Friday, August 15, 2014

What are "Operations Audits"?

Operations audits are those reviews designed to assess the efficiency or economy of contractors' operations. At one time (back in the 1980s and 1990s), operations audits were a significant program area of DCAA (Defense Contract Audit Agency). The Agency programmed up to 5 percent of its staffing to perform operations audits. That worked out to a couple of hundred auditors nationwide. Today however, operations audits are very low on DCAA's priority list. In the past five years, very few operations audit reports have been issued.

From the very beginning, operations audits have focused on major contractors with a significant percentage of their work under cost-reimbursable contracts. The feeling within the Government is, and has always been that cost-reimbursable contracts do not inspire contractors to be "lean and mean" or efficient, effective, and economical in their operations. Fixed price contractors on the other hand are motivated to minimize costs in order to maximize profits.

In planning for operations audits, the auditor will "seek out and identify those areas where the contractor's practices are wasteful, careless, inefficient and result in or may result in unreasonable costs and unsatisfactory conditions in performing Government contracts ..." (see CAM 14-503). The presumption that a contract auditor can identify waste and careless practices better than the contractor boarders on arrogance and has resulted in some unusual reports over the years.

For example, one auditor noticed that a contractor was using a five part form. The original would go somewhere, one copy would go elsewhere and a second copy would go to yet another location. The final two copies were discarded. The auditor recommended the contractor convert from buying five-part forms to buying three-part forms, thereby saving a lot of money each year. In another case, an auditor noted that employees were not regularly turning off lights when they left the room. The auditor recommended training for recalcitrant employees which would result in saving a lot of money toward electricity. In another case, an auditor calculated that software engineers were writing only 12 lines of code per day when the industry average was more than that. The auditor determined that more training was needed so that contractor employees could code with the best. Once that happened, the contractor could lay off a bunch of engineers and save a ton of money. In one of the most presumptuous operations audits in memory, a contractor was holding on to some employees pending notification that it had won or lost a particular contract. The auditor wrote a report stating that if the contractor lost the particular contract, it should lay off  'x' number of employees, something the contractor had planned to do anyway. When the contract was awarded to a competitor, the contractor laid off those employees. The auditor however, took credit for the cost savings.

Thinking back, we can't thing of a single situation where a operations audit truly saved the Government any significant amount of money. If an auditor comes to you with promises of making you more efficient, economical, or effective, run away as fast as you can - or at least do your best to discourage the auditor from wasting his time.

See our posting from 2012 for additional coverage of operations audits.

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