Tuesday, October 16, 2018

DCAA's Annual Report to Congress - Part I

Each year since 2011, DCAA (Defense Contract Audit Agency) has prepared and submitted an annual report to Congress. The basic content of these statutorily required performance reports are fundamentally unchanged but in the 2017 NDAA (National Defense Authorization Act), Congress directed the Agency to provide additional details to support its self-assessment. The most recent report, the 2017 Report to Congress released earlier this year is the first to include the “enhanced” details required by Congress.

DCAA might be the only Governmental audit agency in the Federal Government that has to justify its existence based on cost savings. The IGs (Offices of Inspector Generals) report on cost savings occasionally but that is a small part of what those organizations do. The GAO (Government Accountability Office) conducts audits but they focus on compliance issues or ways to make the Government more efficient, effective, or economical.

It is not surprising then that DCAA’s performance report is peppered with references pertaining to ROI (return on investment). DCAA does a great job of assessing contract costs or forecasted costs against the FAR (Federal Acquisition Regulations) cost principles (FAR Part 31) and contract terms and conditions. It does a great job in assessing the reasonableness of forecasted costs as well – making sense out contractors’ forecasting methodologies. One thing it hasn’t done very well historically is assessing the adequacy of contractor internal control systems, whether any identified internal control deficiencies rise to the level of significant, and the impact that those deficiencies have on the propriety of costs charged by contractors to Government contracts. If you think back to the genesis of DCAA’s so-called scandals ten years ago, they originated when someone higher up in the organization disagreed with the significance of internal control deficiencies identified by an auditor. Internal control deficiencies are not quantifiable into cost savings for the Government. Adherence to FAR cost principles are quantifiable.

DCAA reported that in fiscal year 2017, it examined $281 billion in contract costs and saved $3.5 billion in defense spending. That’s a little better than one percent but it also represents more than five times what it cost to run the organization. That’s not a bad return on investment at all. DCAA states that the $3.5 billion can be reinvested in the warfighter or returned to the Treasury. Cynics might say that it can be wasted elsewhere.

The trajectory of DCAA’s reported return on investment (ROI) has been falling. In fiscal years 2012 through 2014, the ROI was close to or exceed $7 for every dollar spent. In fiscal year 2015, it dropped to less than $5 per dollar spent. The latest year was just over $5 per dollar spent. There are, of course, many factors that go into calculating cost savings and ROI but DCAA did not try to analyze why ROI has been falling.

Tomorrow, we will look into other aspects of DCAA’s annual performance report to Congress. If you wish to read the full performance report yourself, it can be accessed here from DCAA’s public website.

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