Operations Audits

One type of audit that DCAA performs occasionally but gets little discussion is audits of contractor efficiency, effectiveness, and economy or commonly referred to as “operations audits”. The rationale for these audits lies with the presumption that by eliminating inefficiencies in operations and improving the effectiveness of programs and departments the Government contractor and therefore the Government will save money. These audits are typically performed at large contractor locations with significant percentage of flexibly priced contracts (e.g. CPFF, CPIF, T&M, etc). For contractors engaged primarily in commercial work and fixed price contracts, the “competitive influences” (profit motive) kick in and provide ample incentive to become as efficient as possible.

Most of the time, these audits turn out to be duds. Contracting officer who have to adjudicate the audit results don’t like them and often dispose of them with prejudice. One reason is that auditors tend not to look at the larger picture when making recommendations. For example, one time, a Government auditor issued a report stating that the contractor could save a ton of facilities costs by letting their employees work from home. It didn’t matter that the contractor had already tried a work at home program but scrapped it for various reasons. And then there was the recommendation to save electricity by replacing existing lighting with more energy efficient lighting. In his analysis, the auditor did not consider the sunk costs or the cost of the remaining useful life of the current lighting. Had the contractor followed the auditor’s recommendation, it and the Government would have ended up spending more money than less.

There have been a few notable exceptions to the dismal track record of operations audits. One auditor noticed that ship repair crews were spending a significant amount of time to use the land-based restroom facilities. The auditor calculated that the contractor could save significant labor hours by placing portable toilet facilities on the ship. The contractor agreed and everyone saved money. One auditor visiting a remote contractor facility witnessed that contractor employees were sleeping, playing ping pong and other games, reading newspapers, and taking very long lunches. Their first line supervisor was 35 miles away and rarely visited the remote site. The auditor recommended closer, more frequent supervision. The contractor agreed and ultimately was able to reduce the site staff by half while accomplishing the same amount of work.

Auditors will sometimes attempt to impact forward pricing rates for the results of operations audits. It is important for contractors to know that without contracting officer concurrence and determination, such a position is unwarranted and inappropriate.