Thursday, April 19, 2018

Section 809 Panel Wants DCAA to Reduce the Scope of Its Incurred Cost Audits

We are returning once again to our coverage of the Section 809 Panel's first of three reports. The first one was issued back in January of this year. Volume 2 is scheduled to be released in June and the final report, Volume 3 is scheduled for January 2019. Previous coverage of Volume 1 recommendations can be found at the following links.


The Panel's Recommendation #15 is to clarify and streamline the definition of and requirements for an adequate incurred cost proposal to refocus the purpose of DoD's oversight.

The term "incurred cost proposal is not defined in FAR. The term has become the government contracting community's shorthand way of referring to a contractor's "final indirect cost rate proposal", the elements of which are defined in FAR 52.216-7(d). A "final indirect cost rate proposal" is necessary for the contractor and the Government to establish final indirect cost rates for the purposes of settling provisionally billed indirect costs on flexibly priced contracts. A "final indirect cost rate proposal" however, is not a claim for direct costs incurred and billed during contract performance.

Recently, DCAA began auditing direct costs as well as indirect costs during its audits of "final indirect cost rate proposals". That was never the intent and has increased the time it takes DCAA to complete incurred cost audits and has increased the time it takes contracting officers to address and resolve the DCAA audit findings.

The Panel believes that the timeliness of final rate settlements and consequent contract closeouts will substantially improve if DCAA refocus its oversight on the purpose of the final indirect cost rate proposal to reasonably ensure the allowability of contractors' actual indirect costs, not direct costs. DCAA should not be auditing direct contract costs unless requested to do so by the contracting officer.

The Panel further recommended that several mandatory schedules under FAR 52.216-7(d)(2)(iii) be made optional because they have no bearing on evaluating or settling final indirect costs rates. These schedules include:

  • Schedule I - Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract.
  • Schedule J - Subcontract information
  • Schedule K - Summary of each time-and-materials and labor-hour contract information
  • Schedule L - Reconciliation of total payroll per IRS Form 941 to total labor cost distribution
  • Schedule M - Listing of decisions/agreements/approvals and description of accounting/organizational changes
  • Schedule O - Contract closing information for contracts physically completed during the fiscal year.
The problem with this recommendation, as we see it, is that without assurance that direct costs are properly stated and allocable, allowable, and reasonable, there can be no assurance as to the propriety of the indirect expense rates since direct costs are integral to rate calculations.



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  1. AnonymousApril 26, 2018 at 8:47 PM

    I was a former DCAA Incurred Cost Field Technical Specialist for many years and have been retired for about 18 months. Recently, an prior office worker told me about your Congressional hearing held back in April 2017. I then viewed it on you tube.

    Having private outside auditors or CPAs perform the incurred costs is most likely not workable. If this happens, then coordination between the CPAs and DCAA will be rather confusion regarding the annual results and how they will be stored for use in eventual contract closeouts. More importantly, DCAA will have to deal with the residuals left behind by the CPAs. They get to walk away eventually.

    I was with DCAA for more than 40 years and enjoyed doing the audits. When
    I finally left, DCAA was not concentrating on doing real audits anymore.
    It was just functioning and becoming very competent only in theoretical procedures. Newer auditors were shooting endlessly but did not know how to aim correctly. Many audit hours being wasted.

    The only way to removing the backlog effectively is to start improving the fundamental training concepts. Agency auditors don't really understand the basic concepts of an incurred cost audit and its real purpose. Without this understanding, they are just auditing the parts without understanding the whole. Without this understanding, it is very difficult to audit a large incurred cost proposal of a major contractor. In other words, they can't see the big picture and get confused when engaged in a very large proposal. This is the main reason why the large incurred cost audits are not being done timely. Auditors have difficulties making good judgement calls on risks as the audit proceeds. I have made many field observations over the years.

    Further, with all the low risk memos being issued, auditors don't have the opportunities to audit a small contractor proposal for experience before engaging in a large contractor proposal audit.

    At the time I left, I thought the incurred cost training was rather poor.
    Hopefully, it is better now. Nevertheless, I am available to offer some suggestions for improvement if your training staff is willing to contact me.

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