oversight

Financial Management: DOD Progress Payment Distribution Procedures

Published by the Government Accountability Office on 1997-07-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States
General Accounting Office
Washington, D.C. 20548

Accounting and Information
Management Division


B-277089

July 21, 1997

The Honorable Charles E. Grassley
United States Senate

Subject:    Financial Management: DOD Progsess Pavment Distribution
            Procedures

Dear Senator Grassley:

The Department of Defense (DOD) has long recognized that distributing and
accounting for contract progress payments are major contributors to its
problems in accurately accounting for disbursements. Over the past several
years, a number of different methods have been used within the Department to
distribute and account for progress payments when more than one              I
appropriation is used to fund a contract. A distribution method is necessary
because contractors are not required to identify the funding appropriations
when submitting progress payment requests.

On April 22, 1997, we briefed your office on selected DOD progress payment
accounting methods which are being used, or have been used over the past
several years, to distribute progress payments. Subsequent to the briefing, your
office requested an illustration of the differences between and results of each of
the progress payment accounting methods discussed during the briefing.

Defense Finance and Accounting Service (DFAS) officials have stated that the
DOD Financial Management Regulation 7000.14R, Volume 10, Contract Pavment
Policv and Procedures, issued in February 1996, provides the only currently
sanctioned DOD policy governing progress payment distribution. It provides
standard progress payment accounting policies for distributing progress
payments and requires DFAS centers to issue additional guidance prescribing
detailed implementing procedures.

CURRENT DISTRIEWTION METHODS TO ACCOUNT
FOR PROGRESSPAYMENTS

DFAS officials stated that the DOD Financial Management Regulation 7000.14R,
Volume 10, defines two basic methods for distributing progress payments:


                                    GAO/AIMD-97-10’7R DOD Progress Payments
Et-277089
(1) specific instructions as requested and directed in a contract and (2)
proration using obligation balances as the basis (commonly referred to as the
Automatic Payment of Invoices (API) method). In addition, according to the
officials, an October 3, 1995, policy memorandum issued by DFAS-Columbus is
to be followed when payments are rejected for automatic allocation and staff
have to resort to manually allocating progress payments among the funding
appropriations. This represents a third method. Selected details on each of
these distribution methods follow.

      Contract specific payment instructions require progress payments to be
      distributed in accordance with instructions provided by individual
      contracts.

      The Mechanization of Contract Administration Services (MOWS) API
      procedure establishes a payment distribution procedure based on the
      weighted value of the contract’s total obligations. This procedure was
      implemented in 1982 and adopted by DFAS-Columbus as part of the
      consolidation of DOD’s &axe and accounting functions. The API
      method is used today for approximately 80 percent of the progress
      payments processed by DFAS-Columbus.

      DFASCohunbus October 3, 1995, policy memorandum prescribes manual
      progress payment distribution processes that allocate payments in
      alphabetic order based on accounting classification reference numbers’
      (ACRN). This memorandum establishes DFAS-Columbus payment
      distribution procedures consistent with the DOD Comptroller’s
      September 28, 1995, directive.’ While not a prorated distribution as
      required by Volume 10 of the Financial Management Regulation, DFAS
      officials have stated the overall policy prescribed in Volume 10 is
      supplemented by the October 3, 1995, policy memorandum which allows
      an expedient, but less precise allocation method, in order to facilitate
      timely payments to contractors.

F’inally, our work in the disbursement area has identified other accounting
methods used by DFAS-Columbus personnel to distribute progress payments.


‘ACRNs are a two-character code assigned to each unique accounting line in a
contract. DOD uses accounting lines to accumulate appropriation, budget, and
management information for contract obligations and payments.

“On September 28, 1995, the DOD Comptroller issued a memorandum directing
a change to DFAS’s progress payment allocation method. The change required
that DFAS initially attempt to allocate progress payments to all contract ACRN’s
on a prorata basis using total contract obligations. If prevalidation processes
rejected the payment, the change mandated a manual allocation in “ACRN
sequence based on the progress payment rate.”

2                                  GAO/AIMD-97-107R DOD Progress Payments
B-277089

One such method is exemplified in enclosure V. In addition, when recording
the payment transaction in the official accounting records, accounting station
personnel have used other methods, which may change the original distribution
made by DFAS-Columbus.3

OTHER PAYMENT DISTRIEXJTION METHODS

In addition to the four methods discussed above, your office also asked us to
demonstrate the results of applying the following two progress payment
distribution methods which have also been used.

      Air Force Regulation 177-120, Accounting and Finance Central
      Procurement Transactions,4 requires distribution to the oldest fiscal year
      funds first. Although not specifically noted as superseded in the
      Financial Management Regulation, DFAS officials told us that Air Force
      Regulation 177-120 was superseded by the Financial Management
      Regulation and is no longer to be used as guidance in distributing and
      accounting for progress payments.

      DFAS-Columbus Desk Procedure 302, Manual Distribution, was finalized
      on March 16, 1992, and applied the same methodology as the API
      procedures described above for those progress payments rejected from ,
      the automated process. A September 28, 1995, DOD Comptroller
      memorandum directed this policy to be discontinued because it created
      an excessive number of prevalidation requests and disrupted payments.




31nDecember 1993, we reported that for fiscal year 1992, 17 percent of the
Army’s disbursements made by offices other than the Army office responsible
for controlling the funds were charged to a different appropriation when the
responsible funding organizations matched them to the obligations (GAO/AIMD-
9412, December 22, 1993). We have not reviewed Air Force or Navy
disbursements to determine if similar accounting practices exist, nor have we
updated the Army information since the completion of the fiscal year 1992
review.
?he Army and Navy also had separate regulations governing progress payment
accounting on their respective contracts. Information on these regulations is
not provided since your staff specifically requested details on the method
prescribed under Air Force Regulation 177-120.

3                                  GAO/AIMD-97-107R DOD Progress Payments
B-277089
APPLICATION OF PAYMENT DISTRIBUTION METHODS

Table i summarizes the effect of applying each of the above-mentioned progress
payment distribution methods to the same progress payment request of
$1,525,000. Even though for one of the methods illustrated we applied an Air
Force method to the Army progress payment request, the illustrations aptly
demonstrate the payment distribution differences resulting from the use of
various progress payment accounting methods. The amount distributed to the
two appropriations” varied from nothing to the entire payment, depending on
the method used.

Table 1:        Promess Pavment Distribution Using Various DOD and
                Militarv Service Retiatzons and Procedures

                                                                 Fiscal Year 1995               Fiscal Year 1994
                                                                            Other            Other Procurement,
                                                                    Procurement,                           AMY
    Method                                                                  Armv


    FMR methods
             Current methods:
                                                                                                              L
                                                                                  a                               a
             Contract specific instructions
             API                                                    $782.736.75                    $742,263.25
             Supplemental instructions:
             DFAS-Columbus 10/3/95 memo                          $1,525,000.00                              $0.00
             Other obligation based methods:
             Other obligation based proratio&                       $782,782.50                    $742,217.50
    Other methods
             Air Force regulation                                           $0.00                $1,525,000.00
             DFAS-Columbus desk procedure                           $782,736.75                    $742,263.25



“The progress payment dollar amount drstributed to each appropriation would vary based upon the specific amounts stated
IO the contract or the payment request.
bathedollar difference between the API method and the other obligation-based method mll Increase as more dellvenes
occur under the contract, resultmg in a decrease n the unllquidated obltgation balances.

Source: GAO analysts based on DOD policies and regulations




“The request selected pertains to a contract involving only two ACRNS and was
selected for illustrative purposed only. Contracts involving 10 or more ACRNs
account for 77 percent of the dollar value of DFAS-Columbus contracts.

4                                                  GAO/AIMD-97-107R DOD Progress Payments
                                                                                      <.   I
                                                                             - ,’              i’



B-277089


Our work was perform ed in accordance witi generally accepted governm ent
auditing standards between M arch 1997 and M ay 1997. Our scope and
m ethodology is in enclosure I. Enclosure II provides m ore detailed inform ation
on progress paym ent requirem ents and other contract inform ation pertinent to
illustrating the results of the progress paym ent distribution m ethods. Enclosures
III through VU illustrate the paym ent distribution results of applying five of the
six m ethodologies. The sixth m ethod, contract specific paym ent instructions, is
not illustrated because the amount applied to contract ACRNs would be
determ ined based upon unique inform ation provided on a paym ent request.

AGENCY C O M M E N T S AND OTJREVALUATION

In written com m ents on a draft of this letter (see enclosure VIII), DOD stated that
DFAS-Columbus has one policy governing the distribution of progress paym ents,
supplem ented by a policy m emorandum that is used when paym ents are rejected
from the MOCAS API process. DOD stated that this policy allows two
distribution m ethods: (1) specific distribution as directed in the contract or
(2) proration using obligation balances, which it refers to as API. Our work has
shown that distribution m ethods, other than the two described by DOD, such as
the one described in enclosure V, have also been used by DOD since DOD
regulation 7000.14R Financial M anagem ent Regulation, Volum e 10, was issued.

The Com ptroller stated that he will soon require contracting officers or contract
adminiskation    officers to provide DFAS with specific progress paym ent
distribution instructions on all new contracts. The distributions are to reflect the
contract line item level costs incurred by the contractor. However, it should be
noted that because existing contracts authorizing the use of progress paym ents
are generally long-term in nature, we believe it is likely to be a num ber of years
before such a policy applied to new contracts will be a predom inant progress
paym ent distribution m ethod.




                                    GAO/AIMD-97-107R DOD Progress Payments                     h
 We are sending copies of this letter to the Chairmen and Ranking Minority
 Member of the Senate Committee on Armed Services, the House Committee on
 National Security, the Senate Committee on Governmental Al&ins, the House
 Committee on Government Reform and Oversight, the House Subcommittee on
 Government Management, Information, and Technology, the Senate Committee on
 Appropriations, and the House Committee on Appropriations. We are also
 sending copies of this letter to the Director of the Office of Management and
 Budget, the Under Secretary of Defense, Comptroller, the Director, Defense
 F’inance and Accounting Service, and other interested parties. Copies will be
 made available to others upon request. If you or your staff have any questions or
 we can be of further assistance, please contact me at (202) 512-9095.

 Sincerely yours,



Q$G44+~
 I&a G. Jacobson
 Director, Defense Audits


 Enclosures




 6                                 GAO/AfMD-97-107R DOD Progress Paymen:’            *   ’
ENCLOSURE I                                                                ENCLOSURE I



                             SCOPE AND METHODOLOGY

To illustrate the differing results obtained when applying the six progress payment
distribution methodologies discussed in the letter, we used the same actual progress
payment request. An actual payment request processed by DFASColumbus was selected.
The request, for $1,525,000,pertained to an Army contract including two ACRNs
representing two merent appropriations-Fiscal Year 1994 Other Procurement, Army, and
Fiscal Year 1995 Other Procurement, Army. We did not audit the validity of the progress
payment request.

We did not illustrate all progress payment distribution methodologies which DOD is using,
or has used, over the past several years. Instead, we illustrated only selected
methodologies used since the issuance of the DOD Inspector General’s report on the
Titan IV program.’ For example, we have not illustrated Army and Navy regulations
governing progress payment accounting.         a

We performed our work from March 1997 through May 1997 in accordance with generally
accepted government auditing standards. DOD provided written comments on a draft&of
this letter. These comments are presented and evaluated in the “Agency Comments and
Our Evaluation” section and are reprinted in enclosure VIII.




‘Titan IV Program (DOD Inspector GeneraI report 92-064, March 31, 1992).

                                           7        GA0/..4IhfD-97-107RDOD Progress Payments
ENCLOSURE II                                                                                  ENCLOWRE II



   CONTRACT INFORMATION APPLICABLE TO EACH METHOD OF DISTRIBUTING
                         PROGRESS PAYMENTS


The following information is applicable to aII distribution ikstrauons.

Table II.1: Contract ACRNs and Balances Per MOCAS

                                                                               Unliquidated
                           Obligation                  Work-in-process         obligation
              ACRN         Balance                     balance                 balance

              AAa          $14,652,354.07              $2,721,585.58           $8,470,314-l 9
          I   AB’            13.894.788.00                  4.267.197.54       10.280.188.00

          ‘ACRN AA represents Fy 1995 Other Procurement, Army Appropnation.

          ‘ACRN AB represents Fy 1994 Other Procurement, Army Appropriatron.

          Source: GAO anelys~s based on DOD data                                                      I


Seventy-five percent of the amount of each requested progress payment is actually paid.

The approved progress payment of $1,525,000.00 to be processed under this contract is
the 10th request received. No specific payment distribution instt-uctions have been
provided. (See figure II.1.)




                                                        8           G.~O/AIMD-9i-1O7RDOD Progress Payments   .
ENCLOSURE II



Figure II.1:       Proaess Pavment Reauest




          SECXON    #3   COMFUTATION      OF i.ltdl7.S   FOR OUlSTANOlNG   PROGRESS   PAYMENTS




         Nama and TlIh or conuanor      Rapmsantatnfo
         SlgmnO %s Form: Richard     C. ha.   Oiioz      of Admmsmmon        ‘SiiNB


         Source: DOD

                                                                             9              GAO/AIMD-97-107RDOD Progress Payments
‘- i
       ENCLOSURE III                                                                  ENCLOSURE III



                           DFAS-COLUMBUS AUTOMATIC PAYMENT OF INVOICE

       DFAS-Columbus uses the MOCAS API module to process payment requests. This method,
       implemented in 1982, is still in use today for approximately 80 percent of the progress
       payments processed by DFAS-Columbus. API distributes the payment to all available
       funds on the contract based on the weighted value of the total obligations for each ACRN.
       Progress payment distributions under API are done automatically after DFAS-Columbus
       personnel input information from hard copy progress payment requests, Steps taken to
       compute and distribute the progress payment are shown in table III.1.

       Table IlI.1:   API Progress Pavment Distribution Procedures


       I step     Step objective                Actions taken to accomplishstep
           1      Review each progress          Review progress payment request and
                  payment request and           assign ADPE number.
                  asslgn a batch number
                  and Automated Data
                  Processing Equipment
                  (ADPE) number (internally
                  aenerated trackina number).




                                                       10         GAO/AMD-9’i-107R DOD Progress Payments
ENCLOSURE III                                                                                           ENCLOSURE III       ”




  step         Step objective                                 Actions takento accomplishstep

      2         Enter In MOCAS the                            Review the progress payment request
               (1) contract number, (2)                       and enter required data.a
               delivery order number,
               (3) “A” for U.S. funds or
               “B” for foreign military
               sales funds, (4)
               progress payment
               request number,
               (5) action code,
               (6) ADPE number,
               (7) contract dollar
               amount, (8) progress
               payment rate,
               (9) liquidation rate,
               (10) date of request,
               and (11) all information
               Included on lines 9
               through 27 of the
               progress payment
               request form (SF 1443)
               submrtted by the
               contractor.

      3        Calculate the amount                          MOCAS API process computes the amount
               of the progress payment                       to be drstnbuted and makes the
               to be distributed to                          distnbution.b
               each contract ACRN.

‘Figure HI.1 documents the data entered for the hstratwe progress payment request.

*Figure III.2 documents the distribtion   results for this illustrative progress payment request.

Source: GAO analysts based on DOD pohcies and regulations.




                                                                      11            GAO/AIMD-97-107RDOD Progress Payments
ENCLOSUXE III                                                           ENCLOSURE III



F’@ ,aure
       ml:    Contract Administration Progress Pament ReDort




Source: DOD
                                                    GAO/AI&ID-97-107RDOD Progress Payments
ENCLOSURE III                                                                     ENCLOSURE III



Fi,bure III.2 MOCAS Generated Subvoucher



                     OR cbsn-aF**-
                                                                           1,525,OOO.OO
                             mm IQ




                                             MnCrJ                         -
                                      1
                                      D1(:
                                      -      zi%& -@ROJ

                                             55s   IS14                        782.736.75
                                      01:
                                             45s   s14                         742,263.25
                                      01:




                                      -




                                      CONTRACT TOTAL                   1,525,OClO.OO




       Source. DOD

                                             13           GAO/AIMD-97-107R DOD Progress Payments
ENCLOSURE IV                                                                      ENCLOSURE IV

              DFAS-COLUMBUS OCTOBER 3.1995, POLICY MEMORANDUM

A DFAS-Columbus policy memo, which has been in effect since October 3, 1995, requires
manual payments to be distributed to funds cited on the payment request or in
accordance with contract terms. If specific payment instructions are lacking, pavments
are to be distributed in ACRN seauence based on alnhabetic order, i.e., AA will always be
first if used in contracts. This change in the manual payment distribution method was
based on a September 28, 1995, memo issued by the DOD Comptroller. MOWS’
automatic process (API) did not change as a result of this memorandum. Steps taken to
compute and distribute the progress payment are shown in table IV.l.

Table IV.1:   DFAS-Columbus October 3. 1995. Policv Memorandum, Progress Pavment
              Distribution


 SW      Step objective              Actions taken to accomplish step

    1    Deterrnrne contract         Review the contract and payment request and
         specific pay                determine if any specific payment Instructions
         instructions provided       are provided. If provided, pay accordtng to
         for in the contract.        those Instructions. If not provided, go to step 2.

    2    Compute the amount of       Multiply the unliquidated obligation(UL0)
         funds available from        balance by the progress payment rate
         whrch to make thrs          and determine the maximum allowable
         progress payment for        amount for the work-in-process (WIP) line.
         each ACRN included          Deduct the current WIP balance from
         in the contract.            the maximum allowable amount for the
                                     WIP line and determine the amount of
                                      funds available from which to make
                                     the progress payment.


    3    Place contract ACRNs in     Review the MOCAS contingent llabillty record
         alphabetic sequence.        to determine the ACRNs used on thrs contract.
                                     Rank the ACRNs in alphabetic sequence (AA will
                                     always be first).




                                             14         GAOMMJI-97-107R DOD Progress Payments
  Step       Step objective                          Actions taken to accomplish step

     4       Determtne how much of                  Compare the amount of funds available on
             the progress payment                   the first ACRN (computed in step 3) to
             approved amount can                    the approved amount of the progress
             be distnbuted to ACRNs                 payment. Determine if the amount available
             on the contract.                       to make the progress payment exceeds
                                                    the amount of the approved progress
                                                    payment. If yes, distnbute the entire progress
                                                    payment amount to the first ACRN. If no,
                                                    distribute an amount equal to the maxtmum
                                                    available amount to the next ACRN, and
                                                    continue in this manner until the entrre
                                                    progress payment amount is distributed.

Source: GAO analysis based on DOD pohcres and regulatms.


Applying the October 3, 1995, policy methodology to the illustrative progress payment
request results in the following computations and appropriation distributions.



Table IV.2:       Illustrative ExamDIe of Distribution Results Under October 3. 1995,
                  Policv Memorandum

                                                        Fiscal Year 1995         Fiscal Year 1994
                                                      Other Procurement,      Other Procurement,
                                                                   AMY                      AMY               Total

 ULO balance                                             $8,470,314.19          $10,280,188.00       $18.750.502.19
 Multiplied by the progress payment rate                             -75                     .75
 Maximum WIP balance                                     $6,352,735.64           $7,710,141.00       $14,062,876.64
 Less current WIP balance                                  2.721.585.56            4.267.197.54        6.988.783.12
 Available for WIP payment                               $3,631,150.06           $3,442,943.46        $7,074,093.52
 Progress payment #l 0 distribution                      $1,525,000.00                        $0      $1,525,000.00
Source: GAO analysts based on DOD polrcles and regulations.




                                                              15        GAO/AIMD-97-107RDOD Progress Pa?;ments        ” ’
     1%1

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                         ENCLOSURE V                                                                            ENCLOSURE V   *

                                     DOD REGULATION 7000.14R. VOLUME 10 OTHER DISTRIBUTION

                         Volum e 10 of DOD Regulation 7000.14R, issued on February 8, 1996, requires progress
                         paym ents to be distributed based upon the distribution identified in the contract. When
                         the contract does not cite specific paym ent instructions and only one m ilitary service is
                         involved in the contract, the paym ent is to be prorated against those ACRNs with
                         sufficient unliquidated obligations using the obligations as the basis of the proration.
                         However, when the contract is funded with appropriations from m ultiple m ilitary services,
                         the regulation requires that paym ent be distributed to the m ilitary services with sufficient
                         unhquidated obligations and then to the ACRNs within that n-Wary service. Once again,
                         the obligation will be the basis for the proration. In com m enting on these exam ples,
                         DFAS officials stated that using obligations as the basis when distributing progress
                         paym ents is com m only referred to as the MOCAS API m ethod. However, DFAS-Columbus
                         personnel use other obIigation based prorations. One such use of the regulation results in
                         the steps shown in table V.l being taken to com pute and distribute the progress paym ent.


                         Table V.l: DOD Remlation         7000.14R. Progress Pavment Distribution         Procedures


                         I step    Step objective                   Actions taken to accomplish step

                             1     Determine if any contract        Review the contract and payment request and
                                   specific pay instructions are    determ rne if any spectfic payment rnstructions
                                   provided.                        are provrded. If provided, pay according to
                                                                    those Instructions. If not provided, go to step 2.
                             2     Determme which m ilitary         Review the fundrng for the contract and assess
                                   services are funding the         which m ilitary services have funds on the contract.
                                   contract.
                             3     Compute, by ACRN, the            Multiply the ULO balance by the progress
                                   amount of funds available        payment rate and determ ine the
                                   from which to make this          maximum allowable amount for the W IP line.
                                   progress payment.                Deduct the current W IP balance from the
                                                                    maximum allowable amount for the W IP line
                                                                    and determ ine the amount of funds available
                                                                    from which to make the progress payment .




                                                                            16         GAOMMD-9%107R DOD Progress Payments
ENCLOSURE V                                                                                           EXLOSC;REV


     Step    Step objective                         Actions taken to accomplishstep
i
      4      Compute the distribution               Total the values computed In step 3 above to
             percentage for each ACRN               determine the total amount of funds avariable
             on the contract.                       from which to make the progress payment.
                                                    Divrde each ACRN’s funds available for progress
                                                    payments by the total computed and determine
                                                    the distribution percentage for each ACRN.



      5      Compute how much of                    Multiply the approved progress payment
             the progress payment                   amount by the percentage to be applied to each
             approved amount can                    ACRN and determrne the amount of the
             be drstributed to each                 payment to distribute to each ACRN.
             contract ACRN.

Source: GAO analysts based on DOD policies and regulabons.      ..

Applying this methodology to the illustrative progress payment request results in the
following computations and appropriation distributions.



Table V.2: Illustrative ExamDIe of Other Distribution Results Under DOD Retiation
               7000.14R

                                                        Fiscal Year 19%            Fiscal Year 1994
                                                     Other Procurement,         Other Procurement,
                                                                   mY                         Am                 Total
    ULO balance                                          $8,470,314-l 9           $10,280,188.00       $18,750,502.19
    Multiplied by the progress payment rate                           -75                      -75
    Maximum WIP balance                                  $6,352,735.64             $?,710,141.oo       $14,062,876.64
    Less current WIP balance                                 2.721.585.58           4.267.197.54         6.988.783.12
    Available for WIP payment                            $3,631 ,150.06            $3,442,943.46        $7,074,093.52
    Progress payment #I 0 distribution                       $782,782.50             $742.217.50        $1,525,000.00

Source: GAO analysis based on DOD pohc~es and regulations.




                                                              17            GAO/AIMD-97-10’7RDOD Progress Payments       ,. ’
i   1




        ENCLOSURE VI                                                                           ENCLOSURE VI
                                          AIR FORCE REGUIATION 177-120

        Air Force Regulation 177-120 required payments to be dis tributed to appropriations c ited
        on the contractor-prepared payment request. Under this regulation, if the payment
        request did not c ite specific funds , the oldes t fiscal vear funds were to be charged firs t
        using the following sequence of appropriation categories: (1) Air Force Research,
        Development, Test, and Evaluation (RDT&E)-Reimbursable Budget Authority (RBA)
        Budget Program Activity Code (BPAC), (2) Air Force RDT&E-Other Than RBA BPAC,
        (3) DOD RDT&E-Strategic Defense Initiative, (4) Air Force System Command O peration
        and Maintenance, (5) Air Force Procurement and Production appropriations , (6) Air Force
        W orking Capital Funds (Industrial Fund and Stoc k Fund), (7) Air Force O peration and
        Maintenance-Other Major Commands, (8) alI other funds , inc luding Army, Navy, and
        DOD. According to DFAS offic ials , this regulation is no longer to be used as guidance
        when dis tributing progress payments. Steps taken to compute and dis tribute the progress
        payment under this regulation are shown in table VI. 1.

        Table VU:       Air Force Regulation 177-120 Progress Pavment Dis tibution             Procedures


          s tep   Step objective                   Actions taken to accomplish step
            1     Determine if any contract        Review the contract and payment request and
                  specific pay instructions are    determine  if any specific payment tnstructions
                  provided.                        are provided. If provided, pay according to
                                                   those Instructions. If not provrded, go to step 2.
           2        Determine If any Air Force     Review the funding for the contract and assess
                    RDT&E or D O D Strategic       if any Air Force RDT&E or D O D Strategic
                    Defense lnrtlative funds are   Defense lmtiatives are avallable.
                    available for the contract.
           3      Compute the amount of            Multiply the ULO balance by the progress
                  funds available from which       payment rate and determine the maximum
                  to make this progress            allowable amount for each ACRN W IP line.
                  payment for each contract        Deduct the ACRN’s current W IP balance
                  ACRN.                            from the ACRN’s W IP line maxlmum
                                                   allowable amount and determine the
                                                   amount of funds available from which
                                                   to make the progress payment.

           4        Determine which ACRN           Review contract funding information and
                    represents the oldest fiscal   determIne which ACRN represents the
                    year funds.                    oldest fiscal year funds.




                                                          18         GAO/AIMD-97-107RD O D Progress Payments
ENCLOSURE Vi                                                                                        EXCLOWRE 1-I

Table 11.1,continued



   Step     Step objective                         Actions taken to accomplish step

     5      Determine how much of the             Compare the amount of funds available
            approved progress payment             for the oldest fiscal year appropnation
            amount can be distnbuted              (computed In step 3) to the approved
            to the oldest fiscal year             amount of the progress payment.
            funds.                                Determine if the amount available to
                                                  make the progress payment exceeds
                                                  the amount of the approved progress
                                                  payment. If yes, distribute the entire
                                                  progress payment amount to the ACRN.
                                                  If no, distnbute an amount equal to
                                                  the maximum available amount to the
                                                  oldest appropriations, and continue in
                                                  this manner until the entire progress
                                                  payment amount is distnbuted.

Source:GAO analysts based on DOD polmes and regulations.

Applying the Air Force methodology to the illustrative progress payment request results in
the following computations and appropriation distributions.



Table VI.2:      Illustrative ExamDIe of Distribution Results Under Air Force
                 Regulation 177-120

                                                     Fiscal Year 1995            Fiscal Year 1994
                                                   Other Procurement,         Other Procurement,
                                                                  ArmY                      Army              Total

 ULO balance                                          $8,470,314.19             $10,280,188.00       $18,750,502.19
 Multiplied by the progress payment rate                            .75                      -75
 Maximum WIP balance                                  $6,352,735&l               $7,710,141.00       $14,062,876.64
 Less current WIP balance                                  2.721.585.58            4.267.197.54        6.988.783.12
 AvaIlable for WIP payment                            $3,631,150.06              $3,442,943.46        $7,074,093.52
 Progress payment #10 distribution                                  $0           $1.525,000.00        $1,525,000.00

Source: GAO analysts based on DOD pohes and regulabons




                                                            19            GAO/AIMD-97-107X DOD Progress Payments
ENCLOSURE VII                                                           ENCLOSURE VII

           DFAS-COLUMBUS DESK PROCEDURE 302. X4N~~4.L DISTRIBLTTION

DFAS-Columbus Desk Procedure 302 was in effect from March 16, 1992, to October 3,
1995, and recognized that ail payments should attempt to use the MOCAS API process.
However, the procedure required that if MOCAS API could not be used, voucher
examiners were to manually prepare the (1) Progress Payments Prorate Worksheets to
determine if the progress payment could be made and the (2) Progress Payment Prorata
forms to determine the amount of the progress payment to apply to each contract ACRN.
This manual nrocess attempts to mirror that used bv the MOCAS API nrocess. Steps
taken to compute and distribute the progress payment are shown in table VII.1 and
demonstrated in detail in figures VII.1 and VII.2.

Table VII-l:   Desk Procedure 302. Manual Promess Pavment Distribution Procedures


 Step     Step objective             Actions taken to accomplish step
    1     Enter MOCAS                Review MOCAS Contmgent Liability Record and
          information pertaining     record the required information on the Progress
          to (1) contract number,    Payments Prorata Worksheet.
          (2) progress payment
          request number,
          (3) dollar amount of
          progress payment,
          (4) contract’liquidation
          rate, (5) servrce code
          for each ACRN
          (1=Army, 2=Air
          Force, 3=DLA, and
          4=Navy), (6) each
          ACRN, (7) obligation
          dollar amount for each
          ACRN, (8) WIP
          outstanding dollar
          amount for each
          ACRN, and (9) ULO
          balance dollar
          amount for each ACRN
          to the Progress Payments
          Prorata Worksheet.




                                            20          GAOiAtiMD-ST-1OTRDOD Progress Payments
EXCLOSTRE t-II                                                     ENCLOSURE VII


Step    Step objective          Actions taken to accomplishstep
   2   Determine and record     Multiply the ACRN ULO amount by
       on the Progress          the liquidation rate. Subtract each
       Payments Prorata         ACRN’s WIP outstanding dollar amount
       Worksheet the            from each answer computed
       amounts of funds         and determlne the available funds.
       avaiiable to make to
       the progress payment.

   3   Sort ACRNs in            Review the MOCAS contingent Ilability record
       ascending order          to determine the ACRNs used on this contract.
       based upon the dollar    Rank the ACRNs in descending order and
       amount of funds          record the sequence of ACRNs on the
       available to make the    Progress Payments Prorata Worksheet.
       progress payment.


  4    Record on the Progress   Copy and record the required Information to
       Payment Prorata form     the Progress Payment Prorata form.b
       from Progress Payments                                                      l




       Prorata Worksheet the
       following information:
       (I) contract number,
       (2) progress payment
       request number,
       (3) service codes of
       ACRNs in ascending
       order, (4) each
       ACRN in ascending
       order, and (5) each
       ACRN’s dollar amount
       of obligations.

  5    Compute and record to    Total the obligation dollar amounts recorded in
       the Progress Payment     column 3 and record the computed amount
       Prorata form the         on column 4, line 1. Subtract column 3, line 1
       obligation balance for   from column 4, line 1 and enter this amount
       each ACRN on the         on column 4, line 2. Continue this process
       contract.                until column 3 and column 4 equal each other.b




                                                                                          I




                                       21         GAO/AMD-9’i-1O7RDOD Progress Payments
ENCLOSURE VII                                                             EXCLOSURE VII


 Step     Step objective               Actions taken to accomplishstep
   6      Compute and record on        Divrde each ACRN’s obligation amount by
          the Progress Payment         each ACRN’s obligation balance and determlne
          Prorata form the pro rate    the pro rate percent. Record the pro rate percent
          percent amount for each      amount In column 5.’
          ACRN.

   7      Record on the Progress       Review the Progress Payments Prorata
          Payment Prorata form         Worksheet and enter the amounts In
          the dollar amount of funds   column 7 to column 6 on the Progress
          available to make progress   Payment Prorata form.’
          payment.


   8      Determine the dollar         Review the progress payment request to determlne
          amount of the progress       the approved progress payment amount and enter
          payment approved             this amount.b
        . balance for the first
          ACRN listed on the
          Progress Payment
          Prorata form.

   9      Compute the amount of        Multiply the approved balance in column 7, line
          the progress payment to      1 by the pro rate percent in column 5, line 1 to
          be prorated to the first     determine the amount to be prorated to
          ACRN listed on the           the first ACRN?
          Progress Payment Prorata
          form.

   10     Determine the dollar         Compare the amount of funds remaining to
          amount of the progress       pay progress payments Sor the second ACRN
          payment approved             to the amount of the prorated progress payment
          balance for the              computed in step 9 and determine which is
          second ACRN listed           smaller. Record the smaller amount
          on the Progress              In column 8, line 1 of the Progress
          Payment Prorata              Payment Prorata form. Subtract the amount
          form.                        of the progress payment dtstributed to the
                                       first ACRN on the Progress Payment Prorata
                                       form from the progress payment
                                       approved balance on column 7, line 1 and
                                       record this amount In column 7, line 2.b




                                              22          GAO/AIMD-97-107RDOD Progress Paynlenrs
EXLOSURE           VII                                                                     EXCLOSFRE 1-H


  Step       Step objective                          Actions taken to accomplish step

    11       Determine the dollar amount             Repeat steps 9 and 10 until columns 7, 8,
             of the progress payment                 and 9 are complete for all ACRNS.~
             approved balance for all
             remaining ACRNs on the
             contract.
?igure VII.1 documents the data entered for the Wszaave progress payment request

bFigure W 2 documents the mfomation recorded for the Gmranve    progress payment request

Source GAO anaiyss based on DOD potiaes and regulations.




                                                             23           GAO/.AIMD-97-10’
-i,         *
       1

      ‘,:       ;




                                                                                                         ENCLOSURE VTI

                    Figure m .1: Proszress Pavments Prorata Worksheet ExamtAe


                     MULTI ACRNS-ONE   SERVIC




                    Source: GAO analysis based on DOD policies and regulations.




                    F&u-e V5.2:        Prom ess Pament Prorata Form Exanm le

                    PlIN/SPIIN
                                                                         PROGRESS PAYMENT PRORATA
                                                                                                                   PPR
                                                                                                        7      I I     a     I      9
                                                                                                    PROGRESS   1 1 PRO RATED 1   AMOUNT




                                                                                                               1   I         I
                                                                                                               I   I         I




                    scuroe: ( A0 analysis based on DOD policies and regulations.




                                                                                   24   GAO/AIMD-97-107RDOD Progress Payments
I-

     E N C L O S U R EV III                                                                                           E N C L O S U R EV III



                                C O M M E N T SF R O M T H E D E P A R T M E N T O F D E F E N S E



                                                   UNDER       SECRETARY            OF DEFENSE
                                                           1100 DEFENSE  PENTAGON
                                                         WASHINGTON.   DC 20301-1100




                         Mr. G e n eL. D o d a r o
                         AssiitautC o m p trollerG e n e r a l
                         Accounting     a n dInformationM a n a g e m eDivision
                                                                       nt
                         U.S.G e n e r aAccounting
                                           l            office
                         W a s b i n g t OD%C 2 0 5 4 8

                         D&UMLDOdXO:

                                    l3i.s is theD e p a n m e noft Defenser e s p o n stoe the G e n e r aAccounting
                                                                                                          l        O ffice ( G A O )
                         draftrepot&T?INANcIALMANA~                               D O DprogressP a y m e nDistribution
                                                                                                              t          procedures,”
                         d a t e dJ u n e6 , 1 9 9 7( G A OC o d e9 1 8 9 W O S DC a s e1380).

                                   TheDepartmentappreciatesthechangesmadetotheoriginaldmftconcemingthe
                         p r o c a M s miiizedin m a l d n gprogresspayments.However,the charto n p a g e4 a n ds o m eof the
                         asmiatedl a n g u a gmight
                                               e       l e a dthe r e a d e to
                                                                            r concludetbatthe Departmentfollows m o r epolicies
                         thanone.For the record,I wantto m a k ethe followingpoints:

                             T h eDefenseFinancea n dAccountingService( D F A S )paysall progress                 paymentsin a
                     m a n n estipulated
                               r          in contractsor as direct& by specialp a y m e ninstmcdons
                                                                                                t             fkomcontmctiug
                     officets.T h eD F A Susesthe p a y m e npt r o c e d u r ediscus&
                                                                                s        b e l o wonly if therea r en o specific
                     a m tractp a y m e nprodsions
                                          t        or lnstmctions.T h e D F A SC o h t m b u Center
                                                                                                  s         h a souly o n eoverall
                     policythatgovernsh o w p r o g m s payments
                                                         s           a r er ~ 4 s u p p l e m e n t ebyd a policy m e m o r a n d u m
                     thatis u s e dw h e npaymentshil theA u tomaticp a y m e nof   t Invoices(API) process.

                             T h e D o D F ~ M a n a g e m e n tRegulation(DoD~)7ooO.14R, issuedFebruary
                     1 9 9 6is
                            , theg o v e m i n gpolicythat p r o w standard        distributionguidelinesfor theailocationof
                     progress  payments.T h eD o D F M R replacesp a y m e ngt u i d a n cpreviouslye           existingu n d e rvarious
                     D O Dregulations,     orders,or policies.T h e D o D F M R cumxtly & l o w s for two m e thodsof
                     distnbution:(1) specificitemizationasrequested             a n ddirectedin the contractor (2) proration
                     usingobligationbalances       ( c o m m o n l yreferredto as theA H m e thod).O n l y o n em e thodis u s e do n
                     a u invoxep e rcotmac~Also, the D F A S C o l u m b u Center s         issueda n intensivepolicy
                     m e m o r a n d uomn October3,1995,which delineates           p r o c e d u r etos distributem a n u aprogress
                                                                                                                           l
                     payments   b a s e do n a directivep m s c r & d by theD O DC o m p trollerin a S e p tember       28.1995,
                     memorandum.

                                A furtherelaboration
                                                   of theF M R ’s two m e thodsis as follows:

                     l      ContractSoecificInstruction T h eD O DF M R requiresp a y m e nallocation
                                                                                             t          in a c c o r d a n cwith
                                                                                                                             e
                            msnuctions   providedwithin the mdividuaicontracts.O ften,d u eto the potentialfor canceling
                            fundsu n d e rpublicL a w 1 0 1 - 5 1 0contmct
                                                                    ,    specificinsttucuonssimilarto thosec o n t a m ein  d




                                                                             25               G A O IA IM D - 9 7 - 1 0 7 D
                                                                                                                          F iO D Progress P a y m e n t s
                                                                                               ENCLOSURE VIII




                the now expiredAir ForceRegulation177-120,Accounting and FinanceCenttal procurement
                Transactions.am containedin selectedcommas. Theseinstructions may requirepayment
                distributionto the oldestfscai year funds first. This method is used approximately15 percent
                of the time.

            l   AutomaticPavmentof Invoices MPQ. If no spe&c instructions are includedin the contract
                the Her rquires payment based upon the API process. This processestablishesa payment
                distributionpro&me that usesthe weightedvalue of the conttact’s obligation balancesto
                determinepaymentdistribution. This automatedmethodis in use today for approxunately
                80 percentof the progmsspaymentsproces& by the DFAS Columbus Center.

                  Also. asnotedabove,this overall policy is supplementedby an October3,1995. DFAS
           Cohunbuspolicy memorandum.The memomnclumprescribespayment distributionin “ACRN
           alphabeticorde? when speci5i.cpayment allocation instructions were not providedin the contract,
           whenpaymentsare not systemicallyemitled via the API process.or when a m-questfor
           authorizationto pay is denieddtukg the preva&lation pmcess. This guidancewas initiated due
           to in&n&ant dollaramountsbeingallocatedbytheApI~whichdegmdedpayment
           timdins when paymentswere subjectedto the prevalidationprocess.

                   I will issue,shortly,guidancerqdring the conuacting officer or contractadministration
           office to provideDFAS specik instructionson how to distribute each progress payment The
           disttibutionsam to reflect the conttact line item level costsincurred by the contractor. These
           dlsuibutionswill be requhedfor all progmsspaymentsquested under new contracts.

                   When dlsassing progms payments,it is important that they be distinguishedfrom
            deliverypayments.Progresspaymentsare contract5nancing paymentsthat are applicableonly to
           tied price contracts.progresspaymentsdo not representpaymentsfor work or servicesthat
           havebeencompletedor delivered. progresspaymentsrepresentSnancing to contractorsbasedon
           costsincurredand the contmctorremainsliable for the Enancinguntil the items specifiedin the
           contractare delivered The use of progresspaymentson large contracts is authorizedby law for
           all FederalAgenciesbecausethis processproducesthe lowest overall cost to the government.
           Contractorspay higher interestratesthan the Tressmy and those interest rateswould be included
           in contractprices. When the cormactordelivers the items or services specifiedin the contract,the
           applicableoutstandingprogresspaymentsamount is deductedfrom the price of the delivered
           itemsbeforethe paymentis made.




(918912)                                                    26            GAO/AMID-97-107l?        DOD Progress Payments
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