded as prescribed by 31 U.S.C. Section 1501,
and related disbursements. Principal among these are the content
requirements for agencies' annual budget submission and budget
execution reports, 31 U.S.C. Sections 1108c and 1554, respectively, and
the Treasury and OMB accounting system and financial reporting
requirements that implement 31 U.S.C. Sections 1511 to 1514.
[8] Object classes present information on obligations by the items or
services purchased by the federal government. Object classes include
personnel compensation and benefits, contractual services and supplies,
and acquisition of assets. The President's budget is required by 31
U.S.C. Section 1104(b) to present obligations by object class for each
account, and OMB requires agencies to report on these object classes.
[9] A firm-fixed-price contract provides for a price that is not
subject to any adjustment on the basis of the contractor's cost
experience in performing the contract. This contract type places the
maximum risk and full responsibility for all costs and resulting profit
or loss on the contractor.
[10] A cost-plus-fixed-fee contract is a cost reimbursement contract
that provides for payment to the contractor of (1) allowable incurred
cost, to the extent prescribed in the contract, and (2) a negotiated
fee that is fixed at the inception of the contract. The fee does not
vary with actual cost, but may be adjusted as a result of changes in
the work to be performed under the contract.
[11] A cost-plus-award-fee contract is a cost reimbursement contract
that provides for a fee consisting of (1) allowable incurred cost, to
the extent prescribed in the contract, (2) a base amount fixed at
inception of the contract, and (3) an award amount, based on the
judgmental evaluation by the government, sufficient to provide
motivation for excellence in contract performance.
[12] DFAS Columbus Contract Entitlement, Desk Procedure 401, June 1996.
[13] According to DFARS 204.7103-1, contracts shall identify the items
or services to be acquired as separate contract line items.
[14] U.S. General Accounting Office, DOD Business Systems
Modernization: Continued Investment in Key Accounting Systems Needs to
be Justified, GAO-03-465 (Washington, D.C. Mar. 28, 2003).
[15] GAO-03-465.
[16] U.S. General Accounting Office, Information Technology:
Architecture Needed to Guide Modernization of DOD's Financial
Operations, GAO-01-525 (Washington, D.C. May 17, 2001).
[17] U.S. General Accounting Office, High-Risk Series: An Update, GAO-
03-119 (Washington, D.C. January 2003).
[18] The working group consists of representatives from the Offices of
the Under Secretary of Defense (Comptroller) and the Under Secretary of
Defense (Acquisition, Technology, and Logistics), DFAS Columbus, and
the Defense Contract Management Agency.
[19] Pursuant to DOD Instruction 5000.63, subject: Defense Acquisition
Regulations System, July 31, 2002, the Defense Acquisition Regulations
Council is responsible for developing fully coordinated recommendations
for revisions to the FAR and the DFARS.
[20] U.S. General Accounting Office, Department of Defense: Status of
Financial Management Weaknesses and Progress Toward Reform, GAO-03-931T
(Washington, D.C. June 25, 2003).
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