Pentagon Contract Managers Failed to Police Overpayments to Executives

Questioned contractor costs relayed from one Defense Department component to another allowed as much as $22 million in unmerited payments to company executives, the Pentagon’s inspector general found.

The Defense Contract Management Agency, according to the late-March report, declined to apply some recommendations from the Defense Contract Audit Agency that certain payments be disallowed, but neglected documentation and compliance with Defense IG regulations and the Federal Acquisition Regulation.

The watchdog’s review of 35 DCAA audits involving $58.1 million in claimed contractor executive compensation, turned up $22 million from 18 audit reports that DCAA had flagged as “unreasonable.” Some of the corporate officer salaries are in the seven-figure range, charts in the report indicate.

To determine whether the pay that Defense contractors claim for executives is reasonable, “DCAA compares the DoD contractor’s claimed compensation to the average for comparable jobs published in private compensation surveys,” the IG noted. “If the claimed compensation exceeds the compensation survey average plus a 10 percent range of reasonableness (RoR) factor, DCAA typically questions the difference as unreasonable unless the DoD contractor can support above average compensation” before forwarding findings to the relevant contracting officer.

The FAR and other department guidance require the contracting officer who decides not to sustain DCAA’s objections to the executive salaries to document the rationale in a negotiation memorandum.

In these questioned cases, the contract management agency determined that DCAA’s rationales were “not credible” because two Armed Services Board of Contract Appeals cases had rejected DCAA’s use of the 10 percent reasonableness factor, the addition of locality pay to DCAA’s calculated survey average eliminated the executive compensation that DCAA identified as unreasonable, and the grouping of the contractor’s executives into one job class offset the "unreasonable" executive compensation. 

"However, none of these reasons adequately explain why the contracting officers did not sustain DCAA’s recommendations," the IG stated. "First, the two Armed Services Board of Contract Appeals did not reject DCAA’s use of a 10 percent [reasonableness] factor in all instances. Second, the contracting officers did not justify the need to add locality pay to the DCAA calculated survey average. Third, the contracting officers did not explain how the grouping of executives in one job class was appropriate or met the definition of a job class in the FAR. As a result, the contracting officers may have inappropriately reimbursed the contractors up to $22.5 million in unreasonable executive compensation."

The contract management agency's rationales for rejecting the recommended cancellations resulted when the contracting officer did not obtain the required legal review, DCMA short-changed guidelines and training to the contracting officers, and the contracting officers failed to obtain DCAA’s opinion on additional information received from the contractor after reading the audit report.

The IG recommended that the DCMA director implement a program to encourage contracting officers to seek advice from staff specialists in executive compensation, and that the director enhance training and guidance, arrange for more consultation with legal counsel on interpreting the FAR, and obtain a new DCAA opinion once a contractor has supplied new information.

DCMA Director David Lewis agreed.