It does not mention the 40 percent  of work completed. DOD Does Not Know the Full Extent of Its UCA Usage

DOD faces a potentially large gap in its data and thus does not know the  extent to which it is using UCAs. Undefinitized task or delivery orders, as well as contract modifications,  are not identified. As figure 1 shows, DOD’s reported obligations for letter contracts have  increased from $5.98 billion in fiscal year 2001 to $6.53 billion in fiscal year  2005. The local commands we visited performed oversight of their UCA usage to  varying degrees. UCAs Used to Quickly Fill Needs in a Variety of Circumstances

DOD is using UCAs to rapidly fill needs in a variety of circumstances,  many of which are directly or indirectly related to the war in Iraq. For example, one National Geospatial-Intelligence  Agency UCA for the continuation of ongoing services was awarded the day  after the services from the prior contract ended. Local Command Policies Generally Focus on Limiting UCAs

The “tone at the top” provided by the local commands we visited is to not  use UCAs unless absolutely necessary. However, this message is  emphasized differently from one location to another and has only recently  come about in some locations. DOD is Often Not Meeting Definitization Time Frame Requirements

DOD did not meet the definitization time frame requirement of 180 days  after award for over half the UCAs we reviewed. While DOD regulations allow up to half of  the funding to be provided before definitization, we found that DOD tends  to obligate this maximum amount of funding immediately at award—a  practice that could provide a disincentive for the timely definitization of  the UCA. Based on our  review of the contract files and discussions with contracting and program  officials, the most common reasons for the delays were (1) delays in  obtaining a qualifying proposal from the contractor, (2) acquisition  workforce shortages that led to overly heavy workloads, and   (3) complexity of requirements at award of the UCA or changing  requirements after award. In hindsight, he  said it would have been easier to just obligate the 50 percent at the  beginning. As  such, we were unable to assess whether DOD is in compliance with this  requirement. Each contract type includes  either profit (fixed-price contracts) or fee (cost-type contracts) for the  contractor. The profit rate or fee is derived at definitization and then applied  across the entire period of performance, including the undefinitized  period. “When the final price of a UCA is negotiated after a substantial portion of the  required performance has been completed, the head of the contracting activity  shall ensure the profit allowed reflects (a) Any reduced cost risk to the contractor  for costs incurred during contract performance before negotiation of the final  price; and (b) The contractor’s reduced cost risk for costs incurred during  performance of the remainder of the contract.”
When costs have been incurred prior to definitization, contracting officers  are to generally regard the contract type risk to be in the low end of the  designated range. Recommendations for Executive Action

To improve oversight of UCAs, we recommend that  the Administrator of the Office of Management and Budget’s Office of  Federal Procurement Policy assess whether the Federal Procurement  Data System-Next Generation data fields need to be modified to require  coding that will identify undefinitized task and delivery orders and  undefinitized contract modifications, and  the Secretary of Defense issue guidance to program and contracting  officials on how to comply with the FAR requirement to definitize  when 40 percent of the work is complete. Appendix I: Scope and Methodology

To determine the level of insight the Department of Defense (DOD) has  into its use of undefinitized contract actions (UCA), we interviewed DOD  senior-level acquisition officials and service-level acquisition officials to  identify any additional policies specifically addressing the use of  undefinitized contract actions at the locations selected for our review.
Why GAO Did This Study

To meet urgent needs, the Department of Defense (DOD) can issue undefinitized contract actions (UCA), which authorize contractors to begin work before reaching a final agreement on contract terms. The contractor has little incentive to control costs during this period, creating a potential for wasted taxpayer dollars. Pursuant to the House of Representatives report on the National Defense Authorization Act for Fiscal Year 2007, we assessed (1) the level of insight DOD has into its use of UCAs, (2) how and when DOD is using UCAs, (3) whether DOD is definitizing UCAs in a timely fashion, and (4) whether contracting officers are documenting the basis for negotiated profit or fee. GAO reviewed 77 randomly-selected contracts at seven locations and interviewed DOD officials.

What GAO Found

DOD faces a potentially large gap in its data and thus does not know the extent to which it is using UCAs. DOD's reported obligations for UCAs increased from $5.98 billion in 2001 to $6.53 billion in 2005. However, the government's procurement system does not identify undefinitized task or delivery orders or undefinitized contract modifications. In light of DOD's reported increase in its use of task and delivery orders in recent years, the data gap could be large. Because DOD decentralizes oversight of its UCAs, the department would have to manually obtain data from each of its local commands in order to obtain a complete picture. The local commands GAO visited performed oversight of their UCAs to varying degrees. DOD is generally using UCAs to rapidly fill urgent needs, as permitted, in a variety of circumstances. Local managements' message to the contracting community is to not use a UCA unless absolutely necessary, but this message is emphasized differently from one location to another. GAO found 10 instances in the 77 UCAs we reviewed where UCAs could have been avoided with better acquisition planning. For example, one UCA for the continuation of ongoing services was awarded the day after the previous contract expired. DOD did not meet the definitization time frame requirement of 180 days after award on 60 percent of the 77 UCAs reviewed. The most common reasons for the delays were untimely receipt of an adequate proposal from the contractor, acquisition workforce shortfalls, and changing requirements. GAO also found that DOD tends to obligate the maximum amount of funding permitted--up to 50 percent of the not-to-exceed amount--immediately at award of UCAs. As a result, contractors may have little incentive to quickly submit proposals. In addition, since DOD does not track whether it meets the Federal Acquisition Regulation requirement to definitize letter contracts (one type of UCA) before 40 percent of the work is complete, GAO was unable to assess compliance with this requirement. Contracting officers are not documenting, as required, the basis for the profit or fee prenegotiation objective and the profit or fee negotiated. As such, it is unclear whether the costs incurred prior to definitization are considered when computing the profit rates or fee amounts. For the 40 fixed-price contracts GAO reviewed, profit ranged from 3 to 17 percent, and for the 37 cost-type contracts in our sample, fees ranged from 4 to 15 percent. Generally the rate was applied equally over the entire contract term, including the undefinitized period.