DOD Procurement: Funds Returned by Defense Contractors

Published by the Government Accountability Office on 1997-10-28.

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

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

National Security and
International AfTairs Division

October      28,    1997

The Honorable Tom Harkin
United States Senate

Subject: DOD Procurement: Funds Returned by Defense Contractors

Dear Senator Harkin

Over the past few years, we have reported on the Department of Defense
(DOD) overpayments to its contractors. In response to your request, we are
providing updated information on money returned to the Defense fiance and
Accounting Service’s (DFAS) Columbus Center by defense contractors. More
specifically, we are providing information on (1) the center’s process to record,
research, and categorize money returned by defense contractors; (2) the dollar
value of checks received since fiscal year 1993; and (3) the results of the
center’s research on the cause of the returned amounts.


The Columbus Center is the largest of the DOD contract payment centers.
According to the center, it handles about 389,000 contracts and pays an average
of about $7 billion on about 100,000 invoices a month.

In recent years, we have reported on DOD’s problems in making accurate              .
payments to defense contractors. These reports identified millions of dollars in
government overpayments, underpayments, and interest on late payments. For
example, during a 6-month period in fiscal year 1993, the Columbus Center
processed $751 million in checks received from defense contractors.1

In our February 1997 high-risk series on defense contract management, we
reported that if DOD did not achieve effective control over its payment process,
it would continue to risk erroneously overpaying contractors by millions of

‘DOD Procurement: Millions in Overnavments Returned bv DOD Contractors
(GAOLNSIAD-94106, Mar. 14, 1994).

                         GAO/NEW09846R Funds Returned by DOD Contractors

it would continue to risk erroneously overpaying contractors by millions of
dollars and perpetuating other financial management and accounting control
problems.2 More recently, we reported to you on the important factors that
contribute to DOD’s payment problems and increase its costs3


The Columbus Center has a process in place to record the checks received from
defense contractors and to research and categorize the reasons why the checks
were received (see encl. I). This process provides the Columbus Center with a
way of determinin g if the checks it receives are the result of factors within its
control and facilitating corrective actions, if needed.

Between fiscal years 199496, the Columbus Center received checks from
defense contractors totaling about $1 billion a year. For the first 7 months of
fiscal year 1997, the Columbus Center received checks totaling about $559
million (see encl. IlJ

The Columbus Center’s data show that, of the $5.1 billion that the center
received from contractors during the period of fiscal year 1993 through the tit
7 months of fiscal year 1997, $3.7 billion was attributable to factors outside of
its control. These include contract administration actions, such as reductions in
contract prices due to contractors’ not meeting delivery dates, reallocations of
costs to other contracts resulting in returned progress payments, and contract
definitizations resulting in lower unit costs than previously billed by the
contractor and paid by DFAS. The remaining $1.4 billion was due to payment
errors at the Columbus Center. The center’s data also show that the dollar
amounts of its errors have been declining, totaling $592 million in fiscal year
 1993, $283 million in fiscal year 1994, $252 million in fiscal year 1995, $191
million in Escal year 1996, and $67 million through the first 7 months of fiscal
year 1997 (see encl. III).


DOD reviewed a draft of this report. It concurred with the information in the

2High Risk Series: Defense Contract Management (GAO/HR-97-4, Feb. 1997).
“Contract Management: Fixing DOD’s Pavment Problems Is Imnerative
(GAO/NSUD-9737, Apr. 10, 199’7).                 .

2                    GAO/NSUD-9846R Funds Returned by DOD Contractors

To develop information for this report, we analyzed copies of the computerized
data files provided by the Columbus Center showing the amounts and reasons
for checks received from defense contractors. We also interviewed personnel at
the center to ascertain the process for receiving and classifying checks received.
We relied on the checks received data that was provided us by the center. We
did not validate the reliability or completeness of the data.

We conducted our review during July and August 1997 in accordance with
generally accepted government auditig standards.

We are providing copies of this correspondence to the Secretary of Defense; the
Director, Office of Management and Budget; and other appropriate
congressional committees and members. We will also make copies available to
others on request.

Please contact me at (202) 5124587 if you or your staff have any questions
concerning this report. Major contributors to this report were Charles W.
Thompson and John P. Ting.

Sin rely yours,


David E. Cooper
Associate Director
Defense Acquisitions Issues

Enclosures - 3

3                   GAO/‘NSIAD-98-46RFunds Returned by DOD Contractors
Enclosure I                                                                                                                            Enclosure I

     GAO DFAS Process For Recording and
         Categorizing Checks Received

      Checks received &            Disbursing                               Retumed Checks                      Account Receivable Diksions
      lackup documents                                                                                  -I
                          +   *disbursing sends check                       Inventory Control
                                                                                                               -determine category codes for
                               stubs & backup                         records checks in database        k-
                                                                    l                                           each case (Payment Office
                                                                    - diitributes cases to Account              error vs. non-Payment Office
                                                                      Receivable Divisions for coding           error).
                                                                    - records category & reason codes          -determine reasons for
                                                                      in database                                non-Payment Office error
                                                                                                               *forward coding and accounting
                                                                                                                infonation to inventory

                              I          Funds-Returned
                                         Project Office

                                  -forwards Payment Office error
                                   cases to Payment Division
                                                                        k                                       l research reasons for payment
                                                                                                                  office error cases
                                  -review research results from                                                 -implement corrective actions
                                    payment division and records                                                -fonvard research results to
                                    cases                                                                        Funds-Returned Project Office
                                  -generates reports for DFAS
                                    management use
                                  -performs selective reviews &
                                    recommends corrective actions

                                                                                    GAO/NSIAD-98-46R         Funds Returned by DOD Contractors
3xlosure    II                                                                                        Enclosure II

     GA!o Dollar Value of Checks DFAS Columbus
          Received From Contractors

                                           Value of Checks Received
       Dollars in millions

       1,500 -

       1,000 -

           500 -

                                                                      F-Y 96           FY97b

            a includes one check for $252 million.
            b Through April 1997.

                                                          GAO/NSIAD-98-46R     Funds Returned by DOD Contractors
Enclosure Ill                                                                                            Enclosure III

      G&f3 Reasons Why Contractors Returned Funds
           as Determined by DFAS Columbus

        Dollars in millions





                0                                                                       E
                        FY93      FY 94                 FY95                  FY96           FY 97a

                                       Due to payment      Due to contract
                                  cl   office errors       administration actions

       aThrough     April 1997.

                                                               GAO/NSlAD-98-46R      Funds Returned by DOD Contractors
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