Defense Contracting:

Use of Undefinitized Contract Actions Understated and Definitization Time Frames Often Not Met

GAO-07-559: Published: Jun 19, 2007. Publicly Released: Jun 19, 2007.

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To meet urgent needs, the Department of Defense (DOD) can issue undefinitized contract actions (UCA), which authorize contractors to begin work before reaching a final agreement on contract terms. The contractor has little incentive to control costs during this period, creating a potential for wasted taxpayer dollars. Pursuant to the House of Representatives report on the National Defense Authorization Act for Fiscal Year 2007, we assessed (1) the level of insight DOD has into its use of UCAs, (2) how and when DOD is using UCAs, (3) whether DOD is definitizing UCAs in a timely fashion, and (4) whether contracting officers are documenting the basis for negotiated profit or fee. GAO reviewed 77 randomly-selected contracts at seven locations and interviewed DOD officials.

DOD faces a potentially large gap in its data and thus does not know the extent to which it is using UCAs. DOD's reported obligations for UCAs increased from $5.98 billion in 2001 to $6.53 billion in 2005. However, the government's procurement system does not identify undefinitized task or delivery orders or undefinitized contract modifications. In light of DOD's reported increase in its use of task and delivery orders in recent years, the data gap could be large. Because DOD decentralizes oversight of its UCAs, the department would have to manually obtain data from each of its local commands in order to obtain a complete picture. The local commands GAO visited performed oversight of their UCAs to varying degrees. DOD is generally using UCAs to rapidly fill urgent needs, as permitted, in a variety of circumstances. Local managements' message to the contracting community is to not use a UCA unless absolutely necessary, but this message is emphasized differently from one location to another. GAO found 10 instances in the 77 UCAs we reviewed where UCAs could have been avoided with better acquisition planning. For example, one UCA for the continuation of ongoing services was awarded the day after the previous contract expired. DOD did not meet the definitization time frame requirement of 180 days after award on 60 percent of the 77 UCAs reviewed. The most common reasons for the delays were untimely receipt of an adequate proposal from the contractor, acquisition workforce shortfalls, and changing requirements. GAO also found that DOD tends to obligate the maximum amount of funding permitted--up to 50 percent of the not-to-exceed amount--immediately at award of UCAs. As a result, contractors may have little incentive to quickly submit proposals. In addition, since DOD does not track whether it meets the Federal Acquisition Regulation requirement to definitize letter contracts (one type of UCA) before 40 percent of the work is complete, GAO was unable to assess compliance with this requirement. Contracting officers are not documenting, as required, the basis for the profit or fee prenegotiation objective and the profit or fee negotiated. As such, it is unclear whether the costs incurred prior to definitization are considered when computing the profit rates or fee amounts. For the 40 fixed-price contracts GAO reviewed, profit ranged from 3 to 17 percent, and for the 37 cost-type contracts in our sample, fees ranged from 4 to 15 percent. Generally the rate was applied equally over the entire contract term, including the undefinitized period.

Status Legend:

More Info
  • 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: To mitigate the risks of paying increased costs under UCAs, the Secretary of Defense should set forth supplemental guidance to direct contracting officers, where feasible, to obligate less than the maximum allowed at UCA award to incentivize contractors to expedite the definitization process.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In commenting on a draft of the report, DOD concurred with the recommendation and said it is studying changes to its contract financing and funding policies. An AT&L guidance memo was issued August 29, 2008. It states that Contracting Officers should avoid obligating the maximum permissible funding at the time of Undefinitized Contract Action (UCA) award. It instructs Contracting Officers to assess the contractor's spend plan for the undefinitized period, and obligate funds only in an amount consistent with the contractor's requirements for the undefinitized period.

    Recommendation: To help ensure that UCAs are definitized in accordance with regulations, the Secretary of Defense should supplement acquisition personnel on an as-needed basis to quickly definitize UCAs once they are awarded.

    Agency Affected: Department of Defense

    Status: Closed - Not Implemented

    Comments: In commenting on a draft of the report, DOD concurred with the recommendation. However, in an August 1, 2008, status update meeting, a DOD official stated that DOD organizations have more work to do than they can, so it is hard to tell them to implement this recommendation. The official expected that the new reporting requirement will result in focusing oversight on the backlogs.

    Recommendation: To help ensure that UCAs are definitized in accordance with regulations, the Secretary of Defense should put in place a reporting channel to headquarters that includes information on UCAs in place for 180 days or more and that outlines plans and time frames for definitization.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In commenting on a draft of the report, DOD concurred with the recommendation and said that enhanced oversight is appropriate and it will consider requiring the military departments to provide periodic reports of over-age UCAs with remediation plans. On August 29, 2008, an AT&L guidance memorandum was issued that specified new semi-annual reporting requirements for UCAs valued at over $5 million that fail to meet required timelines for definitization or fail to comply with regulatory limitations on the obligation of funds or on profit or fee. The first reports were due in October 2008.

    Recommendation: To improve oversight of UCAs, the Secretary of Defense should issue guidance to program and contracting officials on how to comply with the FAR requirement to definitize when 40 percent of the work is complete.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In commenting on the report, DOD concurred with the recommendation and said it will issue guidance to clarify the appropriate criteria. An AT&L guidance memo was issued August 29, 2008. It reminds employees to definitize Undefinitized Contract Actions (UCAs) in accordance with DFARS 217.74, which states that a UCA should be definitized before 180 days or 50% of the funding is obligated. The guidance memorandum does not discuss definitizing before 40% of the work is complete as FAR requires. As indicated in DOD's comments on the report, a DFARS case (2007-D011) was opened to amend DFARS to make reference to the FAR requirement. DFARS case 2007-D011 was published as a final rule on June 8, 2010. It amended the DFARS to clarify the definitization requirements for letter contracts. The rule specifies that letter contracts will be definitized using the DFARS requirements at 217.7404-3(a) instead of the requirements at FAR 16.603-2(c)(3). As a result, because DOD issued specific guidance clarifying the criteria thereby partially implementing our recommendation, we are closing this recommendation as implemented.

    Recommendation: To improve oversight of UCAs, the Administrator of the Office of Management and Budget's Office of Federal Procurement Policy should assess whether the Federal Procurement Data System-Next Generation data fields need to be modified to require coding that will identify undefinitized task and delivery orders and undefinitized contract modifications.

    Agency Affected: Executive Office of the President: Office of Management and Budget: Office of Federal Procurement Policy

    Status: Closed - Implemented

    Comments: OFPP has implemented this recommendation by making a change to the Federal Procurement Data System-Next Generation (FPDS-NG) that will allow for the identification of undefinitized orders and modifications as undefinitized at award. In April 2008, FPDS-NG item 6B was renamed from "Letter Contract" to "Undefinitized Action" and its coding values have changed: Code A--Letter Contract--is to be used for a letter contract or any funding modification to a letter contract prior to definitization; Code B--Other Undefinitized Action--is to be used for unpriced (undefinitized) purchase/delivery/task orders, unpriced modifications, and funding modifications to these types of actions; Code X--NO--is to be used to indicate that the action is neither a Letter Contract nor an Other Undefinitized Action. This change was publicized in the May 2008 update of the FPDS-NG Data Dictionary. OFPP, who maintains FPDS-NG, confirmed that this change should allow DOD and other agencies to track undefinitized actions, and that it was made in response to the GAO recommendation.

    Recommendation: To mitigate the risks of paying increased costs under UCAs, the Secretary of Defense should set forth supplemental guidance to specify that the effect of contractor's reduced risk during the undefinitized period on profit or fee be documented in the price negotiation memorandum or its equivalent.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In commenting on a draft of the report, DOD concurred with the recommendation and said it is studying changes to its private sector profit/fee policies. An AT&L guidance memo was issued August 29, 2008. It reminds Contracting Officers to use a contract risk factor in the low end of the designated range when calculating profit/fee in the negotiation of a UCA in order to account for the lower risk for the contractor prior to definitization. The guidance states that Contracting Officers must document the risk assessment in the contract file.

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