Contract Management
Extent of Federal Spending under Cost-Reimbursement Contracts Unclear and Key Controls Not Always Used Gao ID: GAO-09-921 September 30, 2009Federal agencies obligate billions of dollars annually using cost-reimbursement contracts. This type of contract involves high risk for the government because of the potential for cost escalation and because the government pays a contractor's costs of performance regardless of whether the work is completed. As such, cost-reimbursement contracts are suitable only when the cost of the work to be done cannot be estimated with sufficient accuracy to use fixed-price contracts. Agencies may use this contract type only if certain conditions are met. At your request, GAO assessed (1) the extent of agencies' obligations under these contracts, (2) the rationales for using this contract type, (3) determinations that contractors' accounting systems are adequate for determining costs applicable to the contracts, and (4) procedures for monitoring contractor cost controls. GAO analyzed federal procurement data and contract files and interviewed contracting and other government officials.
The complete picture of the government's use of cost-reimbursement contracts is unclear. From fiscal years 2003 through 2008 federal obligations under cost-reimbursement contracts were reported to have increased $16 billion, to $136 billion, which represented a decrease in the total percentage of federal obligations over the 6-year period, from 34 percent to 26 percent. However, the overall downward trend is misleading. A significant increase has been reported for obligations using the "combination" contract type, a category that based on GAO's analysis of 2008 data, includes many contracts with cost-reimbursement obligations that are not recorded as such. According to OFPP, a decision was recently made to eliminate the use of "combination" as a Federal Procurement Data System-Next Generation contract type, effective for all new contract awards starting in fiscal year 2010. In addition, GAO found billions of dollars for which the contract type had been coded as "missing" in fiscal year 2008. Agencies' rationales for using cost-reimbursement contracts were difficult to determine because contracting officers frequently did not document--even in acquisition plans--why they chose to use this contract type. The current requirement for such documentation is minimal, but recent legislation (not yet implemented in the Federal Acquisition Regulation) requires that acquisition plans address the rationale. Of the 92 contracts and orders GAO reviewed, about 30 percent did not include any documentation. The supporting documentation GAO did find generally did not explain why a cost-reimbursement contract for the specific requirement was selected. GAO also found little evidence that agency officials are analyzing contracts' pricing history and requirements to determine if they can transition to a contract type with firmer pricing, even though experience may provide a basis for doing so. Of the 92 contracts and orders GAO reviewed, about half had any evidence that, at least within 4 years before contract award, contractors' accounting systems had been deemed adequate to determine costs applicable to the contract. Twenty contract files had no evidence that the contractors' accounting systems were determined adequate and 20 other contract files contained determinations that had been made either many years before award or after the contract was awarded. Inadequate accounting systems, or accounting systems that had not been deemed adequate for many years, may result in the government making improper payments to contractors. GAO found a range of procedures for monitoring contractor cost controls at the agencies in its review. Procedures at the civilian agencies generally call for program officials to review contractor invoices. At the Department of Defense, cost surveillance depends on contractor-reported earned value management data, supplemented with audits for the purpose of testing whether invoiced costs are allowable. GAO's prior work has raised concerns about the effectiveness of these audits.
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-09-921, Contract Management: Extent of Federal Spending under Cost-Reimbursement Contracts Unclear and Key Controls Not Always Used
This is the accessible text file for GAO report number GAO-09-921
entitled 'Contract Management: Extent of Federal Spending under Cost-
Reimbursement Contracts Unclear and Key Controls Not Always Used' which
was released on October 30, 2009.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Committee on Oversight and Government Reform, House of
Representatives:
United States Government Accountability Office:
GAO:
September 2009:
Contract Management:
Extent of Federal Spending under Cost-Reimbursement Contracts Unclear
and Key Controls Not Always Used:
GAO-09-921:
GAO Highlights:
Highlights of GAO-09-921, a report to the Committee on Oversight and
Government Reform, House of Representatives.
Why GAO Did This Study:
Federal agencies obligate billions of dollars annually using cost-
reimbursement contracts. This type of contract involves high risk for
the government because of the potential for cost escalation and because
the government pays a contractor‘s costs of performance regardless of
whether the work is completed. As such, cost-reimbursement contracts
are suitable only when the cost of the work to be done cannot be
estimated with sufficient accuracy to use fixed-price contracts.
Agencies may use this contract type only if certain conditions are met.
At your request, GAO assessed (1) the extent of agencies‘ obligations
under these contracts, (2) the rationales for using this contract type,
(3) determinations that contractors‘ accounting systems are adequate
for determining costs applicable to the contracts, and (4) procedures
for monitoring contractor cost controls. GAO analyzed federal
procurement data and contract files and interviewed contracting and
other government officials.
What GAO Found:
The complete picture of the government‘s use of cost-reimbursement
contracts is unclear. From fiscal years 2003 through 2008 federal
obligations under cost-reimbursement contracts were reported to have
increased $16 billion, to $136 billion, which represented a decrease in
the total percentage of federal obligations over the 6-year period,
from 34 percent to 26 percent. However, the overall downward trend is
misleading. A significant increase has been reported for obligations
using the ’combination“ contract type, a category that based on GAO‘s
analysis of 2008 data, includes many contracts with cost-reimbursement
obligations that are not recorded as such. According to OFPP, a
decision was recently made to eliminate the use of ’combination“ as a
Federal Procurement Data System-Next Generation contract type,
effective for all new contract awards starting in fiscal year 2010. In
addition, GAO found billions of dollars for which the contract type had
been coded as ’missing“ in fiscal year 2008.
Agencies‘ rationales for using cost-reimbursement contracts were
difficult to determine because contracting officers frequently did not
document”even in acquisition plans”why they chose to use this contract
type. The current requirement for such documentation is minimal, but
recent legislation (not yet implemented in the Federal Acquisition
Regulation) requires that acquisition plans address the rationale. Of
the 92 contracts and orders GAO reviewed, about 30 percent did not
include any documentation. The supporting documentation GAO did find
generally did not explain why a cost-reimbursement contract for the
specific requirement was selected. GAO also found little evidence that
agency officials are analyzing contracts‘ pricing history and
requirements to determine if they can transition to a contract type
with firmer pricing, even though experience may provide a basis for
doing so.
Of the 92 contracts and orders GAO reviewed, about half had any
evidence that, at least within 4 years before contract award,
contractors‘ accounting systems had been deemed adequate to determine
costs applicable to the contract. Twenty contract files had no evidence
that the contractors‘ accounting systems were determined adequate and
20 other contract files contained determinations that had been made
either many years before award or after the contract was awarded.
Inadequate accounting systems, or accounting systems that had not been
deemed adequate for many years, may result in the government making
improper payments to contractors.
GAO found a range of procedures for monitoring contractor cost controls
at the agencies in its review. Procedures at the civilian agencies
generally call for program officials to review contractor invoices. At
the Department of Defense, cost surveillance depends on contractor-
reported earned value management data, supplemented with audits for the
purpose of testing whether invoiced costs are allowable. GAO‘s prior
work has raised concerns about the effectiveness of these audits.
What GAO Recommends:
GAO is making recommendations to the Office of Federal Procurement
Policy (OFPP) regarding how contracts are coded in the government‘s
procurement database and aimed at encouraging timely analysis to
determine if a transition can be made to a contract with a firmer
pricing basis. OFPP agreed with the recommendations. The other agencies
in GAO‘s review generally agreed with the findings in the report or had
no comments.
View [hyperlink, http://www.gao.gov/products/GAO-09-921] or key
components. For more information, contact John Needham at (202) 512-
4841 or needhamJK1@gao.gov.
[End of section]
Contents:
Letter:
Background:
Full Picture of Agencies' Use of Cost-Reimbursement Contracts Is
Unclear:
Agencies Purchase a Range of Services under Contracts Coded as Cost-
Reimbursement:
Rationale for Using Cost-Reimbursement Contracts Is Often Not Clear,
and Analysis Is Not Conducted to Determine if Contract Type with Firmer
Pricing Is Warranted:
Agencies Do Not Always Ensure That Contractors' Accounting Systems Are
Adequate for Determining Costs Applicable to Contracts:
Various Procedures for Cost Surveillance Require Effective
Implementation to Avoid Improper Payments:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the National Aeronautics and Space
Administration:
Appendix III: Comments from the Department of Health & Human Services:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Agencies Reviewed and Percentages of Cost-Reimbursement
Obligations Reported in Fiscal Year 2007:
Table 2: Contract Types:
Table 3: Areas of Overlap between Top 15 Categories Reported as Cost-
Reimbursement Contract Type and as Combination Contract Type, Fiscal
Year 2005 through July 13, 2009:
Table 4: Ten Largest Procurement Categories Reported as Using Cost-
Reimbursement Contracts in Fiscal Year 2008:
Table 5: Examples of Goods and Services Procured with Cost-
Reimbursement Contracts at the 10 Agencies in Our Review:
Table 6: Examples of Rationales Used to Show Why Cost-Reimbursement
Contracts Were Awarded:
Table 7: Adequacy of Contractors' Accounting Systems:
Figures:
Figure 1: Cost and Combination Type Contracts as a Percentage of Total
Obligations, Fiscal Years 1999 to 2008:
Figure 2: DOD Procedures for Process and Approval of Interim Invoices:
Abbreviations:
AHRQ: Agency for Healthcare Research and Quality:
COR: Contracting Officer's Representative:
DCAA: Defense Contract Audit Agency:
DCMA: Defense Contract Management Agency:
DOE: Department of Energy:
EVM: Earned Value Management:
FAR: Federal Acquisition Regulation:
FFP: Firm Fixed Price:
FPDS-NG: Federal Procurement Data System-Next Generation:
GAO: Government Accountability Office:
IRS: Internal Revenue Service:
IT: Information Technology:
NASA: National Aeronautics and Space Administration:
NIH: National Institutes of Health:
NSF: National Science Foundation:
OFPP: Office of Federal Procurement Policy:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
September 30, 2009:
The Honorable Edolphus Towns:
Chairman:
The Honorable Darrell Issa:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives:
Federal agencies obligate more than $100 billion annually using cost-
reimbursement contracts. This type of contract is considered high risk
for the government because of the potential for cost escalation and
because the government pays a contractor's costs of performance
regardless of whether the work is completed. As such, cost-
reimbursement contracts are suitable only when the cost of the work to
be done cannot be estimated with sufficient accuracy to use any type of
fixed-price contract.
To mitigate risk and help ensure that the best interests of the
government are served when entering into a cost-reimbursement contract,
agencies may use this contract type only if the contractor's accounting
system is adequate for determining costs applicable to the contract.
This helps prevent situations where contractors bill the government for
unallowable costs. Appropriate government surveillance is also required
to provide reasonable assurance that the contractor is using efficient
methods and effective cost controls. At your request, we reviewed the
federal government's use of cost-reimbursement contracts and:
* identified agencies' reported obligations under these contracts,
* determined what agencies are buying using cost-reimbursement
contracts,
* assessed contracting officers' rationales for using this contract
type and whether analysis is being conducted to determine whether a
different contract type is warranted based on experience with the
requirement,
* determined whether contractors' accounting systems had been deemed
adequate for determining costs applicable to the contracts, and:
* identified agencies' procedures for surveillance of contractor cost
controls.
To select the agencies included in our review, we analyzed cost-
reimbursement contract actions and dollars obligated as reported in the
Federal Procurement Data System-Next Generation (FPDS-NG).[Footnote 1]
Fiscal year 2007 FPDS-NG data were the latest available at the time we
selected the agencies for review, but we subsequently obtained data on
cost-reimbursement obligations for fiscal year 2008 and included those
data in our trend analysis. Based on the fiscal year 2007 data, we
grouped agencies into one of three categories:
* agencies whose obligations under cost-reimbursement contracts were
less than 20 percent,
* agencies whose obligations were from 20 to 50 percent, and:
* agencies whose obligations were 51 percent or higher.
We reviewed contract files for 10 randomly selected contracts or orders
(orders are used to procure goods or services from an established
contract) from each of 10 agencies that fell in the second and third
categories, with two exceptions. We reviewed only one contract at the
Corporation for National and Community Service and at the Department of
the Treasury's Alcohol and Tobacco Tax and Trade Bureau, as those
contracts accounted for the totality of those agencies' reported cost-
reimbursement contracts in fiscal year 2007. In all, we reviewed 92
contracts or orders issued under cost-reimbursement contracts. We
tested the reliability of the FPDS-NG data by comparing basic reported
information (such as contract number, contract type, and awarding
activity) to information in the contract or order files. Table 1 shows
the agencies where we conducted the file reviews and the percentages of
reported fiscal year 2007 obligations using cost-reimbursement
contracts or orders.
Table 1: Agencies Reviewed and Percentages of Cost-Reimbursement
Obligations Reported in Fiscal Year 2007:
Department/agency: Department of the Air Force/Aeronautical Systems
Center;
Reported percentage of cost-reimbursement obligations: 33.
Department/agency: Corporation for National and Community Service;
Reported percentage of cost-reimbursement obligations: 35.
Department/agency: Department of the Treasury/Internal Revenue Service;
Reported percentage of cost-reimbursement obligations: 36.
Department/agency: Department of the Navy/Navy Strategic Systems
Program;
Reported percentage of cost-reimbursement obligations: 39.
Department/agency: Environmental Protection Agency/Cincinnati
Procurement Operations Division;
Reported percentage of cost-reimbursement obligations: 45.
Department/agency: National Aeronautics and Space Administration/Glenn
Research Center;
Reported percentage of cost-reimbursement obligations: 81.
Department/agency: National Science Foundation;
Reported percentage of cost-reimbursement obligations: 81.
Department/agency: Department of Health and Human Services/Agency for
Healthcare Research and Quality;
Reported percentage of cost-reimbursement obligations: 87.
Department/agency: Department of Energy;
Reported percentage of cost-reimbursement obligations: 90.
Department/agency: Department of Defense/Defense Microelectronics
Activity;
Reported percentage of cost-reimbursement obligations: 97.
Department/agency: Department of the Treasury/Alcohol and Tobacco Tax
and Trade Bureau;
Reported percentage of cost-reimbursement obligations: 100.
Source: GAO analysis of FPDS-NG data.
[End of table]
We supplemented our file reviews by interviewing the cognizant
contracting officials and personnel responsible for surveillance of
contractor costs. We identified surveillance procedures at the agencies
in our review but, because of time constraints, did not assess
compliance with those procedures for the 92 contracts and orders. In
addition, we interviewed agency procurement policy representatives and
heads of contracting activities for 10 agencies from the first category
cited above, which had reported a very high use (95 percent or more) of
fixed-price contracts, to determine the reasons for their low use of
cost-reimbursement contracts. We reviewed relevant sections of the
Federal Acquisition Regulation (FAR), implementing agency policies and
regulations, our Standards for Internal Control in the Federal
Government,[Footnote 2] and past GAO reports. In determining whether
the contractors' accounting systems had been deemed adequate before
contract award, we used a period of 4 years, which is the outermost
time frame in Defense Contract Audit Agency (DCAA) policy, as being
"current" for auditing an accounting system that has a significant
impact on government contract costs. We sought any evidence in the
contract file that the contracting officer had made a determination of
the adequacy of a contractor's accounting system and, where there was
no evidence, we held discussions with the contracting officer.
We conducted this performance audit from July 2008 to September 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe the
evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. Appendix I provides more
detail on our scope and methodology, as well as a listing of the 10
agencies with reported high use of fixed-price contracts.
Background:
Federal agencies can choose among three main contract types to procure
goods and services: fixed-price, time-and-materials, and cost-
reimbursement. Each contract type comes with a different level of cost
or performance risk for the government, as shown in table 2.
Table 2: Contract Types:
Fixed-price:
Government: Pays fixed price even if actual total cost of product or
service falls short of or exceeds the contract price. May also pay an
award or incentive fee related to performance;
Contractor: Provides an acceptable deliverable at the time, place, and
price specified in the contract;
Risk to: Contractor.
Time-and-materials:
Government: Pays fixed per-hour labor rates that include wages,
overhead, general administrative costs, and profit; government might
reimburse contractor for other direct costs, such as travel and
materials costs. Contracts include a ceiling price that the contractor
exceeds at its own risk. Government is not guaranteed a completed end
item or service within the ceiling price;
Contractor: Makes good faith effort to meet government's needs within
the ceiling price;
Risk to: Government.
Cost-reimbursement:
Government: Pays contractor's allowable costs incurred, to the extent
prescribed by the contract. Also may pay a fee, which may be related to
performance. Contracts include an estimated total cost for purposes of
obligating funds and a ceiling that the contractor exceeds at its own
risk (unless approved by the contracting officer). Government is not
guaranteed a completed end item or service within the estimated cost.
The FAR prohibits the use of cost-reimbursement contracts to acquire
commercial items;
Contractor: Makes good faith effort to meet government's needs within
the estimated cost;
Risk to: Government.
Source: GAO analysis of the FAR, Defense Federal Acquisition Regulation
Supplement, and DOD Contract Pricing Guide.
[End of table]
Different types of cost-reimbursement contracts can be used, based on
whether incentives, award fees, or other arrangements can be used to
motivate contractor efforts and discourage contractor inefficiency and
waste. Some of these types, and their limitations, follow.[Footnote 3]
* Cost-sharing contracts: The contractor receives no fee and is
reimbursed only for an agreed-upon portion of its allowable costs. A
cost-sharing contract may be used when the contractor agrees to absorb
a portion of the costs, in the expectation of substantial compensating
benefits.
* Cost-plus-incentive-fee contracts: An objective relationship can be
established between the fee earned and performance results, such as
actual costs or delivery dates. This contract type provides for an
initially negotiated fee to be adjusted later by a formula based on the
relationship of total allowable costs to total target costs.
* Cost-plus-award-fee contracts: Objective incentive targets are not
feasible and judgmental standards, such as quality and technical
ingenuity, can be applied. A potential fee is intended to provide an
incentive for excellence in such areas as quality, timeliness,
technical ingenuity, and cost effective management; award of the fee is
a unilateral decision made solely by the government. We have reported
on agencies' use of cost-plus-award-fee contracts, finding in some
cases that award fees had been paid to contractors regardless of
acquisition outcomes.[Footnote 4]
* Cost-plus-fixed-fee contracts: These contracts provide for payment to
the contractor of a negotiated fee that is fixed at contract inception.
The fixed 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. This
contract type permits contracting for efforts that might otherwise
present too great a risk to contractors, but it provides the contractor
only a minimum incentive to control costs. Cost-plus-fixed-fee
contracts are suitable, for example, when contracting for research or
preliminary exploration or study, and the level of effort required is
unknown.
Cost-reimbursement contracts are suitable only when uncertainties
involved in contract performance do not permit costs to be estimated
with sufficient accuracy to use a fixed-price contract. The two major
reasons for the inability to accurately estimate costs are (1) the lack
of knowledge of the work needed to meet the requirements of the
contract, for example, under research contracts, which necessarily
involve substantial uncertainties, and (2) the lack of cost experience
in performing work, such as the development of a weapon system because
manufacturing techniques and specifications are not stable enough to
warrant contracting on a fixed-price basis. We have reported that
during weapon system development, the Department of Defense (DOD) often
asks prime contractors to develop cutting-edge systems and awards cost-
reimbursement contracts for the work. Because the government often does
not perform the up-front analysis needed to determine whether its needs
can be met by the contract requirements, significant cost increases can
occur under the contracts as the scope of requirements changes or
becomes better understood. As of fiscal year 2007, for example, DOD
anticipated reimbursing the prime contractors on the Joint Strike
Fighter and Future Combat Systems programs nearly $13 billion more than
initially expected.[Footnote 5]
Cost-reimbursement contracts involve significantly more government
oversight than do fixed-price contracts, which means the government
incurs additional administrative costs on top of what it is paying the
contractor. For example, the government must determine that the
contractor's accounting system is adequate for determining costs
related to the contract and update this determination periodically. In
addition, contractor costs need to be monitored--known as cost
surveillance--to provide reasonable assurance that efficient methods
and effective cost controls are used.
Congress has taken action to increase oversight of these contracts, for
DOD specifically as well as governmentwide. The John Warner National
Defense Authorization Act for Fiscal Year 2007 called for the Secretary
of Defense to modify DOD's regulations to require at Milestone B
(approval for major acquisition programs to enter the engineering and
manufacturing development phase) documentation of the basis for the
contract type. Before approving the use of a cost-type contract for
development, the Milestone Decision Authority must execute a written
determination that among other things, the program is so complex and
technically challenging that it would not be practicable to reduce
program risk to a level that would permit the use of a fixed-price type
contract.[Footnote 6] Further, the conference report accompanying the
act stated that DOD should reduce program risk to the point that the
use of a fixed-price contract for a major acquisition program may be
appropriate.
In addition, the Duncan Hunter National Defense Authorization Act for
Fiscal Year 2009 called for revisions to the FAR, to include guidance
on (1) when and under what circumstances cost-reimbursement contracts
are appropriate, (2) the acquisition plan findings necessary to support
decisions to use cost-reimbursement contracts, and (3) the acquisition
workforce resources necessary to award and manage cost-reimbursement
contracts.[Footnote 7] The FAR revisions were required by July 11,
2009, but as of September 28, 2009, had not been implemented. This act
also states that within 1 year after these revisions are promulgated,
the inspector general for each executive agency shall review the use of
cost-reimbursement contracts by the agency for compliance with these
regulations and must include the results of the review in the inspector
general's next semiannual report.[Footnote 8]
Finally, in a March 2009 memorandum on government contracting issued to
the heads of departments and agencies, President Obama noted that
excessive reliance by the federal government on cost-reimbursement
contracts "creates a risk that taxpayer funds will be spent on
contracts that are wasteful, inefficient, subject to misuse, or
otherwise not well designed to serve the needs of the Federal
Government or the interests of the American taxpayer." The President
directed the Office of Management and Budget to develop guidance to
assist agencies in "reviewing, and creating a process for ongoing
review of, existing contracts in order to identify contracts that are
wasteful, inefficient, or not otherwise likely to meet the agency's
needs, and to formulate appropriate corrective action in a timely
manner." In this regard, on July 29, 2009, the Office of Management and
Budget sent a memorandum to the heads of departments and agencies
requiring agencies to reduce high-risk contracting authorities, such as
cost-reimbursement contracts. The memorandum requires agencies to
reduce by 10 percent the share of dollars obligated in fiscal year 2010
under new contract actions that are awarded with high-risk contracting
authorities.
Full Picture of Agencies' Use of Cost-Reimbursement Contracts Is
Unclear:
The complete picture of the government's use of cost-reimbursement
contracts is unclear. From fiscal years 2003 through 2008, federal
obligations under cost-reimbursement contracts were reported to have
increased by $16 billion, from $120 billion to $136 billion.[Footnote
9] When viewed as a percentage of total reported federal obligations,
this represented a decrease over the 6-year period, from 34 percent to
26 percent.[Footnote 10] However, this decrease is misleading for
several reasons, including a significant increase in agencies' reported
obligations under the "combination" contract type, which includes cost-
reimbursement obligations, and contradictory guidance in the FPDS-NG
user manual, which could result in misreporting of contract type.
Further, although contract type is a data element field required in
FPDS-NG for all awards, we found billions of dollars reported as
missing a contract type (i.e., no specific contract type was indicated)
or indicating "other" as the contract type. The contract type field
displays the type of contract that applies to the particular
procurement. It is incumbent on the contracting officers and agencies
to ensure the accuracy of all information submitted.
Significant Increase in "Combination" Contract Type Belies Reported Use
of Cost-Reimbursement Contracts:
Combination contracts, one of the contract type fields in FPDS-NG, are
those where two or more contract types are used, such as in different
line items in one contract action. Agencies have recently reported a
significant increase in obligations under this contract type, from less
than 1 percent ($1.3 billion) of total government obligations in fiscal
year 2004 to almost 8 percent ($39 billion) in fiscal year 2008. DOD
obligations accounted for $34 billion, or 87 percent, of this amount.
Figure 1 depicts the reported trends in the percentage of total
obligations under cost-reimbursement contracts and under combination
contracts.
Figure 1: Cost and Combination Type Contracts as a Percentage of Total
Obligations, Fiscal Years 1999 to 2008:
[Refer to PDF for image: line graph]
Year: 1999;
Cost contracts: 38%.
Year: 2000;
Cost contracts: 35%.
Year: 2001;
Cost contracts: 35%.
Year: 2002;
Cost contracts: 33%.
Year: 2003;
Cost contracts: 34%.
Year: 2004;
Cost contracts: 36%;
Combination contracts: 0.4%.
Year: 2005;
Cost contracts: 33%;
Combination contracts: 0.5%.
Year: 2006;
Cost contracts: 34%;
Combination contracts: 1.3%.
Year: 2007;
Cost contracts: 30%;
Combination contracts: 5.4%.
Year: 2008;
Cost contracts: 26%;
Combination contracts: 7.6%.
Source: GAO analysis of FPDS-NG data.
[End of figure]
We analyzed fiscal year 2008 FPDS-NG obligations coded as combination
contracts and found that half of the $39 billion was obligated under
contracts that had at least some cost-type actions, and about a quarter
of this amount ($9 billion) went to contracts that had 50 percent or
more cost-type obligations. These obligations were not recorded as cost-
reimbursement in FPDS-NG.
Further illustrating the potential overlap between combination and cost-
reimbursement contract types, we found that contracts coded as
combination are used to procure similar items as those coded as cost-
reimbursement. Our examination of the 15 categories of items most often
procured under both cost-reimbursement and combination contract types
over the past several years showed substantial overlap. Table 3 depicts
the top 15 categories in both contract types and the 11 categories that
are the same, from fiscal year 2005 to July 13, 2009, the most current
data available at the time of our analysis.
Table 3: Areas of Overlap between Top 15 Categories Reported as Cost-
Reimbursement Contract Type and as Combination Contract Type, Fiscal
Year 2005 through July 13, 2009:
Category reported as cost-reimbursement: Defense systems research and
development;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: Professional services;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: Operate government-owned
buildings;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: Management support services;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: General healthcare services;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: Space research and
development;
Category also reported as combination: [Empty].
Category reported as cost-reimbursement: Maintenance, repair, and
rebuild of equipment;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: Automated data processing and
telecommunications;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: Other research/development;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: Aircraft/airframe structure
components;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: Defense (other) research and
development;
Category also reported as combination: [Check].
Category reported as cost-reimbursement: Motor vehicles, cycles, and
trailers;
Category also reported as combination: [Empty].
Category reported as cost-reimbursement: Space vehicles;
Category also reported as combination: [Empty].
Category reported as cost-reimbursement: Guided missiles[A];
Category also reported as combination: [Empty].
Category reported as cost-reimbursement: General science/technology
research and development;
Category also reported as combination: [Check].
Source: GAO analysis of FPDS-NG data.
[A] Guided missiles was the 16th category reported under the
combination contract type.
[End of table]
Because many of the combination contracts include cost-type
obligations, those contracts coded as cost-reimbursement do not portray
the full picture of the government's use of cost-reimbursement
contracting. FPDS-NG does not delineate what contract types comprise
those coded as combination, for example, whether they are cost-plus-
award-fee and cost-plus-incentive-fee contracts, or a mix of fixed-
price and labor-hour line items.
We also identified conflicting definitions in the FPDS-NG user manual,
which agency officials use as guidance when entering contract
information into the database, that further complicate efforts to
identify obligations under cost-reimbursement contracts. For contracts
composed of more than one contract type, instructions direct agencies
to "identify the type with greater contract value." For example, if a
contract has both cost-reimbursement and fixed-price portions but the
fixed-price portion of the contract makes up 55 percent of the expected
contract value, the contract would be coded as fixed-price. However,
the very next page of the user manual describes combination contracts
as awards "where two or more contract types apply." It is not clear,
then, whether contracts with more than one contract type should be
coded as the contract type representing the preponderance or as
combination contracts.
According to a response to a draft of this report by the Office of
Federal Procurement Policy (OFPP), a change was recently approved to
FPDS-NG, anticipated to be effective for all new contracts awarded in
fiscal year 2010, that will eliminate "combination" as a contract
type.[Footnote 11] Contracts containing more than one contract type
will be coded as the contract type representing the preponderance of
obligations. With the elimination of the combination contract type
option, the conflicting user manual definitions we identified will be
removed.
Missing Contract Types and Obligations Using "Other" Contract Type
Contribute to Lack of Clarity about Extent of Cost-Reimbursement
Obligations:
Although FPDS-NG guidance states that contract type is a required field
for all contracts, we found that billions of dollars in obligations are
either missing a contract type (i.e., no contract type was reported) or
the contract type is indicated as "other." In fiscal year 2008, over
$10 billion in obligations was reported as missing a contract type and
$4.3 billion was reported as "other." In addition, some very large
contracts that had been previously labeled as cost-reimbursement were
subsequently coded as missing a contract type in fiscal year 2008. For
example, six Navy contracts with missing contract types had been coded
in prior years as predominately cost-reimbursement; in total these
contracts accounted for over $2 billion. Additionally, FPDS-NG guidance
prohibited the use of the "other" category as a contract type beginning
in fiscal year 2009, but we found contracts in fiscal year 2009, with
obligations of $1.3 billion, that were still using this category. OFPP,
in its response to a draft of this report, explained that contracts
previously designated as "other" retain that designation when
modifications to those contracts are subsequently made. We queried FPDS-
NG and verified that the fiscal year 2009 obligations for the "other"
contract type were all modifications to contracts awarded earlier than
fiscal year 2009. In its response, OFPP noted that agencies have the
ability to self-correct the contract type selection on modifications
and stated that it would discuss with agencies the burden associated
with making such changes on a voluntary basis (such as for
modifications to contracts that were recently awarded and may not
expire for a number of years).
Agencies Purchase a Range of Services under Contracts Coded as Cost-
Reimbursement:
For contracts coded strictly as cost-reimbursement in FPDS-NG, the
largest procurement categories in fiscal year 2008 were defense systems
research and development, professional services, and the operation of
government-owned buildings.[Footnote 12] The 10 largest procurement
categories reported as using cost-reimbursement contracts in fiscal
year 2008 are listed in table 4.
Table 4: Ten Largest Procurement Categories Reported as Using Cost-
Reimbursement Contracts in Fiscal Year 2008:
Procurement: Defense systems research and development;
Obligations (in billions): $17.50;
Percentage: 13.
Procurement: Professional services;
Obligations (in billions): $14.80;
Percentage: 11.
Procurement: Operation of government-owned buildings;
Obligations (in billions): $14.50;
Percentage: 11.
Procurement: Management support services;
Obligations (in billions): $7.80;
Percentage: 6.
Procurement: General healthcare services;
Obligations (in billions): $7.10;
Percentage: 5.
Procurement: Space research and development;
Obligations (in billions): $6.50;
Percentage: 5.
Procurement: Maintenance, repair, and rebuild of equipment;
Obligations (in billions): $6.00;
Percentage: 4.
Procurement: Automated data processing and telecommunications;
Obligations (in billions): $5.80;
Percentage: 4.
Procurement: Other research and development;
Obligations (in billions): $5.70;
Percentage: 4.
Procurement: Other;
Obligations (in billions): $50.30;
Percentage: 37.
Procurement: Total reported cost-reimbursement obligations;
Obligations (in billions): $136.00;
Percentage: 100.
Source: GAO analysis of FPDS-NG data.
Note: These data do not include contract actions coded as
"combination," "other," or "missing," which could include cost-
reimbursement obligations.
[End of table]
Contracts included in our sample make clearer the range of services
agencies are procuring under cost-reimbursement contracts. Table 5
provides examples of the goods and services procured with cost-
reimbursement contracts at the 10 agencies in our review.
Table 5: Examples of Goods and Services Procured with Cost-
Reimbursement Contracts at the 10 Agencies in Our Review:
Agency: Corporation for National and Community Service;
Item or service procured: Administration of Health Benefits Program.
Agency: Department of the Air Force/Aeronautical Systems Center;
Item or service procured: Software upgrade on C-17 aircraft.
Agency: Department of Energy;
Item or service procured: Management and operation of research
laboratory.
Agency: Department of Health and Human Services/Agency for Healthcare
Research and Quality;
Item or service procured: Medical survey data collection.
Agency: Department of the Navy/Navy Strategic Systems Program;
Item or service procured: Technical engineering support services in the
area of nuclear survivability analysis.
Agency: Department of the Treasury/Internal Revenue Service;
Item or service procured: Development, modernization, and enhancement
of E-filing system.
Agency: Department of Defense/Defense Microelectronics Activity;
Item or service procured: Study and analysis to define basic
requirements for an A-10 multifunction color display upgrade.
Agency: Environmental Protection Agency/Cincinnati Procurement
Operations Division;
Item or service procured: Analytical lab support to ensure drinking
water quality.
Agency: National Aeronautics and Space Administration/Glenn Research
Center;
Item or service procured: Turbine pump assembly design and development
for Ares I.
Agency: National Science Foundation;
Item or service procured: Labor, supplies, materials, and support for
the planning and science services of the Integrated Ocean Drilling
Program.
Source: GAO review of agency contract files.
[End of table]
By contrast, the 10 agencies in our review that reported very high use--
95 percent or more--of fixed-price contracts procure goods and services
for which the requirements are known and research and development is
not required, and that are available commercially and have substantial
pricing histories on which to base fixed prices.[Footnote 13] For
example, officials from the Department of Justice's Bureau of Prisons
told us they procure items for prison operation and maintenance, as
well as goods needed to regularly operate these facilities, such as
food and inmate clothing. The Department of Agriculture's Agricultural
Marketing Service officials said that they purchase janitorial
services, and Defense Commissary Agency officials said they purchase
goods, such as groceries, which are sold in commissaries throughout the
world. Other examples of procurements by those agencies that had a very
high use of fixed-price contracts include fuel, pharmaceutical
products, ammunition, office supplies, clothing, and information
technology (IT) equipment, according to officials.
Rationale for Using Cost-Reimbursement Contracts Is Often Not Clear,
and Analysis Is Not Conducted to Determine if Contract Type with Firmer
Pricing Is Warranted:
Contracting officials frequently did not document contract files to
show why they awarded cost-reimbursement contracts. The documentation
we did find, for the most part, used boilerplate language; was short,
vague, and repetitive; and did not show why a cost-reimbursement
contract was selected. In three cases, documentation in contract files
stated that funding unavailability was a reason cost-reimbursement
contracts, rather than fixed-price contracts, were awarded. We also
found little evidence at the agencies we reviewed that contracting
officers are analyzing contract pricing history or requirements to
determine if experience under the contract could provide a basis for
firmer pricing.
Little Documentation Available Showing Why Contracting Officers Use
Cost-Reimbursement Contracts:
Although a formal determination and findings is no longer required to
justify a cost-reimbursement contract (as is the case for using time-
and-materials contracts), contracting officers are generally required
to include in the contract file documentation to show why a particular
contract type was selected.[Footnote 14] The FAR does not contain
details as to what this documentation is to entail. Along these lines,
a regulatory change is in process to implement a recent congressional
direction that acquisition plans set forth the findings necessary to
support a decision to use cost-reimbursement contracts. Standards for
Internal Control in the Federal Government also state that for an
agency to manage its operations, it must have relevant, reliable, and
timely information relating to internal events. From a management
standpoint, that information should be recorded and available to help
ensure that this contract type is used only when suitable. Setting
forth a full and specific explanation showing why a cost-reimbursement
contract was selected for award could, for example, provide agency
personnel and their managers with helpful information as they consider
awarding future contracts or exercising options on an existing
contract.
Of the 92 contract files we reviewed, we found that 28, or 30 percent,
contained no documentation showing why a cost-reimbursement contract
was selected for award, including in the acquisition plans. Contracting
officers frequently could not provide an explanation for its absence,
were unaware of the need for documentation, or stated that they
inherited the contract from contracting officers who had retired or
otherwise left the agency. In one case, the contracting officer told us
that the decision to use a cost-type contract was not reduced to a
specific document in the file but resulted from discussions. In another
case, the contracting officer noted that it was intuitive that the
contract was not appropriate for a fixed-price arrangement.
For those contracts that did contain documentation, it was often brief,
vague, and repetitive. For example, National Aeronautics and Space
Administration (NASA) contracting officers use a boilerplate template
on which they select the appropriate justification, without setting
forth the facts and explanation of why this contract type was selected.
NASA's template includes the following choices for why a cost-
reimbursement contract should be awarded:
* The level of complexity is moderate to high and performance
uncertainties cannot be sufficiently identified or their cost impacts
reasonably estimated.
* Changes during performance are: likely, unlikely, or have an average
chance of occurring.
The Environmental Protection Agency also uses standard language, not
specific to the procurement at hand, to document its rationale for why
it awarded a cost-reimbursement contract. For example, two contract
files contained the statement, "these activities are non-routine,
complex in nature, and specific requirements have not been completely
defined." Two other contract files had the following language: "due to
the uncertainties involved in the performance of this contract, costs
cannot be estimated with sufficient accuracy to use any type of fixed-
price contract."
Table 6 contains representative examples of rationales we found to be
brief and not clearly tied to the individual procurements.
Table 6: Examples of Rationales Used to Show Why Cost-Reimbursement
Contracts Were Awarded:
Agency: Corporation for National and Community Service;
What was procured: Administration of Health Benefits Program;
Documented rationale: Uncertainties involved in contract performance do
not permit costs to be estimated with sufficient accuracy to use any
type of fixed-price contract.
Agency: Department of the Air Force/Aeronautical Systems Center;
What was procured: Predator Primary Data Link Secure-Communications
Upgrade;
Documented rationale: Contract type and performance incentives were
appropriate to motivate the contractor in the subcontract management
area and as an on-time delivery incentive.
Agency: Department of Energy;
What was procured: Enhancement of the department's credibility
regarding its activities related to hydrologic, environmental,
atmospheric, and soil sciences and human health issues at the Nevada
Test Site;
Documented rationale: A fixed-price type of arrangement is not
appropriate because the uncertain duration and specific nature of the
work requirements.
Agency: Department of Health and Human Services/Agency for Healthcare
Research and Quality;
What was procured: Support of the HIV Research Network;
Documented rationale: There are uncertainties involved in contract
performance that do not permit costs to be estimated with sufficient
accuracy to use a fixed-price contract. The work to be performed is
such that it is not feasible to devise predetermined objective
incentive targets applicable to cost, technical performance, or
schedule.
Agency: Department of the Navy/Navy Strategic Systems Program;
What was procured: Systems tactical engineering support and test
engineering support to deployed systems for MK5 and MK6 guidance
program;
Documented rationale: The exact nature of this procurement effort
cannot be established in advance with the certainty required for a firm
fixed-price contract nor can the cost of the work be accurately
forecasted to permit the undertaking of such work for a fixed price.
Agency: Department of the Treasury/Internal Revenue Service;
What was procured: Support services for Automated Collection System
Support;
Documented rationale: The work and nature of the services to be
performed and the uncertainties involved in the contract performance
are such that cost of performance cannot be estimated with sufficient
reasonableness to permit use of any type of fixed-price contract.
Agency: Department of Defense/Defense Microelectronics Activity;
What was procured: Tracking analysis and track integration;
Documented rationale: Reasonable and firm performance objectives and
schedules that have not been firmly established and the amount of
effort required is not fully known.
Agency: Environmental Protection Agency/Cincinnati Procurement
Operations Division;
What was procured: Support and development of BASINS (Better Assessment
Science Integrating Point and Nonpoint Sources);
Documented rationale: Because of uncertainties involved in the
performance of this contract, costs cannot be estimated with sufficient
accuracy to use any type of fixed-price contract.
Agency: National Aeronautics and Space Administration/Glenn Research
Center;
What was procured: Aeronautics communications and education support;
Documented rationale: Level of complexity is moderate to high and
performance uncertainties cannot be sufficiently identified or their
cost impacts reasonably estimated. Changes are likely.
Agency: National Science Foundation;
What was procured: Meeting planning, logistical, and administrative
support services;
Documented rationale: We have selected this type of contract because of
the uncertainties of requirements.
Source: GAO review of agency contract files.
[End of table]
The Navy Strategic Systems Program, in addition to the standard
language showing why it selected cost-reimbursement contracts, provided
us with a briefing explaining that a primary reason for using cost-
reimbursement contracts is the emphasis this office places on the
safety, reliability, quality, and readiness of the nuclear weapons it
procures. Shifting too much risk to the contractor, the Navy states,
would increase the risk that safety, reliability, quality, and
readiness could be compromised because, when problems are encountered,
contractors are motivated not to lose money and to look for ways to cut
costs. Cutting costs can translate to performance degradations that may
not surface until years later. Navy officials also told us that cost-
reimbursement contracts for nuclear weapons are cost-effective because
the high technical risk of what is being procured would expose
contractors to great financial risk with a fixed-price contract,
causing contractors to mitigate such risk with proposals that would be
prohibitively expensive.
One contract file in our review did include a more specific rationale
for using a cost-reimbursement contract type. A memorandum in a NASA
contract file justified the use of a cost-reimbursement contract to
procure traveling wave tubes, a component of electronic equipment. The
memorandum stated that "because of the high breakage rate which occurs
during fabrication of Traveling Wave Tubes, a fixed-price contract
would be too costly for the government. Consequently, a cost-type
contract is the chosen method of procurement."
Funding Availability Sometimes Drove Decision to Use Cost-Reimbursement
Contracts:
In some cases, we found that it was not necessarily uncertainty about
requirements that drove the selection of a cost-reimbursement contract,
but rather uncertainties about funding availability. Some contracting
officers told us that cost-reimbursement contracts could be modified
more easily than fixed-price contracts as more funding became available
(if, for example, funding was made available on a periodic basis
instead of at the beginning of the fiscal year), whereas fixed-price
contracts were required to be fully funded up front. For example, a
contracting officer at the National Science Foundation (NSF) noted that
as a result of the ambiguities of the services provided and the funding
available each year, a fixed-price contract was not possible for the
procurement. However, the contracting officer said that even if there
were no ambiguities regarding the services to be awarded, if funding
availability was incremental and uncertain then the contract would be
awarded on a cost-reimbursement basis. At the Internal Revenue Service
(IRS), one of the contract files we reviewed contained documentation
stating the following:
"The customer did not have sufficient funding available to structure
the task order and obligate the funding under a firm fixed price (FFP)
structure. As a result, a Cost Plus Fixed Fee — was awarded. The
customer estimated their requirement at $8.1 million; however, they
were only able to provide $2.1M at the time of award. After initial
award, four (4) additional increments of funds were provided to
incrementally fund this requirement in the first year. Given our
continuous cycle of Continuing Resolutions each Fiscal Year, our use of
Cost Reimbursement contract vehicles are the most practical awards."
In our view, the perceived ease of adding funding under cost-
reimbursement contracts as funding is made available is not a correct
assumption. Under a cost-reimbursement contract, an agency is required
to obligate the estimated costs (or ceiling) established in the base
year contract for the required services or products at the time of
award. When modifications are approved increasing the original funding
ceiling in the contract award, the increased costs are charged to the
appropriation current at the time of the modification. It is true that
modifications of fixed-priced contracts can be charged against the
funding available at the time of the original contract award, depending
upon the type of contract modification. However, agencies must obligate
the ceiling amount under a cost-reimbursement contract based upon a
reasonable estimate of costs for providing the service or product.
Agencies cannot simply limit the amount of a recorded obligation by
stating that the contract is limited to an amount of funding available
for the contract or stating that the contract will be incrementally
funded if those amounts are different than the estimated ceiling costs.
[Footnote 15]
At the Air Force Aeronautical Systems Center, we found that the
availability of research and development funds--as opposed to
procurement--was a reason for awarding a cost-reimbursement contract.
The price negotiation memorandum for one contract we reviewed stated
that "The Government directed the contractor to bid the effort as firm
fixed price. (The contractor) submitted a firm fixed price in
response... The Government later changed direction... in order to use
FY07 3600 funds."[Footnote 16] There was no additional indication in
the contract file as to the reason the decision was made to switch to a
cost-reimbursement contract. We were unable to discuss the reason for
switching with the contracting officer because the contracting officer
had left the agency.
Agency Officials Are Not Conducting Analysis to Determine Potential to
Transition to Contract Types with Firmer Pricing:
The FAR does not specifically require a transition plan from a cost-
reimbursement contract to one with firmer pricing. However, the FAR
states that in the course of an acquisition program, a series of
contracts, or a single long-term contract, changing circumstances may
make a different contract type appropriate in later periods than that
used at the outset. In particular, contracting officers should avoid
the protracted use of a cost-reimbursement contract after experience
provides a basis for firmer pricing,[Footnote 17] for example, by
transitioning part or all of the requirements to a fixed-price
contract. Information important to such an effort would include a
contracting officer's analysis of the contract's pricing history and
the results of program offices revisiting the government's requirements
to determine whether they can be better defined. In this regard, on
July 29, 2009, the Office of Management and Budget issued a memorandum
requiring agencies to reduce high-risk contracting instruments, such as
cost-reimbursement contracts. Using fiscal year 2008 as a baseline, the
memorandum states that agencies should aim to reduce by at least 10
percent the combined share of dollars obligated through new contracts
in fiscal year 2010 that (1) are awarded noncompetitively, receive only
one bid in response to a solicitation or a request for quote, or both;
(2) are cost-reimbursement contracts; or (3) are time-and-materials and
labor-hour contracts. To meet this goal, the memorandum states that
agencies might plan for the migration of work from cost-type to fixed-
price contracts as requirements become better defined.
We did not assess whether an agency's decision to use a cost-
reimbursement contract was the most appropriate choice of contract type
during our review, but we generally found no evidence that agency
officials assessed, for example, the contract's pricing history or
requirements under the contracts we reviewed to determine whether there
was a basis for firmer pricing, even when the contracts had been in
place for several years. For example, NSF awarded a $2.8 million cost-
reimbursement contract in 2007 to collect and analyze data for a survey
of science and engineering research facilities. NSF has been conducting
the survey since 1986 and noted in its acquisition plan that
methodological studies have been performed during each cycle to improve
the design and processes for subsequent cycles. However, the
documentation showing why the agency selected a cost-reimbursement
contract, rather than one with firmer pricing, was vague, stating that
the survey tasks include "analysis work involving several
uncertainties, and sufficient room during the collection process for
variegated opportunities to revise and improve on survey methods,
creating additional areas of uncertainty." Although contracting
officers are to consider the cost-reimbursement contracts' pricing
history, there was no evidence in the contract file that this occurred-
-or that the program office had revisited requirements--to determine
whether there was a basis to convert to a contract type with firmer
pricing. In another example, the Agency for Healthcare Research and
Quality (AHRQ) awarded a contract to collect data for its annual
Medical Expenditure Panel Survey. The contract, awarded in 2002 with
options extending through 2008, was worth over $128 million with the
options included. The same contractor had performed this survey since
1996, but the contract file contained no evidence regarding why a cost-
reimbursement contract continued to be used, despite having at least 6
years of data regarding costs and requirements.
We found cases where leadership had encouraged movement away from cost-
reimbursement contracts, largely by focusing on the program offices'
role in establishing firmer requirements. An IRS contracting office,
for example, recently established a contract review board to review the
use of cost-reimbursement contracts supporting a multibillion-dollar IT
modernization program that has been in place for over 20 years.
[Footnote 18] Cost-reimbursement contracts had initially been
determined to be in the government's best interest because IRS was
unable to define its requirements sufficiently to allow for fixed-price
contracts. According to IRS officials, over time cost-reimbursement
contracts and orders continued to be awarded and issued for this
program because it was easier. In effect, maintaining the status quo
became the way contracting was done. Officials told us that the
partnership between the contracting and program office was weak; one
contracting officer told us that a source selection was conducted, the
acquisition plan written, and proposal evaluation made without any
input from the contracting officer. In January 2008, new leadership at
this IRS contracting office established a contract review board to
review and approve procurements proposed as cost-reimbursement
contracts. The IRS Director, Office of Information Technology
Acquisition, told us that the review board represented a significant
paradigm shift from how business was conducted. In one case, the board
stopped a planned sole-source, cost-reimbursement order from being
awarded in favor of a competitive, firm-fixed-price task order. The
order was awarded for approximately $9.5 million--about half of the
government estimate and $15 million less than what the contractor
requested as a sole-source provider.
We also found two additional cases where agencies had contracted for IT
services on a firm, fixed-price basis. While we recognize that IT
services vary significantly in terms of complexity, in these cases
contracting officials had made a concerted effort to work with the
program offices to define requirements such that vendors could submit
offers on a fixed-price basis. Procurement officials at the District of
Columbia's Pretrial Services Agency[Footnote 19] and the Department of
Agriculture's Farm Services Agency--two agencies with high proportions
of fixed-price contracts--noted that IT services contracts were among
their largest obligations under fixed-price contracts. Both of the
agencies were successful at implementing these contracts as fixed-price
contracts because their technical personnel (i.e., officials in their
program offices) were required to separate and define their IT contract
requirements into specific, measurable deliverables. The head of
contracting activity at the Farm Services Agency told us that it was "a
long road" to get the program office on board with this approach, as
the office had preferred cost-reimbursement contracts for IT services
in the past, but that the effort paid off in terms of savings as well
as a greater likelihood that the government would get the deliverables
it expected. This official emphasized that a key to the agency's
success was including its technical personnel in the contracting
process.
Agencies Do Not Always Ensure That Contractors' Accounting Systems Are
Adequate for Determining Costs Applicable to Contracts:
Cost-reimbursement contracts are to be used only when the contractor's
accounting system is adequate for determining costs applicable to the
contract. This determination is critical because it helps assure the
government that the contractor has systems in place to accurately and
consistently record accumulated costs and bill for allowable costs. If
accounting systems are not deemed adequate, problems can arise when
costs are accumulated during contract performance.[Footnote 20]
Contracting officers have a number of methods available to them to make
this determination. One method is to rely upon assessments of
accounting systems prepared by DCAA for prior contracts. The FAR does
not specify a time frame within which an accounting system needs to be
determined adequate to be used as a basis to award a new cost-
reimbursement contract. As such, for the purposes of this review, we
used a period of 4 years, which is the outermost time frame in DCAA
policy, as being "current" for auditing an accounting system that has a
significant impact on government contract costs.
Another method by which contracting officers can determine if an
accounting system is adequate is to perform a pre-award survey of a
prospective contractor's accounting system.[Footnote 21] According to
the FAR, determining that an accounting system is adequate as part of a
pre-award survey includes a determination of whether it is in
accordance with generally accepted accounting principles and whether it
provides for:
* a proper segregation of direct costs from indirect costs,
* an identification and accumulation of direct costs by contract,
* a logical and consistent method for the allocation of indirect cost
to intermediate and final cost objectives,
* an accumulation of costs under general ledger control,
* a timekeeping system that identifies employees' labor by intermediate
or final cost objectives,
* a labor distribution system that charges direct and indirect labor to
the appropriate cost objectives, and:
* an interim (at least monthly) determination of costs charged to a
contract through routine posting of books of account.
The contracting officer is responsible for verifying that the
contractor has an adequate accounting system.[Footnote 22] For most of
the contracts we reviewed, this verification was based on a DCAA
opinion stemming from its review of the contractor's accounting system
and related internal control policies and procedures, but the opinion
can also be rendered by an independent accounting firm or other
designated entity.[Footnote 23] According to the DCAA Contract Audit
Manual, each relevant accounting or management system that has a
significant impact on government contract costs should be audited on a
cyclical basis, that is, every 2 to 4 years, depending on a documented
risk assessment of experience and current audit risk.
Regular accounting system reviews are necessary to help ensure that
changes to the contractor's accounting practices are considered by the
government and evaluated for compliance with government contract cost
principles. Over the period of a contract, the contractor's cost
structure or accounting procedures can change because of multiple
factors, such as changing the criteria for capitalizing or depreciating
assets, applying different indirect cost allocation bases, or merging
of a contractor's various operating segments. By continuing to pay a
contractor without taking into account these changes, the government
risks paying for unallowable costs. The contracting officer takes into
account DCAA's opinion, or that of the designated entity, but retains
the ultimate authority for determining whether the contractor's
accounting system is adequate.
As an example of what can occur when the determination of adequacy is
not made or the contractor's accounting systems are not deemed
adequate, in August 2007, a contractor disclosed to the Air Force that
it had periodically overbilled on the Joint Strike Fighter Systems
Development and Demonstration cost-reimbursement contract since its
inception. The amount overbilled was about $267 million. In this case,
DCAA had rendered the opinion that the contractor's accounting system
was "inadequate in part." The contractor reimbursed the Air Force for
the amount overbilled and paid an additional $28 million in interest.
Timely Accounting System Approval in 52 Cases Reviewed; 13 Others
Approved After Award:
Of the 92 contract files we reviewed, only 52 (about 57 percent) had
any evidence that contractors' accounting systems had been deemed
adequate in a current time frame (within 4 years or less) before
contract award. Other accounting systems had been deemed adequate
either after award or not at all. Where the contract files contained no
evidence of an adequacy determination, we interviewed the cognizant
contracting officers to confirm the lack of evidence. Table 7 depicts
the results of our analysis of contract files and discussions with
contracting officers.
Table 7: Adequacy of Contractors' Accounting Systems:
Status of accounting system adequacy: Determined adequate in current
time frame before award;
Contracts/orders: Number: 52;
Contracts/orders: Percent: 57;
Number of contractor accounting systems[A]: 40.
Status of accounting system adequacy: Determined adequate before award
but not in current time frame;
Contracts/orders: Number: 7;
Contracts/orders: Percent: 8;
Number of contractor accounting systems[A]: 6.
Status of accounting system adequacy: Determined adequate after
contract award;
Contracts/orders: Number: 13;
Contracts/orders: Percent: 14;
Number of contractor accounting systems[A]: 11.
Status of accounting system adequacy: No evidence of accounting system
adequacy pre-or post-award;
Contracts/orders: Number: 20;
Contracts/orders: Percent: 22;
Number of contractor accounting systems[A]: 20.
Status of accounting system adequacy: Total;
Contracts/orders: Number: 92;
Contracts/orders: Percent: 100[B];
Number of contractor accounting systems[A]: [Empty].
Source: GAO analysis based on contract file data and interviews with
agency officials.
[A] Several contractors had multiple contracts, orders, or both but
only one accounting system.
[B] Numbers do not add to 100 because of rounding.
[End of table]
Thirteen contract files in our sample indicated that contractor
accounting systems were determined adequate after contract award; the
contracts were awarded before any determination that the accounting
systems were adequate for determining cost. For example, the Department
of Energy (DOE) awarded a contract in October 1996, but the accounting
system was not determined to be adequate until July 1998, more than 2
years after the contract was awarded.
Approval for Seven Accounting Systems Occurred More Than 4 Years Prior
to Award:
Seven of the contract files we reviewed revealed that accounting
systems were not determined adequate before award within current time
frames. For example, NASA awarded a contract with an estimated value of
more than $205 million (with options) in April 2005. However, the
contractor's accounting system was last determined to be adequate on a
prior contract in August 1998, more than 7 years before the award of
the current contract.[Footnote 24] In another example, at the Defense
Microelectronics Activity, DCAA found a contractor's accounting system
to be inadequate in part.[Footnote 25] The contractor took corrective
action, resolving some of the deficiencies to DCAA's satisfaction; the
Defense Contract Management Agency (DCMA) found that the remaining
deficiencies were not material to government contracts and concluded
that the contractor's accounting system was adequate. A previous
determination, based on a DCAA opinion, that the contractor's
accounting system was adequate, was made by DCMA in 2001--5 to 6 years
before the orders we reviewed were issued.
No Evidence of Accounting System Adequacy for 20 Contracts:
We found no evidence, either pre-or post-award, of determinations that
the contractors' accounting systems were deemed adequate for 20 of the
contracts we reviewed (with a total value of more than $1.4 billion,
not including option periods). This means that contracting officers
obligated funds without knowing whether the contractors had accounting
systems capable of billing the government properly. These 20 contracts
were from the following agencies:
* NSF - 4 contracts:
* NASA - 2 contracts:
* Air Force Aeronautical Systems Center - 3 contracts:
* Corporation for National and Community Service - 1 contract:
* AHRQ - 10 contracts:
Contracting officials confirmed the lack of evidence in the contract
files. However, most could not provide an explanation for why this was
the case, or were not aware of their responsibility for ensuring that
contractor accounting systems are determined adequate for cost-
reimbursement contracts. Some said that they inherited the contracts
from contracting officers who retired or otherwise left the agency.
Further, a DCMA official incorrectly told us that the contractor's
accounting system is presumed to be adequate unless it is otherwise
documented that the accounting system is not adequate.
Four of these contract files contained opinions by DCAA that the
accounting systems were inadequate in part. According to DCAA internal
control criteria, an inadequate in part opinion meant that one or more
significant deficiencies existed that affected parts of the accounting
system. Such an opinion required the contractor to take corrective
action and could require DCAA to review contractor invoices. For
example, one of the Air Force Aeronautical Systems Center contracts we
reviewed showed that DCAA found the contractor's accounting system to
be inadequate in part. According to the administrative contracting
officer, the inadequate in part opinion was significant enough to
preclude the contractor from direct billing the Defense Finance and
Accounting System for payment and required the contractor to submit
invoices to DCAA for review and approval before payment could be made
to the contractor. On December 19, 2008, DCAA issued audit guidance
stating that it will no longer report inadequate in part opinions.
Audit reports that report any significant deficiencies or material
weaknesses will include an opinion that the system is inadequate.
At AHRQ, none of the contract files we reviewed contained documentation
stating that the contractors' accounting systems had been deemed
adequate for determining costs applicable to the contracts at any time.
Three of these contract files contained memos from the former AHRQ
senior staff accountant stating that although his review did not
consider the adequacy of the contractors' financial capability or their
accounting systems, nothing came to his attention to preclude an award
on this basis. The contracting officers told us that they had relied on
the National Institutes of Health's (NIH) negotiation of indirect cost
rates for these contracts. But according to the NIH Director of
Financial Advisory Services, this indirect rate negotiation does not
satisfy the FAR requirement that a contractor's accounting system is
deemed adequate for determining costs applicable to its contracts.
[Footnote 26]
Various Procedures for Cost Surveillance Require Effective
Implementation to Avoid Improper Payments:
For the agencies in our review, we found a range of cost surveillance
procedures. Cost surveillance procedures under cost-reimbursement
contracts are intended to help ensure that the contractor is performing
efficiently and effectively and that the government pays only for
allowable, allocable, and reasonable costs applicable to the contract.
Lack of adequate cost surveillance can lead to overpaying the
contractor. The civilian agency procedures call for program officials
to review contractors' invoices. DOD procedures do not include invoice
review by program offices, but rely on monthly reviews of contractors'
costs and a project management tool called Earned Value Management
(EVM), supplemented by periodic DCAA audits. Whether cost surveillance
is done by reviewing invoices or by the methods used by DOD, the key is
effective implementation to help avoid improper payments or
overbilling.
Cost Surveillance Procedures at Civilian Agencies:
Procedures in the civilian agencies in our review generally call for
contracting officers' representatives (COR) to examine contractor
invoices. CORs are appointed by the contracting officer to assist in
the technical monitoring or administration of a contract. Invoice
reviews help to ensure that the goods and services for which the
government is being billed were actually received, the amounts billed
are allowable, and the government is not incurring claimed costs that
are inadequately supported. Agency officials outlined the steps in the
cost surveillance process as follows.
* The program office directs work to be done, consistent with the
contract's statement of work.
* How the work is done, together with the time and cost required to do
the work, is proposed by the contractor and, upon approval by the
program office, becomes a work request. Work requests describe the work
to be done, the labor categories needed, and the hours required by each
labor category to complete the work.
* As invoices are submitted, the CORs are supposed to reconcile the
invoices to the work requests to ensure that the government only pays
for the completed work authorized by the work requests.
Some CORs told us that they also pay attention to the labor categories
charged to ensure that the contractor is billing for the level of
expertise actually used to do the work and the hours worked. Once an
invoice is reconciled, payment is made. Should a contractor experience
technical problems, which may cause cost overruns, the COR must
determine if the technical problems are legitimate before the
government will approve continued work and invoices for payment.
The efficacy of invoice review depends on an agency's policies and
procedures and the diligence and expertise of the COR in implementing
them. Another factor is the time CORs have available to devote to
oversight duties. We have reported that CORs are often assigned these
oversight functions as an additional duty.[Footnote 27] In addition, we
reported in 2007 that DOE was not adequately reviewing invoices for a
multibillion-dollar cost-reimbursement contract to design and construct
the Hanford waste treatment plant, risking hundreds of millions of
dollars in improper payments.[Footnote 28] Instead, DOE relied
primarily on DCAA's review and approval of the contractor's financial
systems and on the contractor's review and approval of subcontractor
charges. DOE's heavy reliance on others, with little oversight of its
own, exposed the hundreds of millions of dollars it spent annually on
the project to an unnecessarily high risk of improper payments. In
September 2008, DOE amended its acquisition guide to hold contracting
officers responsible for ensuring that contract invoices are properly
reviewed and analyzed before any payment is made to contractors.
DOD Reliance on Contractor-Provided Program Management Data May Be
Inadequate if Required Audits Are Not Conducted to Supplement Cost
Surveillance:
At DOD, procedures for monitoring contractor costs depend in large part
on the EVM system--a tool that presents contractor-provided data to
measure the value of work accomplished in a given period compared to
the planned value of work scheduled and the actual cost of work
accomplished--supplemented with audits for the purpose of testing
whether invoiced costs are allowable.[Footnote 29] DOD policy dictates
that CORs shall not be delegated authority to approve invoices (as this
is the role of DCAA and administrative contracting officers), but they
may review contractor billings to determine whether the hours billed
and labor mix are commensurate with the work performed. CORs and
program officials responsible for surveillance for the DOD contracts in
our sample told us that they rely on contractor-provided monthly
reports and EVM data to perform cost surveillance. EVM data do not
provide surveillance of specific contract costs, as would be presented
in an invoice, but are intended to alert program managers to potential
problems with cost or schedule overruns sooner than a review of
contract expenditures (such as an invoice review) alone would.[Footnote
30] At the same time, however, the EVM data's level of detail at the
contract and order level can be much less than that of an invoice--
where the specifics in terms of labor categories, travel, and equipment
would be reflected.
Therefore, analysis of EVM data alone does not satisfy FAR requirements
for cost surveillance under cost-reimbursement contracts. In addition
to the key control discussed above--determining that the contractor's
accounting system is adequate--the EVM data must be supplemented with
audits for the purpose of testing whether invoiced costs are allowable.
DOD has two main sets of procedures in place to do this, one for when
the contractors are approved for direct billing and one for when they
are not. Direct billing allows approved contractors to send their
invoices directly to the Defense Finance and Accounting Service for
payment, without invoice review by either DCAA or the COR. In these
situations, DCAA is required to perform periodic review of invoices,
incurred cost audits, and "floor checks" at contractor facilities to
test the reliability of such things as employee time records and job
classifications. To be eligible to participate in the direct billing
program, contractors must meet certain criteria, such as having an
adequate accounting/billing system and related internal controls, as
determined by DCAA. If a contractor is not eligible to participate in
the direct billing program, the contractor must submit all cost-
reimbursement interim invoices to DCAA for approval for provisional
payment. Upon approval of the invoices, DCAA submits them to the
Defense Finance and Accounting Service for payment. DCAA expresses an
opinion as to whether the costs are reasonable, applicable to the
contract, determined under generally accepted accounting principles,
and cost accounting standards are applicable in the circumstances and
not prohibited by the contract, by statute or regulation, or by
previous agreement with, or decision of, the contracting officer
through final incurred cost audits. Figure 2 depicts these various
procedures.
Figure 2: DOD Procedures for Process and Approval of Interim Invoices:
[Refer to PDF for image: illustration]
Contractor: Approved for direct billing program;
* Invoices are sent directly to DFAS for payment;
* Continued participation in direct billing program based on DCAA
ongoing surveillance;
* DCAA determines adequacy of accounting system every 2 to 4 years
depending on risk;
* DCAA performs annual testing of paid invoices;
* DCAA performs audits to obtain sufficient evidence to support an
opinion on the allowability, allocability, and reasonableness of costs.
Contractor: Not approved for direct billing program;
* DFAS reviews all invoices;
* DCAA sends approved invoices to DFAS for payment;
* DCAA determines adequacy of accounting system every 2 to 4 years
depending on risk;
* DCAA performs audits to obtain sufficient evidence to support an
opinion on the allowability, allocability, and reasonableness of costs.
Source: GAO, based on review of DCAA Contract Audit Manual.
[End of figure]
The effectiveness of DOD's cost surveillance process depends, to a
large extent, on compliance with these DCAA audit procedures. Our
recent work has raised concerns in this regard.[Footnote 31] For
example, rather than documenting the population of invoices, preparing
sampling plans, and testing a random (statistical) sample, as should be
done, auditors generally used a nonrepresentative selection of invoices
in deciding the number of invoices they would review and the extent of
testing they would perform to support conclusions in their work. For
example, we found that for one contractor that generated $1.1 billion
in annual billings to the government, the DCAA auditor only reviewed 3
invoices totaling $88,000 out of 222 invoices submitted for payment
from March 2003 through February 2004, tested the first invoice
selected, and performed limited testing on the remaining 2 invoices.
Despite this limited testing, DCAA prepared a memorandum for the
record, stating that "continued reliance can be placed on the
contractor's procedures for the preparation of interim vouchers
(invoices)" and "the contractor has met the criteria for continued
participation in the direct billing program." Also, we recently
testified that allegations that certain audits at three locations did
not meet professional standards were substantiated.[Footnote 32]
Specifically, contractor officials and the DOD contracting community
improperly influenced the audit scope, conclusions, and opinions in
three cases, a serious independence issue. At two DCAA locations, we
found evidence that (1) working papers did not support reported
opinions, (2) DCAA supervisors dropped findings and changed audit
opinions without adequate evidence for their changes, and (3)
sufficient audit work was not performed to support audit opinions and
conclusions.
In our review, we found an additional example of what can happen when
adequate cost surveillance is not in place. NSF awarded a $1.1 billion,
10-year 5-month cost-reimbursement contract (with options) for logistic
and operational support for the U.S. Antarctic Program. As discussed in
a series of NSF Office of Inspector General audit reports, DCAA found
that the contractor was billing indirect costs as direct costs, billing
over the negotiated ceiling limitations, and not providing supporting
documentation for other costs. To compound these issues, NSF had not
determined that the contractor's accounting system was adequate for
determining costs applicable to its contract. In November 2007, an
independent auditor reported that NSF had significant weaknesses in its
contract monitoring policies and procedures, meaning that the agency
did not know whether the costs it was paying the contractor were
allowable and reasonable. NSF officials acknowledged the weaknesses and
have begun to take corrective action.
As a final example of inadequate cost surveillance, in January 2009,
the DOE Inspector General reported weaknesses in a contractor's
internal audit, which DOE relies on to help ensure that contractors'
costs charged to DOE are allowable under the terms of the contract.
[Footnote 33] For fiscal year 2007, the contractor had expended and
claimed over $1.4 billion. The Inspector General found that the
contractor's internal audit during fiscal year 2007 was not
satisfactory in several material respects. Specifically:
* Procurements were not properly approved, but the contractor's
internal audit management permitted the contractor to provide approvals
3 years after the fact. Questioned costs associated with the
procurements were omitted from the contractor's audit report.
* The contractor's internal audit manager encouraged the omission of
information that confirmed improper labor cost allocations.
* After the completion of audit testing, the contractor's internal
audit management directed the modification of the testing attribute
related to independent receipt of procured goods and services, an
action that caused some of the questioned costs to be excluded from
reporting.
As a consequence, DOE managers at the Savannah River Site were not
provided with the information necessary to fully comprehend the
materiality of, or to address and resolve, internal control weaknesses.
The contractor did not agree with all of the Inspector General's
findings, but did acknowledge weaknesses and indicated that it planned
to address them.[Footnote 34]
Conclusions:
Cost-reimbursement contracts are appropriate when contracting for
requirements that involve substantial uncertainties, but they require
careful management to protect the government's interests. At a macro
level, careful management is enabled by good information. Current
reporting in FPDS-NG, specifically regarding the combination contract
type and billions of dollars with missing contract types, does not
provide decision makers with adequate visibility into the government's
use of cost-reimbursement contracts. Further, while the FAR cautions
against the protracted use of cost-reimbursement contracts after
experience provides a basis for firmer pricing, it does not set forth
procedures or provide guidance for doing the analysis needed to make
this determination. We found little evidence that agency officials are
analyzing whether such a transition can be made. While recent
congressional and executive branch actions are intended to help ensure
that cost-reimbursement contracts are used only when appropriate, they
have yet to take full effect.
Recommendations for Executive Action:
We recommend that agency officials take the following four actions to
address the cost-reimbursement contract issues we found.
To help ensure that analysis is conducted to determine whether to
continue using cost-reimbursement contracts when experience may provide
a basis to transition to firmer pricing, we recommend that the
Administrator of OFPP take steps to amend the FAR. Specifically, we
recommend that the Administrator require procedures for contracting
officers (in conjunction with the requiring activity) to analyze,
before the award of a new contract or at other appropriate times during
a contract's period of performance, the agency's requirement and
determine if its experience with a procurement provides a basis for
firmer contract pricing. The results and findings of this analysis
should be documented in the contract file. If the analysis indicates
that a basis for firmer pricing does exist, the procedures should
require consideration, modification, and implementation, if feasible,
of an acquisition plan to transition to a contract type with firmer
pricing.
To help clarify reporting requirements in FPDS-NG to provide a clearer
picture of the extent to which various contract types, including cost-
reimbursement, are being used, we recommend that the Administrator of
OFPP:
* implement controls in FPDS-NG to preclude information from being
entered without a contract type being identified, that is, eliminate
the "missing" contract type option, and:
* reconcile the conflicting instructions in the FPDS-NG user manual for
coding combination contracts versus coding based on the preponderance
of contract type.
We also recommend that the Secretary of Health and Human Services
direct the Director of AHRQ to provide guidance to the agency's
contracting staff to ensure that they are aware of their responsibility
to ensure that contractors' accounting systems have been deemed
adequate before awarding cost-reimbursement contracts.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from OFPP, the
Departments of Defense, Energy, Health and Human Services, and
Treasury; NASA; the Environmental Protection Agency; NSF; and the
Corporation for National and Community Service. In comments provided
via e-mail, OFPP agreed with the recommendations directed to it. The
response stated that OFPP would work with the FAR Council to address
the issue of setting forth procedures for determining whether analysis
may indicate a basis for firmer contract pricing based on contract
pricing history and requirements. OFPP also stated that version 1.4 of
FPDS-NG (with a projected launch of February 2010) will make the
selection of a contract type mandatory, so that new contract awards
will no longer be coded as missing a contract type. Finally, OFPP
stated that a decision was recently made, while our report was at OFPP
for comment, to make changes to FPDS-NG to eliminate the "combination"
contract type as an option for new contracts starting in fiscal year
2010. Modifications made to contracts awarded prior to fiscal year 2010
may still show "combination" as the contract type, as contract type is
inherited from the base contract award; however, agencies have the
ability to self-correct the contract type selection at any time, and
the retroactive contract type selection will flow from the base
contract to all modifications.
A final recommendation to OFPP, which was in our draft report, has been
removed based on new information. This recommendation had to with
obligations coded as "other" contract type in fiscal year 2009. OFPP
stated that agencies are prevented from selecting "other" as a contract
type for new procurements awarded after September 30, 2008, but that
this contract type may still occur on modifications made after that
date. We analyzed fiscal year 2009 FPDS-NG information and confirmed
that the obligations coded as "other" were modifications to existing
contracts. OFPP noted that, as with the "missing" contract type,
agencies have the ability to self-correct the "other" contract type on
modifications to existing contracts. OFPP stated that it will discuss
with agencies the burden associated with making these changes on a
voluntary basis, such as when making modifications to contracts that
were recently awarded and may not expire for a number of years.
In written comments, reprinted in appendix II, NASA stated that the
report provides a balanced view of the issues related to the use of
cost-reimbursement contracts. The Department of Health and Human
Services (HHS) also provided written comments, included in appendix
III, agreeing with our recommendation directed to it. HHS stated that,
in response to our findings, the Office of Acquisition Management and
Policy issued a departmentwide notice to remind contracting staff of
the need to ensure the adequacy of contractors' accounting systems
before award of a cost-reimbursement contract. HHS also stated that it
would emphasize the importance of documenting the basis for cost-
reimbursement contracts in acquisition plans and further encourage
contracting officers to assess the viability of transitioning from cost-
reimbursement contracts to more definite contract types. Finally, HHS
provided additional information on AHRQ's contract for its annual
Medical Expenditure Panel Survey.
The Departments of Defense, Energy, and Treasury provided technical
comments which we incorporated as appropriate. The Environmental
Protection Agency, NSF, and the Corporation for National and Community
Service had no comments on the report.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the report date. We will then send copies of this report to
interested congressional committees; the Secretaries of Defense,
Energy, Health and Human Services, and the Treasury; the Administrators
of the Environmental Protection Agency, NASA, and OFPP; the Director of
NSF; and the Chief Executive Officer of the Corporation for National
and Community Service. The report also will be available at no charge
on GAO's Web site at [hyperlink, http:///www.gao.gov].
If you or your staff have any questions about this report or need
additional information, please contact me at (202) 512-4841 or
needhamjk1@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Staff acknowledgments are provided in appendix IV.
Signed by:
John K. Needham, Director:
Acquisition and Sourcing Management:
[End of section]
Appendix I: Scope and Methodology:
To determine the extent to which federal agencies are using cost-
reimbursement contracts, we extracted and analyzed, from the Federal
Procurement Data System-Next Generation (FPDS-NG), cost-reimbursement
coded contract actions and dollars obligated by agencies for fiscal
years 2003 to 2007. In some cases, agency data are reported to FPDS-NG
at component levels; in other cases, the entire agency reports as a
whole. We also extracted and analyzed from FPDS-NG contract actions
coded as "combination," "other," and "missing" for fiscal years 1999
through 2008.
To determine what agencies are buying using cost-reimbursement
contracts, we analyzed FPDS-NG data for fiscal year 2008. We also
analyzed the statements of work for the contracts and orders in our
sample.
To determine agencies' rationales for using cost-reimbursement
contracts, whether contracting officers had deemed contractor
accounting systems adequate for determining costs applicable to the
contracts, and procedures for surveillance of contractor cost controls,
we took the following steps. Based on FPDS-NG data for fiscal year
2007, we grouped the agencies and their components into three
categories based on their reported obligations under cost-reimbursement
contracts. Category 1 comprises agencies that reported obligating less
than 20 percent of their total obligations in fiscal year 2007 under
cost-reimbursement contracts. Category 2 comprises agencies with
reported cost-reimbursement obligations of 20 to 50 percent. Category 3
comprises agencies with cost-reimbursement obligations of 51 percent
and higher. We reviewed the files of 10 randomly selected contracts or
orders, with obligations of at least $1 million, from 5 of the category
2 and 6 of the category 3 agencies, with two exceptions. We reviewed
only one contract at the Corporation for National and Community Service
and at the Department of the Treasury's Alcohol and Tobacco Tax and
Trade Bureau, as those contracts accounted for the totality of those
agencies' reported cost-reimbursement contracts in fiscal year 2007.
In all, we reviewed 92 contracts or orders at the agencies listed
below. Agencies were selected based on location and their reported use
of cost-reimbursement procurements.[Footnote 35]
Category 2:
* Corporation for National and Community Service, Washington, D.C. - 35
percent:
* Department of the Air Force, Aeronautical System Center, Wright-
Patterson Air Force Base, Dayton, Ohio - 33 percent:
* Department of the Navy, Navy Strategic Systems Program, Arlington,
Virginia - 39 percent:
* Department of the Treasury, Internal Revenue Service, National
Procurement Office, Oxon Hill, Maryland - 36 percent:
* Environmental Protection Agency, Cincinnati Procurement Operations
Division, Cincinnati, Ohio - 45 percent:
Category 3:
* Department of Defense, Defense Microelectronics Activity, McClellan,
California - 97 percent:
* Department of Health and Human Services, Agency for Healthcare
Research and Quality, Rockville, Maryland - 87 percent:
* Department of Energy, multiple sites in several states[Footnote 36] -
90 percent:
* Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau,
Washington, D.C. - 100 percent:
* National Aeronautics and Space Administration, Glenn Research Center,
Cleveland, Ohio - 81 percent:
* National Science Foundation, Arlington, Virginia - 81 percent:
Our review of the contract files focused on whether the files contained
documentation providing the rationales for awarding cost-reimbursement
contracts and evidence that the contractors' accounting systems were
adequate for determining costs applicable to their contracts. We also
reviewed the sections of the Federal Acquisition Regulation (FAR) and
implementing agency policies and regulations that stipulate the
requirements that need to be met before a cost-reimbursement contract
is to be used. We interviewed a recognized expert from academia with
experience with this contract type. To supplement file reviews, we
interviewed agency contracting officers, contract specialists, or both
to determine how they documented their rationales for awarding cost-
reimbursement contracts.
As a data reliability check, for the 11 agencies in our review we also
identified cost-reimbursement contracts coded in FPDS-NG as buying
commercial items. We did this because the FAR prohibits the use of cost-
reimbursement contracts to acquire commercial items, as commercial
items can be procured with a contract type other than a cost contract
on the open market. FPDS-NG reported that 3 of the agencies had at
least one cost-reimbursement contract coded as buying a commercial
item. For these contracts, we obtained explanations for the coding from
agency officials. In all cases, agency officials explained, to our
satisfaction, that the coding was in error. For example, FPDS-NG showed
that 12 cost-reimbursement contracts at the Air Force's Aeronautical
System Center were used to procure commercial items. Center officials
explained that the coding was incorrect because of a glitch in the
implementation of a new computerized contract writing system, which has
subsequently been corrected. A review of the contracts showed that they
should have been coded as fixed-price or time-and-materials contracts,
not cost-reimbursement contracts, as reported to FPDS-NG.
Further, we conducted interviews with agency procurement policy
representatives and heads of contracting activities for 10 agencies
with very high reported use (95 percent or more) of fixed-price
contracts to determine the reasons for their low use of cost-
reimbursement contracts. One of the agencies that we identified as
having reported a high use of fixed-price contracts in fiscal year
2007, the Department of Justice's U.S. Marshals Service, was dropped
from this part of our review because we found that many of its
contracts had been miscoded. Although the U.S. Marshals Service had
reported 95 percent of its obligations as fixed price, discussions with
contracting officials revealed that many of their obligations should
have been coded as labor-hour contracts and not as fixed-price
contracts. U.S. Marshals Service officials told us that they have taken
steps to correct these coding errors in FPDS-NG.
The remaining nine agencies, together with the percentage of their
fiscal year 2007 obligations using fixed-price contracts, are presented
below.
* Court Services and Offender Supervision Agency, Pretrial Services
Agency, Washington, D.C. - 99.8 percent:
* Department of Agriculture, Agricultural Marketing Service,
Washington, D.C. - 99.9 percent:
* Department of Agriculture, Farm Service Agency, Washington, D.C. - 98
percent:
* Department of Agriculture, Agricultural Research Service, Washington,
D.C. - 98 percent:
* Department of Defense, Defense Commissary Agency, Fort Lee, Virginia
- 100 percent:
* Department of Defense, Defense Logistics Agency, Fort Belvoir,
Virginia - 98 percent:
* Department of the Interior, Office of Surface Mining Reclamation and
Enforcement, Washington, D.C. - 97 percent:
* Department of Justice, Federal Prison System, Washington, D.C. - 97
percent:
* General Services Administration, Public Buildings Service,
Washington, D.C. - 98 percent:
Finally, to identify agencies' procedures for surveillance of
contractor costs, we reviewed contract files and documents maintained
by surveillance officials for each contract and order in our review. We
also reviewed agency cost surveillance procedures, relevant parts of
the Defense Contract Audit Agency's contract audit manual and our Cost
Estimating and Assessment Guide,[Footnote 37] which provides
information on practices for ensuring credible cost estimating,
including earned value management. In addition, we interviewed
contracting officers and the personnel responsible for the
surveillance.
Where appropriate, we supplemented our analysis with reviews of prior
GAO reports, agency inspector general reports, and recent statutory and
regulatory actions pertaining to cost-reimbursement contracts.
We conducted this performance audit from July 2008 to September 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe the
evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the National Aeronautics and Space
Administration:
National Aeronautics and Space Administration:
Headquarters:
Washington, DC 20546-0001:
September 17, 2009:
Reply to: Office of Procurement:
Mr. John K. Needham:
Director, Acquisition and Sourcing Management:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Needham:
Thank you for the opportunity to review the Government Accountability
Office (GAO) draft report entitled, "Contract Management: Extent of
Federal Spending under Cost-Reimbursement Contracts Unclear and Key
Controls Not Always Used," (GAO-09-921).
We found the draft report to be complete, concise, and accurate. In our
opinion, the draft report provides a balanced view of the issues
related to use of cost-reimbursement contracts. We have not provided
technical comments to the draft report.
Again, thank you for the opportunity to provide comments on the draft
report and for your continued interest in the use of cost-reimbursement
contracts.
Sincerely,
Signed by:
William P. McNally:
Assistant Administrator for Procurement:
[End of section]
Appendix III: Comments from the Department of Health & Human Services:
Department Of Health & Human Services:
Office Of The Secretary:
Assistant Secretary for Legislation:
Washington, DC 20701:
September 24, 2009:
John P. Hutton:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street NW:
Washington, DC 20548:
Dear Mr. Hutton:
Enclosed are the Department's comments on the U.S. Government
Accountability Office's (GAO) draft report entitled: Contract
Management: Extent of Federal Spending under Cost-Reimbursement
Contracts Unclear and Key Controls Not Always Used (GAO-09-921).
The Department appreciates the opportunity to review and comment on
this draft report before its publication.
Sincerely,
Signed by:
Andrea Palm:
Acting Assistant Secretary for Legislation:
Enclosure:
[End of letter]
General Comments Of The Department Of U.S. Health And Human Services
(HHS) On The Government Accountability Office's (GAO) Draft Report
Entitled, Contract Management: Extent Of Federal Spending Under Cost-
Reimbursement Contracts Unclear And Key Controls Not Always Used (GAO-
09-921):
In response to the recommendation that the Secretary of Health and
Human Services direct the Director of the Agency for Healthcare and
Research Quality (AHRQ) to provide guidance to the agency's contracting
staff to ensure that they are aware of their responsibility to ensure
that the contractors' accounting systems have been deemed adequate
before awarding cost-reimbursement contracts, the Department of Health
and Human Services (HHS) has the following response:
As a result of the GAO review, the Office of Acquisition Management and
Policy issued a Department-wide notice to remind HHS contracting staff
of the need to ensure the adequacy of the contractors' accounting
systems prior to award of a cost-reimbursement contract. This reminder
addressed the acquisition regulation, contract audit guidance and best
practices regarding the determination of the adequacy of contractors'
accounting systems. The Acting AHRQ Head of Contracting Activity
further disseminated and emphasized the importance of this guidance to
AHRQ contracting personnel.
HHS will continue to focus attention on GAO findings and share
successful practices at our quarterly Executive Committee for
Acquisition (ECA) meetings and incorporate compliance with the
requirements of Federal Acquisition Regulation Part 16.301, Limitations
regarding the use of Cost-Reimbursement Contracts, in our Procurement
Management Review protocols.
In addition, HHS will continue to emphasize the importance of
documenting the basis for the contract type in its Acquisition Plans;
this requirement is consistent with our current Acquisition Plan
guidance.
HHS contracting officers are further encouraged to consider and assess
the viability of transitioning from cost-reimbursement contracts to a
more definite contract type. With assistance from program and technical
personnel, requirements can be separated and defined into specific,
measurable deliverables and firmer requirements. AHRQ's contracting
office has reported that they have successfully transitioned many of
their contracts to fixed-price type contracts as a result of such
assistance.
HHS appreciates this opportunity to also address the AHRQ contract for
annual Medical Expenditure Panel Survey (MEPS) referenced in the
report. Although the surveys have been performed since 1996, this is a
set of complex, large scale surveys with families and individuals,
their medical providers and employers across the United States. While
the surveys are an ongoing requirement, the dynamics of the surveys are
constantly changing due to their dependence on the National Health
Interview Survey, which directly affects the field work structure,
pricing and degree of statistical effort which is often not known until
after award of the contract. Additional information is provided in the
Attachment.
The National Medical Expenditure Survey (NMES) is a complex set of
large scale surveys of families and individuals, their medical
providers, and employers across the U.S. While it is an ongoing
requirement, the dynamics of the survey constantly change. These
changes, which can not always be identified at the time of the
requirement, greatly influence the contract type and impact the overall
performance. Consequently, the use of a cost-reimbursement contract
best enables the government the flexibility to contractually adjust for
these impacts.
Since its initiation the Medical Expenditure Panel Survey (MEPS) has
changed and expanded to provide more timely information about the
nation's health care system or to comply with AHRQ's reauthorization
legislation. A new panel or sample of households is introduced into the
survey every year.
MEPS has 2 major components: the Household Component (HC) and the
Insurance Component (IC). The HC collects detailed information from
each person in a household drawn from a sample of families and
individuals in selected communities nationwide. The information
includes demographic characteristics, health conditions, health status,
use of medical services, charges and source of payments, access to
care, satisfaction with care, health insurance coverage, income, and
employment. Interviews cover two full years; this data enables AHRQ to
determine how changes in respondents' health status, income,
employment, eligibility for public/private insurance coverage, use of
services, and payment for care are related.
MEPS-HC households are a sub-sample of households that participate in
the National Health Interview Survey (NHIS) conducted by the National
Center for Health Statistics approximately six months prior to MEPS.
Changes in the NHIS directly affect the field work structure, pricing,
and degree of statistical effort required for MEPS; however, these
changes are often not known until after award of the contract.
The IC collects data from a sample of private and public sector
employers on the health insurance plans they offer their employees. The
information includes the number and types of private insurance plans
offered (if any), premiums, contributions by employers and employees,
eligibility requirements, benefits associated with these plans, and
employer characteristics.
The information collected during these surveys is always subject to
data element changes that result from geographical relocations and
survey mortality rates.
Given the history of MEPS, and AHRQ's mission to provide the most
comprehensive data on the cost and use of health care and health
insurance coverage, it is critical that the a Contractor have a
thorough understanding of MEPS, NHIS, statistical survey practices and
methodology, and human subjects regulations.
Without this knowledge, which is gained only through experience with
the requirement, the contractor may not understand that in order to
ensure responses at the required rate level ample field resources must
be provided. The Contractor must also develop a custom designed
computerized application process capable of capturing high response
rates from survey respondents.
In an effort to encourage competition, AHRQ issued an RFI for both the
2002 and 2008 procurements. While no responses were received for the
2002 request, AHRQ did successfully award part of the effort to a new
contractor in 2008. Due to the dynamic nature of the requirement, it
was noted by both AHRQ program and contracting staff that this would
have been unlikely in a fixed-priced environment. AHRQ will continue to
carefully explore opportunities for competition, and the use of
alternate contract types, if only on a portion of the effort, in its
mission to provide reliable and valid information on the overall health
and wellbeing of the Nation.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
John K. Needham (202) 512-5274 or needhamjk1@gao.gov:
Acknowledgments:
In addition to the contact named above, Michele Mackin, Assistant
Director; Julie Hadley; Daniel Hauser; Julia Kennon; LeAnna Parkey;
Kenneth Patton; Matthew Shaffer; and Sylvia Schatz made key
contributions to this report.
[End of section]
Footnotes:
[1] FPDS-NG contains detailed information on contract actions and
identifies, among other data, the contract types used by federal
agencies in procuring goods and services.
[2] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[3] See FAR Subpart 16.3 and Subpart 16.4 for more details on these
contract types' descriptions and applications.
[4] GAO, Federal Contracting: Guidance on Award Fees Has Led to Better
Practices but Is Not Consistently Applied, [hyperlink,
http://www.gao.gov/products/GAO-09-630] (Washington, D.C.: May 29,
2009); NASA Procurement: Use of Award Fees for Achieving Program
Outcomes Should Be Improved, [hyperlink,
http://www.gao.gov/products/GAO-07-58] (Washington, D.C.: Jan. 17,
2007); and Defense Acquisitions: DOD Has Paid Billions in Award and
Incentive Fees Regardless of Acquisition Outcomes, [hyperlink,
http://www.gao.gov/products/GAO-06-66] (Washington, D.C.: Dec. 19,
2005).
[5] GAO, Defense Acquisitions: Assessments of Selected Weapon Programs,
[hyperlink, http://www.gao.gov/products/GAO-08-467SP] (Washington,
D.C.: Mar. 31, 2008).
[6] This provision was implemented in the Defense Federal Acquisition
Regulation Supplement and was effective January 24, 2008. DFARS
234.004.
[7] Duncan Hunter National Defense Authorization Act for Fiscal Year
2009, Pub. L. No. 110-417, § 864.
[8] This requirement applies only to those executive agencies that
awarded cost-reimbursement contracts or issued orders (under contracts
previously awarded) of at least $1 billion in the fiscal year
proceeding the fiscal year in which the assessments and reports were
submitted.
[9] This amount is in constant fiscal year 2008 dollars.
[10] In order to use consistent data through the time period, we only
included actions over $25,000.
[11] The OFPP Administrator is statutorily required to provide for and
direct the activities of the computer-based Federal Procurement Data
System (including recommending to the Administrator of General Services
a sufficient budget for such activities), which is located in the
General Services Administration, in order to adequately collect,
develop, and disseminate procurement data. 41 U.S.C. § 405(d)(4)(A).
[12] Operation of government-owned buildings is a FPDS-NG designation.
The designation includes federally funded research and development
centers, such as the Department of Energy's Fermi National Accelerator
Center, which conducts high-energy physics research. The buildings at
these research centers are government owned and contractor operated.
[13] According to FPDS-NG, the U.S. Marshals Service was one of the
agencies reporting very high use of fixed-price contracts. However,
during discussions with agency officials, we discovered that a
significant number of the agency's contracts were actually labor-hour
contracts (a type of a time-and-materials contract) that had been
miscoded in FPDS-NG as fixed-price contracts because of the mistaken
belief that the fixed labor rate in labor-hour contracts makes them
fixed-price. U.S. Marshals Service officials told us that they have
taken steps to correct these coding errors. We found a similar issue at
other government agencies in our recent review of time-and-materials
contracts. See GAO, Contract Management: Minimal Compliance with New
Safeguards for Time-and-Materials Contracts for Commercial Services and
Safeguards Have Not Been Applied to GSA Schedules Program, GAO-09-579
(Washington, D.C.: June 24, 2009).
[14] A formal determination and findings had been required before using
cost-reimbursement contracts; see, e.g., 48 C.F.R. § 16.301-3(c)
(1993). However, this requirement was repealed by the Federal
Acquisition Streamlining Act of 1994, Pub. L. No. 103-355, §§ 1021 and
1071. The act's legislative history indicated that such determinations
were unnecessary in light of the acquisition planning requirements of
the FAR. See H. Report 103-545, part 2, § 1021, p. 83; Hearing before
the Committee on Armed Services, U.S. Senate, April 26, 1994, S. Hrg.
103-578, p. 330.
[15] See B-317139, June 1, 2009. In some circumstances, services
contracted under cost-reimbursement contracts and other types of
contracts may be charged to funding available during subsequent fiscal
years. This may depend upon whether the services are severable or
nonseverable. See id.
[16] The designation "3600 funds" is the Air Force designation for
budget authority appropriated for research and development. The record
is not clear as to why research and development and not procurement
funds were available.
[17] FAR Subpart 16.103(b).
[18] A February 2009 Department of the Treasury Inspector General for
Tax Administration report found that IRS contract files lacked
justification for cost contracts. It also found that IRS had a
predisposition to use cost-reimbursement contracts and made little
effort to convert follow-on work to less risky contract types.
[19] The District of Columbia Pretrial Services Agency was designated a
federal agency in 2000.
[20] The contractor has until the time performance begins to meet the
accounting system requirement. For purposes of this report, we equate
this to the time the contract was awarded.
[21] FAR 53.301-1408, FAR Form 1408; FAR 9.106-4. An agency's
determination of whether a contractor has an adequate accounting system
is part of a responsibility determination of a prospective awardee,
that is, determining that the firm has the ability or capacity to
perform the contract. FAR 9.103; 9.104-1(e). The contractor has until
the time performance begins (i.e., when the contractor begins the work)
to meet the accounting system requirement. For purposes of this report,
we equate this to the time the contract was awarded. In making this
responsibility determination, a contracting officer can request a pre-
award survey from DCAA of a prospective contractor's accounting system,
but is only required to do so when the information on hand or readily
available is not sufficient to make this determination. FAR 9.106-1(a);
FAR 9.105-1(b)(2). DCAA normally issues a Standard Form 1408 "Pre-award
Survey of Prospective Contractor--Accounting System" (FAR 53.301-
1408). To complete this form, the audit scope should be limited to
obtaining an understanding of the prospective accounting system's
design to determine whether the design is acceptable for accumulating
costs under a government contract; it is not necessary to conduct an in-
depth evaluation of the overall accounting system. DCAA Contract Audit
Manual, section 5-202.a; DCAA Information for Contractors, section 2-
301.1.a.
[22] Particularly for large dollar value contracts, an administrative
contracting officer may be assigned to handle contract administration
as opposed to contract award. In the case of DOD, Defense Contract
Management Agency personnel are typically assigned as the
administrative contracting officers.
[23] Although DCAA plays a critical role in DOD contractor oversight,
it also performs audit services for other federal agencies, on a fee-
for-service basis.
[24] DCAA reported on December 3, 2004, that the contractor's
accounting system was adequate, based on its August 24, 1998, audit,
rather than work preformed within 4 years of contract award.
[25] A DCAA inadequate in part opinion meant that one or more
significant deficiencies affected parts of the accounting system. By
contrast, a DCAA inadequate opinion means one or more significant
deficiencies render the entire accounting system unreliable.
[26] An indirect cost is a cost a contractor incurs for a common or
joint objective that cannot be specifically identified, in its
entirety, with a particular cost objective. Typical indirect costs
include the costs of operating and maintaining facilities, equipment,
and grounds and administrative salaries and supplies. Indirect cost
rates are negotiated to ensure that only the portion of those indirect
costs needed to support the contract is reimbursed to the contractor.
[27] GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, [hyperlink,
http://www.gao.gov/products/GAO-05-274] (Washington, D.C.: Mar. 17,
2005).
[28] GAO, Hanford Waste Treatment Plant: Department of Energy Needs to
Strengthen Controls over Contractor Payments and Project Assets,
[hyperlink, http://www.gao.gov/products/GAO-07-888] (Washington, D.C.:
July 20, 2007).
[29] The Office of Management and Budget mandates use of EVM for
capital assets (Circular A-11, part 7) and for new, major IT projects,
ongoing IT development projects, and high-risk projects (OMB Memorandum
M-05-23, Aug. 4, 2005).
[30] An example would be a contract that calls for 4 miles of railroad
track to be laid in 4 weeks at a cost of $4 million. After 3 weeks of
work, only $2 million has been spent. An analysis of planned versus
actual expenditures suggests that the project is running under its
estimated costs. However, an earned value analysis reveals that the
project is in trouble because even though only $2 million has been
spent, only 1 mile of track has been laid and, therefore, the contract
is only 25 percent complete. Given the value of work done, the project
will cost the contractor $8 million ($2 million to complete each mile
of track), and the 4 miles of track will take a total of 12 weeks to
complete (3 weeks for each mile of track) instead of the originally
estimated 4 weeks.
[31] GAO, DCAA Audits: Widespread Problems with Audit Quality Require
Significant Reform, [hyperlink, http://www.gao.gov/products/GAO-09-468]
(Washington, D.C.: Sept. 23, 2009).
[32] GAO, DCAA Audits: Allegations That Certain Audits at Three
Locations Did Not Meet Professional Standards Were Substantiated,
[hyperlink, http://www.gao.gov/products/GAO-08-993T] (Washington, D.C.:
Sept. 10, 2008).
[33] In 1992, DOE implemented the Cooperative Audit Strategy to
maximize audit coverage of facility contractors. As part of that
strategy and as required by contract, each contractor is to maintain an
internal audit function acceptable to DOE. In turn, the DOE Office of
Inspector General is supposed to assess the contractor's internal audit
staff's qualifications, independence, and workpapers, and test the work
performed by the contractor's internal audit staff. Department of
Energy, Office of Inspector General Office of Audit Services, Audit
Report: Washington Savannah River Company, LLC, Internal Audit
Function, DOE/IG-0811 (Washington, D.C., January 2009).
[34] In technical comments on a draft of this report, submitted to us
on September 28, 2009, DOE's Assistant Secretary for Environmental
Management stated that the department uses a variety of mechanisms, not
just internal audits, to ensure that contractors' costs charged to DOE
are allowable. The Assistant Secretary noted that the DOE Inspector
General report we cite represents an example of an internal control
specifically required by the Cooperative Audit Strategy. According to
the official, DOE managers at the Savannah River Site investigated the
questioned costs identified by the Inspector General and found that the
costs were allowable, but DOE acknowledges the internal control
weaknesses and has increased the level of oversight in this area.
[35] Percentages have been rounded.
[36] We did not conduct file reviews at the Department of Energy since
there were multiple locations. Program officials provided copies of
requested information from contract files.
[37] GAO, GAO Cost Estimating and Assessment Guide: Best Practices for
Developing and Managing Capital Program Costs, [hyperlink,
http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: March 2009).
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO‘s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO‘s Web site,
[hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
