What are Improper Payments?

Under OMB (Office of Management and Budget), Federal agencies are required to periodically review payments under contracts, awards, grants, and other expenditures for improper payments. Within DoD, many agencies have programs in place to test for improper payments. DCAA (Defense Contract Audit Agency), for example, checks for improper payments in connection with "Testing of Paid Vouchers".

What are "improper payments"? Here's the OMB definition (which comes from Public Law No. 107-300).

1. Any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements, and includes any payment to an ineligible recipient, and
2. Any payment for an ineligible service, any duplicate payment, any payments for services not received, and any payment that does not account for credit for applicable discounts.

One primary purpose of an adequate billing system is to minimize improper payments. That's why contract auditors place so much emphasis on billing systems and associated internal controls. Many improper payments are inadvertent and could be avoided with a good billing system.

One area that has come into focus regarding improper payments is provisional billing rates. Contractors with cost-type contracts are reimbursed their actual direct costs and reimbursed their indirect costs at provisional billing rates. Provisional billing rates are trued up after the end of the year when contractors submit their annual incurred cost proposals. But it is contractors' responsibility to ensure that their provisional billing rates accurately reflect their best estimate of the final rate. At the beginning of the year, indirect rates are just educated guesses but as the year progresses, it becomes easier and easier to see what the final rate will look like. If the provisional billing rate is significantly higher than what the final rate is expected to be, contractors have an affirmative duty to revise those rates downward. Billing excessive provisional rates for too long will land contractors in the improper payment pool.