Defense Contracting:

DOD Has Enhanced Insight into Undefinitized Contract Action Use, but Management at Local Commands Needs Improvement

GAO-10-299: Published: Jan 28, 2010. Publicly Released: Jan 28, 2010.

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To meet urgent needs, DOD can issue undefinitized contract actions (UCA), which authorize contractors to begin work before reaching a final agreement on contract terms. Such actions are considered to be a risky contract vehicle for the government because contractors lack incentives to control costs during this period. Defense regulations provide that the government determination of contractors' allowable profit or fee should reflect any reduced cost risk. Pursuant to the 2008 National Defense Authorization Act, GAO assessed whether DOD actions taken as required by the act have (1) improved departmental insight and oversight of UCA use and (2) resulted in local commands meeting DOD's standards for documenting the basis for negotiating the contractor profit or fee, definitization timelines, and obligation amounts. GAO reviewed relevant DOD regulations and policies, and contract files for 83 randomly-selected UCAs totaling $6.1 billion at eight local commands. The findings from this contract file review can not be generalized across DOD.

DOD has taken several actions since August 2008 to enhance departmental insight into and oversight of UCAs; however data limitations hinder its full understanding of the extent to which they are used. DOD issued policy that requires centralized, semi-annual reporting of undefinitized actions to gain insight in UCA use, including information on reason for award, obligation amounts at award, and definitization timelines. Over time, reporting requirements have evolved as DOD has taken steps to clarify guidance on the types of contract actions to be reported. DOD has also required components to submit management plans to describe actions taken for improved UCA use. Although these actions have helped enhance insight and oversight of UCA use, not all UCAs are included in the reports. Of the 24 UCAs GAO reviewed that should have been included in the April 2009 semi-annual report, 8 actions valued at $439 million were unreported by the local commands to DOD. Implementation of DOD's recent policies and guidance on the use of UCAs has varied at the local commands GAO visited and the associated management standards were not fully met. For the 66 UCAs GAO reviewed that were eventually definitized, contracting officers generally did not document their consideration of cost risk to the contractor during the undefinitized period of work as required. In 34 cases, the weighted guideline worksheets were not used when required, nor any other documentation of how any reduced cost risk during the undefinitized period of performance was considered in determining the negotiation objective. This was particularly the case for cost-plus-award fee contracts where defense regulations are not clear about how any cost risks are to be considered and documented. Even for the remaining 32 cases in which weighted guideline worksheets were used, the contracting officers' basis for risk calculations were often not clear due to limitations of the weighted guideline documentation. Other management standards were not always met. Only 41 UCAs--about 50 percent of the actions GAO reviewed--met the 180-day definitization requirement. Moreover, 66 of the 83 UCAs GAO reviewed were awarded with obligations near or above the 50 percent maximum.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: This recommendation has been implemented by DOD. In June 2011 DOD updated its DFARS Policy, Guidance, and Instructions Subpart 216.4 Incentive Contracts section 216.405-2 Cost Plus Award Fee contracts. This section now requires Contracting Officers to separately assess and document the reduced cost risk on UCA Cost Plus Award Fee contracts for (i) The period up to the date of definitization; as well as (ii) The remaining period of performance. Although specific guidance for how to document the reduced risk is not specified in the updated PGI section, the requirement that contracting officers assess and document the reduced risk is in line with our recommendation.

    Recommendation: To mitigate the risks of paying increased costs when using an undefinitized contract action, the Secretary of Defense should revise Defense Federal Acquisition Regulation Supplement (DFARS) to provide specific guidance on how to perform an assessment of any reduced cost risk for profit or fee during the undefinitized period for cost-plus-award-fee UCAs.

    Agency Affected: Department of Defense

  2. Status: Open

    Comments: In providing comments on this report, the agency concurred with this recommendation but has not completed actions necessary to implement it. Defense Procurement and Acquisition Policy's(DPAP) Pricing Committee members have completed another review discussing proposed changes to the weighted guideline worksheet. The purpose of DPAP's pricing committee reviews has been to address the DOD Inspector General's report number DODIG-2012-039, a summary report on DOD's Management of Undefinitized Contractual Actions, dated January 13, 2012. The potential proposed change to the Defense Federal Acquisition Regulation Supplemental (DFARS) rule is designed to provide a more transparent means of documenting the impact of costs incurred during the undefinitized period of an undefinitized contract action (UCA) on allowable profit. Proposed changes to the worksheet include more transparency and narrative requirements to detail the rationale for contracting officers' assignments of weighted guideline values. In addition to proposed changes to the weighted guideline worksheet, the proposed DFAR rule also provides new narrative requirements for Price Negotiation Memorandums. DPAP expects a Defense Acquisition Regulations council proposal with prospective language and changes to the weighted guidelines worksheet within 60-90 days.

    Recommendation: To ensure DOD officials are able to gain insight into the risk assessment that is required to be documented in the contract file and the basis for the government's profit or fee negotiation objective, the Secretary of Defense should redesign the weighted guidelines worksheet to explicitly show the incurred cost calculations and a narrative description of the reason for assigning a specific contract-type risk value.

    Agency Affected: Department of Defense


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