oversight

Contract Management: Fixing DOD's Payment Problems Is Imperative

Published by the Government Accountability Office on 1997-04-10.

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

                  United States General Accounting Office

GAO               Report to Congressional Requesters




April 1997
                  CONTRACT
                  MANAGEMENT
                  Fixing DOD’s Payment
                  Problems Is Imperative




GAO/NSIAD-97-37
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      National Security and
      International Affairs Division

      B-272540

      April 10, 1997

      The Honorable John Glenn
      Ranking Minority Member
      Committee on Governmental Affairs
      United States Senate

      The Honorable Tom Harkin
      United States Senate

      The Honorable Peter A. DeFazio
      The Honorable Carolyn B. Maloney
      House of Representatives

      In response to your request, we reviewed the Department of Defense’s
      (DOD) efforts to improve its contract payment practices. Specifically, we
      looked at (1) the factors contributing to payment errors and increased
      costs, (2) DOD’s efforts to improve its payment system, and (3) payment
      practices of commercial companies that DOD might adopt. This report
      focuses on the payment of contracts administered by the Defense Contract
      Management Command (DCMC) and paid by the Defense Finance and
      Accounting Service’s (DFAS) Columbus Center. As part of our effort to
      identify innovative practices that might be applicable to DOD’s contract
      payment process, we concentrated on those of four non-federal
      entities—Electronic Data Systems, Boeing, ITT Automotive, and the
      University of California, Berkeley.

      In recent years, we have reported on DOD’s numerous problems in making
      accurate payments to defense contractors. These reports identify millions
      of dollars in government overpayments, underpayments, and interest on
      late payments, in addition to other financial management problems. For
      example, during a 6-month period in fiscal year 1993, the Center processed
      $751 million in checks returned by defense contractors. Our examination
      of $392 million of the $751 million disclosed that about $305 million, or
      about 78 percent, represented overpayments by the government.
      Subsequently, we found that some contractors had retained overpayments.
      For example, in one case, a contractor was overpaid $7.5 million due to
      numerous errors. The overpayment remained outstanding for 8 years. We
      estimate that government interest lost on the overpayment amounted to
      nearly $5 million. We concluded that neither DOD nor the responsible
      contractors appeared to be aggressively pursuing resolution of payment
      discrepancies.




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                   It is imperative that DOD achieve cost-effective control over its payment
Results in Brief   process. Otherwise, it continues to risk hundreds of millions of dollars in
                   potential overpayments and other financial management and accounting
                   control problems. Further, improving the efficiency of the payment
                   process would save additional millions of dollars annually in reduced
                   processing costs.

                   The following factors contribute significantly to problems and increased
                   costs in DOD’s payment process: (1) nonintegrated computer systems that
                   require manual entry of data that is erroneous or incomplete, (2) multiple
                   documents that must be matched before contractors are paid, and
                   (3) payments that require allocation among numerous accounting
                   categories.

                   Improving DOD’s payment system will not be an easy or quick undertaking.
                   It will require continued top management attention and support for many
                   years to come. While DOD is taking some steps to address its payment
                   problems, when and to what degree they will effectively correct its
                   problems remains to be seen. Further, DOD’s actions do not go far enough
                   in addressing the factors we identified as contributing to payment
                   problems. For example, DOD has yet to decide on how to minimize
                   transferring existing erroneous data to the new automated system.
                   Moreover, it also plans to continue to match multiple documents and
                   allocate payments across numerous accounting categories.

                   Our review indicated that DOD might benefit from further examining best
                   practices of commercial organizations that have reengineered their
                   contract payments process. The organizations we visited have focused on
                   a long-term effort of continual improvements with contract payments
                   viewed as an integral part of the acquisition process. In general, these
                   organizations have combined technological improvements with
                   streamlined processes to improve service and reduce costs.

                   In light of our findings to date we are making recommendations to
                   enhance DOD’s strategy for addressing its contract payment problems.


                   Contracting officers typically delegate to DCMC responsibility for
Background         administering contracts when they require delivery or supply of centrally
                   managed military- or agency-unique items or services. Such contracts can
                   range in size from small purchases (under $25,000), which are typically




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                           completed within a few months, to multibillion dollar weapon systems
                           development and production contracts that take years to complete.

                           In January 1991, DOD established DFAS to assume responsibility for DOD
                           finance and accounting. DFAS’ Columbus Center pays contracts
                           administered by DCMC. For fiscal year 1995, these contract payments
                           amounted to 37 percent of the dollars, and 5 percent of the invoices paid
                           by DOD. The Center’s computer system contained contract administration
                           and financial data on about 376,000 contracts as of September 1995. The
                           financial data in the Center’s payment system is not, however, the official
                           accounting record for the contracts. Rather, approximately 190 accounting
                           stations maintain the official accounting records. The Center had
                           1,440 employees, who processed 1.2 million invoices and disbursed
                           $61 billion in fiscal year 1995.

                           The Center makes two basic types of contract payments—delivery
                           payments and financing payments. About two-thirds of all payments are
                           delivery payments for goods and services; the balance is financing
                           payments. Financing payments are made on both cost reimbursement and
                           fixed-price contracts as contractors incur costs and submit billings.
                           Financing payments on fixed-priced contracts—called progress
                           payments—are later credited against delivery payments when items are
                           delivered, a process called progress payment liquidation. The type of
                           payment made will affect how the transaction is processed.

                           DOD  recognizes it has serious, long-standing problems in correctly
                           disbursing billions of dollars in payments and providing reliable
                           accounting information. DOD identified this as a high-risk area in its
                           February 1996 Federal Managers’ Financial Integrity Act report. We have
                           also identified DOD contract management, including contract payments, as
                           a high-risk area.1


                           We identified three key factors that contribute significantly to problems in
Factors Contributing       DOD’s payment process. These three factors are:
to Contract Payment
Process Errors and     •   nonintegrated computer systems that require data to be entered manually
                           and often with information that is erroneous or incomplete,
Cost                   •   multiple documents that must be matched before contractors are paid, and
                       •   payment information that is allocated among numerous accounting
                           categories.

                           1
                            High Risk Series: Defense Contract Management (GAO/HR-97-4, Feb. 1997).



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                                      Although there may be other factors contributing to DOD’s payment
                                      problems, such as the complexity of contracting requirements for major
                                      weapon systems, our review indicated that addressing the three factors is
                                      key to DOD’s ability to improve payment accuracy and reduce costs.

                                      These factors increase costs by increasing manual data input, invoice
                                      research, contract reconciliation, and manual payment processing.
                                      Figure 1 illustrates that a large portion of the Columbus Center’s reported
                                      invoice processing cost are consumed by these functions. For fiscal year
                                      1995, the Center reported that it cost an average of $87 to process a
                                      contract invoice, $44 of which was direct labor.2



Figure 1: Activity Cost Analysis by
Contract Payment Function                                                                  Disbursing

                                                                                           Invoice research

                                                                                           Contract reconciliation
                                                   12%              30%

                                           6%


                                           16%                                             Initial data input
                                                                         21%

                                                            15%


                                                                                           Manual processing

                                                                                           Other



                                      Source: Based on DFAS Columbus Center MOCAS BPR Assessment, KPMG Peat Marwick, LLP,
                                      August 1995.




                                      2
                                      We did not verify or validate the accuracy of the Center’s reported data. However, in February 1996,
                                      DOD acknowledged that accurate and complete cost accounting information is a serious DOD-wide
                                      weakness.



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Nonintegrated Computer   Manual entry of contract data into the payment system adds significantly
Systems Often Require    to processing costs. Generally, other DOD activities, such as purchasing and
Manual Data Entry        accounting, provide most of the data to DFAS (see fig. 2). However, because
                         DOD’s payment system is not integrated with DOD’s procurement and
                         accounting systems, much of the data they generate cannot be
                         electronically transferred to the payment system and must be manually
                         entered from hard copy documents.3 Even when data is electronically
                         transmitted, it often is incomplete or inaccurate. Furthermore, because of
                         a perceived high error rate of electronic transmissions, many DFAS data
                         clerks enter data manually, according to DOD.




                         3
                          According to DOD, several of the major procurement offices do not have the capability to make
                         electronic transmissions.



                         Page 5                                                  GAO/NSIAD-97-37 Contract Management
                                             B-272540




Figure 2: Payment Process Information Flow


       1,400
    Contracting                                   Purchase Order/Contract
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                                                                         Acceptance                                         P   ay




          Defense          Contract Modifications
                                                                     DFAS                                                                              Defense
          Contract                                                                                   Voucher Approval
                               Receiving Reports                   Columbus                                                                            Contract
        Management
                                                                   (paying office)                                                                   Audit Agency
         Command
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                    Treasury                                                                          187 Accounting
                                                                                                         Stations
                                                                                                        33 Systems




                                             Source: GAO.




                                             Because the systems are not integrated, the payment process is highly
                                             paper dependent. According to a file room supervisor at the Columbus
                                             Center, the Center files about 25,000 loose contract documents a week. A
                                             consulting firm’s study noted that the Center’s paper dependent workflow




                                             Page 6                                                                   GAO/NSIAD-97-37 Contract Management
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                        has frequently led to misrouted and misplaced paper documents.4 This
                        condition delays payments and further increases processing costs.
                        According to DOD, it made a decision in 1995 to implement the government
                        and industry standard for electronic transmissions to eliminate the manual
                        data entry of contract data into its accounting and payment systems. The
                        Center is testing the use of these transmissions in some of its divisions.
                        However, manual entry may still be required in certain situations, such as
                        contracts with special clauses.


The Document Matching   Before making payments, Columbus Center employees match a number of
Process Consumes Time   documents to ensure the payments are in accordance with the purchase
and Resources           order and that funds are available to cover payments. For both delivery
                        and finance payments, Center employees match at least the purchase
                        order, the invoice, and the obligation records contained in the Center’s
                        payment system.5 For delivery payments, they also match to the receiving
                        document. Although time consuming, matching is intended to ensure that
                        items ordered were received and that funds have been obligated and are
                        available to make the payment.

                        According to DOD officials, the matching to obligation records is performed
                        to avoid violating the Anti-Deficiency Act.6 Among other things, that act
                        provides that a government employee may not make an expenditure
                        (payment) exceeding the amount in an appropriation or fund available for
                        that purpose. When a contract is signed, an obligation is recorded, which
                        essentially reserves sufficient appropriated funds until payments become
                        due. Center employees match an invoice to contract obligations recorded
                        in the Center’s payment system to verify the availability of funds before
                        making a payment. The obligation records used by Center employees,
                        however, are not DOD’s official accounting records. For payments over
                        $5 million, the Center is also required to verify funding availability in the
                        official accounting records maintained at the accounting stations.7

                        The Center tries to pay invoices automatically, and it did so for about half
                        of its payments in fiscal year 1995. However, if Center employees are
                        unable to verify or match payment data to its records (invoices, purchase


                        4
                         DFAS Columbus Center MOCAS BPR Assessment, KPMG Peat Marwick, LLP, August 1995.
                        5
                         An obligation is a binding commitment that will require an expenditure at some later time from an
                        appropriation.
                        6
                         31 U.S.C. 1341.
                        7
                         Section 8137 of Public Law 103-335, Department of Defense Appropriations Act, 1995.



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                             orders, receiving documents, Center obligation records, or accounting
                             station records), they are required to research discrepancies before
                             making payment. An inability to match payment data causes Center
                             employees to manually process payments, which can cost up to seven
                             times more than an automated payment.

                             Mismatches can also cause the Center to have to reconcile a contract—an
                             extensive and costly process that can take from several hours to years. For
                             example, on a contract valued at $1.2 billion, the Center’s and the
                             accounting station’s disbursement records differed by $12 million. In
                             addition, both the Center’s and the accounting station’s records differed
                             from the contractor’s records. The Center and a public accounting firm
                             engaged by the Center have spent about 5 years off and on attempting to
                             reconcile this contract. While the costs for reconciling this contract were
                             not available, DOD paid the public accounting firm about $8.6 million in
                             fiscal year 1996 for contract reconciliation support on numerous
                             contracts.

                             Efforts to resolve mismatches through invoice research, contract
                             reconciliation, and manual processing account for about 57 percent of
                             average payment costs. About one-third of the Center’s contract payment
                             personnel are dedicated to invoice research and contract reconciliation.


Payment Allocations Can      DOD uses a “long line of accounting” to accumulate appropriation, budget,
Be Inaccurate, Misleading,   and management information for contract payments. For all contracts, the
and of Questionable Value    buying activity assigns a two-character code called an accounting
                             classification reference number (ACRN) to each accounting line containing
                             unique information. The Center allocates payments to ACRNs in an attempt
                             to ensure that the payments comply with the requirements of the
                             Anti-Deficiency Act. Figure 3 is an example of an accounting line—the
                             type and quantity of information varies among the services.




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Figure 3: Example of DOD’s Long Line of Accounting

                                                                                                                         Project Directive
                                                                                                                         Line Item and Suffix
                                           Weapons System
                                                                                                                         for Management
                                        Budget Activity                            Transaction Type                      Oversight
                                                                                                                         (e.g., engine
                                          Command                         Accounting Station                             accessory)
                                Appropriation                         Appropriation
                                                                      Suballotment

                        AA 17      9395    1506     4     1   AV 031      BZ     276   0 068342    2B    000000    01030 MAS         0020

                                                   Office of
                    ACRN                           Management                            Receiving Activity
                                                   and Budget
                      Service                      Cost Code                                            Project Unit
                                                                                                        (e.g., engine)
                        Beginning                             Participating
                        Fiscal                                Manager
                        Year                                                                                       Contractor
                               Ending                                                                              Support
                               Fiscal                                Requiring                                     Cost Code
                               Year                                  Financial
                                                                     Manager




                                                  Source: DOD.




                                                  Contracts can be assigned anywhere from 1 to over 1,000 ACRNs. A contract
                                                  with numerous ACRNs may involve extensive data entry, increasing the
                                                  chance for errors and manual payment processing. Manual payment
                                                  processing costs an average of $15 per ACRN, according to a consulting
                                                  firm’s study.

                                                  According to a DFAS official, contracts with 10 or more ACRNs are more
                                                  likely to have payment problems. Our review showed that of the 217,000
                                                  active contracts, about 3 percent have 10 or more ACRNs, but they account
                                                  for 77 percent of the total value, as shown in table 1.




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Table 1: Number of ACRNs Per
Contract                       Dollars in billions
                                                                        Number of       Percent of         Value of   Percent of
                               Number of ACRNs                           contracts       contracts        contracts       value
                               1                                           174,087              80           $29.7               5
                               2 to 9                                        35,846             17           116.4              18
                               10 to 100                                      6,523               3          327.4              51
                               101 to 1,000                                     448                   *      164.1              26
                               more than 1,000                                     4                  *         0.9              0
                               Total                                       216,908             100          $638.5          100
                               * Less than 1 percent.

                               Source: GAO analysis of “active” contracts from DOD’s Mechanization of Contract Administrative
                               Services (MOCAS) system, March-April 1996.



                               When buying activities assign numerous ACRNs, payment allocations to the
                               ACRNs can be time consuming and may not provide useful or reliable
                               management information. For example, in one case we reviewed, a single
                               payment on a contract with many ACRNs took 6 to 8 hours to process. The
                               contractor, required to bill by ACRN, took 487 pages to assign $2.1 million in
                               costs and fees to 267 ACRNs. Ten of the ACRNs cited by the contractor had
                               insufficient obligation balances to cover the payment, according to the
                               Center’s records. The remaining 257 ACRNs corresponded to 8 annual
                               appropriations covering from 1 to 5 fiscal years and included Army, Air
                               Force, and general defense funds. Of the 257 transactions processed,
                               38 were for less than $10, and some involved debits or credits for pennies.
                               Unresolved discrepancies, such as insufficient funds on some ACRNs, have
                               persisted for about 3 years, and the contract is currently scheduled for
                               reconciliation. The contractor believes the contract was underpaid by
                               about $2.6 million, as of September 1996.

                               Even for a simple purchase, assigning numerous ACRNs can cause
                               extensive and costly rework, and provide information of questionable
                               management value. For example, a $1,209 Navy contract for children’s
                               toys, candy, and holiday decorations for a child care center was written
                               with most line items (e.g., bubble gum, tootsie rolls, and balloons)
                               assigned a separate ACRN. A separate requisition number was generated for
                               each item ordered, and a separate ACRN was assigned for each requisition.
                               In total, the contract was assigned 46 ACRNs to account for contract
                               obligations against the same appropriation. To record this payment against
                               the 1 appropriation, the Center had to manually allocate the payment to all




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                             46 ACRNs. Figure 4 is an actual portion of this contract showing the ACRNs
                             assigned to each item.



Figure 4: Contract Excerpt




                             Source: DOD.




                             The contract was modified three times—twice to correct funding data and
                             once to delete funding for out-of-stock items. The modification deleting
                             funding did not cite all of the affected ACRNs. The Center made errors in
                             both entering and allocating payment data, compounding errors made in
                             the modification. Consequently, the Center allocated payment for the toy
                             jewelry line item to fruit chew, jump rope, and jack set ACRNs—all of which
                             should have been deleted by modification. Contract delivery was
                             completed in March 1995, but payment was delayed until October 1995.
                             Center officials acknowledged that this payment consumed an excessive
                             amount of time and effort when compared to the time to process a
                             payment charged to only one ACRN. The contract could have been assigned
                             a single ACRN, according to a Navy official, thus making it easier to pay
                             without losing useful information. A single ACRN would also have




                             Page 11                                   GAO/NSIAD-97-37 Contract Management
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                  significantly reduced the amount of data entered into the system and the
                  opportunities for errors.

                  In addition, sometimes contracts do not require contractors to provide the
                  accounting detail necessary to allocate the payments. In these instances,
                  the Center prorates payments among ACRNs. These prorations have little
                  relationship to the contractor’s actual performance and may cause funds
                  to be initially paid from the wrong appropriation. As an example, the
                  Center’s proration of development and procurement costs on an Army
                  contract understated the development expenditures of the contractor.
                  According to a DOD program official, the understatement frustrated the
                  program office’s initial request for additional development funding
                  because the Army’s official accounting records incorrectly showed
                  adequate development funds as being available. The DOD Inspector General
                  identified the proration issue as a problem in March 1992, and DFAS is
                  attempting to resolve the issue with the Inspector General.8

                  Allocating progress payments can also contribute to later payment
                  problems when the Center liquidates progress payments. As items are
                  delivered and the actual charges to the various ACRNs become known,
                  Center employees adjust the amounts previously prorated against the
                  ACRNs. They also incrementally cancel the debt the contractor owed the
                  government for the contract financing it received. This adjustment process
                  is known as liquidation of contract financing. In 1995, we reported that
                  errors in liquidating progress payments were the most frequent cause of
                  overpayments identified by Columbus Center analysis.9 Due to the
                  complex issues involved, we have undertaken a separate review of
                  progress payment processing.

                  User requirements for detailed accounting can place unreasonable or
                  unachievable demands on the payment system. Moreover, DOD’s current
                  pricing structure does not reflect the time it takes DFAS to meet user
                  requirements. Thus, the user has little incentive to critically evaluate the
                  level of detail being required and its associated costs.


                  The four organizations we visited have reported significant improvements
Commercial Best   in service and reductions in cost by reengineering their payment systems
Practices         and adopting process improvements. These organizations have

                  8
                   Titan IV Program (92-064 Mar. 31, 1992), DOD, Office of the Inspector General.
                  9
                   DOD Procurement: Millions in Contract Payment Errors Not Detected and Resolved Promptly
                  (GAO/NSIAD-96-8, Oct. 6, 1995).



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                            emphasized the need to approach payment reengineering as a long-term
                            effort focusing on continual improvement and viewing contract payments
                            as part of the total acquisition process. The outcome of their reengineering
                            efforts, according to these organizations, combined technological
                            improvements with streamlined processes and included:

                        •   consolidating and centralizing payment organizations;
                        •   developing fully integrated automated systems and using electronic data
                            interchange;
                        •   implementing simplified processes, to include eliminating one of three
                            documents typically used to make a payment; and
                        •   using alternative procurement practices, such as use of purchase cards, for
                            smaller purchases.

                            More details on the results of our visits to four nonfederal organizations is
                            discussed in appendix I.

                            Two of the private-sector organizations we visited had available
                            processing costs. They reported that reengineering reduced their direct
                            labor costs to process a contract payment to less than $3—a 30- to
                            50-percent reduction. Moreover, the organizations we visited reported that
                            payment productivity increased. For example, one reported that the
                            annual number of invoices processed per full-time employee equivalent
                            (FTE) increased from about 8,500 to 16,400, a 93-percent increase. In
                            contrast, the Columbus Center processes an average of about
                            1,000 invoices per individual per year.10


                            DOD is aware of the seriousness of its payment problems and is taking
DOD Is Addressing Its       steps to address them, including testing and adopting some commercial
Payment Problems,           best practices. In the shorter term, DOD is attempting to further automate
but It Can Do More          the payment process and is testing streamlined payment practices. Its
                            longer-term initiative involves the development and introduction of
                            procurement and payment systems that will share common data. While
                            these are positive steps, there are other actions DOD can take to better
                            ensure it effectively addresses and resolves its payment problems, to
                            include further exploring the best practices used by organizations to
                            reengineer their payment systems.




                            10
                             Based on about 1.2 million invoices paid divided by the total payment personnel in the Center’s
                            disbursing section and three payment directorates. FTE data was not available.



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DOD’s Contract Payment       DOD  is developing two systems to replace 76 procurement and 8 payment
Initiatives                  systems. The procurement and payment systems are expected to share
                             common data, thus providing one-time entry of contract data, including
                             invoice and receiving and acceptance documents. By doing this, DOD
                             expects to eliminate redundant data entry, data inconsistencies, and hard
                             copy dependence. The payment system, according to DOD, is scheduled for
                             implementation in fiscal year 1999 and both systems are planned to be
                             fully operational by fiscal year 2004.

                             While DOD is developing these systems, DFAS is taking other steps to
                             automate its payment process and reduce manual entry. DFAS’ initiatives
                             include:

                         •   upgrading the Columbus Center’s existing payment system with electronic
                             data interchange (EDI) capabilities so that several of DOD’s present contract
                             writing systems can transmit data electronically;
                         •   implementing a software application that automates a portion of the
                             manual payment process;
                         •   implementing document imaging, which converts hard copies to electronic
                             images;
                         •   increasing the use of electronic funds transfer;11 and
                         •   developing a capability to electronically access contract and modification
                             information from a single source using DOD’s private network.

                             DOD  also has efforts to streamline its payment processes. It continues to
                             expand its use of the purchase card12 and has formed two teams to
                             recommend better ways for using the card. In addition, in August 1996, the
                             Naval Air Systems Command (NAVAIR) directed its program managers to
                             limit the collection of financial and budgetary information. By doing so, it
                             hopes to simplify contracts by reducing the number of ACRNs.

                             DOD has other initiatives to streamline the payment process for contracts
                             not administered by DCMC. If successful, a DOD official said it may apply
                             them to DCMC-administered contracts. For example,

                         •   The Los Angeles Air Force Base is planning a pilot to eliminate invoices
                             for purchases under $100,000. It wants to use bar code and EDI technology


                             11
                               Per the Federal Financial Management Act of 1994 (31 U.S.C. 3332, as amended by P.L. 104-134), all
                             federal payment must be made by electronic funds transfer after January 1, 1999. The Secretary of the
                             Treasury may waive the requirement for certain types of payments or payees.
                             12
                              According to DOD, during the first quarter of fiscal year 1997, the card was used to make 935,750
                             purchases valued at $410 million.



                             Page 14                                                  GAO/NSIAD-97-37 Contract Management
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                                to transmit receipt information to the DFAS-Denver paying office, match
                                information to the purchase order, and trigger payments. The Defense
                                Commissary Agency eliminated the need for an invoice in 1994, and,
                                according to DOD, achieved significant savings.
                            •   The DFAS-Denver paying office plans to pay for certain purchases under
                                $2,500 without matching to a receipt. It intends to control payments by
                                auditing a sample of paid invoices.


Additional Actions Needed       While DOD’s initiatives are positive steps and may improve its payment
                                process efficiency and reduce costs, there are additional steps DOD needs
                                to take as it implements its strategy for improving its contract payment
                                system.

                                While DOD plans to improve the linkage between the payment and
                                procurement systems to improve accuracy and reduce processing costs,
                                there remains the issue of what to do with the inaccurate data already in
                                the existing system. According to DFAS officials, while the transferred data
                                will be tested for logic errors, such as missing contract numbers,
                                verification for accuracy would require contract reconciliation. They said
                                limited resources restrict the number of reconciliations they can complete.
                                According to DOD, it has not yet made a decision on how to avoid
                                transferring erroneous data to the new system, but it believes that other
                                initiatives may help minimize errors.

                                The current system also contains contracts that DFAS considers
                                unreconcilable because of missing documents. In March 1996, DFAS
                                proposed that DCMC negotiate settlements with contractors for 57
                                unreconcilable contracts, permitting DOD to close these contracts. In
                                October 1996, DCMC directed its administrative contracting officers to
                                settle these contracts within 180 days. DOD now needs to decide what to do
                                with all the other unreconcilable contracts. It needs to establish an overall
                                policy for closing out existing contracts that cannot be reconciled because
                                of incomplete data. That policy should take into account such factors as
                                the age and complexity of the contract, the dollar value of the discrepancy,
                                and the possibility of multiple errors.

                                DOD’s  initiatives do not fully streamline the contract payment process. DFAS
                                still matches multiple documents before making a payment. However,
                                there may be appropriate opportunities to eliminate the requirement to
                                match payments to invoices, such as when the existence of a receiving
                                report constitutes sufficient evidence that a payment is owed. This



                                Page 15                                    GAO/NSIAD-97-37 Contract Management
                                       B-272540




                                       practice is consistent with our guidance to federal agencies.13 Commercial
                                       best practices provide some lessons on how this might be done while
                                       maintaining adequate controls (see p. 26).

                                       Alternate procurement practices for small purchases, such as use of the
                                       purchase card, are not being fully used. As shown in table 2, 21 percent of
                                       the DCMC-administered contracts had a value of $2,500 or less.

Table 2: Contract Value Per Contract
                                                                                                               Number of Cumulative
                                       Contract values                                                          contracts   percent
                                       $0                                                                              452             0
                                       $1 to $100                                                                    3,265             2
                                       $101 to $2,500                                                               41,836            21
                                       $2,501 to $10,000                                                            40,408            40
                                       $10,001 to $100,000                                                          68,481            71
                                       $100,001 to $1,000,000                                                       42,753            91
                                       more than $1,000,000                                                         19,713           100
                                       Total                                                                       216,908
                                       Source: GAO analysis of “active” contracts from the MOCAS system, March-April 1996.



                                       Contracts of $2,500 or less are within the current threshold for
                                       micropurchases and could be paid using the government purchase card.14
                                       While DOD is expanding its use of purchase cards, table 2 suggests that
                                       there are even more opportunities to streamline the process, through
                                       increased use of purchase cards or other means.

                                       DOD recognizes that it is costly to account for payments at the ACRN level
                                       and that, in some instances, the information obtained may be inaccurate
                                       and of questionable value. While DOD is continuing to review how best to
                                       improve the process, DOD officials believe that the information collected is
                                       necessary to comply with the Anti-Deficiency Act and other management
                                       requirements.

                                       We recognize the importance of compliance with the Anti-Deficiency Act;
                                       however, we do not believe that DOD’s current detail level of accounting is
                                       required to achieve this compliance. Our analysis indicates that DOD’s


                                       13
                                        GAO Policy and Procedures Manual for the Guidance of Federal Agencies, Title 7, “Fiscal
                                       Procedures.”
                                       14
                                        Micropurchases are exempt from the Buy America Act, certain small business requirements, and the
                                       general requirement for competition.



                                       Page 16                                                 GAO/NSIAD-97-37 Contract Management
                      B-272540




                      current detail level of accounting is driven by internal management
                      decisions regarding the allotment of appropriations and not the
                      Anti-Deficiency Act or any other regulations prescribed under this act. We
                      agree that once these allotments are made, the requirements of the
                      Anti-Deficiency Act are imposed. DOD’s current accounting detail goes
                      beyond the requirements of this act because appropriations are allocated
                      and suballocated. In some instances, this level of fund distribution may be
                      desired for internal management purposes. However, current DOD
                      initiatives are moving away from the detail levels and toward a higher level
                      of fund distribution and obligation accounting. For example, as mentioned
                      earlier, NAVAIR has a policy prohibiting the suballocation of funds to other
                      NAVAIR organizational units within the same program office, thereby
                      limiting the accounting detail and reducing the number of unique contract
                      ACRNs.



                      It is imperative that DOD achieve cost-effective control over its payment
Conclusions and       process. Otherwise, it continues to risk hundreds of millions of dollars in
Recommendations       potential overpayments and other financial management and accounting
                      control problems. Further, improving the efficiency of the payment
                      process could save additional millions of dollars annually in reduced
                      processing costs. Improving DOD’s payment system will not be an easy or
                      quick undertaking. It will require continued top management attention and
                      support for many years to come.

                      DOD is moving in the right direction in attempting to strengthen its use of
                      automated systems, ensure that these systems are integrated, and adopt
                      best practices. However, when and to what degree these actions will
                      correct its problems remains to be seen. Further, additional steps can be
                      taken to ensure that the payment problems are effectively and efficiently
                      addressed, including increased use of purchase cards for small purchases
                      and reduction in the requirement to match payments to invoices if other
                      controls are in place. DOD might also benefit from further examining best
                      practices of organizations that have reengineered their contract payments
                      process.

                      We recommend that the Secretary of Defense direct the DOD Comptroller
                      and the Under Secretary of Defense for Acquisition and Technology, as a
                      part of their improvement strategy, to:

                  •   thoroughly evaluate the information requirements of the user,
                      procurement, and accounting communities in terms of their impact on the



                      Page 17                                   GAO/NSIAD-97-37 Contract Management
                         B-272540




                         payment process and on the process’ ability to produce useful information,
                         in order to reduce the amount of detail accounting placed on the payment
                         center;
                     •   evaluate whether the pricing structure that the Columbus Center uses to
                         charge its customers for accounting services needs to better reflect the
                         cost of servicing contracts, particularly where the customer requires costly
                         detailed expenditure information;
                     •   establish a DOD-wide policy for closing out existing contracts that cannot
                         be reconciled because accurate and complete data are lacking. Such a
                         policy should take into account such factors as the age and complexity of
                         the contract, the dollar value of the discrepancy, and the possibility of
                         multiple errors; and
                     •   explore increased opportunities for using best practices, including
                         streamlined payment techniques, such as purchase cards. Twenty-one
                         percent of DCMC-administered contracts paid by the Columbus Center were
                         $2,500 or less. In addition, consider eliminating the requirement to match
                         payments to invoices, where appropriate, such as when the existence of a
                         receiving report may constitute sufficient evidence that a payment is
                         owed.


                         In commenting on a draft of this report, DOD said that the report (1) does
Agency Comments          not address some of the major factors contributing to the complexity of
and Our Evaluation       the contract payment process, (2) over simplifies the applicability and
                         implementation of best practices, and (3) does not present the full scope
                         of DOD’s aggressive improvement initiatives. DOD also indicated that most
                         of the recommended actions were underway within the Department.
                         However, none had been completed. DOD has a long way to go before its
                         payment problems are under control.

                         We recognize that there may well be other factors contributing to DOD’s
                         payment problems, including the complexity of contracting requirements
                         for major weapon systems. However, our review indicated that effectively
                         addressing the factors highlighted in this report is key to DOD’s ability to
                         correct the payment problems we identified in this and in previous
                         reports.

                         We also recognize that DOD is aware of the seriousness of its payment
                         problems and is taking steps to address them. The draft report discussed a
                         number of DOD initiatives to address its payment problems, but based on
                         DOD’s comments, we have included an additional DOD initiative in the final
                         report.



                         Page 18                                    GAO/NSIAD-97-37 Contract Management
                  B-272540




                  We acknowledge in the report that DOD is exploring the use of some best
                  practices. During our review, we attempted to identify other best practices
                  that might be worth further examination by DOD. The scope of our review
                  did not include a detail examination of each best practice and the
                  feasibility of its adoption, or the legislative and regulatory changes that
                  might be required before implementing these practices. We believe,
                  nevertheless, that there may be additional opportunities for DOD to take
                  advantage of best practices and we present information on companies that
                  have reengineered their payment practices to illustrate the types of
                  initiatives they undertook. As DOD examines these best practices, it will
                  need to examine the legislative or regulatory impacts of their adoption. In
                  this regard, in other work we have underway, we found that DOD lacks the
                  information necessary to analyze the costs and benefits of legislative
                  initiatives it believes would streamline its payment processes.

                  DOD’scomments refer to five recommendations. We have consolidated
                  them into four recommendations in the final report. DOD’s comments are
                  presented in their entirety in appendix II, along with our more detailed
                  evaluation of them.


                  To determine the factors contributing to payment process errors and cost,
Scope and         and DOD’s efforts to improve its payment process, we interviewed officials
Methodology       and reviewed supporting documentation from the

              •   Office of the Under Secretary of Defense Comptroller/Chief Financial
                  Officer, Office of the Principal Deputy Under Secretary of Defense for
                  Acquisition and Technology, Deputy Under Secretary of Defense for
                  Acquisition Reform, Washington, D.C.;
              •   Defense Finance and Accounting Service Headquarters, Navy Finance and
                  Accounting Office, Office of the Assistant Secretary of Defense Command,
                  Control, Communications, and Computer Systems Directorate,
                  Department of the Navy’s Office of Research Development and
                  Acquisition, Arlington, Virginia;
              •   Army Materiel Command, Alexandria, Virginia;
              •   Defense Logistics Agency, Fort Belvoir, Virginia;
              •   Air Force Materiel Command, Dayton, Ohio;
              •   Army Aviation and Troop Command, Defense Finance and Accounting
                  Service, St. Louis, Missouri; and
              •   Defense Finance and Accounting Service, Columbus Center, Columbus,
                  Ohio.




                  Page 19                                   GAO/NSIAD-97-37 Contract Management
    B-272540




    We also obtained information from Coopers & Lybrand LLP and KPMG
    Peat Marwick, LLP firms DOD engaged to assist in resolving its contract
    payment problems.

    To determine the characteristics of DCMC-administered contracts paid by
    the Columbus Center, we obtained contract and payment data from the
    MOCAS system the Center used to pay contracts. We analyzed those
    contracts classified as “both physically and administratively active, and
    have line items left to be shipped.” We did not statistically verify the
    accuracy of the data.

    To identify best commercial practices that DOD might adopt to further
    enhance its payment process, we reviewed articles, books, and on-line
    databases on reengineering; identified organizations that were highlighted
    as developing and implementing innovative management practices; and
    visited the following organizations:

•   Electronic Data Systems, Plano, Texas;
•   the Boeing Company, Seattle, Washington;
•   ITT Automotive, Auburn Hills, Michigan; and
•   University of California, Berkeley, California.

    At each organization, we discussed and obtained documentation related to
    the organization’s reengineering efforts associated with contract
    payments.

    We also obtained information from an accounts payable reengineering
    conference and workshop, which included case studies from various
    companies and consulting firms. However, we did not independently verify
    cost data obtained from DOD or the organizations we visited.

    We conducted our review between December 1995 and October 1996 in
    accordance with generally accepted government auditing standards.



    As agreed with your offices, we plan no further distribution of this report
    until 30 days from its issue date unless you publicly announce its contents
    earlier. At that time, we will send copies to the Secretary of Defense; the
    Director, Office of Management and Budget; and other interested
    congressional committees. We will also make copies available to others
    upon request.



    Page 20                                    GAO/NSIAD-97-37 Contract Management
B-272540




Please contact me at (202) 512-4587 if you or your staff have any questions
concerning this report. Major contributors to this report are listed in
appendix III.




David E. Cooper
Associate Director
Defense Acquisitions Issues




Page 21                                   GAO/NSIAD-97-37 Contract Management
Contents



Letter                                                                                            1


Appendix I                                                                                       24

Best Practices of Four
Nonfederal
Organizations
Appendix II                                                                                      29

Comments From the
Department of
Defense
Appendix III                                                                                     40

Major Contributors to
This Report
Related GAO Products                                                                             43


Tables                   Table 1: Number of ACRNs Per Contract                                   10
                         Table 2: Contract Value Per Contract                                    16

Figures                  Figure 1: Activity Cost Analysis by Contract Payment Function            4
                         Figure 2: Payment Process Information Flow                               6
                         Figure 3: Example of DOD’s Long Line of Accounting                       9
                         Figure 4: Contract Excerpt                                              11
                         Figure I.1: Commercial Two-Way Match and DOD’s Five-Way                 27
                           Match


                         Abbreviations

                         ACRN      accounting classification reference number
                         DCMC      Defense Contract Management Command
                         DFAS      Defense Finance and Accounting Service
                         DOD       Department of Defense
                         EDI       electronic data interchange
                         FTE       full-time employee equivalent
                         MOCAS     Mechanization of Contract Administrative Services
                         NAVAIR    Naval Air Systems Command


                         Page 22                                 GAO/NSIAD-97-37 Contract Management
Page 23   GAO/NSIAD-97-37 Contract Management
Appendix I

Best Practices of Four Nonfederal
Organizations

                  The nonfederal organizations we visited—Boeing, Electronic Data
                  Systems, ITT Automotive, and the University of California at
                  Berkeley—reported significant improvement in efficiencies while reducing
                  administrative costs of paying invoices by implementing best practices.
                  These organizations undertook a fundamental reassessment of the costs
                  and benefits of process controls, known as risk management. They
                  focused on a long-term effort of continual improvements with contract
                  payments viewed as an integral part of the acquisition process. In general,
                  these organizations combined technological improvements with
                  streamlined processes to improve service and reduce costs.


Risk Management   Organization officials said that one key to successful reengineering was a
                  fundamental reevaluation of the nature and extent of controls required in
                  their organizations. Competition demands for cost and cycle time
                  reductions forced these organizations to assess whether the cost of
                  controls exceeded the potential risk for exposure. According to these
                  officials, making this assessment allowed the organizations to eliminate
                  non-value added activities and streamline their processes.

                  At a reengineering accounts payable conference, a consulting firm pointed
                  out that reducing organization controls meant that senior management had
                  to ensure a culture of high integrity and values. At the same time,
                  compliance should be verified by sampling transactions and reviewing
                  exception-based information. For example, in establishing its purchase
                  card program, one organization made it clear that with a simplified
                  procurement process came responsibility and accountability. The
                  organization indicated that if a random audit revealed an employee
                  misused the card, the organization might suspend the employee’s card and
                  fire the employee.


Organizational    Two of the organizational changes undertaken involved (1) consolidating
Improvement       the accounting activities and (2) managing contract payments as part of
                  the overall acquisition process. Officials from two organizations we visited
                  said that their companies consolidated the accounting activities, including
                  the payment function, into one central location to reduce overhead and
                  improve efficiencies. Before reengineering, these organizations were
                  decentralized, with each business unit operating autonomously and
                  generally using different processes and systems.




                  Page 24                                   GAO/NSIAD-97-37 Contract Management
                Appendix I
                Best Practices of Four Nonfederal
                Organizations




                The notion that procurement and payment were part of the overall,
                interrelated, acquisition process was a difficult concept to get people to
                appreciate, according to organization officials. They explained that these
                activities are traditionally separate, autonomous functions, and are often
                at odds with one another. As with the Department of Defense (DOD),
                complexity of contracts and incomplete or erroneous data provided by
                procurement personnel frustrated the organization’s ability to pay
                contracts accurately and efficiently. Officials pointed out that successful
                reengineering of the contract payment function required cooperation from
                procurement personnel. It also required support from a level of
                management higher than the accounting and procurement functions to
                ensure cooperation.

                Solutions cited by the organizations we visited included educating
                procurement and payment personnel about each other’s processes and
                requirements, and showing the financial impact of not meeting those
                requirements. In addition, one organization had payment personnel
                involved during negotiations for complex contracts. According to this
                company official, early involvement helped ensure simpler payment terms
                or at least familiarity with the reasons behind payment terms and made
                paying the contract easier.


Technological   Another objective of the reengineering was to have a seamless, fully
Improvements    integrated system that allowed on-line access. This required some
                organizations to replace their multiple software systems with one system
                that integrated the procurement, payment, and accounting functions. The
                organizations opted to either buy commercial software packages or better
                use in-house systems already developed. One official told us that by
                selecting commercial software, his organization decided to collect less
                information in some cases than it had done previously. This reduced the
                costs of modifying and maintaining the software.

                Besides having integrated software, organizations also used electronic
                data interchange (EDI), which allows the electronic exchange of business
                information, including payment information, in a standardized format, and
                electronic funds transfer.

                After implementing these changes, the organizations reported labor-saving
                improvements. These included: (1) reduced data entry, which increased
                accuracy and timeliness of invoice and document processing and
                (2) reduced administrative costs through elimination of special handling,



                Page 25                                   GAO/NSIAD-97-37 Contract Management
                      Appendix I
                      Best Practices of Four Nonfederal
                      Organizations




                      distribution, research, and follow-up due to errors. Less quantifiable
                      benefits included enhanced financial management information. One
                      organization projected net savings of $1.8 million a year from its integrated
                      systems.


Streamlined Payment   Organizations we visited streamlined their processes by implementing
Processes             (1) a two-way matching process and (2) alternate procurement methods,
                      specifically purchase cards, for smaller purchases. The organizations did
                      not have data on how much these two practices had saved. A management
                      consultant said, however, that companies using these practices typically
                      achieve a savings equaling 40 percent of processing costs.

                      A two-way match of documents eliminates one document used to make a
                      payment. Previously, approval to pay a vendor required matching data on
                      three documents—the purchase order, the invoice and the receiving
                      document. If there was a discrepancy in any of the three documents,
                      payment personnel had to research the discrepancy through
                      correspondence and telephone calls with the vendor and purchaser.
                      Unlike the federal government, which is required to match payments to
                      obligations, the visited organizations do not match payments to budget
                      before paying an invoice. However, they post payments to cost accounts,
                      which management may use in budget-to-actual comparisons.

                      Three of the organizations we visited eliminated one of the three
                      documents for matching before payment. The organizations reported that
                      matching two documents greatly reduced reconciliation problems, yet still
                      maintained payment controls. These organizations employ an “evaluated
                      receipts” or “pay-on-receipt” process that uses the purchase order and the
                      receiving document for terms, price, and quantity. The system
                      automatically calculates payment. The process requires (1) having
                      integrated systems, (2) cooperation from vendors who may have to modify
                      their billing and shipping documents and practices, and (3) cooperation
                      from those receiving the goods or services. Figure I.1 shows both the
                      two-way matching process and DOD’s matching process, which was
                      discussed on page 6.




                      Page 26                                    GAO/NSIAD-97-37 Contract Management
                                                          Appendix I
                                                          Best Practices of Four Nonfederal
                                                          Organizations




Figure I.1: Commercial Two-Way Match and DOD’s Five-Way Match

                                                                                                                      A
                                                                                                                  St cco
                                                                                                                     at un
                                                                                                           O             io ti
                                                                                                              bl           n ng
                                                                                                                 ig          Re
                                                                                                    In              at          co
                                                                                                       vo              io          rd
                                                                                               Re           ic            ns          s
                    Re                                                                            ce e
                       ce                                                                 Pu          ip
                          ipt                                                                rc          t
                                                                                                ha
          Pu                                                                                       se
            rch                                                                                        O
               as                                                                                          rd
                  eO                                                                                          er
                    rde                                                                                                                                    Pay Contractor
                         r                                                                                                                          Yes
                                                                                                                                      MATCH?

                                                  Yes          Pay Contractor
                                MATCH?
                                                                                         Reconcile    Reconcile
                                                                                   ent   DFAS         DFAS Records
                                                                                 ym
                                                                              Pa         & Accounting
                                                                        ext                                         No                         Line Item   Wait for ACO or
                                                                    stN                  Station                                               Research    PCO to Modify
                                                                dju                                             and/or
 Purchasing Modifies
                                   No                      ndA                           Records                                                           Contract
 Purchase Order                                        ra
                                                  racto
                                              ont
                                and/or     yC
                                         Pa



                                                                                                                           Return
                                                                                                                           Improper
                                                                                                                           Invoice



                                                          Source: GAO.




                                                          Three organizations we visited also increased the use of purchase cards.
                                                          Two of these organizations adopted the use of the cards after they found
                                                          that small purchases accounted for a small percentage of purchase dollars,
                                                          but represented a large percentage of the transactions. For example, one
                                                          organization determined that before reengineering, total acquisition costs
                                                          (including those for procurement and payment) averaged about $142, but
                                                          at least 20 percent of its invoices were for purchases of less than $100. By
                                                          issuing purchase cards to the individuals who were likely to make small
                                                          purchases, the organization eliminated the need to prepare and approve
                                                          requisitions and purchase orders. In addition, the purchase card reduced
                                                          the number of payment transactions. The organization reported
                                                          eliminating about 5,000 payment transactions a month by making
                                                          1 electronic payment to the card issuer.




                                                          Page 27                                                                         GAO/NSIAD-97-37 Contract Management
                        Appendix I
                        Best Practices of Four Nonfederal
                        Organizations




                        Controls were maintained by setting guidelines, limiting the purchase
                        amount per transaction and per month, and periodic reviews of charges.
                        Officials noted that each card can be coded so that purchases are charged
                        to the proper cost accounts. One organization official said that accounting
                        requirements were less detailed than previously. However, he believed the
                        increased efficiency of management reviews of consolidated information
                        and savings per transaction outweighed the usefulness of the more
                        detailed accounting information.

                        Our report on federal agencies’ use of purchase cards also showed that
                        agencies were able to reduce labor and payment processing costs by using
                        purchase cards for simple purchases.1


Reduced Cost and        Two of the private-sector organizations we visited had available
Improved Productivity   processing costs. They reported that reengineering reduced their direct
                        labor costs to process a contract payment to less than $3—a 30- to
                        50-percent reduction. A study of 700 firms conducted by a management
                        consulting firm showed labor costs for invoice processing ranged from
                        $0.71 to $12.23 per invoice.

                        Moreover, the organizations we visited reported that payment productivity
                        increased. For example, one organization reported that the annual number
                        of invoices processed per full-time employee equivalent (FTE) nearly
                        doubled from about 8,500 to 16,400, a 93-percent increase. The consulting
                        firm also reported that the number of invoices processed per FTE ranged
                        from about 1,900 to about 55,000 per year with an average of about 11,000
                        per year. The Columbus Center processes an average of about 1,000
                        invoices per individual per year.2




                        1
                         Acquisition Reform: Purchase Card Use Cuts Procurement Costs, Improves Efficiency
                        (GAO/NSIAD-96-138, Aug. 6, 1996).
                        2
                         Based on about 1.2 million invoices paid divided by the total payment personnel in the Center’s
                        disbursing section and three payment directorates. FTE data was not available.



                        Page 28                                                  GAO/NSIAD-97-37 Contract Management
Appendix II

Comments From the Department of Defense


Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




                             Page 29   GAO/NSIAD-97-37 Contract Management
                          Appendix II
                          Comments From the Department of Defense




Discussed on pp. 18-19.




Discussed on p. 19.




                          Page 30                                   GAO/NSIAD-97-37 Contract Management
                 Appendix II
                 Comments From the Department of Defense




Now on p. 3.

See comment 2.




See comment 3.



See comment 4.




See comment 5.
Now on p. 2



See comment 5.
Now on p. 4




See comment 6.
Now on p. 5.




                 Page 31                                   GAO/NSIAD-97-37 Contract Management
                  Appendix II
                  Comments From the Department of Defense




See comment 7.

Now on p. 7.

See comment 8.
Now on p. 8.


See comment 5.
Now on p. 8.




See comment 9.


Now on p. 8.




See comment 10.
Now on p. 10.




See comment 5.
Now on p. 12.




                  Page 32                                   GAO/NSIAD-97-37 Contract Management
                 Appendix II
                 Comments From the Department of Defense




See comment 5.

Now on p. 14.




See comment 5.




Now on p. 15.



See comment 5.


Now p. 15.




See comment 5.
Now on p. 16.




                 Page 33                                   GAO/NSIAD-97-37 Contract Management
                  Appendix II
                  Comments From the Department of Defense




See comment 11.




See comment 12.




                  Page 34                                   GAO/NSIAD-97-37 Contract Management
                        Appendix II
                        Comments From the Department of Defense




Now recommendation 4.




See comment 13.




Now recommendation 3.




See comment 14.




                        Page 35                                   GAO/NSIAD-97-37 Contract Management
                        Appendix II
                        Comments From the Department of Defense




Now recommendation 4.




See comment 15.




                        Page 36                                   GAO/NSIAD-97-37 Contract Management
               Appendix II
               Comments From the Department of Defense




               The following are GAO’s comments on the Department of Defense’s letter
               dated February 7, 1997.


               1. DOD’s principal concerns are discussed and evaluated on pages 17 and 18
GAO Comments   of this report.

               2. We have modified the report to reflect the percent of dollars and the
               percent of invoices paid by the Defense Finance and Accounting Service
               (DFAS) Columbus.

               3. We have added language to clarify our position and provided a more
               detailed discussion of the basis for our conclusion, which is presented on
               pages 15-16.

               4. We have added additional information on DOD’s initiatives and have
               modified our recommendations so as to not imply that the DOD
               Comptroller and the Under Secretary of Defense for Acquisition and
               Technology are not working together. Our observations on DOD’s
               comments related to specific recommendations are discussed below.

               5. We have modified the report based on this comment.

               6. The report mentions that one of DOD’s initiatives to eliminate manual
               data entry is the use of EDI, including ANSI X-12. DFAS currently has limited
               testing underway for EDI transactions. However, as we mentioned on page
               6, manual entry will be required in certain situations.

               7. The report explains “matching” in much the same way as DOD’s
               comment. However, DOD’s comment does not discuss the procedures
               followed by the Center to verify obligations in its accounting records, or
               the prevalidation with the accounting station’s records. As we pointed out
               in the report, efforts to resolve mismatches through invoice research,
               contract reconciliation, and manual processing account for about
               57 percent of average payment costs (p. 4). About one-third of the Center’s
               contract payment personnel are dedicated to invoice research and
               contract reconciliation.

               8. Our report mentions that this amount is for “reconciliation support on
               numerous contracts,” not just the one discussed in the paragraph.




               Page 37                                    GAO/NSIAD-97-37 Contract Management
Appendix II
Comments From the Department of Defense




9. We have added language to clarify our position and provided the basis
for our conclusion.

10. The 6-8 hours refers to one case we reviewed. The Columbus Center
was unable to provide us with overall data on the time required to process
a payment. We modified the report to include the Entitlement Automation
System as one of DOD’s initiatives.

11. We have modified the report based on DOD’s comments, but we
continue to believe that it may be not only possible, but desirable to look
for ways to reduce the amount of detailed information going through the
payment center.

12. The purpose of this recommendation is to place on those organizations
that request excessively detail payment accounting the costs associated
with these payment requirements. This action might incentivize these
organizations to look more carefully at the demands they place on the
payment system. To the extent the Department finds that the costs
associated with implementing this recommendation exceeds its benefits,
we would defer to DOD’s judgment in this regard. We are pleased that DOD
has agreed to study the recommendation’s feasibility.

13. Although the Department is increasing its use of government purchase
cards, our analysis of DFAS payments show that 21 percent of the Defense
Contract Management Command (DCMC)-administered contracts paid by
DFAS, Columbus, has a value of $2,500 or less (p. 15). This suggests to us
that there may be further opportunities to streamline the process, through
increased use of purchase cards or other means. We have modified the
recommendation to indicate that there may be other means, other than
purchase cards, to streamline the payment of small purchases.

14. The cited memorandum, dated October 25, 1996, is applicable to 57
specific contracts and does not represent a DOD-wide policy for closing out
contracts. DFAS-Columbus officials told us the Center has no general
guidance to handle unreconcilable contracts.

15. As we pointed out in our draft, vendors may have to modify their
shipping/receiving documents to conform with invoicing requirements.
Our draft also noted that elimination of the invoice is consistent with our
guidance for federal agencies, GAO Policy and Procedures Manual for the
Guidance of Federal Agencies, Title 7, “Fiscal Procedures.” At the same




Page 38                                    GAO/NSIAD-97-37 Contract Management
Appendix II
Comments From the Department of Defense




time, we recognize that the False Claims Act may require some alternative
evidence of a contractor request for payment.

The draft includes a discussion of the DFAS Denver pilot. The Denver pilot
still requires three documents—the purchase order, the invoice, and a
statistical sample of the shipping/receiving documents; whereas the
evaluated receipts method requires two—the purchase order and receiving
document—and allows for 100-percent verification of receipt of goods.




Page 39                                   GAO/NSIAD-97-37 Contract Management
Appendix III

Major Contributors to This Report


                        Charles Thompson
National Security and   David Childress
International Affairs
Division, Washington,
D.C.
                        Margaret Armen
Office of General
Counsel
                        Hilary Sullivan
Dallas Field Office     Jeffrey Knott
                        Jack Kriethe
                        Kay Muse
                        Joe Quicksall
                        James Turkett




                        Page 40            GAO/NSIAD-97-37 Contract Management
Appendix III
Major Contributors to This Report




Page 41                             GAO/NSIAD-97-37 Contract Management
Appendix III
Major Contributors to This Report




Page 42                             GAO/NSIAD-97-37 Contract Management
Related GAO Products


              Financial Management: DOD Needs to Lower the Disbursement
              Prevalidation Threshold (GAO/AIMD-96-82, June 11, 1996).

              DOD Infrastructure: DOD Is Opening Unneeded Finance and Accounting
              Offices (GAO/NSIAD-96-113, Apr. 16, 1996).

              Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little
              Savings for Modernization (GAO/NSIAD-96-131, Apr. 4, 1996).

              DODProcurement: Millions in Contract Payment Errors Not Detected and
              Resolved Promptly (GAO/NSIAD-96-8, Oct. 6, 1995).

              DOD Infrastructure: DOD’s Planned Finance and Accounting Structure Is Not
              Well Justified (GAO/NSIAD-95-127, Sept. 18, 1995).

              Financial Management: Challenges Confronting DOD’s Reform Initiatives
              (GAO/T-AIMD-95-146, May 23, 1995).

              Financial Management: Challenges Confronting DOD’s Reform Initiatives
              (GAO/T-AIMD-95-143, May 16, 1995).

              Defense Infrastructure: Enhancing Performance Through Better Business
              Practices (GAO/T-NSIAD/AIMD-95-126, Mar. 23, 1995).

              DODProcurement: Overpayments and Underpayments at Selected
              Contractors Show Major Problem (GAO/NSIAD-94-245, Aug. 5, 1994).

              Defense Business Operations Fund: Improved Pricing Practices and
              Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,
              June 22, 1994).

              Financial Management: DOD’s Efforts to Improve Operations of the
              Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, Mar. 24, 1994).

              DOD Procurement: Millions in Overpayments Returned by DOD Contractors
              (GAO/NSIAD-94-106, Mar. 14, 1994).

              Financial Management: Status of the Defense Business Operations Fund
              (GAO/AIMD-94-80, Mar. 9, 1994).

              Financial Management: Strong Leadership Needed to Improve Army’s
              Financial Accountability (GAO/AIMD-94-12, Dec. 22, 1993).



              Page 43                                   GAO/NSIAD-97-37 Contract Management
           Related GAO Products




           Letter to the Deputy Secretary of Defense (GAO/AIMD-94-7R, Oct. 12, 1993).

           Financial Management: DOD Has Not Responded Effectively to Serious,
           Long-standing Problems (GAO/T-AIMD-93-1, July 1, 1993).

           Financial Management: Opportunities to Strengthen Management of the
           Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993).

           Financial Management: Navy Records Contain Billions of Dollars in
           Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993).

           Financial Audit: Examination of Army’s Financial Statements for Fiscal
           Year 1991 (GAO/AFMD-92-83, Aug. 7, 1992).

           Financial Management: Immediate Actions Needed to Improve Army
           Financial Operations and Controls (GAO/AFMD-92-82, Aug. 7, 1992).

           Financial Management: Defense Business Operations Fund
           Implementation Status (GAO/T-AFMD-92-8, Apr. 30, 1992).

           Financial Audit: Aggressive Actions Needed for Air Force to Meet
           Objectives of the CFO Act (GAO/AFMD-92-12, Feb. 19, 1992).

           Financial Audit: Status of Air Force Actions to Correct Deficiencies in
           Financial Management Systems (GAO/AFMD-91-55, May 16, 1991).

           Defense’s Planned Implementation of the $77 Billion Defense Business
           Operations Fund (GAO/T-AFMD-91-5, Apr. 30, 1991).




(705124)   Page 44                                    GAO/NSIAD-97-37 Contract Management
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