United States General Accounting Office
Washington, DC 20548

March 20, 2002
The Honorable Dan Burton
Chairman
Committee on Government Reform
House of Representatives
Subject: Bureau of Prisons Contract Payments
You asked that we review several agencies to determine whether they had made
overpayments to contractors. One of the agencies was the Department of Justice. In
consultations with your staff, we agreed to concentrate our work at the department’s
Bureau of Prisons because it administered large construction contracts. During fiscal
year 2001, the Bureau of Prisons had 24 open construction contracts that totaled
approximately $1.9 billion. As a first step in determining whether the bureau was likely
to have made overpayments to construction contractors, we identified their internal
controls. We then tested how well the controls were working by reviewing a sample of
construction contract payments. Our work was conducted between August 2001 and
December 2001 in accordance with generally accepted government auditing standards.
We also provided the Bureau of Prisons an opportunity to comment on a draft of this
letter. This letter describes the scope and results of our work.
In order to assess the risk of construction contractor overpayments, we asked Bureau of
Prisons personnel what types of preventive and detective controls were in place. Based
on these inquiries, we determined that general disbursement controls included

• segregating key disbursement responsibilities;
• using only original contractor invoices or, in limited circumstances, certified copies
as a basis for payment;

• performing automated input edit and processing checks; and
• mutilating invoices to prevent reprocessing.
In addition, we found that internal controls specific to construction contracts included the
following:

• The project representative and the contracting officer must both approve each
monthly progress payment invoice. The contracting officer checks the invoice for
completeness, accuracy, and compliance with contract terms.
• The contracting officer keeps a running record in the contract file of funds available
for the contract.

GAO-02-508R Bureau of Prisons Contract Payments

• Final contract payment is not made until all required work is verified as complete and
all open claims have been satisfied.
We reviewed a sample of 27 payments on five different construction contracts to assess
whether the construction contract payment controls were properly designed and whether
they were in place and operating to prevent or detect overpayments for the selected
items.1 The contracts totaled approximately $186 million. The 27 payments selected for
review totaled approximately $31 million, including the final payment for each of the five
construction contracts. For each payment selected, we reviewed the payment file and
obtained clarifications from Bureau of Prisons personnel when necessary.
For the payments that we reviewed, we found that the internal controls were in place and
operating and that construction contract payment amounts were correct, or, that if errors
occurred, they were detected and corrected promptly as a normal part of the payment
system. We found a few minor clerical errors for three of the contracts we reviewed.
The errors were subsequently detected and corrected by the Bureau of Prisons through its
own routine detective control procedures before we made our review. For example, in
one contract, there was an overpayment of $3 on a payment of about $4 million. The
error was rectified the following month by reducing the next month’s payment by $3. In
a second contract, the increase in retainage (costs to be paid later in the contract) was
$11,581 more than the contract costs incurred during the same period. In the following
payment period, this error was corrected by reducing the retainage payment by $11,581.
The risk of undetected construction contractor overpayments at the Bureau of Prisons
does not appear to be significant based on the controls in place and operating at the time
we made our tests. Because of this, and as agreed with your staff, we believe no further
work relative to this request is warranted at this time. In an oral response to a draft of this
letter, the bureau stated that it had no comments.
We are sending copies of this letter to the ranking minority member of the House
Committee on Government Reform and the Bureau of Prisons. Copies of this letter are
available to other interested parties. This letter will also be available on GAO’s home
page at http://www.gao.gov.

1

These contracts were selected because they had been closed in fiscal year 2001, allowing us to review the
full activity of the contracts. They included three construction contracts for two prisons and two related
contracts for monitoring and oversight. Because our sample was not statistically based, our conclusions are
drawn solely for the transactions we reviewed and cannot be extrapolated to all construction contract
payments.

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GAO-02-508R Bureau of Prisons Contract Payments

If you have any questions, please contact me at (202) 512-9508 or by e-mail at
Calboml@gao.gov or my Assistant Director, Mark P. Connelly, at (202) 512-8795 or by
e-mail at Connellym@gao.gov. Key contributors to this letter were Don Campbell and
Jack Warner.
Sincerely yours,

Linda Calbom
Director, Financial Management
and Assurance

(190028)

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GAO-02-508R Bureau of Prisons Contract Payments