Full Picture of Agencies’ Use of Cost- Reimbursement Contracts Is Unclear

The complete picture of the government’s use of cost-reimbursement  contracts is unclear. From fiscal years 2003 through 2008, federal  obligations under cost-reimbursement contracts were reported to have  increased by $16 billion, from $120 billion to $136 billion. When viewed as  a percentage of total reported federal obligations, this represented a  decrease over the 6-year period, from 34 percent to 26 percent. Missing Contract Types and Obligations Using “Other” Contract Type Contribute to Lack of Clarity about Extent of Cost-Reimbursement Obligations

Although FPDS-NG guidance states that contract type is a required field  for all contracts, we found that billions of dollars in obligations are either  missing a contract type (i.e., no contract type was reported) or the  contract type is indicated as “other.” In fiscal year 2008, over $10 billion in  obligations was reported as missing a contract type and $4.3 billion was  reported as “other.” In addition, some very large contracts that had been  previously labeled as cost-reimbursement were subsequently coded as  missing a contract type in fiscal year 2008. Rationale for Using Cost-Reimbursement Contracts Is Often Not Clear, and Analysis Is Not Conducted to Determine if Contract Type with Firmer Pricing Is Warranted

Contracting officials frequently did not document contract files to show  why they awarded cost-reimbursement contracts. Of the 92 contract files we reviewed, we found that 28, or 30 percent,  contained no documentation showing why a cost-reimbursement contract  was selected for award, including in the acquisition plans. For example, two contract files  contained the statement, “these activities are non-routine, complex in  nature, and specific requirements have not been completely defined.” Two  other contract files had the following language: “due to the uncertainties  involved in the performance of this contract, costs cannot be estimated  with sufficient accuracy to use any type of fixed-price contract.”
Table 6 contains representative examples of rationales we found to be  brief and not clearly tied to the individual procurements. We did not assess whether an agency’s decision to use a cost- reimbursement contract was the most appropriate choice of contract type  during our review, but we generally found no evidence that agency  officials assessed, for example, the contract’s pricing history or  requirements under the contracts we reviewed to determine whether there  was a basis for firmer pricing, even when the contracts had been in place  for several years. Agencies Do Not Always Ensure That Contractors’ Accounting Systems Are Adequate for Determining Costs Applicable to Contracts

Cost-reimbursement contracts are to be used only when the contractor’s  accounting system is adequate for determining costs applicable to the  contract. Timely Accounting System Approval in 52 Cases Reviewed; 13 Others Approved After Award

Of the 92 contract files we reviewed, only 52 (about 57 percent) had any  evidence that contractors’ accounting systems had been deemed adequate  in a current time frame (within 4 years or less) before contract award. The  civilian agency procedures call for program officials to review contractors’  invoices. DOD Reliance on Contractor-Provided Program Management Data May Be Inadequate if Required Audits Are Not Conducted to Supplement Cost Surveillance

At DOD, procedures for monitoring contractor costs depend in large part  on the EVM system—a tool that presents contractor-provided data to  measure the value of work accomplished in a given period compared to  the planned value of work scheduled and the actual cost of work  accomplished—supplemented with audits for the purpose of testing  whether invoiced costs are allowable. Our recent work has  raised concerns in this regard. We  found little evidence that agency officials are analyzing whether such a  transition can be made. Finally, OFPP stated that a decision was  recently made, while our report was at OFPP for comment, to make  changes to FPDS-NG to eliminate the “combination” contract type as an  option for new contracts starting in fiscal year 2010. To determine agencies’ rationales for using cost-reimbursement contracts,  whether contracting officers had deemed contractor accounting systems  adequate for determining costs applicable to the contracts, and  procedures for surveillance of contractor cost controls, we took the  following steps.
Why GAO Did This Study

Federal agencies obligate billions of dollars annually using cost-reimbursement contracts. This type of contract involves high risk for the government because of the potential for cost escalation and because the government pays a contractor's costs of performance regardless of whether the work is completed. As such, cost-reimbursement contracts are suitable only when the cost of the work to be done cannot be estimated with sufficient accuracy to use fixed-price contracts. Agencies may use this contract type only if certain conditions are met. At your request, GAO assessed (1) the extent of agencies' obligations under these contracts, (2) the rationales for using this contract type, (3) determinations that contractors' accounting systems are adequate for determining costs applicable to the contracts, and (4) procedures for monitoring contractor cost controls. GAO analyzed federal procurement data and contract files and interviewed contracting and other government officials.

What GAO Found

The complete picture of the government's use of cost-reimbursement contracts is unclear. From fiscal years 2003 through 2008 federal obligations under cost-reimbursement contracts were reported to have increased $16 billion, to $136 billion, which represented a decrease in the total percentage of federal obligations over the 6-year period, from 34 percent to 26 percent. However, the overall downward trend is misleading. A significant increase has been reported for obligations using the "combination" contract type, a category that based on GAO's analysis of 2008 data, includes many contracts with cost-reimbursement obligations that are not recorded as such. According to OFPP, a decision was recently made to eliminate the use of "combination" as a Federal Procurement Data System-Next Generation contract type, effective for all new contract awards starting in fiscal year 2010. In addition, GAO found billions of dollars for which the contract type had been coded as "missing" in fiscal year 2008. Agencies' rationales for using cost-reimbursement contracts were difficult to determine because contracting officers frequently did not document--even in acquisition plans--why they chose to use this contract type. The current requirement for such documentation is minimal, but recent legislation (not yet implemented in the Federal Acquisition Regulation) requires that acquisition plans address the rationale. Of the 92 contracts and orders GAO reviewed, about 30 percent did not include any documentation. The supporting documentation GAO did find generally did not explain why a cost-reimbursement contract for the specific requirement was selected. GAO also found little evidence that agency officials are analyzing contracts' pricing history and requirements to determine if they can transition to a contract type with firmer pricing, even though experience may provide a basis for doing so. Of the 92 contracts and orders GAO reviewed, about half had any evidence that, at least within 4 years before contract award, contractors' accounting systems had been deemed adequate to determine costs applicable to the contract. Twenty contract files had no evidence that the contractors' accounting systems were determined adequate and 20 other contract files contained determinations that had been made either many years before award or after the contract was awarded. Inadequate accounting systems, or accounting systems that had not been deemed adequate for many years, may result in the government making improper payments to contractors. GAO found a range of procedures for monitoring contractor cost controls at the agencies in its review. Procedures at the civilian agencies generally call for program officials to review contractor invoices. At the Department of Defense, cost surveillance depends on contractor-reported earned value management data, supplemented with audits for the purpose of testing whether invoiced costs are allowable. GAO's prior work has raised concerns about the effectiveness of these audits.