New GAO Report on DCAA Incurred Cost Audits

The Government Accountability Office (GAO) was asked (by Congress) to review the extent of the contract closeout backlog at large federal agencies. It published its findings this month (see Additional Management Attention and Action Needed to Close Contracts and Reduce Audit Backlog). As the report title implies, the GAO was not satisfied that agencies have been effectively managing the contract closeout process. GAO attributed most of the problem to everyone's favorite whipping boy, the Defense Contract Audit Agency (DCAA).

The biggest contributing factor cited by agency officials in closing out flexibly-priced contracts is the delay in receiving audits of contractors' incurred cost proposals that are conducted by the Defense Contract Audit Agency. Digging a bit deeper, the GAO concluded that although DCAA has made some progress in reducing its backlog of incurred cost audits, it still took the Agency an average of two and a half years to push one out the door.

Since 2011, the Defense Contract Audit Agency (DCAA) has reduced its inventory of contractors' incurred cost proposals awaiting audit by about half to 14,208, and DCAA has significantly reduced its backlog of older proposals - those for 2013 and prior - as of September 2016. To do so, DCAA used a risk-based approach to reduce the number of audits and began conducting multi-year audits, in which two or more incurred cost proposals are closed under a single audit. Nevertheless, DCAA did not meet its initial goal of eliminating its backlog by fiscal year 2016. DCAA averaged 885 days from when a contractor submitted an adequate incurred cost proposal to when the audit was completed. The lag was due to limited availability of DCAA staff to begin audit work, as it took DCAA an average of 138 days to complete the actual work.

The GAO identified two areas in which DCAA may be missing opportunities or currently lacks information to help identify additional ways to reduce its inventory of incurred cost audits. These include (i) assessing actions for reducing the amount of time it takes DCAA to begin an incurred cost audit (nearly two years in fiscal year 2016) and establishing related performance measures to assess its progress and (ii) evaluating the use of multi-year auditing and establishing related performance measures.

DCAA attributed the delay in initiating audits to staffing shortages and the fact that the majority of incurred cost proposals are submitted all at once. DCAA uses a 6-24-6 framework for conducting incurred cost audits; 6 months for the contractor to submit its proposal, 24 months to complete the audit, and 6 months for the contracting officer to close the affected contracts. GAO noted however that the 6-24-6 framework is not being met in practice and needs to be revised to take into account the realities of the time-frames for contractors to submit adequate proposals and DCAA's own staffing issues.

At the end of FY 2016, there were 452 incurred cost proposals that were determined to be inadequate and thus not auditable. DCAA however does not have insight into the reasons why DCAA determined that a contractor's proposal was inadequate, the number of times that a contractor submits revised proposals until it is deemed adequate, or the length of time it takes to receive an adequate proposal. We know from personal experience that there is a lot of variability among DCAA's 80 or so field offices as to what constitutes an adequate incurred cost proposal. Sometimes proposals are rejected for the most inconsequential reasons.

GAO made a couple of recommendations to DCAA for improving its processes. Essentially the recommendations related to establishing performance measures to track its progress. DCAA concurred.

Click here if you want to plow through all 52 pages of the GAO report.