Report No.: GAO/HR-93-8 Date: December 1992
____________________________________________________________________________
___
Author: United States General Accounting Office
Addressee: High-Risk Series
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Overview
- The Problem
- The Causes
- Gao's Suggestions for Improvement
Background
Defective Pricing Totals $3.67 Billion for 5 Years
Poor Cost Estimating by Contractors Adds Millions to Contract Costs
- Prime Contractors Obtain Price Reductions on Competitive Subcontract
s After
Negotiating With DOD
- Prime Contractors Award Noncompetitive Subcontracts at Lower Costs
- Inadequate Government Oversight Increases the Risk of Contract Overp
ricing
- Increased Coverage of Known High Risk Contracts and Subcontracts Is
Needed
- Many Subcontracts Are Not Identified for Audit Consideration
- Actions by Contracting Officers to Obtain Contractor Improvements Ar
e Mixed
- DOD's Follow-up System Is Inaccurate and Incomplete
Deterrents Offered by the Truth in Negotiations Act Are Not Used Effectively
- Low Sustention Rates
- Interest Not Fully Collected
- Penalty Provisions Not Exercised
Lack of a Financial Reporting System to Ensure Fair and Reasonable Profits
Conclusions and Action Needed
Related GAO Products
High-risk Series
- Lending and Insuring Issues
- Contracting Issues
- Accountability Issues
Office of the Comptroller General
Washington, DC 20548
December 1992
The President of the Senate
The Speaker of the House of Representatives
In January 1990, in the aftermath of scandals at the Departments of Defense
and Housing and Urban Development, the General Accounting Office began a
special effort to review and report on federal government program areas that
we considered "high risk."
After consulting with congressional leaders, GAO sought, first, to identify
areas that are especially vulnerable to waste, fraud, abuse, and
mismanagement. We then began work to see whether we could find the fundament
al
causes of problems in these high-risk areas and recommend solutions to the
Congress and executive branch administrators.
We identified 17 federal program areas as the focus of our project. These
program areas were selected because they had weaknesses in internal controls
(procedures necessary to guard against fraud and abuse) or in financial
management systems (which are essential to promoting good management,
preventing waste, and ensuring accountability). Correcting these problems is
essential to safeguarding scarce resources and ensuring their efficient and
effective use on behalf of the American taxpayer.
This report is one of the high-risk series reports, which summarize our
findings and recommendations. It describes our concerns over the significant
risks the Department of Defense (DOD) faces as a result of overpriced
contracts. The report concludes that, despite the existence of laws and
regulations designed to protect the government, the overpricing of defense
contracts remains both significant and widespread and costs the taxpayer
billions of dollars. While DOD has taken steps to address some problems with
overpricing, other serious problems remain. Unless these problems are
resolved, DOD can expect continued contract overpricing--
omething it cannot afford.
Copies of this report are being sent to the President-elect, the Democratic
and Republican leadership of the Congress, congressional committee and
subcommittee chairs and ranking minority members, the Director-designate of
the Office of Management and Budget, and the Secretary-designate of Defense.
In fiscal year 1991, the Department of Defense (DOD) reported spending almos
t
$150 billion contracting for goods and services--nearly two and a half times
the combined purchases of all federal civilian agencies. Even though defense
spending is expected to decrease, contracting costs are not expected to fall
below $100 billion over the next several years.
A substantial share of these expenditures involve negotiations between DOD a
nd
contractors. In an attempt to ensure that contractors offer fair and
reasonable prices, the law requires that they provide the government with co
st
or pricing data to support their proposed prices and to certify that this
information is accurate, complete, and current. DOD regulations also require
major contractors to employ sound cost-estimating systems. DOD has the tools
to enforce contractors' compliance with these and other legislative and
regulatory requirements and in some overpricing cases can adjust contract
prices. Additional tools include imposing monetary penalties, reducing or
withholding progress payments, or deciding not to contract further with
contractors who break the rules.
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===
THE PROBLEM
Despite the laws and regulations, overpricing of defense contracts remains
significant and widespread, costing the taxpayer billions of dollars more th
an
necessary for the goods and services purchased. Overpricing practices includ
e
(1) failing to provide DOD with accurate, complete, and current cost or
pricing data at the time of negotiations (producing what is called "defectiv
e"
pricing) and (2) using inadequate methods to estimate costs.
While the government is at risk for overpricing in prime contracts, it is
particularly at risk in subcontracts, where DOD relies heavily on the prime
contractor and the quality of its cost-estimating system to ensure reasonabl
e
subcontract prices. Subcontracts frequently account for more than 50 percent
of a contract's costs.
A limited number of contractors account for the majority of reported defecti
ve
pricing. For example, for fiscal years 1987-91, about 6 percent of the
contractors audited accounted for about 80 percent of the defective pricing
dollars reported by the Defense Contract Audit Agency (DCAA).
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===
THE CAUSES
DOD has taken some steps to address contract overpricing problems, but serio
us
shortcomings remain. Specifically,
1) contractors' cost-estimating systems are often inadequate, (2) oversight
by
DOD is too little and too late, and (3) the application of monetary and othe
r
penalties is insufficient to change contractors' behavior in any meaningful
way.
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===
GAO'S SUGGESTIONS FOR IMPROVEMENT
While we have suggested legislative and regulatory improvements in DOD
contracting practices, reducing overpricing problems is less a matter of
creating new laws and regulations than of better enforcing those already in
place. Without effective enforcement, contractors have a strong incentive to
avoid compliance. If negotiated costs are inflated, so too are contractor
profits. The following steps would strengthen contractors' incentives to
follow the rules.
First, when defense contractors do not provide accurate, complete, and curre
nt
data to the government or when they do not apply the internal controls that
would enable them to do so, the government should use the full range of
available tools to enforce compliance. When contractors repeatedly overcharg
e
the government or fail to act aggressively to correct contract pricing
deficiencies, DOD should reduce or suspend their progress payments or declin
e
to award them additional business.
Second, contracting officers and other government officials involved in the
contracting process have a responsibility to protect the government's
interests. They should be provided with the resources to do their jobs
effectively and should be held fully accountable for the results.
Third, although contractors should be allowed to make fair and reasonable
profits, they should not receive excessive profits, especially through
overpricing. To monitor contractor profits on defense contracts, the Congres
s
should enact legislation requiring the government's contractors to annually
report financial data to DOD. If effectively employed, the monitoring of
contractors' return on capital and the efficiency of their operations could
be
used as an alternative to reduce the amount of audit and oversight by DOD on
a
contract-by-contract or cost-by-cost basis.
Historically, a principal concern in noncompetitive procurements has been ho
w
to ensure that the prices proposed by contractors are fair and reasonable.
Because of the nature of the contracting process in a noncompetitive
environment, both parties--the contractor and the government--attempt to
protect their own constituents' interest. The contractors support the
shareholder by attempting to maximize profits, while the government protects
the taxpayer by trying to ensure that contractors provide quality products a
t
fair and reasonable prices.
Contract overpricing results (1) when contractors do not provide accurate,
complete, and current cost or pricing data, as required by the Truth in
Negotiations Act, and (2) when contractor cost-estimating systems do not
produce reliable contract pricing estimates.
As a result of documented overcharging by defense contractors, the Congress
passed the Truth in Negotiations Act in 1962. The act requires contractors a
nd
subcontractors to provide the government with cost or pricing data supportin
g
their proposed prices and to certify that the data submitted is accurate,
complete, and current. The law and its added provisions over the years also
provided the tools to get contractors to comply by requiring the recovery of
amounts determined to be defectively priced plus interest on overpayments an
d
penalties when a contractor knowingly submits defective data. These were maj
or
steps forward in achieving a more level negotiating table.
The Department of Defense, after prodding from us and others, also recognize
d
that if contractors were required to provide accurate, complete, and current
cost or pricing data, they had to have sound cost-estimating systems to
produce this data. At the time, many did not. Thus, in March 1988, DOD chang
ed
its regulations to require that major contractors have sound cost-estimating
systems.
Even though overpricing resulting from poor estimating may not be recoverabl
e,
the regulations did provide for the necessary tools to get contractors to
comply. These tools include reducing or withholding progress payments or
deciding not to contract with contractors that do not adhere to existing law
s
and regulations.
DEFECTIVE PRICING TOTALS $3.67 BILLION FOR 5 YEARS
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Despite the existence of laws and regulations designed to protect the
government, overpricing of defense contracts remains significant and
widespread. Overpricing costs the government billions of dollars, with rough
ly
one of every three audited contracts being identified as defectively priced.
[
Footnote 1: "Defective pricing" occurs when a contract price is increased
because the contractor does not provide complete, accurate, and current cost
or pricing data. If this happens, the government can reduce the contract
price. ] During fiscal years 1987-91, the Defense Contract Audit Agency
identified defective pricing totaling $3.67 billion.
While the government is at risk for overpricing in prime contracts, it is
particularly at risk for overpricing in subcontracts--subcontract costs
frequently represent over 50 percent of a contract's cost. For example, in
fiscal year 1991, subcontract defective pricing accounted for $484 million,
or
66 percent, of the defective pricing found by DCAA. Although subcontracts
accounted for only 16 percent of the total dollars DCAA examined in fiscal
years 1987-91, subcontract defective pricing accounted for 37 percent of the
defective pricing found by DCAA during that period.
Overpricing is especially high for a limited number of defense contractors a
nd
subcontractors. For fiscal years 1987-91, about 6 percent of the contractors
audited accounted for about 80 percent of the defective pricing dollars
reported by DCAA. A listing of contractors accounting for large amounts of
defective pricing in fiscal years 1990 and 1991 can be found in our report
_Contract Pricing: A Low Percentage of Contractors Are Responsible for Most
Defective Pricing_ (GAO/NSIAD-93-1).
POOR COST ESTIMATING BY CONTRACTORS ADDS MILLIONS TO CONTRACT COSTS
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If the government is to achieve fair and reasonable contract prices, it is
essential that a contractor have a sound cost-estimating system. Such a syst
em
is the principal means by which a contractor develops its proposed contract
prices, which form the foundation for contract negotiations. In March 1988,
in
response to our reports and others, DOD revised its regulations to require
major contractors to establish adequate cost-estimating systems. In addition
,
the revised regulations authorized the contracting officer to take whatever
action is determined necessary to ensure that contractors correct identified
estimating deficiencies. Such actions include reducing or suspending progres
s
payments and recommending that contracts not be awarded. DOD regulations als
o
require contractors to evaluate subcontract prices and include the results o
f
these evaluations as part of their contract proposals to the government. Suc
hevaluations assist DOD contracting officers in ensuring that only fair and
reasonable subcontract estimates are included in contracts.
Despite DOD's efforts to prevent contract overpricing by strengthening its
regulations on cost-estimating systems and by increasing its management
emphasis on subcontract pricing, DOD contract prices continue to be overstat
ed
because of inflated subcontract estimates. Too often, the real "scrubbing"
(detailed review) of subcontract proposals by the prime contractor takes pla
ce
_after_ the contractor has negotiated with the government. At that point, th
e
prime contractor is frequently able to significantly reduce the subcontract
price and retain all or part of the price reduction as windfall profits.
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===
PRIME CONTRACTORS OBTAIN PRICE REDUCTIONS ON COMPETITIVE SUBCONTRACTS AFTER
NEGOTIATING WITH DOD
The DOD requirement for contractors to obtain cost or pricing data supportin
g
subcontractor proposals, to evaluate the data, and to provide the evaluation
results to the government as part of their proposals does not apply to
subcontracts awarded on the basis of adequate price competition because
competition, in large measure, is presumed to produce fair and reasonable
prices.
We found, however, that the government did not always receive the full
benefits of competition. Contractors, after informing DOD that subcontract
estimates were competitively obtained and agreeing on contract prices,
obtained lower prices from their prospective subcontractors. For example, we
reviewed 66 subcontracts worth $44 million whose estimates were identified b
y
a contractor as having been competitively obtained. We found that after
"competitively" soliciting subcontract prices to support its proposals to th
e
government, the contractor had resolicited prices and, on 55 of the
subcontracts, obtained prices that were $10.4 million lower than what was
proposed and included in the prime contracts. Conversely, the contractor
awarded 10 subcontracts at prices that were about $1.5 million more than wha
t
was proposed and negotiated in the prime contracts. Thus, the prime
contractor's actions subsequent to negotiating with the government resulted
in
a net amount of $8.9 million less than agreed to with the government. This i
s
not a new issue, and the practice appears widespread.
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===
PRIME CONTRACTORS AWARD NONCOMPETITIVE SUBCONTRACTS AT LOWER COSTS
In addition to negotiating lower prices on competitive subcontracts, some
prime contractors negotiate substantial price reductions on noncompetitive
subcontract proposals after completing negotiations with the government. For
example, we examined 12 noncompetitive subcontract estimates, each in excess
of $1 million. We found that in the aggregate, prime contractors had made
awards on these estimates for about $8.8 million less than the prices
negotiated in the contracts with DOD.
As mentioned earlier, overpricing resulting from poor estimating may not be
recoverable by the government. So it is absolutely essential that contractin
g
officers' actions to correct contractors' deficient cost-estimating systems
are effective and timely.
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===
INADEQUATE GOVERNMENT OVERSIGHT INCREASES THE RISK OF CONTRACT OVERPRICING
In addition to requiring sound contractor cost-estimating systems, DOD must
have an effective oversight program that
1) identifies and audits contractors that are considered at risk for
overpricing and
2) ensures effective and timely action when problems are found. Our reviews
have shown that
-- DCAA's audit coverage of known high-risk contractors is limited,
-- many subcontracts that are subject to being audited for defective pricing
are not known to DCAA and thus not evaluated for risk or for overpricing,
-- action by some contracting officers to correct contractors' deficient
cost-estimating systems are insufficient, and
-- DOD's management information on problem contractors is inaccurate and
incomplete.
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===
INCREASED COVERAGE OF KNOWN HIGH RISK CONTRACTS AND SUBCONTRACTS IS NEEDED
DCAA is the principal agency for auditing defense contracts. It is responsib
le
for conducting defective pricing audits to determine whether contractors hav
e
complied with the Truth in Negotiations Act. DCAA, along with government
contract administration personnel, also evaluates the adequacy of contractor
s'
cost-estimating systems.
Because of the large number of contracts and subcontracts that are subject t
o
DCAA audits for defective pricing and the competing demands on its resources
,
DCAA cannot audit all contracts and subcontracts subject to the Truth in
Negotiations Act. As a result, DCAA allocates its audit resources based on i
ts
assessment of risk. In assessing risk, DCAA considers, among other factors,
the adequacy of contractors' cost-estimating systems and their histories of
defective pricing. For example, for high-risk, fixed-price contracts worth
under
10 million each, DCAA's selection criteria for fiscal year 1992 called for i
t
to audit 1 in 15 contracts. For medium-high risk, fixed-price contracts, its
selection plan calls for it to audit 1 in 30 contracts worth under
10 million each. In the past, DCAA has not been able to complete all the
audits that its plans call for.
Contract overpricing remains a high-risk area, vulnerable to fraud, waste, a
nd
mismanagement. Even though contracting for goods and services will continue
to
consume over one-third of the defense budget in the near term, we recognize
that the post Cold-War reductions will result in fewer contracting actions
requiring audits by DCAA. However, in previous reports and testimonies we ha
ve
cautioned that, because of the significant amount of audit backlog and the
constrained coverage in areas such as operational audits and defective
pricing, DCAA must have sufficient audit resources and adequate information
to
ensure that the government's interests are adequately protected. We believe
that any reduction in DCAA work load resulting from reduced numbers of
contracting actions offers an opportunity to redirect DCAA's staff resources
to these other areas of risk.
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===
MANY SUBCONTRACTS ARE NOT IDENTIFIED FOR AUDIT CONSIDERATION
In order to allocate its resources to contracts with the highest risk, DCAA
must be aware of the universe of both prime contracts and subcontracts subje
ct
to audit under the Truth in Negotiations Act. In reviewing a sample of 211
negotiated subcontracts having a dollar value of about $337 million, we foun
d
that DCAA was not aware of 186, or 88 percent, of the subcontracts. The
86 subcontracts were worth about $189 million, or 56 percent of the total
value of subcontracts in our sample.
Unless DCAA knows of all subcontracts subject to audit and assesses the risk
of defective pricing on each, it cannot ensure that its audit resources are
being appropriately applied to subcontracts with the greatest risk of
defective pricing. Also, by not being aware of all subcontracts, DCAA will
understate the resources it needs for its defective pricing program.
Accurately estimating DCAA's work load and staffing needs is particularly
important in today's environment, where DCAA may be required to reduce
staffing.
The principal reason that DCAA auditors are not aware of subcontracts is tha
t
prime contractors are not required to provide DCAA with lists of subcontract
s
that are subject to the Truth in Negotiations Act. The regulations should be
changed to require contractors to report this information. We recently
recommended that the Secretary of Defense examine the costs and benefits of
changing the Defense Federal Acquisition Regulation Supplement to require
prime contractors to notify the government of all subcontracts subject to th
e
Truth in Negotiations Act. As an interim measure, we also recommended that t
he
Secretary direct DCAA to require that when offices auditing prime contracts
identify subcontract information, they share that information with the DCAA
office responsible for auditing the subcontract. DOD is currently taking
action to address these recommendations.
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===
ACTIONS BY CONTRACTING OFFICERS TO OBTAIN CONTRACTOR IMPROVEMENTS ARE MIXED
Government contracting officers, with DCAA's help, are responsible for
determining the adequacy of contractors' cost-estimating systems. When DCAA
reports an estimating deficiency, DOD regulations establish procedures and
time frames for its correction. If a contractor does not make adequate
progress in correcting the deficiency, administrative contracting officers a
re
authorized to take actions to obtain correction, such as reducing or
suspending progress payments, recommending that new contracts not be awarded
,
or bringing the issue to the attention of higher-level DOD management.
In 1991, we reported that many cost-estimating deficiencies had remained
uncorrected for long periods of time despite (1) the 1988 revision in DOD's
regulation requiring major contractors to establish adequate cost-estimating
systems and
2) DCAA audit reports identifying estimating deficiencies. Some problems
remain.
One reason for the slow correction of deficiencies was that DOD administrati
ve
contracting officers had taken inadequate actions or had not followed
established procedures. For example, some contracting officers considered
deficiencies to have been corrected when contractors simply promised to do s
o.
We found that too often, the promised actions had either not been taken or
proved inadequate. If DOD is to reduce the risks of overpriced contracts, it
s
contracting officers need to more thoroughly review contractors' actions. Wh
en
contractors do not act, contracting officers need to use the tools available
to them to ensure compliance.
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===
DOD'S FOLLOW-UP SYSTEM IS INACCURATE AND INCOMPLETE
DOD's audit follow-up system is a key component of its oversight of
contractors with cost-estimating problems. In May 1991, DOD testified that i
ts
audit follow-up system provided DOD management with the necessary insight in
to
pricing problems with both prime contractors and subcontractors.
We reviewed DOD's audit follow-up system and found that the system did not
provide accurate and complete information on the condition of cost-estimatin
g
systems for many high risk contractors. The follow-up system data was
inadequate in three areas. The system (1) was missing reports on contractors
;
(2) understated the length of time cost-estimating deficiencies remained
uncorrected; and (3) showed contractors had corrected deficiencies, when our
review showed they had not.
DOD has proposed changes or recently taken action to improve its audit
follow-up system. While we believe these actions will improve the follow-up
system, DOD's administrative contracting officers still need to verify that
contractors have corrected all deficiencies cited in DCAA audits of
cost-estimating systems before reporting that corrective actions have been
completed.
For the Truth in Negotiations Act to be a successful deterrent, DOD's
implementation of the sanctions provided by the act must sufficiently compel
contractors to comply with its requirements. The basic sanction provided by
he act is that if defective pricing is found, the contract is to be reduced
by the amount of defective pricing. In November 1985, the Congress added
provisions to the act requiring contractors to pay (1) the interest on
overpayments and
2) a penalty equal to the amount of defective pricing, when they knowingly
submit defective data.
Our ongoing review is showing that DOD's enforcement of the act has not serv
ed
as an effective deterrent because (1) the amount of DCAA-identified defectiv
e
pricing sustained by DOD is low, (2) the interest on overpayments is not ful
ly
collected, and
3) the penalty provision of the law is not used.
The DOD Inspector General reported that the defective pricing sustention rat
e
for the first half of fiscal year 1992 was 34 percent, down 7 percentage
points from fiscal year 1991. Primary reasons for the low sustention rate ar
e
that (1) contracting officers negotiate with contractors to resolve
DCAA-identified defective pricing and settle for significantly reduced amoun
ts
rather than assume the litigative risk associated with defending a settlemen
t
decision before an independent board of contract appeals and (2) DCAA audits
were in error or the facts did not sufficiently support their determinations
of overpricing. Further, the bases for many of the settlements were not
adequately documented, preventing determinations as to why the reductions fr
om
audit findings had occurred. While contracting officers are required to full
y
consider DCAA's audit findings and to document the disposition of
recommendations, they exercise wide latitude in settling audit findings with
contractors. We are in the process of more fully identifying the reasons for
low sustention rates and pursuing whether there are problems in need of
corrective action.
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===
INTEREST NOT FULLY COLLECTED
More interest could be recovered on overpayments. The law provides that
interest shall be charged from the date of overpayment to the date of
repayment by the contractor. The procurement regulations, however, limit the
interest charged to the period from the date a product or service is deliver
ed
until the date of repayment--a shorter time period because contractors are
paid before delivery. In addition, in some cases, contracting officers are
inappropriately waiving interest in the negotiation of a settlement with the
contractor. With $731 million of DCAA-identified defective pricing in fiscal
year 1991, interest on overpayments can amount to tens of millions of dollar
s
annually.
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===
PENALTY PROVISIONS NOT EXERCISED
According to DOD, the penalty provision of the act, one of the more
significant enforcement tools available to contracting officers, has not bee
n
exercised. The act states that a penalty equal to the amount of the defectiv
e
pricing may be assessed the contractor if the contractor knowingly submitted
defective data. However, the penalty provision has not been exercised becaus
e
contracting officers, as well as other DOD officials, equate the "knowing"
determination with civil and criminal fraud. Cases of defective pricing with
civil or criminal fraud implications are beyond the contracting officers'
authority to settle and are prosecuted by the Department of Justice under th
e
False Claims Act. We noted several cases in which contractors would have
avoided submitting the defective data if established procedures had been
followed or the contractors had corrected long-standing problems with their
cost-estimating systems. Such cases appear to warrant penalties even if frau
d
cannot be proven. While the effective use of the penalty provision would
result in more dollars being collected, the more significant effect is the
enhanced deterrence against future overpricing that would likely be achieved
LACK OF A FINANCIAL REPORTING SYSTEM TO ENSURE FAIR AND REASONABLE PROFITS
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---
About 10 years ago, segment-level financial data was collected for a DOD stu
dy
comparing defense contractors' profitability with that of nondefense
manufacturers. The study showed that defense firms were earning excessive
profits on government contracts. In response, defense contractors stated tha
t
doing business with the government was riskier than doing business with
nondefense companies, thereby warranting higher profits. Defense contractors
pointed out that their stock price/earnings ratios were below market average
s,
resulting in a higher cost of capital, thereby making it more costly to do
business with the government.
Tracking the cost of capital, when compared with the return on that capital,
could provide the information needed to determine whether defense contractor
s
are making excessive profits over time. Monitoring this measure, along with
other financial measures, would eliminate the controversy over whether defen
se
contractors' profitability should be compared with that of other companies,
thereby reducing concerns about whether firms are comparable.
Financial data specific to the segments of a company that perform defense wo
rk
is generally not publicly available. A financial reporting system requiring
defense contractors to annually report segment-level financial data, contain
ed
in their income statements and balance sheets, could identify whether
excessive profits were being made on defense contracts. This reporting syste
m
could alert policymakers that adjustments are needed in government policies
to
ensure profits earned on government contracts are fair and reasonable. This
process could reduce the amount of audit and oversight by DOD on a
contract-by-contract or cost-by-cost basis.
CONCLUSIONS AND ACTION NEEDED
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---
Contract overpricing amounting to billions of dollars continues to plague
DOD's procurement system despite the existence of laws and regulations
designed to prevent such overpricing. While DOD has taken steps to address
some overpricing problems, other serious problems remain. Specifically,
1) contractors' cost-estimating systems are too often inadequate, (2)
government oversight is too little and too late, and (3) the application of
"penalties" is insufficient to change contractors' behavior in any meaningfu
l
way.
Unless more aggressive steps are taken, overpriced contracts will continue t
o
plague the Department of Defense. Some of the steps that need to be taken ar
e
basic.
First, when defense contractors do not provide accurate, complete, and curre
nt
data to the government or when they do not have the internal control systems
to support this requirement, the government should use the full range of
legislative and regulatory tools available to it to achieve compliance. If
contractors continually overcharge the government or in some other substanti
ve
way fail to comply with government laws and regulations, progress payments
should be reduced or suspended, or the contractor should not be awarded futu
re
contracts.
Second, contracting officers and others involved in the contracting process
have a responsibility to protect the government's interests. They should be
provided the resources to do their jobs well, and they should be held fully
accountable for the results. A significant step would be to change the
procurement regulations to require prime contractors to report all
subcontracts subject to audit under the Truth in Negotiations Act. Also, as
DCAA's work load is reduced as a result of fewer contract actions, the
Secretary of Defense should consider redirecting DCAA resources to other are
as
of contract risk that are now being inadequately covered.
Third, contractors should be allowed to make fair and reasonable profits, bu
t
they should not receive excessive profits from government contracts. To
monitor contractor profits on defense contracts, the Congress should enact
legislation requiring the government's contractors to annually report
financial data specific to the segment doing defense work in each company. I
f
effectively employed, the monitoring of contractors' return on capital and t
he
efficiency of their operations could be used as an alternative to reduce the
amount of DOD audit and oversight on a contract-by-
ontract or cost-by-cost basis.
