Contractors Report Significant Payment Discrepancies

In response to our data request, 374 business units of large and small contractors reported overpayments and underpayments using their accounting records. The business units responding to our request reported payment discrepancies of $857.4 million—overpayments of $231.5 million and underpayments of $625.9 million. Many contractors notified the government of payment errors but did not always return overpayments until instructed to do so. Center personnel, in accordance with payment procedures, pay contractor invoices as if the payment information in the system were correct, even though the information in the system is known to have a high error rate. Overpayments Reported by Contractors Not Recovered Promptly

The Columbus Center did not promptly recover identified overpayments because it did not (1) follow the Center’s policy of requesting contractors to immediately return identified overpayments pending a reconciliation and (2) record and track actions on reported overpayments. We estimate that delays in recovering the $84.2 million in overpayments cost the government about $10.6 million in interest. We recommended that DOD develop a comprehensive plan to mobilize resources to identify and correct payment discrepancies. For example, Center officials advised us of corrective actions being taken to improve the detection and collection process, including changes to ensure that the Center’s policy of asking contractors to immediately return overpayments is implemented, including an August 1995 pilot installation of telephone and computer equipment to establish a historical record, by contract, of payment problems identified by customers; changes to prevent overpayments that occur because of incorrect progress payment liquidations, including both procedural and systems changes that are expected to improve payment research and progress payment records; changes in monitoring and reporting practices to ensure that all reconciliations that identify amounts owed the government are resolved promptly; and increases in the resources directed toward reducing the backlog of contracts requiring reconciliation by December 1995. Also, after discussing the results in this report with DOD and DFAS officials, DFAS, on July 31, 1995, directed the Columbus Center to begin surveying contractors to identify and resolve payment discrepancies. We also discussed payment errors with the Defense Logistics Agency, the Defense Contract Management Command, and the Defense Finance and Accounting Service (DFAS) officials. 3. 5. 6. Examples of Selected Overpayments

We reviewed over $84 million in overpayments on eight contracts to determine why the overpayments were made and to evaluate the efforts of the DFAS Center in Columbus, Ohio, to recover the overpayments. 1. 8. However, as of May 1995, the Center’s automated payment records showed the contract to be underpaid by about $2.7 million. 14, 1994). 9, 1994).
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed outstanding overpayments and underpayments identified in Department of Defense (DOD) contractors' records, focusing on: (1) whether DOD was detecting and recovering contract overpayments promptly; and (2) the actions taken to recover overpayments at the Defense Finance and Accounting Service (DFAS) Center in Columbus, Ohio.

What GAO Found

GAO found that: (1) the 374 business units (representing 82 large defense contractors and 57 small contractors) that responded to GAO's request for data as of July 1994 reported about $231.5 million in outstanding overpayments and about $625.9 million in underpayments; (2) the evidence suggests and contractors reported that they followed up to collect underpayments and usually notified DOD of overpayments; however, contractors did not always return overpayments unless instructed to do so; (3) the DFAS Columbus Center cannot readily detect payment discrepancies because of significant errors in its automated payment records; (4) despite these errors, Center personnel, in accordance with payment procedures, pay contractor invoices as if the payment data were correct; (5) with significant errors in the automated payment records, incorrect payments are likely to continue; (6) the Center did not properly pursue recovery after overpayments were reported by contractors or identified through reconciliation; (7) on the basis of GAO's research of $84.2 million in overpayments, the Center's delay in collecting overpayments was long and costly; (8) for those overpayments, GAO estimates that recovery delays cost the government about $10.6 million in interest; (9) even after a public accounting firm completed contract reconciliations to identify the amounts owed the government, the Center did not recover overpayments promptly; (10) in response to GAO's August 1994 recommendation that DOD mobilize resources to identify, verify, and correct payment discrepancies, DOD advised GAO in May 1995 that various actions were under way or planned to to reduce payment discrepancies and to use contractor records to facilitate reconciliations; and (11) on July 31, 1995, DFAS requested the Columbus Center to undertake a new effort to identify and resolve payment discrepancies.