Report | May 11, 2020

Audit of Military Department Management of Undefinitized Contract Actions (DODIG-2020-084)

Audit

Publicly Released: May 13, 2020

 

Objective

The objective of this audit was to determine whether the Military Departments (MILDEPs) properly managed undefinitized contract actions (UCAs) by obligating funds within required limits, ensuring profit was adjusted for cost incurred, and definitizing actions within required time limits.

 

Background

UCAs are agreements that allow a contractor to begin work and incur costs before the Government and the contractor have reached a final agreement on contract terms, specifications, or price. Once a UCA is awarded, the contractor immediately begins working and the Government must reimburse the contractor’s allowable costs during the undefinitized period. As a result, a UCA is essentially a cost-reimbursable contract during the undefinitized period. When the contractor and Government agree on contract terms, specifications, price, and profit, the UCA is then definitized.

In addition, as contracting officers determine the final price for the UCA, they are required to assess as part of the profit rate for contract type risk the extent to which costs have been incurred before the UCA is definitized. Contract type risk, referred to as contract risk in this report, is the degree of cost risk accepted by the contractor and Government under varying contract types. For example, under a cost‑reimbursable contract, the Government has more cost risk than the contractor, while under a fixed‑price contract the contractor has more cost risk than the Government. Contracting officers use the assessment of contract risk to adjust the profit for the UCA up or down depending on how much of the overall cost for the UCA had been incurred before definitization. Before definitization, allowable costs are reimbursable by the Government, and the cost risk to the contractor is lower. The lower the cost risk to the contractor, the lower the profit.

Defense Pricing and Contracting (DPC), under the Office of the Under Secretary of Defense for Acquisition and Sustainment, is responsible for pricing, contracting, and procurement policy for the DoD, including updates to Defense Federal Acquisition Regulation Supplement (DFARS) and its Procedures, Guidance, and Information. DPC also provides guidance for UCAs within the DoD and reports to Congress semiannually on DoD usage and management of UCAs.

Federal Procurement Data System–Next Generation (FPDS-NG) is a web-based tool for Federal agencies to report contract actions, including UCAs. Contracting officers are required by the Federal Acquisition Regulation to populate, complete, and submit contract action reports on all contract actions, including award and modifications, in the FPDS-NG.

 

Finding

MILDEP contracting officers generally followed requirements when obligating funds for the 116 UCAs we reviewed, valued at $10.9 billion. However, some contracting officers did not fully comply with requirements for adjusting profit or definitizing UCAs. Specifically, these contracting officers did not:

  • adjust the profit rate for contract risk to reflect costs already incurred on the UCA at definitization when they determined the profit for 12 UCAs, valued at $523.9 million, because the DFARS does not provide clear guidance on how contracting officers should adjust the profit rate for contract risk for costs already incurred on the UCA;
  • adequately support their contract risk determinations in the contract file for 56 UCAs, valued at $5.3 billion, because contracting officers did not prepare price negotiation memorandums with sufficient detail to document incurred costs, and the DD Form 1547 lacked sufficient detail to show the reduced cost risk related to incurred costs during the undefinitized period; or
  • definitize 53 UCAs, valued at $4.8 billion, within the required 180 days after the contracting officers received a qualifying proposal from the contractor because, according to the contracting officers, lengthy negotiations were caused by changing Government requirements and they were working with “inexperienced” or “uncooperative contractors.”

In addition, we determined that some contractors took up to 542 days from award of the contract to provide qualifying proposals for the 116 UCAs we reviewed. This occurred because DFARS lacks contract clauses that contracting officers could use to further incentivize contractors to provide timely qualifying proposals.

Furthermore, while selecting our sample of UCAs, we conducted a reconciliation of the contract actions identified as UCAs in the FPDS-NG to the UCAs reported to DPC for inclusion in the semiannual UCA report to Congress. While this reconciliation only covered the seven contracting offices in our sample, we found that contracting officers did not report accurate or complete information in the FPDS-NG for 402 contract actions, valued at $12.8 billion, or to DPC for 17 UCAs, valued at $2.1 billion, because the MILDEPs did not have controls in place to reconcile the FPDS-NG data to the UCA information they reported semiannually to DPC and Congress.

As a result, the DoD assumed more contract risk and potentially paid $4.6 million more profit than necessary for 12 UCAs. Also, contracting officers could not fully incentivize contractors to submit timely qualifying proposals and control their costs before definitization. In addition, the DPC Principal Director and Congress were not aware of the DoD’s use and management of 17 UCAs, valued at $2.1 billion, that were not reported to DPC.

 

Recommendations

Among other recommendations, we recommend that the DPC Principal Director:

  • update the DFARS to clarify that when considering the reduced cost risks associated with allowable incurred costs on a UCA, it is appropriate to apply separate and differing contract risk factors for allowable incurred costs and estimated costs to complete according to the United States Code when completing the contract risk sections of DD Form 1547, “Record of Weighted Guidelines.”
  • encourage contractors to provide timely qualifying proposals by updating DFARS Subpart 217.7404-3, “Definitization Schedule” to:
    • open the suspension and reduction of progress payments to include all types of contract payments and not just progress payments; and
    • require contracting officers document in the contract file their justification for why payments were not withheld if the qualifying proposal was not received in accordance with the initial definitization schedule.
  • update the DFARS clause 252.217-7027, “Contract Definitization,” to include that failure to meet the qualifying proposal date in the definitization schedule could result in the Government withholding a percentage of all payments yet to be paid under a UCA until the qualifying proposal is received, and

Among other recommendations, we recommend that the Assistant Secretary of the Army (Acquisition, Logistics, and Technology), the Deputy Assistant Secretary of the Navy for Procurement, and the Deputy Assistant Secretary (Contracting) Assistant Secretary of the Air Force (Acquisition, Technology, and Logistics):

  • require the head of each contracting activity to establish a process by which the contracting officers who have not received a qualifying proposal in accordance with the UCA definitization schedule to immediately report to their Head of the Contracting activity on why a qualifying proposal was not received, how they plan to obtain a qualifying proposal within 60 days or less, and if payments will be withheld.

Army Contracting Command–Redstone Arsenal, Army Contracting Command–Detroit Arsenal (formerly Army Contract Command–Warren), Naval Air Systems Command, Naval Sea Systems Command, Air Force Life Cycle Management Center–Wright Patterson, Air Force Life Cycle Management Center–Hanscom, and Air Force Space and Missile Systems Center contracting officials took actions to correct contract action reports in the FPDS-NG that were not accurate.

 

Management Comments and Our Response

The DPC Acting Principal Director, responding for the DPC Principal Director, agreed with 6 of the 8 recommendations and requested that 2 recommendations be combined and revised to take into consideration recent changes made by the 2017 National Defense Authorization Act on how profit is calculated. We revised the recommendations as requested by the Acting Principal Director. Comments from the Acting Principal Director, addressed the recommendations; therefore those recommendations are resolved but will remain open until we receive documentation to support that the Acting Principal Director implemented those recommendations.

The Deputy Assistant Secretary of the Army (Procurement), responding for the Assistant Secretary of the Army (Acquisition, Logistics, and Technology), and the Director of Policy, Deputy Assistant Secretary of the Navy (Procurement), responding for the Deputy Assistant Secretary of the Navy for Procurement, disagreed with the recommendation to require the head of each contracting activity to establish a process that the contracting officers, who have not received a qualifying proposal in accordance with the UCA definitization schedule, to immediately report to their Head of the Contracting Activity. They stated that the recommendation is not necessary because the requirement already exists in the DFARS or DFARS Guidance and Information (PGI). The Director of Policy also stated that the Navy has processes in place which meet the intent of the recommendation. The Principal Deputy Assistant Secretary of the Air Force (Acquisition, Technology, and Logistics), responding for the Deputy Assistant Secretary (Contracting) Assistant Secretary of the Air Force (Acquisition, Technology, and Logistics), agreed with the specifics of the recommendation.

We disagree that the DFARS requirement is being fully implemented at the Army and Navy sites we visited. We found that all emphasis was placed on meeting the 180-day definitization deadline after receipt of the qualifying proposal and not when the deadline for the qualifying proposal was missed. The Deputy Assistant Secretary of the Army (Procurement) and the Director of Policy, Deputy Assistant Secretary of the Navy (Procurement), did not address the specifics of the recommendation. Therefore, the recommendation is unresolved. We request that the Assistant Secretary of the Army (Acquisition, Logistics, and Technology) and the Deputy Assistant Secretary of the Navy for Procurement provide additional comments on the actions that the Army and the Navy will take to implement the recommendations. Comments from the Principal Deputy Assistant Secretary of the Air Force, partially addressed the specifics of the recommendation; therefore, the recommendation is resolved but will remain open.

 

This report is the product of Proj. No. D2019-D000AH-0090.000