Update on Section 809 Panel

It is time for an update on the activities of the Section 809 Panel, an advisory panel formed to streamline the Defense Department's acquisition regulations. The name 'Section 809 Panel" comes from Section 809 of the Fiscal Year 2016 NDAA (National Defense Authorization Act). For more information on this panel, refer to "New Advisory Panel to be Formed to Streamline Acquisition Regulations". Briefly, the Section 809 Panel's overarching objective has been to make recommendations that, if adopted, will enable DoD to more consistently buy what it needs in a timely and cost-effective manner - whether that be commercial items, information technology, services, weapon systems, or the full range of tools and equipment on which war-fighters depend.

One thing for certain, the Section 809 Panel has been very active, holding monthly meetings and frequent stakeholder meetings. Its 18 appointed commissioners have been augmented by 30 or so professional staff members. Its got its own website (section809panel.org) with plenty of information on its activities and research. This past May, the Panel published its first interim report where it set forth the framework under which it intends to focus its work and recommendations. These include:

1. Adapt at the speed of a changing world
2. Leverage the dynamic defense marketplace
3. Allocate resources effectively
4. Simplify acquisition
5. Enable the workforce

The one that we're most interested in is number 4, simplifying the acquisition process but all five are tightly integrated. For example, you can simplify the acquisition process now but if you are not adaptable to the speed of a changing world, the acquisition process will soon feel cumbersome once again.

There have been many failed attempts at acquisition reform so what makes the likelihood that the Section  809 Panel will succeed (or have some modicum of success). The committee recognizes the fact that past reform initiatives have not had much success. That is why one sees the word "Bold" used liberally in their publications and website. In its Interim Report, the Panel makes the following observation:

In the last 50 years, there have been more than 100 reports, studies, and analyses of how DoD acquires goods and services. From these reports, the lesson learned is clear. Tinkering and incremental approaches to acquisition reform have not provided the necessary results and are especially ineffective in today's rapidly changing environment. In fact, incremental approaches have exacerbated problems with the acquisition system by adding more layers of sign off, mountains of paperwork, and hundreds of additional regulations. DoD must implement bold approaches and bold solutions to produce true reform (underscore added).

Its not too late to get in on the action. The stakeholder meetings are open to the public and there are ample opportunities for present their reform ideas for consideration. At one recent Panel meeting, a presenter offered five recommendations for reform:

• Give contractors a total contract price range in the solicitation. It would be helpful to know whether the Government wants and can afford a Mercedes or whether it just has the budget for a used Yugo with ripped upholstery.
• Make GAO the only forum for bid protests. Have you ever been the awardee who has to stop work as the protester ties up the award through multiple forums?
• GSA cannot be on the leading edge of technology because it requires contractors to have previously sold the product or service before it can add it to a GSA Schedule. So, GSA is always looking backwards and not forward.
• Eliminate the use of cost reimbursable contracts for low tech services when the end product is just the service.
• Post awarded (redacted) contracts to a common website rather than make people go through the burdensome process of requesting them under the Freedom of Information Act.

These are just a few of probably hundreds, if not thousands of ideas that have been proffered for consideration by the Panel. If you've got some, this is the time to let the Panel know. Spend some time on their website and see whether you can contribute.

Section 809 Panel - Team 9 - Cost Accounting Standards

The Section 809 Panel, created by section 809 of the 2016 NDAA (National Defense Authorization Act) was tasked with finding ways to streamline and improve the defense acquisition process. The Panel has two years to do it.

In order to cover every aspect needed to improve the defense acquisition process, the Section 809 Panel is broken up into 10 teams that analyze specific topics. Today we want to discuss Team 9 that was set up to review the Cost Accounting Standards Board (CASB) administrative and accounting requirements in the context of significant changes in what is being acquired, contracting methods, acquisition methods, and contractor operations.

Most Government contractors are not CAS covered or even subject to modified CAS coverage. However, most of the CAS standards, which were first promulgated back in the 70s, have now been incorporated into FAR cost principles in one form or another. Therefore, any recommendations coming out of the Section 809 Panel could easily impact all DoD contractors.

Team 9 has sent out a request to interested parties on recommended issues to address and potential solutions to those issues, with a particular emphasis on concerns that are significant and widespread enough that addressing them will noticeably improve the effectiveness and efficiency of DoD procurement.

So far, CAS matters under review by Team 9 include the following 10 areas:

1. CAS applicability, exemptions, and thresholds focusing on expanding existing exemptions
2. Conformance of GAAP and CAS where GAAP offers a suitable basis for fulfilling CASB objectives
3. Cost impact measurement and administration (contractors especially will benefit from changes here)
4. Materiality - more objective criteria for determining materiality
5. Improved definition of terms such as "cost accounting practice" and "change to a cost accounting practice
6. Allocation standards 403, 410, 418, and 420 (including accounting for allocated direct costs)
7. Disclosure statement structure and requirements
8. Accounting for unallowable costs - especially definitions and illustrations concerning expressly unallowable cost and directly associated costs
9. Pension costs
10. Insurance costs - self insurance and postretirement benefits

If you have any ideas, comments, complaints, or recommendations or are just curious about the process, find a way to become involved in the Section 809 Panel.

Section 809 Panel - Recommendation to Adopt an Audit Professional Practice Guide

This month, the Section 809 Panel released Volume 3 of its report on streamlining and codifying acquisition regulations. Volume 1 issued in January 2018 contained 24 recommendations (as well as many more sub-recommendations). Volume 2 issued in June 2018 contained an additional 10 recommendations. Volume 3, the Panel's final volume, contains 59 recommendations and more than 1,000 pages. We have written covered, what we think were highlights in Volumes 1 and 2 (search this blog for 'Section 809 Panel'). You can download all three volumes at the Section 809 Panel Website.

We are not going to attempt to digest all 59 recommendations on these pages but we will focus on a few recommendations that will be of interest to Government contractors and the potential for being subject to contract audit (namely audits by the Defense Contract Audit Agency (DCAA)).

Recommendations 71 through 73 share a common theme of adoption of an audit professional practice guide (PPG). Today we will cover Recommendation 71. Coverage of Recommendations 72 and 73 will come later.

The Section 809 Panel is recommending that DoD adopt a professional practice guide to support the contract audit practice of DoD and the independent public accountants DoD may use to meet its contract audit needs, and to establish a working group to maintain and update the guide. The Panel believes that existing audit guidance is too insular. It framed its concern like this:

Although professional standards are common in the auditing profession, none of them have been developed or interpreted for the unique purpose of federal government contract oversight. DCAA's Contract Audit Manual provides a good foundation, but it lacks the collaborative inputs, perspectives, and interpretations of knowledgeable professionals outside DCAA and the government. This point is important because IPAs (Independent Public Accountants) and other qualified professional services firms are playing an increasingly important role in the  government's oversight of federal government contracts.

According to the Panel, professional standards of importance that require a collaborative interpretation on how to apply the standards in the contract oversight environment include:

• materiality
• risk
• internal controls
• independence
• objectivity
• sufficient evidence
• reliance on the work of others

The Panel included a draft Professional Practice Guide for Audits and Oversight of Defense Contractor Costs and Internal Controls in its report. The team that developed the Guide consisted of representatives of the Section 809 Panel, DCAA, DCMA, GAO, AICPA and industry.

Tomorrow we will continue discussion of the draft PPG.

Section 809 Panel and Texting While Driving

For the past couple of days, we've been discussing the activities of the Section 809 Panel (refer to Update on Section 809 Panel). Ultimately, the Panel will be "making recommendations, including actionable changes to regulatory and statutory language, to improve the acquisition process within DoD." For the purposes of the panel, regulations include not only regulations, but executive orders, directives, policies, and procedures as well. The Panel's goal is to take a comprehensive approach to weeding out regulatory and statutory underbrush that gets in the way of the DoD mission and to recommend entirely new pathways for approaching defense acquisition that promotes innovation, agility, and speed across the whole range of goods and services.

Last May, the Panel issued its first interim report that included several "problematic policies and requirements" that it highlighted as case studies of what's wrong the the procurement process. These, the Panel states, represent only a small sample of what bogs down the defense acquisition process. We will discuss one of those items here. For a complete listing, see the Panel's Interim Report Supplement.

Texting While Driving. Back in 2009, the President issued an Executive Order (EO) - Federal Leadership on Reducing Text Messaging While Driving - which included language to encourage contractors to employ practices and policies to ban texting while driving. Eventually, a section was added to FAR (Federal Acquisition Regulations) at 23.11 to implement the EO and a clause was required to be inserted in all contracts. We questioned the need for the  EO and the FAR change at the time (see FAR Now Says You Can't Text While Driving) because even back then, it seemed redundant to what States were already legislating.

The Section 809 Panel noted that since the EO was issued, the norms surrounding cell phone use while driving have evolved, making the provisions of FAR 23.11 and 52.223-18, no longer necessary. DoD already prohibits the use of cell phones while driving on all military installations while 46 states, Washington DC, Puerto Rico, Guan and the U.S. Virgin Islands ban text messaging for all drivers. Because most states and DoD now ban cell phone usage and/or texting while driving, the FAR provisions are no longer necessary and should be deleted, according to the Panel's recommendation.

Although many acquisition regulations, including the prohibition against texting while driving, are designed to further arguably laudable public policy objectives, The Section 809 Panel wishes to emphasize that the aggregate effect of hundreds of similar regulations is costly for DoD.

NDAA 2020 - Study the Applicability of Section 809 Panel Recommendations to Energy Department

This is another installment of our coverage of the 2020 NDAA (National Defense Authorization Act). The Senate and House have passed their respective versions of the 2020 NDAA and differences in the two bills are now being reconciled in conference committee. Although there is no certainty that the provisions we have been highlighting, including this one, will make it to the President's desk, they do not seem overly partisan so we think they will likely make it to the final legislation.

A lot of the provisions in both the Senate and House bills call for more studies including the following study to determine whether the recommendations from the Section 809 committee can be applied to the Department of Energy.

The Section 809 Panel was established under the 2016 NDAA to study and make recommendations on streamlining and codifying acquisition regulations for the Department of Defense. The Panel issued three reports containing recommendations related to improving the defense acquisition process. While these recommendations were not aimed at the Department of Energy (DOE), the Panel believed that DOE faces a number of the same acquisition challenges. Therefore, the Senate included a provision in the 2020 NDAA that directs the Government Accountability Office to assess the application of some of the recommendations.

First, GAO is to review issues affecting DOE's acquisition workforce. Specifically, the Senate is interested in DOE's workforce planning efforts, particularly related to (i) how it determines the number of acquisition professionals needed and the skills and training required for those positions, (ii) whether DOE's acquisition professionals attain the needed training and skills, (iii) any challenges in recruitment and retention of DOE's acquisition workforce and (iv) any systemic challenges for those professionals in performing their acquisition oversight responsibilities.

Second, the Senate finds the portfolio management framework recommended by the Section 809 Panel compelling and therefore directs GAO to study whether it can be ported over to DOE.

Finally, the Section 809 Panel provided examples of essential audit and non-audit services provided by DoD agencies across the contract life-cycle. Most of these services are performed pursuant to FAR requirements which are generally applicable to all agencies, including DOE. The Senate directs GAO to review how DOE obtains the required audit and non-audit services and whether there are any opportunities for improvement or efficiency in how DOE obtains these services.

GAO to Study DOE's Acquisition Workforce and Audit Needs

The Senate Committee on Armed Services released a report to accompany its 2018 NDAA (National Defense Authorization Act). The Senate and the House versions of the NDAA are currently in conference committee to resolve differences before going to a vote by the full chambers. The Committee report offers some insight into why the Senate added various provisions to the NDAA. One of the provisions called out in the NDAA (Senate version) is for the GAO (Government Accountability Office) to review the applicability of the Section 809 Panel to the Department of Energy. We last discussed this back in July (see NDAA 2020 - Study the Applicability of Section 809 Panel Recommendations to Energy Department) so today's blog represents a refresher and update to what we wrote previously.

Section 809 of the 2016 NDAA required DoD to establish an advisory panel on streamlining and codifying acquisition regulations for the Department of Defense. Between January 2018 and January 2019, the Section 809 Panel (as it came to be called) issued several reports containing recommendations related to improving the defense acquisition process. While these recommendations were not aimed at the Energy Department, the Senate Armed Services Committee believes that DOE face a number of the same acquisition challenges as the DOD. That is why the Committee inserted the requirement for GAO to assess the application of a subset of these recommendations to DOE.

If enacted, the GAO will be directed to review issues affecting DOE's acquisition workforce. Specifically, the Armed Services Committee is interested in DOE's workforce planning efforts related to (i) how DOE determines the number of acquisition professionals needed and the skills and training required for those positions, (ii) whether DOE's acquisition professionals attain the needed training and skills, (iii) any challenges in recruitment and retention of DOE's acquisition workforce, and (iv) any systemic challenges for those professionals in performing their acquisition oversight responsibilities.

Volume 1 of the Section 809 Panel's final report provides examples of essential audit and non-audit services provided by DoD agencies across the contract life-cycle. Most of these services are performed pursuant to requirements in FAR (Federal Acquisition Regulation), which are generally applicable to all agencies, including the DOE. The Senate Armed Services Committee wants GAO to review how the DOE obtains the required audit and non-audit services and whether there are opportunities for improvement or efficiency in how the DOE obtains these services. Up until six or so years ago, DOE acquired its contract audit services through DCAA (Defense Contract Audit Agency) after which it began contracting with commercial accounting firms for the service. Whether the switch was beneficial to the Government is a question that the GAO will try to assess.

Will the Newly Created "Defense CAS Board" Survive?

We ended last week's blog with a news article about the CAS (Cost Accounting Standards) Board's upcoming meetings and the agenda topics for the Board's November and January meetings (see CAS Board Meeting). Today and tomorrow we want to take a closer look at two of the agenda topics for their potential impact on small Government contractors.

Agenda topic #4 reads as follows:

Review of Section 809 Panel Recommendation on Defense Cost Accounting Standards Board (Defense CAS Board). The Board will discuss the analysis and recommendation made by the Panel (in Volume 2 of its report) to repeal the provisions in Section 820 of the FY 2017 NDAA (National Defense Authorization Act) that created the Defense CAS Board. See Section 820(b), which amends title 10 by adding a new section 190.

Section 820 of the 2017 NDAA had several purposes:

• Revive the Cost Accounting Standards Board
• Establish a Defense Cost Accounting Standards Board (Defense CAS Board), and
• Privatize some of the audit work being performed by the Defense Contract Audit Agency (DCAA)

With respect to item no. 2, the Defense CAS Board enumerated duties include (see Defense Cost Accounting Standards - Part 2 for more detailed information):

1. review cost accounting standards established by the CASB and recommend changes to such cost accounting standards to the CASB
2. has exclusive authority with respect to the Department of Defense to implement such cost accounting standards to achieve uniformity and consistency in the standards governing measurement, assignment, and allocation of costs to contracts with the DoD, and
3. shall develop standards to ensure that commercial operations performed by Government employees at the DoD adhere to cost accounting standards that inform managerial decision-making.

Last June, the Section 809 Panel (officially the Advisory Panel on Streamlining and Codifying Acquisition Regulations) issued Vol. 2 of this three volume report. In that report, the Panel recommended abolishing the Defense CAS Board (even before it had a chance to organize). Concerning the Defense CAS Board, the report concluded:

Creation of the Defense CASB is an attempt to solve the problem of the non-functioning CASB. Adding another regulatory organization is the wrong solution. Government and industry representatives who spoke with the Section 809 Panel expressed they do not support creation of a Defense CASB. Stakeholders are concerned by the many unanswered questions raised by creating this board, including whether the new board will be biased toward DoD issues, and if the two boards will create competing sets of CAS. Creation of a Defense CASB would almost certainly be counter-productive.

We're not sure what the current CAS Board might discuss with respect to its new sibling, the Defense CAS Board other than give credence to and endorse the recommendation of the Section 809 Panel. The creation of the Defense CAS Board was statutorily derived so another statute will be necessary to abolish the Board. Its not something that the CAS Board can do on its own.

Section 809 Panel - Replace Single Deficiency with Tiered Approach to Better Describe Severity

Today we are continuing our discussion of the recently released Volume 3 report published by the Section 809 Panel. We have been focusing on recommendations 71 through 73 which sare the common theme of adopting a Professional Practice Guide (PPG) to assist oversight agencies and independent public accountants (IPAs) to better meet the needs of contracting officials who rely on oversight activities. Today we are covering Recommendation No. 73; replace the DFARS (DoD FAR Supplement) definition of "business system deficiency" with a tiered rating system to more closely align with generally accepted auditing standards (GAAS).

As most Defense contractors know, there are six business systems that the Government considers essential to protecting its interests and essential for contractors to ensure good internal control systems are in place. These are (i) accounting system (ii) purchasing system, (iii) estimating system (iv) property management, (v) material management and accounting system (MMAS), and (vi) earned value management system (EVMS). Various oversight agencies (usually DCAA and DCMA) will take the lead in reviewing internal controls for these systems and issue reports as to their conclusion on the adequacy of those controls. If the controls are found to be deficient, the Government will expect corrective action  plans and perform follow-up reviews to ensure those plans are in place and effective.

The definition of the term significant deficiency for contractor  business systems (based on Section 893 of the Fiscal Year 2011 NDAA (National Defense Authorization Act) and carried over into the DFARS (DoD FAR Supplement)) does not align with generally accepted auditing standards for evaluating and reporting on internal control deficiencies. This lack of consistency creates confusion regarding the identification, severity, meaning and resolution of deficiencies.

According to DFARS, a significant deficiency describes it as materially affecting DoD officials' and contractor's ability to rely on information produced by the business system that is needed for management purposes.

The term in GAAS for a weakness of this severity is a "material weakness. GAAS also uses the term "significant deficiency" but in a way to describe a deficiency that is less severe than a material weakness. The use of the same term to mean different levels of severity of a deficiency creates confusion about the meaning of significant deficiency among contractors, independent public accountants performing internal control audits, government auditors, and the acquisition community.

The Section 809 Panel believes that contractor business systems could have a number of deficiencies that range from trivial to severe. Reporting deficiencies by different levels of severity, and in a manner that aligns with established auditing standards, will allow contracting officers to make informed decisions on the acceptability of the business system.

• Material weakness: A deficiency, or combination of deficiencies, in internal control over risks related to Government contract compliance or other shortcomings in the system, such that there is a reasonable possibility that a material noncompliance will not be prevented, or detected and corrected, on a timely basis. A reasonable possibility exists when the likelihood of an event occurring is either reasonably possible, meaning the chance of the future event occurring is more than remote but less than likely, or is probable.
• Significant deficiency: A deficiency, or combination of deficiencies, in internal control over risks related to Government contract compliance or other shortcomings in the system that is less sever than a material weakness yet important enough to merit the attention of those charged with governance
• Other deficiency: A deficiency or combination of deficiencies, in internal control over Government contract compliance or other shortcomings in the system that have a clearly trivial or inconsequential effect on the ability of the business system to prevent or detect and correct, material noncompliances on a timely basis.

The "other deficiency" acknowledges the possibility that a business system deficiency, or combination of system deficiencies, may have a clearly trivial effect on the quality of information produced by the contractor's business systems. The Section 809 Panel believes that "other deficiencies" should not impact the audit opinion or be included in the audit report. Such deficiencies would be communicated to the contracting officer via email or other method of communication. It should be noted that trivial deficiencies sometimes turn into significant deficiencies if not corrected.

New Professional Practice Guide (PPG) for Performing Incurred Cost Audits

Section 809 of the 2016 NDAA (National Defense Authorization Act) established the Section 809 Panel to research and recommend improvements to the acquisition process. Section 803 of the 2018 NDAA required the Defense Department to adopt commercially accepted standards of risk and materiality in the performance of incurred cost audits. The Section 809 Panel, with the help of DCAA (Defense Contract Audit Agency) and others, drafted a Professional Practice Guide (PPG) to develop a risk assessment framework intended to 'manage' DoD's risk and materiality approaches to incurred cost audits.

DCAA has now uploaded part of the the PPG to its public website. The Agency included only Chapters 1 and 2 plus Appendix A. It did not include Chapter 3 which deals with internal controls. The PPG has been publicly available for many months but has been buried in the Section 809's 600-page volume 3 final report. DCAA intends to adopt the new risk-based sampling framework for sampling incurred cost proposals and to adopt the materiality standards for performing the incurred costs audits found in the PPG. The first materiality criteria involves the selection of contractors to audit. Once the selection has been made, the second materiality criteria involves what cost elements withing the incurred cost proposal should be audited.

The Professional Practice Guide can be found under the Guidance tab at dcaa.mil. Or, go directly there by clicking here.

Get Your Voice Heard - Section 809 Panel Wants to Hear From You

Over the past several weeks, we've written a few times about the activities of the Section 809 Panel whose job is to figure out how to ensure the Defense Department (and by extension, Civilian agencies) to more consistently buy what it needs in a timely and cost-effective manner (see, for example, Update on Section 809 Panel).

The Panel sincerely wants to hear from people and organizations affected by the current state of procurement regulations and they've made it very easy to submit your dirty dozen (except that they call it the "50 Worst"). The Panel needs your help in identifying and tallying the 50 worst regulations, laws, and policies that frustrate you and must go.

The Panel has created an on-line form with two basic questions:

1. What regulatory roadblock are you encountering? Is there a policy that frustrates you and must go? Know a law that doesn't make sense and costs you time and money? Describe it here
2. How does it specifically get in your way? How would you change it, get rid of it, or make it simpler?

There is no limit to the number of contributions one can make to the "50 Worst" regulations, laws, and policies. The Section 809 Panel may be the best shot at improving the Government's procurement regulations for many many years so please contribute.

The 50 Worst on-line form can be accessed here.

More Recommendations for the Section 809 Panel

From time to time, we provide updates to some of the activities of the Section 809 Panel, an advisory panel created by the 2016 NDAA (National Defense Authorization Act) to make recommendations on streamlining the Defense Department's acquisition regulations. The Section 809 Panel solicits recommendations and ideas from anyone that has an interest in Government procurement and wishes to offer up ideas for streamlining the acquisition process.

Last week, The Coalition for Government Procurement submitted a list of 30 specific recommendations for (i) reducing unnecessary regulations on industry, (ii) empowering successful acquisition management and (iii) strengthening inter-agency contracts to ensure that DoD contracting officers can make informed contracting choices. The Section 809 Panel is reviewing those recommendations now, The Coalition's report can be found here.

So what were some of their recommendations? Well, to be honest, we haven't read the full 94 page report ourselves. That seems a bit much to ask, no? But we did review the titles of the 30 recommendations, scanned through the document, and read the details of a few that sounded interesting. Here are some samples:

1. There were a few suggestions that appear outside the scope of the Panel's mission. For example, the Coalition recommended that a change required by the 2017 NDAA - competition at the task order level - be expanded to civilian agencies as well.
2. Permanent sun-setting - the Coalition recommend a procurement sun-setting on all procurement regulations not required by statute.
3. Eliminating the requirement to report executive compensation - this will save contractors 55,000 hours every year and the requirement has dubious benefits.
4. Increase the micro-purchase threshold to $10,000 (from $5,000). Affects only one percent of spending but would increase the speed of thousands of transactions.
5. Streamline the cumbersome SAM (System for Award Management) registration process. The current process is intimidating for new businesses seeking to sell to the Government.
6. More training for the acquisition workforce (a recommendation that comes up every year)
7. Modernize FedBizOpps - it lacks many of the features found on comparable commercial market platforms.
8. Change the auditing process - This recommendation is not a slam against DCAA.  Rather it is a recommendation that civilian agencies use organizations other than their own Inspector General offices to conduct contract audits.

You can read (or peruse) the full report here.

Section 809 Panel Issues First Report

The Section 809 Panel released its first of three reports this week. This 642 page tome can be downloaded here. The Section 809 Panel, you will recall, was named for Section 809 of the 2016 NDAA (National Defense Authorization Act) from which it gained its status and authority. Its objective is to make recommendations that will enable DoD to more consistently buy what it needs in a timely and cost-effective manner.

The Panel stated that its research "unequivocally" proved that the cumbersome, and often one-size-fits-all acquisition process is an obstacle to DoD's ability to access a marketplace that has moved far beyond the captive industrial base of the Cold War era.

This report contains numerous recommendations to update the process by which DoD acquires IT business systems, streamline DoD's cumbersome auditing requirements, address challenges in how the small business community and DoD interact, update commercial buying, clarify definition of personal and non-personal  services, remove statutory requirements for 13 acquisition-related DoD offices, and repeal 20 acquisition-related statutory reporting requirements.

There's plenty of material in this report to keep us busy writing for a long time. But today, we want to focus on recommendations impacting the Defense Contract Audit Agency (DCAA), the Agency that has taken more than its fair share of criticisms lately - some justified, most not - for a lot of the inefficiencies in the current process.

The recommendations concerning DCAA fall into three categories; re-focus on assisting contracting officers, use commercial standards rather than home-grown ones, and find better ways to be more effective and efficient in oversight activities. Here they are.

Enhance DCAA's Focus on the Contracting Officer and Acquisition Team

• Align DCAA's mission statement to focus on its primary customer, the contracting officer
• Revise the elements of DCAA's annual report to Congress to incorporate multiple key metrics
• Provide flexibility to contracting officers and auditors to use audit and advisory services when appropriate.
• Establish statutory time limits for defense oversight activities.
• Permit DCAA to use Independent Public Accountants (IPAs) to manage resources to meet time limits.

Use Accepted Commercial Standards and Practices with Objective and Standardized Compliance Criteria

• Replace system criteria from DFARS 252.242-7006, Accounting System Administration, with an internal control audit to assess the adequacy of contractors' accounting systems.
• Develop a Professional Practice Guide for DoD's oversight of contractor costs and business systems.
• Require DCAA to obtain peer review from a qualified external organization

Provide More Effective and Efficient Contract Compliance Oversight

• Increase coverage of the effectiveness of contractor internal control audits by leveraging IPAs
• Incentivize contractor compliance and manage risk efficiently through robust risk assessment.
• Clarify and streamline the definition of and requirements for an adequate incurred cost proposal to refocus the purpose of DoD's oversight.

Many of these are excellent recommendations. We'll unpack some of them in later posts.

Section 809 Panel Wants DCAA to Reduce the Scope of Its Incurred Cost Audits

We are returning once again to our coverage of the Section 809 Panel's first of three reports. The first one was issued back in January of this year. Volume 2 is scheduled to be released in June and the final report, Volume 3 is scheduled for January 2019. Previous coverage of Volume 1 recommendations can be found at the following links.

• Section 809 Panel Issues First Report
• What Gets Measured, Gets Done
• Statutory Due Dates for DCAA Audits
• Outsourcing Contract Audits

The Panel's Recommendation #15 is to clarify and streamline the definition of and requirements for an adequate incurred cost proposal to refocus the purpose of DoD's oversight.

The term "incurred cost proposal is not defined in FAR. The term has become the government contracting community's shorthand way of referring to a contractor's "final indirect cost rate proposal", the elements of which are defined in FAR 52.216-7(d). A "final indirect cost rate proposal" is necessary for the contractor and the Government to establish final indirect cost rates for the purposes of settling provisionally billed indirect costs on flexibly priced contracts. A "final indirect cost rate proposal" however, is not a claim for direct costs incurred and billed during contract performance.

Recently, DCAA began auditing direct costs as well as indirect costs during its audits of "final indirect cost rate proposals". That was never the intent and has increased the time it takes DCAA to complete incurred cost audits and has increased the time it takes contracting officers to address and resolve the DCAA audit findings.

The Panel believes that the timeliness of final rate settlements and consequent contract closeouts will substantially improve if DCAA refocus its oversight on the purpose of the final indirect cost rate proposal to reasonably ensure the allowability of contractors' actual indirect costs, not direct costs. DCAA should not be auditing direct contract costs unless requested to do so by the contracting officer.

The Panel further recommended that several mandatory schedules under FAR 52.216-7(d)(2)(iii) be made optional because they have no bearing on evaluating or settling final indirect costs rates. These schedules include:

• Schedule I - Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract.
• Schedule J - Subcontract information
• Schedule K - Summary of each time-and-materials and labor-hour contract information
• Schedule L - Reconciliation of total payroll per IRS Form 941 to total labor cost distribution
• Schedule M - Listing of decisions/agreements/approvals and description of accounting/organizational changes
• Schedule O - Contract closing information for contracts physically completed during the fiscal year.

The problem with this recommendation, as we see it, is that without assurance that direct costs are properly stated and allocable, allowable, and reasonable, there can be no assurance as to the propriety of the indirect expense rates since direct costs are integral to rate calculations.

Section 809 Panel - Government's Acquisition Workforce Needs Reforming

Why should Government contractors care about the Government's acquisition workforce? Well, for one, the acquisition workforce (AWF) is pivotal to acquisition and the efficiency of Defense acquisition depends on and is determined by the people who are responsible for all phases of the acquisition. Long-time Government contractors know - they know that acquisitions, be they easy or long drawn-out affairs, are greatly influenced by the competency of the Government's AWF.

The Section 809 Panel recently released its second of three reports on streamlining acquisition regulations and the Panel was specifically requested to address the needs of the AWF. Here's a paraphrase of their assessment and the things that need to be done to ensure that the workforce is capable of implementing much-needed acquisition reforms in the 21st Century.

Challenges faced by the acquisition workforce (AWF) are well known. They include a cumbersome hiring process, budgetary constraints that hinder recruitment incentives, training and development and a professional certification process that is increasingly disconnected from the practical skills and experience requirements. There are cultural challenges as well that include a personnel system that fails to incentivize success, political and administrative decisions that promote adherence to process and procedure instead of creativity and innovation, and a lack of authority on on the part of key players in the acquisition system to properly perform their duties. Underlying all of these challenges are rigid, bureaucratic rules, overly prescriptive regulations, and a slow process of integrating new technologies into existing processes. DoD recognizes these problems and has called for a new emphasis on critical thinking, risk management, flexible decision-making that would constitute a significant cultural shift away from existing regimented process and zero-risk mentality.

In this report, the Section 809 Panel made several AWF recommendations and promised more recommendations in its third report. These recommendations include:

• Simplify and expedite hiring authority - right now it takes seemingly forever to bring someone on board and the Government is not necessarily attracting the best qualified candidates.
• Convert a pilot project that provides DoD with greater control over personnel processes and functions that enable DoD to attract and retain employees who contribute most to successful organizational mission outcomes to a permanent personnel system.
• Enhance the Defense Acquisition Workforce Development Fund - monies used for recruitment, training, and retention of acquisition personnel.

These recommendations do not seem to address the Panels main criticism, that being the adherence to process and procedure instead of creativity and innovation. As long as there are IG (Inspector General) organizations running around beating up on workforce personnel for not complying with some obscure and unimportant procedure, innovation will always take back seat to adherence to procedures. Perhaps the additional recommendations promised in the Panel's third report will be to redirect the IG's activities.

Government Contractors No Longer Need to Accept and Dispense Sacajaweas

Did you know that there is a clause in most Government contracts that require contractors involved in business operations (including vending machines) on any premises owned by the United States or under control of any agency  or instrumentality of the United States to be fully capable of:

1. accepting $1 coins in connection with such operations; and
2. dispensing $1 coins in connection with such operations

Why is it there? Because in 2007, Congress passed a law designed to remove barriers to the circulation of $1 coins. As part of that law, Congress made it mandatory for any business operating on Government premises to accept and dispense $1 coins, hence the FAR clause.

The Section 809 Panel, a congressionally mandated panel to streamline and improve the acquisition process by identifying and eliminating outdated acquisition provisions, made a recommendation to eliminate the requirement because the intention of the Act was to increase circulation of the $1 coin and was not directly related to agencies' missions. 

Congress acted on the Section 809 Panel's recommendation as part of the 2018 NDAA and exempted contractors, when performing under a Government contractor, for the requirements to accept and dispense $1 coins.

This week, the FAR (Federal Acquisition Regulations) councils acted and removed the requirements from FAR (Parts 37.116 and 52.212-5). 

Well, that's one useless regulation out of the way. Hopefully, Congress will begin adopting many of the other recommendations of the Section 809 Panel.

NDAA 2020 - Repeal of the Defense Cost Accounting Standards Board (DCASB)

Back in 2015 when Congress was deliberating the 2016 NDAA (National Defense Authorization Act), it created the Defense Cost Accounting Standards Board (DCASB). The DCASB was to be an independent board within the Office of the Secretary of Defense. The seven-member board was to be chaired by the Department's CFO with three Government and three private sector members. Its purpose was to review and recommend changes to existing CAS standards (Cost Accounting Standards) and to implement new standards for Defense contractors to achieve uniformity and consistency in measuring, assigning, and allocating costs to DoD contracts.

The idea of a DCASB was essentially a shot at the CASB (Cost Accounting Standards Board), who, at the time, had become moribund. By 2017, the CASB had not met for more than five years. Recently however, the CASB has been resuscitated and is now meeting somewhat regularly. Hopefully those meetings involve more than getting together for a cup of coffee - we haven't seen substantive meeting minutes yet.

The Section 809 Panel last year recommended that the DCASB be eliminated. Volume 2 of its 3-Volume report included the following:

Creation of the Defense CASB is an attempt to solve the problem of the non-functioning CASB. Adding another regulatory organization is the wrong solution. Government and industry representatives who spoke with the Section 809 Panel expressed they do not support creation of a Defense CASB. Stakeholders are concerned by the many unanswered questions raised by creating this board, including whether the new board will be biased toward DoD issues, and if the two boards will create competing sets of CAS. Creation of a Defense CASB would almost certainly be counter-productive.

DCAA (Defense Contract Audit Agency) also recommended that it be abolished as did the original CASB.

The end has come. Section 810 of the 2020 NDAA repeals 10 USC 190 that authorized the DCASB. We're not entirely sure but we don't think that the DCASB ever formulated in the first place.

Outsourcing Contract Audits

DCAA (Defense Contract Audit Agency) is not the only organization capable of performing audits of incurred costs and other types of audits designed to support Government procurement. DCAA's activities are not an inherently governmental function - a function so intimately related to the public interest as to require performance by Federal Government employees. Consider the Energy Department and to a lesser extent NASA who routinely outsource their contract audit requirements.

Recommendation #9 from the Section 809 Panel's recently released report wants DCAA to use IPAs (Independent Public Accountants, i.e. CPA Firms) to manage resources to meet time limits - to augment their current staffing with non-Governmental firms.

Here's why.

DCAA cannot eliminate its current backlog of unaudited final indirect cost rate proposals (i.e. incurred cost audits) while providing timely financial oversight and advisory services to contracting officers. DCAA needs additional resources to get and stay current with its oversight responsibilities.

Although DCAA has reduced the backlog of incurred cost audits from more than 20,000 to around 4,500, the Agency still has a sizable number of current incurred cost audits in its inventory. According to a recent GAO report, DCAA possesses nearly 10,000 unaudited final indirect cost rate proposals that are not currently included in its backlog, many of which will be subject to an audit in accordance with DCAA's risk assessment approach.

It currently takes DCAA an average of 747 days to begin its work on a final indirect cost rate proposal once it is received. GAO concluded in its report that “the primary reason for the delay is due to the availability of DCAA staff to begin the audit work.” Because DCAA lacks sufficient capacity to perform the current needs of DoD contracting officers and eliminate its backlog of unaudited final indirect cost rate proposals, the time it is taking for DCAA to start its nonbacklogged incurred cost audits is growing. Due to the backlog and previous legislation that prohibited DCAA’s provision of audit services to nondefense agencies, NASA now allows its contracting officers to use IPAs to conduct incurred cost audits as well as other financial services.

The Section 809 Panel concluded that DCAA should use IPAs to provide timely audit and advisory services in accordance with statutory time limits (discussed yesterday). This approach will assist DCAA in eliminating its final indirect cost rate proposal backlog and provide better coverage and more responsiveness in other audits and advisory services. The contracting community will benefit from increased use of IPAs by DCAA to perform oversight functions. Timely performance of necessary risk management activities allows oversight professionals and contracting officers to gain insights into current contractor operations. This insight facilitates faster corrective actions (if necessary), which, in turn, reduces risks of noncompliance and DoD’s oversight burden.

The Panel foresees a time when IPAs will no longer be necessary to augment DCAA resources. For that to happen, DCAA must first:

• embrace a more robust risk assessment process,
• adopt commercial engagement management and materiality approaches, and
• focus on the contracting officer as its customer.

Section 809 Panel - Recommendation to Enhance Risk Assessments

Yesterday we began a discussion on the recently released Volume 3 report published by the Section  809 Panel. For now, we are focusing on recommendations 71 through 73 which share the common theme of adopting a Professional Practice Guide (PPG) to assist oversight agencies and independent public accountants (IPAs) contracted to perform oversight activities, to better meet the needs of contracting officers who rely on oversight activities.

One of the primary areas of focus that the Panel hopes to clarify is that of the concept of "materiality". The draft (or, proposed) PPG (professional practice guide) correctly notes that "materiality" is paramount when considering risk. The PPG then sets forth clear materiality guidelines that help oversight professionals (i.e. DCAA, DCMA, and IPA (independent public accountants) plan their work and provide the information contracting officers need in order to make reasonable business decisions. We will discuss those guidelines later. The reports itself states:

What may be material to a particular business decision will be influenced by a variety of qualitative and quantitative considerations, recognizing that the contracting officer's role is to manage DoD's risk, rather than avoid it. The cost of DoD's oversight including adverse effects on the timeliness of decision making, must be balanced with the expected benefits of that oversight.

One of the knocks against oversight agencies is the "in for a penny in for a pound" mentality where once an audit begins, it must adhere to the totality of professional auditing standards or else it is considered deficient. There is little room for the exercise of professional judgment when assessing risk and for reassessing risk during the course of audit. This ends up squandering a tremendous amount of resources that could be better spent on audits where risk is assessed higher.

The PPG provides a risk model that should be employed by DCAA. Although DCAA has historically used a risk-based approach to determine which contractors are subject to incurred cost audits, as part of the PPG working group, DCAA has embraced an expanded risk model to include additional risk factors that further refine and improve the process. We will be discussing the new risk model in a later posting but for now, just note that the model is intended to "incentivize" contractor compliance.

DoD Professional Practice Guide (Audit) - Part 1

Back in January when the Section 809 Panel issued its third and final report, we briefly touched on their recommendation to develop a PPG (Professional Practice Guide) to guide Government auditors and commercial audit firms in conducting audits of Government contractors. This week we will dig deeper into the new guidance to see what it may portend for Government contractors. The guide itself is included in Vol 3 of the Section 809 Panel's report.

The PPG is intended to supplement existing guidance for auditors involved in DoD Procurement contract auditing. It provides additional information regarding how to interpret and apply specific auditing concepts for Government contract audits to assist auditors, contracting officers, and other stakeholders involved in the audit process.

Eventually, the PPG will address seven areas although the current draft version contains just coverage of the first three. Due to its limited statutory term, the Panel did not have time to address them all.

1. Risk assessment
2. Materiality
3. Audits of Internal Controls
4. Independence
5. Objectivity
6. Sufficient evidence
7. Reliance on the work of others

Risk Assessment

The risk assessment framework provides incentives for contractors to achieve and maintain compliant cost accounting and internal controls over Government contract compliance. It also provides disincentives for those contractors who have not.

The framework provides for three levels of risk: low, medium, and high risk strata based on a contractor's ADV (auditable dollar volume). ADV is the total costs charged to flexibly priced (i.e. CPFF, CPIF, FPI, T&M, etc) each year. For contractors with ADV of $1 billion or more, an annual incurred cost audit is mandatory. At the other end of the spectrum, contractors with ADV of less than $5 million, get dumped into a sampling pool if there were no significant questioned costs in the last completed incurred cost audit and there are no "concerns" expressed by someone in the Government acquisition community concerning the particular submission. Contractors with ADV between $5 and $100 million are also in the low-risk sampling pool if they have approved accounting systems. Contractors who don't make it to the "sampling pool" are audited.

Medium risk strata include contractors with ADV between $100 million and $500 million. To make it to the sampling pool, the contractors must meed the three criteria previously discussed  plus not have any business system deficiencies on the books, nor have had any accounting practice or organization changes. Contractors in this strata, even if they make it to the sampling pool, must be audited every four or five years.

The high risk strata includes contractors with ADV between $500 million and $1 billion. It uses the same criteria as the previous strata to determine whether it makes it to the sampling pool. The only difference is that contractors in this strata must be audited at least every other year.

Tomorrow we will discuss the PPG concept of materiality.

Section 809 Panel - Recommendations Concerning Accounting System Adequacy

We are continuing our discussion of the Section 809 Panel's recommendations focused on adopting private-sector practices when performing oversight responsibilities. In the Panel's Volume 3 report, these are enumerated as Recommendations 71 through 73. Previously, we covered Recommendation 71. Recommendation No. 72, then, calls for replacing the 18 system criteria from DFARS 252..242-7006, Accounting System Administration, with an internal control audit to assess the adequacy of contractors' accounting system based on seven system criteria.

The Panel concluded that DoD has not been obtaining timely assurance that internal controls for defense contractor accounting systems are properly designed and functioning. In their opinion (and we agree), ensuring effective internal controls is one of the most efficient ways to protect the Government's interest, reduce risk, and improve performance.

To do business with the Government, contractors (and prospective contractors) must demonstrate capability to meet the requirements outlined in the Standard Form 1408, Pre-Award Survey of a Prospective Contractor Accounting System. This pre-award system review should not be confused with the reviews required by the DFARS Business System rule that tests the design and capability of the system, as well as whether controls are in place and functioning properly although essentially the same attributes are being considered in both types of reviews. While the SF 1408 has a checklist format, the business system rules focuses on processes and related internal controls.

The Panel is recommending that the 18 system criteria found in DFARS be scrapped and replaced with an internal control audit framework to assess the adequacy of contractors' accounting systems. The envisioned internal control audits will focus on assessing the key controls that ensure government objectives are being met. Auditors' conclusions on the effectiveness of the key controls are essential information for contracting officers and contractors to evaluate whether the Government's interests are adequately protected.

Specifically, auditors will evaluate whether key internal controls are in place and operating to provide reasonable assurance of the following seven accounting system criteria:

1. Direct costs and indirect costs are classified in accordance with contract terms, FAR, CAS and other regulations, as applicable.
2. Direct costs are identified and accumulated by contract in accordance with contract terms, FAR, CAS, and other regulations, as applicable.
3. Methods are established to accumulate and allocate indirect costs to contracts in accordance with contract terms, FAR, CAS, and other regulations, as applicable.
4. General ledger control accounts accurately reflect all transactions recorded in subsidiary ledgers and/or other information systems that either integrate or interface wit the general ledger including, but not limited to, timekeeping, labor cost distribution, fixed assets, accounts payable, project costs, and inventory.
5. Adjustments to the general ledger, subsidiary ledgers, or other information systems bearing on the determination of contract costs (e.g. adjusting journal entries, reclassification journal entries, cost transfers, etc.) are done for reasons that do not violate contract terms, FAR, CAS, and other regulations, as applicable.
6. Identification and treatment of unallowable costs are accomplished in accordance with contract terms, FAR, CAS, and other regulations, as applicable.
7. Billings are prepared in accordance with contract terms, FAR, CAS and other regulations, as applicable.

Using a "framework" methodology is well-established in the private sector but it may take some time, training, and experience for Government auditors to become proficient in applying such a framework. For one, it requires auditors to exercise a lot more professional judgement than the methods traditionally applied to evaluating the adequacy of contractor accounting system.