What is Contract Audit Followup - (CAFU) - Part 3?

This is the third and final posting on DoD's CAFU (Contract Audit Follow-Up) system. If you missed either of the first two segments, go to Part 1 and Part 2.

The Contract Audit Follow-Up system was established to ensure that the contracting officer had all pertinent evidential materials to assist in resolving the issues, that the resolution was documented and, in certain cases, approved by higher management, and that audit findings were timely acted upon so that the findings didn't become 'stale' or the audit report was misplaced or buried.

Reportable audits, as we discussed yesterday, are those with significant or material findings. After an audit report is 'reported' under the CAFU system, there are specific deadlines a contracting officer must adhere to. For reportable audits, there are two key milestone dates; resolution and disposition. The simplest way to think about this is to compare them with forward pricing activities. The resolution date corresponds to the pre-negotiation objective while the disposition date corresponds to the post-negotiation memorandum (PNM). Contracting officers have six months to "resolve" the issue and twelve months to "dispose" of the issue (unless there are other mitigating circumstances, of course).

The DoD Instruction on CAFUs, requires that dispositions of all reportable findings and recommendations must be documented in a signed and dated post-negotiation memorandum. The documentation must itemize each audit finding and recommendation, indicate whether the finding and/or recommendation is agree to, and if not, document the rational for the disagreement. If the reported findings or recommendations are based on interpretation of law or regulation, the contracting officer is required to consult with legal counsel.

So why should contractors be concerned about this internal DoD reporting mechanism? There are several reasons.

1. Extends the resolution process. If a contractor and auditor cannot reach an agreement on whatever issue is at stake, the resolution process is kicked upstairs to the contracting officer to resolve. This will add a minimum of six to twelve months before resolution.
2. Glib talk may not work. It used to be that where there was an impasse between contractor and auditor, contractors would opt to take the issue up with the contracting officer figuring that the contracting officer might be more reasonable since he/she has not been so heavily invested in the issue. Under the CAFU system, that strategy doesn't work as well as it once did because now the contracting officer must address each issue individually and specifically and document and seek approval if his/her decision is contrary to the audit findings.
3. Cost money. If the issue involves the allowability of incurred costs, the Government is going to keep the money until there is a resolution. This means that regardless of the outcome, there will be imputed interest on the amount withheld. For contractors borrowing working capital, this is a very real cost.

Sometimes auditors are (or can seem to be) unreasonable so there is no option other than taking the issue to the contracting officer. Our experience however is that resolution of audit issues is usually much quicker if resolved at the auditor level.