Monday, January 13, 2014

Operations Audits

Back in the 1980s and 1990s, when there were many more major contractors with predominantly cost-reimbursable contracts then there are today, the Government performed a significant number of  "operations" audits. Operations audits, sometimes called functional audits, focus on efficiency, effectiveness, and economy of operations (the three "Es"). Its not such a significant program area these days for a couple of reasons. First, the contract environment has changed over the years. We recall a contractor with $5 billion in annual revenues, 99 percent of which came from cost-type contracts. Under that environment, there was little incentive to be lean and mean and the Government found a lot of low-hanging fruit. Today, its rare to see that kind of contract mix (except for Department of Energy) and contractors have a strong incentive to be as productive as possible. The second reason for operations audits becoming a lesser or lower priority is that rarely would the Government and contractor come to an agreement on how to implement recommendations so little, if anything, ever came of audit recommendations. For example, in one real live case, the auditor noted that the supervisor to worker ratio at a particular contractor was significantly higher than the norm for that industry and size of company. The contractor argued that their higher than average ratio was justified due to quality control, increased oversight, and other unique Government requirements. The poor contracting officer who had to decide who was right, could decide, threw in the towel and nothing ever came of the recommendation. As that happened over and over, the Government began to realize that there wasn't sufficient payback to justify the expenditure of resources. (There is a third reason if you talk to contractors - the operations audit recommendations were often not well developed and failed to take into account some key factors. One recent audit recommended cost savings by retrofitting plant lighting to more energy efficient lighting. Problem was, the contractor had already done that a couple months before the audit report was issued.)

That being said, the Government still dedicates a small amount of audit resources to operations audits. Contractors likely to be considered for operations audits are those where the Government has a significant interest, i.e., a significant amount of cost-reimbursable effort. Audit plans focus on cost areas that have managerial significance and will contribute to a more economical and efficient operation.

Besides saving money as a result of more efficient, effective, and economical operations, another tangible benefit is the prognosis of reduce Government oversight. In theory (in DCAA's theory anyway), oversight agency's can reduce coverage where there is

  1. evidence of prudent management policies and decisions
  2. an efficient organization reflecting effective management control over operations, and
  3. a sound and reliable system of accumulating accounting and financial data
Operations audits can benefit contractors. If the audit findings are well developed, applicable to the situation, cost-effective, and feasible, why not implement them. It would be a "win" for both you and the Government.

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