Contract Management:

Extent of Federal Spending under Cost-Reimbursement Contracts Unclear and Key Controls Not Always Used

GAO-09-921: Published: Sep 30, 2009. Publicly Released: Oct 30, 2009.

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Federal agencies obligate billions of dollars annually using cost-reimbursement contracts. This type of contract involves high risk for the government because of the potential for cost escalation and because the government pays a contractor's costs of performance regardless of whether the work is completed. As such, cost-reimbursement contracts are suitable only when the cost of the work to be done cannot be estimated with sufficient accuracy to use fixed-price contracts. Agencies may use this contract type only if certain conditions are met. At your request, GAO assessed (1) the extent of agencies' obligations under these contracts, (2) the rationales for using this contract type, (3) determinations that contractors' accounting systems are adequate for determining costs applicable to the contracts, and (4) procedures for monitoring contractor cost controls. GAO analyzed federal procurement data and contract files and interviewed contracting and other government officials.

The complete picture of the government's use of cost-reimbursement contracts is unclear. From fiscal years 2003 through 2008 federal obligations under cost-reimbursement contracts were reported to have increased $16 billion, to $136 billion, which represented a decrease in the total percentage of federal obligations over the 6-year period, from 34 percent to 26 percent. However, the overall downward trend is misleading. A significant increase has been reported for obligations using the "combination" contract type, a category that based on GAO's analysis of 2008 data, includes many contracts with cost-reimbursement obligations that are not recorded as such. According to OFPP, a decision was recently made to eliminate the use of "combination" as a Federal Procurement Data System-Next Generation contract type, effective for all new contract awards starting in fiscal year 2010. In addition, GAO found billions of dollars for which the contract type had been coded as "missing" in fiscal year 2008. Agencies' rationales for using cost-reimbursement contracts were difficult to determine because contracting officers frequently did not document--even in acquisition plans--why they chose to use this contract type. The current requirement for such documentation is minimal, but recent legislation (not yet implemented in the Federal Acquisition Regulation) requires that acquisition plans address the rationale. Of the 92 contracts and orders GAO reviewed, about 30 percent did not include any documentation. The supporting documentation GAO did find generally did not explain why a cost-reimbursement contract for the specific requirement was selected. GAO also found little evidence that agency officials are analyzing contracts' pricing history and requirements to determine if they can transition to a contract type with firmer pricing, even though experience may provide a basis for doing so. Of the 92 contracts and orders GAO reviewed, about half had any evidence that, at least within 4 years before contract award, contractors' accounting systems had been deemed adequate to determine costs applicable to the contract. Twenty contract files had no evidence that the contractors' accounting systems were determined adequate and 20 other contract files contained determinations that had been made either many years before award or after the contract was awarded. Inadequate accounting systems, or accounting systems that had not been deemed adequate for many years, may result in the government making improper payments to contractors. GAO found a range of procedures for monitoring contractor cost controls at the agencies in its review. Procedures at the civilian agencies generally call for program officials to review contractor invoices. At the Department of Defense, cost surveillance depends on contractor-reported earned value management data, supplemented with audits for the purpose of testing whether invoiced costs are allowable. GAO's prior work has raised concerns about the effectiveness of these audits.

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: To address the cost-reimbursement contract issues, and to help clarify reporting requirements in the Federal Procurement Data System (FPDS-NG) to provide a clearer picture of the extent to which various contract types, including cost-reimbursement, are being used, the Administrator of OFPP should reconcile the conflicting instructions in the FPDS-NG user manual for coding combination contracts versus coding based on the preponderance of contract type.

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

    Status: Closed - Implemented

    Comments: In a September 28, 2009 response to a draft of GAO-09-921, the Office of Federal Procurement Policy (OFPP) reported that a change was approved to FPDS-NG, anticipated to be effective for all new contracts awarded in fiscal year 2010 that would eliminate combination as a contract type. GAO's review of the FPDS-NG user manual shows this was done. Specifically, as of October 1, 2009, combination is not a valid option for new base award actions.

    Recommendation: To address the cost-reimbursement contract issues, and to help clarify reporting requirements in the Federal Procurement Data System (FPDS-NG) to provide a clearer picture of the extent to which various contract types, including cost-reimbursement, are being used, the Administrator of OFPP should implement controls in FPDS-NG to preclude information from being entered without a contract type being identified, that is, eliminate the "missing" contract type option.

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

    Status: Closed - Implemented

    Comments: An Office of Federal Procurement Policy (OFPP) official confirmed contract type is now a mandatory field. The contract types "combination" and "other" are no longer choices in the Federal Procurement Data System Next Generation (FPDS-NG).

    Recommendation: To address the cost-reimbursement contract issues, and to help ensure that analysis is conducted to determine whether to continue using cost-reimbursement contracts when experience may provide a basis to transition to firmer pricing, the Administrator of the Office of Federal Procurement Policy (OFPP) should take steps to amend the FAR. Specifically, the Administrator should require procedures for contracting officers (in conjunction with the requiring activity) to analyze, before the award of a new contract or at other appropriate times during a contract's period of performance, the agency's requirement and determine if its experience with a procurement provides a basis for firmer contract pricing. The results and findings of this analysis should be documented in the contract file. If the analysis indicates that a basis for firmer pricing does exist, the procedures should require consideration, modification, and implementation, if feasible, of an acquisition plan to transition to a contract type with firmer pricing.

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

    Status: Closed - Implemented

    Comments: According to an Office of Federal Procurement Policy (OFPP) official a Federal Acquisition Regulation (FAR) rule addressing cost reimbursement contracting is in the final stages of review and an interim rule will be published shortly. The rule specifically addresses transitioning away from cost reimbursement contracts. The interim rule (FAR Case 2008-030) was published in the Fed. Register on March 16, 2011 with comments due by May 26, 2011. The interim rule addresses our recommendation.

    Recommendation: To address the cost-reimbursement contract issues, the Secretary of Health and Human Services (HHS) should direct the Director of the Agency for Healthcare Research and Quality (AHRQ) to provide guidance to the agency's contracting staff to ensure that they are aware of their responsibility to ensure that contractors' accounting systems have been deemed adequate before awarding cost-reimbursement contracts.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Implemented

    Comments: In September 2009, the HHS Office of Acquisition Management and Policy issued a department-wide notice to remind contracting staff of the need to ensure adequacy of contractors' accounting systems prior to award of a cost-reimbursement contract.

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