DOD Contract Payments:

Management Action Needed to Reduce Billions in Adjustments to Contract Payment Records

GAO-03-727: Published: Aug 8, 2003. Publicly Released: Sep 2, 2003.

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GAO has reported that the Department of Defense's (DOD) inability to accurately account for and report on disbursements is a long-term, major problem. GAO was requested to determine (1) the magnitude of the adjustments and related costs in fiscal year 2002, (2) why contracts, including payment terms, are so complex, (3) the key factors that caused Defense Finance and Accounting Service (DFAS) Columbus to make payment adjustments, and (4) what steps DOD is taking to address the payment allocation problems.

For fiscal year 2002, DFAS Columbus data showed that about $1 of every $4 in contract payment transactions in the MOCAS system was for adjustments to previously recorded payments--$49 billion of adjustments out of $198 billion in transactions. To research payment allocation problems, DFAS Columbus reported that it incurred costs of about $34 million in fiscal year 2002. This represents about 35 percent of the total $97 million that DFAS Columbus spent on contract pay services. DFAS Columbus bills DOD activities for contract pay services based on the number of accounting lines on an invoice. Consequently, all DOD activities pay the same line rate, regardless of whether substantial work is needed to reconcile problem contracts and adjust payment records. GAO's analysis of two contracts showed that the contracts were complex because of the (1) legal and DOD requirements to track and report on the funds used to finance the contracts, (2) substantial number of modifications made on the contracts to procure goods and/or services, and (3) different pricing provisions on the contracts. GAO's review of $160 million of adjustments showed that the adjustments were made for four reasons. The Army made an error in accounting for obligations, resulting in about $127 million in payment allocation adjustments. DFAS Columbus did not follow its internal procedures for allocating payments to accounts on an Army contract containing multiple pricing provisions, resulting in about $5 million in adjustments. DFAS made over $2 million in adjustments to correct recording errors on an Army contract due to complex and changing payment instructions. The Air Force frequently changed payment instructions after payments were made on an Air Force contract, resulting in about $26 million in adjustments. DOD has initiated a major long-term effort to improve its business operations, including its acquisition and disbursement activities. If implemented successfully, this initiative may help correct many of the contract payment allocation problems. In the interim, DOD has initiatives under way to address payment allocation problems, including (1) billing DOD contracting offices for contract reconciliation services, (2) providing DOD activities information on the correct method for presenting payment instructions, and (3) establishing a working group to develop options for presenting standard contract payment instructions. While the DOD working group initiative may reduce payment allocation errors associated with misinterpreting contract payment instructions, DOD needs to automate the standard payment instructions to eliminate payment allocation errors associated with manually allocated payments.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to direct the Director of the Defense Finance and Accounting Service to automate the standardized payment instructions in Mechanization of Contract Administration Services once the standard payment instructions are adopted.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In August 2003, GAO reported that Defense Finance and Accounting Service (DFAS) Columbus processed almost $50 billion in adjustments in fiscal year 2002 to correct contract payment transactions in the Mechanization of Contract Administrative Services (MOCAS) system. In addition, to research payment allocation problems, DFAS Columbus reported that it incurred costs of about $34 million in fiscal year 2002. This represented about 35 percent of the total of $97 million that DFAS Columbus spent on contract payment services. GAO's analysis of two DOD contracts identified four reasons for the $160 million in adjustments on these contracts. These reasons included (1) the Army made errors in accounting for contract obligations, (2) DFAS Columbus did not follow its internal procedures for allocating payments, (3) DFAS made errors due to complex and changing payment instructions, and (4) the Air Force frequently changed payment instructions after payments were made. In order to help reduce future contract payment adjustments in MOCAS and improve the accuracy of contract payment data, GAO recommended that DFAS automate standard payment instruction in MOCAS once standard payment instructions are adopted. In 2005, DOD eliminated the use of local payment clauses and adopted 12 standard payment instructions. The payment instructions were placed on a Defense Federal Acquisition Regulation Supplement web page. In February 2011, DFAS Columbus completed implementation of a system change to automate contract payment instructions in MOCAS. MOCAS now accepts contract payment instructions in electronic data interchange format and makes payments in accordance with those instructions. By automating the payment instructions in MOCAS, DOD addressed one of the fundamental weaknesses that have resulted in billions of dollars of adjustments to correct contract payment allocations annually. This will also help reduce the DFAS Columbus costs to research payment allocation problems.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to issue guidance to the contracting community reiterati ng the requirement in Defense Finance and Accounting Service that all contracts containing multifunded contract line items contain payment instructions and that these instructions be revised when additional accounting classification reference numbers are needed.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: On September 9, 2003, the Undersecretary of Defense (Acquisition, Technology, and Logistics) issued a memorandum reiterating the requirement in the Defense Federal Acquisition Regulation Supplement 204.7107(e)(3)(i); that all contracts containing multifunded contract line items include adequate payment instructions to permit the paying office to charge the accounting classification citations assigned to that contract line item. Furthermore, the memorandum also states that the contracting officers must ensure that payment instructions are revised if additional accounting classification reference numbers are subsequently added to the contract. The memorandum was distributed to Department of Defense contracting leaders, contracting officers, and buyers.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Acquistion, Technology, and Logistics) to develop payment allocation options for presenting standard payment instructions in contracts containing multifunded contract line items.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In response to our recommendation, on October 11, 2005, DOD revised the Defense Federal Acquisition Regulation Supplement (DFARS) to update and improve procedures for payment and billing under DOD contracts. The changes included: (1) an addition of a contract clause that addresses line item information needed in contractor payment requests; (2) an amendment of the material inspection and receiving report that requires an updated invoice instructions; and (3) relocation of text addressing distribution of contracts and numbering of contract line items to a new DFARS web page called Procedures, Guidance, and Information. Further, DOD eliminated the use of local payment clauses by including a list of 12 standard payment instructions in a new DFARS web page--Procedures, Guidance, and Information--for use in Section G of DOD contracts. By implementing these changes, DOD addressed the fundamental weaknesses that have resulted in billions of dollars of adjustments to correct contract payment allocations annually.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to direct the Director of the Defense Finance and Accounting Service to issue guidance reiterating DFAS's internal requirement that when a contract does not contain payment instructions and the contractor invoice does not contain payment instructions, the payments for costs and services must be allocated to ACRNs financed on a cost reimbursable basis in accordance with DFAS's desk procedures.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: On September 24, 2003, the Deputy Director of Commercial Payment Services at DFAS Columbus issued a memorandum directing adherence to the Defense Finance and Accounting Service policies and procedures, especially as it relates to the lack of definitive payment instructions in the contractual documents. The memorandum states that when a contract does not contain payment instructions and the contractor invoice does not contain payment instructions, the payment for cost and services must be allocated to accounting classification reference numbers on a cost reimbursable basis in accordance with DFAS desk procedure 401.

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