Yesterday, the Chairman of the House Armed Service Committee announced that House and Senate negotiators have reached an agreement on the National Defense Authorization Act for Fiscal Year 2016 (NDAA). The Act authorizes $515 billion in spending for national defense and an additional $89.2 billion for Overseas Contingency Operations (OCO) for a total of $604.2 billion. Over the next few days, we will describe some of the provisions that will be of interest to Government contractors. We start with Section 893, Improved Auditing of Contracts. Its an interesting title inasmuch as it has nothing to do with improving the audit process. It simply reduces the amount of work that the Defense Contract Audit Agency (DCAA) performs.
Section 893 prohibits DCAA from providing audit support for non-Defense Agencies (e.g. NASA, Department of Energy) unless the Secretary of Defense certifies that the Agency's backlog for incurred cost audits is less than 18 months of incurred cost inventory. And just to make sure that DCAA doesn't try to hide some extracurricular activities, Section 893 also requires that the Defense Department reduce its funding for DCAA by an amount that equals any reimbursements for non-DoD work. At one time, reimbursable audit activities accounted for eight percent of the Agency's budget. This means that non-DoD agencies that have utilized and relied upon DCAA audits are now forced to find other sources for required contract audits.
Section 893 also adds a couple of new items for inclusion in DCAA's annual report to Congress. Congress now wants DCAA to report on the percentage of questioned costs sustained or recovered. It has long been suspected that the many of the Agency's reported findings have not been sustained by procurement (i.e. the Contracting Officers). This may be more a reflection on the contracting officer community and their unwillingness or inability to work hard at sustaining reported findings, than on DCAA itself. Also, the annual report must include a description of outreach actions toward industry to promote more effective use of audit resources. That should be interesting. We haven't met a Government contractor yet that doesn't have a few ideas of what DCAA can do with their auditors.
Finally, Section 893 requires the Department of Defense to conduct an internal review of the oversight and audit structure functions within DoD with the goals of enhancing the productivity of oversight and program and contract auditing to avoid duplicative audits and streamlining the oversight process. The report must include (i) a description of actions taken to avoid duplicative audits and streamline oversight reviews, (ii) a comparison of commercial industry accounting practices with CAS to determine if some portions of CAS compliance can be met through such commercial practices, (iii) a description of standards of materiality used by DCAA and the DoD-IG, (iv) an estimate of average delay and range of delays in contract awards due to the time necessary for DCAA to complete pre-award audits, and (v) the total costs of sustained or recovered costs both as a total number and as a percentage of question costs. Presumably, the last item will reconcile with the data that DCAA must now include in its annual report.