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Award and Administration of Performance-Based Payments in DoD Contracts

DODIG-2013-063

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What We Did

We determined whether DoD contracting personnel’s negotiation and administration of 60 performance-based payment schedules, which identify all events for a contract, were in compliance with Federal Acquisition Regulation and DoD requirements. Specifically, we determined whether DoD properly negotiated, verified, and disbursed the payment requests. The contracts containing the schedules were awarded from FY 2009 through FY 2011 and are valued at $13.2 billion.

What We Found

Contracting personnel did not properly evaluate and negotiate schedules. Specifically, they did not: 

  • establish appropriate events for 1,807 events out of 2,356 total events on 57 approved performance-based payment schedules, and determine whether the event value fairly represented contract performance for 44 schedules;
  • clearly define the criteria for successful completion in 33 schedules, identify events as severable or cumulative in 23 schedules, and specify completion dates in 21 schedules; or
  •  properly negotiate and verify the contractors’ need for contract financing or level of investment before authorizing performance-based payments in all 60 sample contracts.

This occurred because DoD contracting personnel did not perform adequate reviews of schedules provided by contractors and did not use expenditure data or other independent data to value events. In addition, DoD guidance did not require contracting personnel to take any performance-based payment contract financing training and DoD guidance was inadequate and inaccurate.

As a result, DoD risked making advance payments totaling $11.4 billion and might have made full payments for less than full contract performance. Also, the Government could have needlessly incurred $28.8 million in carrying costs associated with the $7.5 billion that DoD paid contractors. The Government could realize potential monetary benefits of $13.6 million to $53.3 million over the next 5 years related to reduced carrying costs. Finally, DoD limited its ability to ensure that it received adequate consideration.

What We Recommend

The Director, Defense Pricing, should:   

  • require that contracting personnel request a contractor estimate of expenditures before approving the performance-based payment schedule;
  • develop a training program that includes a discussion on appropriate event descriptions and required elements; and
  • update guidance to require contracting personnel to determine whether the contractor could obtain private financing and the amount of contract financing and define what a reasonable level of contractor investment is.

Management Comments and Our Response

Management comments were responsive, and no additional comments are required. Defense Pricing will issue guidance addressing the topics contained in the recommendations.

This report is a result of Project No. D2012-D000DD-0139.000.