Thursday, October 18, 2018

DCAA's Annual Report to Congress - Part III

Today we bring you Part III of our series on DCAA’s (Defense Contract Audit Agency) performance report – a statutorily required report where DCAA provides a self-assessment on how it is meeting customer expectations. In Part I, we discussed the Agency’s impressive return on investment. In Part II, we discussed the Agency’s professional staff, the cost of performing various types of audits, and the unimpressive sustention rate for incurred cost audits. If you missed either Part I or Part II, click here and here, respectively. Today we will focus on how DCAA is reducing its backlog of contractor submitted incurred cost proposals.

As most readers know, contractors with flexibly priced contracts (e.g. CPFF, CPIF, FPI, and T&M) are required to prepare and submit an annual summation of costs charged to those contracts. The content of these proposals (commonly referred to as ICE submissions), is prescribed in FAR 52.216-7, Allowable Cost and Payment. Every year, the Agency receives 6-7 thousand of these submissions. So, if the Agency is not clearing out that many, they quickly fall behind in their responsibility and a backlog is created.

DCAA does not have sufficient staffing to conduct 6-7 thousand GAGAS-compliant incurred cost audits each year. So, it developed a risk-based approach to selecting those that they will audit. Contractors are divided into high-risk and low-risk. High risk contractors are audited while indirect rates and incurred costs on submissions from low-risk contractors are simply accepted as proposed. In fiscal year 2017, DCAA closed out 6,786 incurred cost submissions but only 1,527 of those were audited. The remaining 5,259 were simply closed without any audit effort performed. Expressed in terms of contract costs, the 1,527 submissions that were audited totaled $326 billion whereas the 5,259 submissions that were not audited totaled $25.4 billion. So, DCAA effectively audited 90 percent of the contract costs while auditing only 23 percent of submissions. So, while $25 billion might be a lot to leave on the table, and contractors knowing their chance of being audited are negligible might be tempted to less diligent in excluding unallowable costs from their submissions, the bottom line (90 percent coverage) does seem to be an acceptable risk to the Government.

Overall, as a result of this risk-based approach to auditing incurred costs, the Agency has reduced the incurred cost backlog from 21,000 in fiscal year 2011 to a manageable 2,860 at the end of fiscal year 2017

DCAA has been often criticized for taking too long to complete audits. One of the metrics that Congress wanted DCAA to track was its ability to meet due dates. DCAA reported that it met agreed-to due dates 78 percent of the time (by comparison, it met due dates only 32 percent of the time in fiscal year 2012 and has been steadily improving each year. The key to this metric is the definition of “agreed-to” due date. That is different that “requested” due date. Say, for example, a contracting officer requests an audit to be completed in 30 days. DCAA acknowledges the request but says that it cannot complete the audit in 30 days but can complete it 45 days. The contracting officer agrees to accept the audit in 45 days. The requested due date was 30 days but the agreed-to due date was 45 days.

Tomorrow, we will finish this short series on DCAA’s annual performance report to Congress by looking at how long it takes DCAA to complete its work, its recommendations to Congress on how the audit process can be improved, and its activities with respect to assisting small businesses. If you wish to read the full DCAA performance report yourself, it can be accessed herefrom DCAA’s public website.

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