DFAS Columbus Made $49 Billion of Adjustments at a Cost of about $34 Million in Fiscal Year 2002

For fiscal year 2002, our analysis of DFAS Columbus data showed that  about $1 of every $4 in contract payment transactions in MOCAS was for  adjustments to previously recorded payments—$49 billion of adjustments  out of $198 billion in disbursement, collection, and adjustment  transactions. To research the payment allocation problems and make adjustments to  correct the disbursing and accounting records, DFAS Columbus reported  that it incurred costs of about $34 million in fiscal year 2002, primarily for  hundreds of DOD and contractor staff. This represented about 35 percent  of the $97.4 million that DFAS Columbus spent on contract pay service  operations. This occurred because DFAS Columbus currently bills DOD  activities (for example, the Army) for contract pay services based solely on  the number of lines of accounting on an invoice. Consequently, all DOD  activities pay the same line rate, regardless of whether substantial work is  needed to reconcile problem contracts and adjust the payment records. Contracts Were Complex Due to Legal and DOD Requirements, Contract Modifications, and Pricing Provisions

Our analysis of an Army and an Air Force contract showed that the  contracts and related payment instructions were complex because of a  combination of factors, including the (1) legal and DOD requirements to  track and report on the funds used to finance the contract, (2) number of  modifications made to the contract over the years that added goods and/or  services, or added or changed payment instructions for these goods and/or  services, and (3) different pricing provisions to pay for goods and services  on the contract. Our evaluation of $160 million of adjustments showed that  DFAS Columbus made these adjustments to reallocate payments to the  correct ACRNs. Frequent Contract Modifications to Change Payment Instructions for Air Force Contract

In March 2001, DFAS Columbus processed 1,262 transactions totaling over  $26 million to adjust previously recorded payment allocations on the Air  Force contract. DOD has initiated a major long-term effort to develop and  implement an enterprise architecture, which is intended to improve its  business operations, including its acquisition and disbursement activities. If implemented successfully, this initiative may help correct many of the  contract payment allocation problems. In the interim, DOD has several  initiatives under way to address the payment allocation problems caused  by complex contracts with confusing payment instructions. The working group  concluded that payment allocation errors at DFAS Columbus (1) were  often the result of problems experienced with confusing payment  instructions and (2) were further compounded because DOD did not have  payment allocation options for including standard contract payment  instructions for use on DOD contracts. Our analysis of the working group initiative to develop standard payment  instructions showed that it is a good first step because it should reduce  some of the payment allocation errors that were the result of DFAS  Columbus voucher examiners misinterpreting contract payment  instructions.
Why GAO Did This Study

GAO has reported that the Department of Defense's (DOD) inability to accurately account for and report on disbursements is a long-term, major problem. GAO was requested to determine (1) the magnitude of the adjustments and related costs in fiscal year 2002, (2) why contracts, including payment terms, are so complex, (3) the key factors that caused Defense Finance and Accounting Service (DFAS) Columbus to make payment adjustments, and (4) what steps DOD is taking to address the payment allocation problems.

What GAO Found

For fiscal year 2002, DFAS Columbus data showed that about $1 of every $4 in contract payment transactions in the MOCAS system was for adjustments to previously recorded payments--$49 billion of adjustments out of $198 billion in transactions. To research payment allocation problems, DFAS Columbus reported that it incurred costs of about $34 million in fiscal year 2002. This represents about 35 percent of the total $97 million that DFAS Columbus spent on contract pay services. DFAS Columbus bills DOD activities for contract pay services based on the number of accounting lines on an invoice. Consequently, all DOD activities pay the same line rate, regardless of whether substantial work is needed to reconcile problem contracts and adjust payment records. GAO's analysis of two contracts showed that the contracts were complex because of the (1) legal and DOD requirements to track and report on the funds used to finance the contracts, (2) substantial number of modifications made on the contracts to procure goods and/or services, and (3) different pricing provisions on the contracts. GAO's review of $160 million of adjustments showed that the adjustments were made for four reasons. The Army made an error in accounting for obligations, resulting in about $127 million in payment allocation adjustments. DFAS Columbus did not follow its internal procedures for allocating payments to accounts on an Army contract containing multiple pricing provisions, resulting in about $5 million in adjustments. DFAS made over $2 million in adjustments to correct recording errors on an Army contract due to complex and changing payment instructions. The Air Force frequently changed payment instructions after payments were made on an Air Force contract, resulting in about $26 million in adjustments. DOD has initiated a major long-term effort to improve its business operations, including its acquisition and disbursement activities. If implemented successfully, this initiative may help correct many of the contract payment allocation problems. In the interim, DOD has initiatives under way to address payment allocation problems, including (1) billing DOD contracting offices for contract reconciliation services, (2) providing DOD activities information on the correct method for presenting payment instructions, and (3) establishing a working group to develop options for presenting standard contract payment instructions. While the DOD working group initiative may reduce payment allocation errors associated with misinterpreting contract payment instructions, DOD needs to automate the standard payment instructions to eliminate payment allocation errors associated with manually allocated payments.