Contractor's Risk of Being Audited Jumps Significantly

It appears that DCAA (Defense Contract Audit Agency) has quietly and significantly increased the number of incurred cost audits it intends to perform. In its most recent edition of the DCAA Contract Audit Manual, Section 6-104 (December 2017), DCAA lays out its policy for performing incurred cost audits. In short, it classifies contractors as either high risk or low risk. 100 percent of incurred cost submissions from high risk contractors will be audited and 33 percent of incurred cost submissions from low-risk contractors will be audited.

The Agency has always audited 100 percent of incurred cost submissions from high-risk contractors, but the 33 percent threshold for low-risk submissions marks a significant increase in numbers of audits. Consider the previous sampling criteria in the following chart. The term "ADV" refers to Auditable Dollar Volume and represents the total costs charged to flexibly priced contracts in a given year. Flexibly priced contracts include CPFF, CPIF, FPI, and T&M. If you're a Government contractor and charged less than $1 million to flexibly-priced contracts (and you're a low-risk contractor), your chances of being selected for audit just increased from zero percent to 33 percent.

These old percentages were probably only temporary anyway. DCAA had a huge backlog of incurred cost submissions subject to audit and took a lot of criticism from GAO and the DoD Inspector General as well as members of Congress over its inability to keep up with the workload. To catch up, simply agreed to or recommended that contracting officers accept claimed rates as proposed. No audits were performed on thousands of submissions. This approach certainly reduced DCAA's backlog but it also left the Government at risk for reimbursing contractors for potentially unallowable costs.

It will be interesting to see whether DCAA can stay current with the added workload. However, the Agency might not have to do it on their own. The 2018 NDAA (National Defense Authorization Act) contains a provision that requires DoD to utilize commercial audit organizations to accomplish 20 percent of incurred cost audits (see our coverage of this provision here).