UCAs are considered risky contract vehicles for the government. With all allowable costs  covered, contractors bear less risk and have little incentive to control  costs. DOD Steps to Enhance Insight and Oversight of UCAs Are Hampered by Incomplete Data

DOD has taken a number of steps aimed at enhancing its insight into and  oversight of UCA use among the components and local commands;  however, data limitations hinder its full understanding of the extent to  which UCAs are used. The department’s reporting requirements  have evolved over time to include other types of contract actions that  should be reported and DOD has instituted contract peer reviews for  contracts above $1 billion, which may include UCAs. For  instance, we found DOD’s centralized reporting did not include 8 of 24  UCAs we reviewed that should have been reported in the April 2009 semi- annual report. See Figure 1  for the recent changes to policies and guidance intended to increase  insight and oversight of the use of UCAs. The other 2 contract actions, valued at $15  million, were overlooked. Local Commands Are Generally Not Meeting DOD’s Management Standards

Despite DOD’s recent UCA management policy, guidance, and instructions  designed to improve their use, implementation varied at local commands  we visited and the management policy standards were not fully met. For 66 of the 83 UCAs we reviewed that were definitized, contracting  officers generally did not document the profit or fee negotiation objective  or consideration of reduced cost risk to the contractor during the  undefinitized period of work as required. In the remaining 32 of 66 UCAs we reviewed, the contract files included  weighted guideline worksheets, but it was not always clear whether the  contracting officers considered any reduced cost risk to the contractor  during the undefinitized period as a factor when determining allowable  profit or fee as required. Of the 66 actions that  obligated near 50 percent of the not-to-exceed price, 34—52 percent— exceeded the 180-day time frame for definitization. Conclusion

Undefinitized contract actions can be an important tool for DOD to meet  urgent contracting needs. DOD  has issued new policies and guidance and now requires components to  report semi-annually on UCA use as well as submit updated management  plans detailing actions taken to ensure appropriate use. Also, in instances when cost-plus- award-fee contracts were awarded and weighted guidelines were not  required, guidance was not clear as to how to consider and document any  reduced risk borne by the contractor during the undefinitized period. 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, 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. To identify whether DOD’s recent actions have resulted in local commands  meeting DOD’s UCA management standards with regard to documenting  the basis for negotiating the contractor profit or fee, definitization time  lines and obligation percentages, and the circumstances in which UCAs  are used, we conducted a contract file review using a randomized list of  UCAs from among six military commands, one joint service combatant  command, and a defense agency. We analyzed  these data to determine how many contract actions in our review were  obligated at or near the 50 percent limit at the time of award.
Why GAO Did This Study

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.

What GAO Found

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.