Wednesday, September 30, 2015

National Defense Authorization Act for Fiscal Year 2016

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.


  1. It is worthy of note that Section 893 should result in DCAA ceasing all non-Defense audits on the date the Act becomes effective. Initially, this will be due to the provision that DCAA is legally barred from performing such audit (meaning that contractors do not have to cooperate with them) on the effective date of the Act, and even once DCAA catches up with the incurred cost backlog they will have to return DoD funding dollar-for-dollar for any non-DoD funding received. This represents and effective cut in DCAA's budget of about 10% (the amount of reimbursable audit funding received per annum over the past few years, that will no longer be available under one provision or the other). It is also worthy of note that no additional DoD funding was provided under the Act to offset this cut. Therefore, there are serious questions as to how DCAA is going to pay the staff hours previously used for non-DoD audits, that are now expected to be used for DoD audits without any funding for those hours from DoD. Unless DCAA can find savings elsewhere in its budget, it is hard to see how it can maintain its current staffing levels. This has serious long-term implications -- which may be seen as good or bad depending on ones perspective and stake in the matter.

  2. "or inability to work hard at sustaining reported findings, than on DCAA itself". How hard is that? I've seen CO's reflexively agree to audit findings and put the burden of proof squarely on the contractor without breaking a sweat.

  3. The "questioned costs" are easily refuted or have no merit. Sustainment rates are around 10% I would guess. It has nothing to do with being more diligent or working harder. The questioned costs are "pie in the sky" to make their stats/metrics look better. It is embarrassing to even ask for justification on some of these issues. Oh AND they are 5-6 years behind.