The demonstration program began in September 1996, when the Defense Supply Center, Philadelphia (DSCP), competitively contracted with Profit Recovery Group International (PRGI). It requires PRGI to identify and document overpayments and to make recommendations to reduce future overpayments. Success of the Methods Used to Identify Overpayments

PRGI’s methodology involves four key steps. About 20 percent of the vendors responded, resulting in the recovery of $1.2 million. As of August 14, 1998, according to PRGI, it had audited about 80 percent of the $7.2-billion audit base and identified about $19.1 million in overpayments. Table 1 shows the types and amounts of overpayments identified by PRGI and recovered by DOD. Factors Limiting the Identification or Recovery of Overpayments

A number of factors have inhibited the identification or recovery of overpayments. Foremost, vendors disagreed with DSCP claims that it did not receive most favored customer status because it was not offered cash discounts offered to commercial customers. PRGI also had considerable difficulty identifying potential duplicate payments because its proprietary software was incompatible with the payment systems. Finally, according to PRGI, even though the contract was awarded in September 1996, PRGI could not begin audit work in earnest until June 1997, due to delays in obtaining computerized payment files. Time Between Payment and Audit Recovery Efforts Create Documentation Problems

The time between the years the payments were made by DSCP (fiscal years 1993-95) and the date of the recovery audit (fiscal years 1997-98) made finding supporting documentation difficult for both PRGI and the vendors. Further, PRGI personnel needed time to understand DOD’s unique procurement and payment processes, according to PRGI. Vendor responses surfaced an estimated $1.75 million in overpayments that were outside the scope of the PRGI contract either because they were not within the contractual review period ($484,000) or the overpayments were related to another government contract (estimated by PRGI to be $1.27 million). Both DFAS and DSCP officials said they had not taken action to pursue recovery or to inform the other government agencies so that they could pursue recovery and take steps to avoid future overpayments for a number of reasons. Conclusions

PRGI, through its methodology, has identified overpayments of $19.1 million and is continuing its efforts to identify additional overpayments. However, government efforts to collect these overpayments have been slow—only $1.9 million has been recovered—largely because the recovery process virtually stopped for 8 months, while DSCP reviewed the merits of the vendors’ complaints. While DSCP has concluded the government’s claims are valid, it has not yet issued letters notifying vendors of the final decision regarding amounts owed. To develop recommendations for improving the process by which overpayments are recovered by DOD, we reviewed the private sector practices for identifying and recovering overpayments and the recommendations PRGI made, and considered the factors limiting the identification or recovery of overpayments. Comments From the Department of Defense

The following are GAO’s comments on the Department of Defense’s (DOD) letter dated November 4, 1998. GAO Comments

1.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the results of the Department of Defense's (DOD) demonstration program evaluating the feasibility of using private contractors to identify overpayments made to vendors, focusing on: (1) assessing the success of the methods used to identify overpayments; (2) determining the types of overpayments identified and the amounts recovered; and (3) identifying factors limiting the identification or recovery of overpayments and developing recommendations for improving the process.

What GAO Found

GAO noted that: (1) the methods used by the Profit Recovery Group International (PRGI) to perform recovery auditing resulted in the identification of $19.1 million in overpayments, as of August 14, 1998, and efforts to identify additional amounts continue; (2) however, recoveries of overpayments amounted to only $1.9 million, in large part, because vendors took issue with some of the overpayments identified by PRGI; (3) this caused the recovery process to virtually stop for 8 months while the Defense Supply Center, Philadelphia reviewed the merits of the vendors' issues; (4) the Defense Supply Center, Philadelphia has concluded that the claims of overpayment are valid, but it has not yet notified vendors of the final decision regarding their indebtedness; (5) of $19.1 million in overpayments, $12.4 million was related to cash discounts not taken or received or deducted at the wrong rate, $2.2 million related to most favored customer terms not received, $1.3 million related to duplicate payments made, and $1.2 million related to credits for returned merchandise not taken; (6) as of August 14, 1998, according to PRGI, it had audited about 80 percent of the $7.2 billion audit base; (7) the fact that the overpayments were made 4 to 6 years before audit recovery began also made overpayment identification or recovery challenging; (8) documentation was difficult to retrieve for both PRGI and vendors, and sometimes it was not available; (9) PRGI also had considerable difficulty identifying duplicate payments because the needed information was not retained in the Defense Finance and Accounting Service payment files; (10) according to PRGI, even though its contract was awarded in September 1996, it was slow to begin audit work because of delays in obtaining Defense Finance and Accounting Service computerized payment files and the time PRGI needed to understand DOD's procurement and payment processes; (11) PRGI has made recommendations to the Defense Finance and Accounting Service and the Defense Supply Center, Philadelphia to reduce future overpayments, but none have been implemented; (12) PRGI identified about $1.8 million in overpayments that were outside the scope of its contract, either because they were not within the fiscal year 1993-95 contractual review period or because they involved other government agencies; and (13) neither the Defense Finance and Accounting Service or the Defense Supply Center, Philadelphia chose to pursue payment recovery or inform the other government agencies of the overpayments so that they could pursue recovery and take steps to avoid future overpayments.