DoD tries to get money back from contractors

The Defense Department is experimenting with an auditing technique that could help the government recover millions of dollars in overpayments from contractors.

Recovery auditing, in which an external auditor tries to identify and recover overpayments, holds promise for Defense managers seeking to get the best deal from private contractors, the General Accounting Office concludes in a new report ("Contract Management: Recovery Auditing Offers Potential to Identify Overpayments," NSIAD-99-12).

Since 1996, the Defense Supply Center in Philadelphia has been experimenting with recovery auditing. The center contracted with Profit Recovery Group International (PRGI), which keeps 20 percent of the funds it collects for the Defense Department.

PRGI uncovered $19.1 million that the Defense Supply Center overpaid contractors from 1993 to 1995. The company sent mailings to vendors asking them to supply PRGI with current statements of their accounts with the center. In one case, a discrepancy between the vendor's statement and the center's revealed that the vendor owed DoD $957,000 for an immunization serum that had been recalled.

PRGI identified duplicate payments and accounting errors. The company also checked the prices DoD paid for goods against the discounted prices vendors offer to bulk-order customers to make sure DoD got the best price possible.

So far however, the center has only collected $1.9 million of the $19.1 million that PRGI says vendors owe it. PRGI and vendors have had trouble unearthing records of payments made from 1993 to 1995.

In addition, vendors have complained that under the Federal Acquisition Regulation, collection letters must be signed by government officials, not PRGI collectors. Vendors also said the center was often ineligible for price discounts because it didn't pay its bills within the discount period. Demand letters from PRGI had a harsh tone, vendors complained.

The Defense Supply Center disagreed with the vendors, but has not yet issued letters calling on the companies to pay up.

Despite the problems, GAO said recovery auditing is worth the effort. GAO recommended that audit efforts focus on recent purchases to lessen the chances that government and vendor documentation can't be found. DoD could also look into using internal groups to identify overpayments before turning audits over to outside groups, GAO suggested. The department could periodically request account reports from vendors to compare with Defense records.

PRGI recommended that the Pentagon train its contracting personnel to take advantage of price discounts available to bulk purchasers.

Recovery auditing is commonly used by the automobile, retail and food services industries. The military exchanges also take advantage of the technique. In an August 1998 memorandum, Defense Comptroller William J. Lynn encouraged other DoD agencies to use recovery auditing.