Enhanced Debriefings

One feature of the 2018 NDAA (National Defense Authorization Act) is a requirement that DOD provide additional information to contractors competing for contracts. For contracts greater than $100 million, the Government must provide a redacted version of the Agency's written source selection award decision. For contracts between $10 and $100 million, small businesses and nontraditional contractors are allowed to request redacted versions of the source selection decision.

Perhaps the most significant change to the debriefing rules is the question and answer period. The new rules will provide an opportunity for unsuccessful offerors to submit additional follow-up questions within two days of the post-award debriefing. The agency then, must answer these questions, in writing, within five business days.

So why is this important? Because it extends the time available for an unsuccessful offeror to appeal the award. After a debriefing, an unsuccessful offeror has five days to file a bid protest with the GAO (Government Accountability Office). Now that there's a question and answer period (two days to submit questions and five days to provide answers), that period could potentially double to ten days or longer. This is because a debriefing is not considered finished until the day the agency delivers its written responses. Seven extra days is significant for contractors considering whether to appeal an award.

Refer to FAR 15.505 and 15.506 for more information on debriefing requirements.

The 2018 National Defense Authorization Act is Now Law

Yesterday, the President signed into law the 2018 National Defense Authorization Act (NDAA) as had been predicted. The NDAA establishes spending levels of about $626 billion for the base defense budget and an additional $66 billion for contingency operations (e.g. Afghanistan). It calls for a 20,000 member increase in the number of armed forces and a 2.4 percent salary increase for existing armed services members. And, of course, it includes all of the various provisions we've been discussing here on this blog over the past few weeks.

A couple of provisions we have not addressed are those related to improving the hiring and training of the acquisition workforce. These are included in Sections 841 and 843. Although improved hiring practices and better education might improve the acquisition process, one of the most glaring weaknesses among the acquisition workforce is the excessively high employee turnover rates resulting in little continuity and slim experience levels among those most responsible for ensuring wise and effective expenditures of taxpayer dollars.

Section 841, Enhancements to the Civilian Program Management Workforce, establishes a Program Manager Development Program for civilian Defense Department and military department personnel. The Secretary of Defense is required to implement a new career development program for highly qualified, competitively selected civilian employees to increase the pool of experienced civilian employees qualified to serve as program manager for major defense acquisition programs (MDAPs). It also requires an independent study of personnel policies and incentives needed to attract, retain, and hold accountable civilian and military program managers for the largest and most complex acquisition programs. Attracting highly qualified program managers does not seem to be the problem. Figuring out how to keep them (retention) is a problem.

Section 843, Improvements to the Hiring and Training of the Acquisition Workforce, among other provisions, will require the Comptroller General (GAO) to submit a report on the effectiveness of existing hiring flexibility for the acquisition workforce, as well as the need for acquisition training for personnel who work in acquisition programs but are not formally considered part of the acquisition workforce. The GAO study must also include a description of the flexibilities available to the Department to remove under-performing members of the acquisition workforce and the extent to which any such  flexibilities are used. It also includes a provision that requires DoD to evaluate gaps in knowledge of industry operations, industry motivation, and business acumen in the acquisition workforce.

Initially, this provision included a requirement for DCAA to report on strategies to enhance the professionalization of its workforce to meet "increasing demands" but this provision was omitted in conference committee.

2018 NDAA - New Prohibitions on Use of LPTA as a Basis for Contract Award

The Government's use of LPTA (lowest price technically acceptable) as a source selection technique has been very popular. It certainly drives prices down as bidders compete only on price and contracting officers like it because its less work for them. They don't have to consider the relative merits of benefits in excess of the basic requirements offered by competing proposals.

However, the Government is now realizing that the use of LPTA might be short-sited. In 2016, DoD tried limiting the use of LPTA techniques with the following guidance: LPTAs may be used in situations where the Government would not place any value on a product or service exceeding the Government's threshold technical or performance requirements and these requirements can be objectively defined in measurable terms."

In the 2017 NDAA (National Defense Authorization Act), Congress moved to further limit the use of LPTA techniques. That NDAA restricted DoD from using LPTA when purchasing (i) information technology services, (ii) cyber-security services, (iii) systems engineering and technical assistance services, (iv) advanced electronic testing, (v) audit or audit readiness services, (vi) other knowledge-based professional services, (vii) personal protective equipment, and (viii) knowledge-based training or logistics services in contingency operations.

The 2018 NDAA (expected to be signed into law shortly) places more limitations on the use of LPTA techniques. Under the new NDAA, LPTA can be used only where DoD would realize minimal innovation if LPTA was not used and when goods are purchased. Goods are defined as those that are predominantly expendable in nature, nontechnical, or have a short life expectancy or short shelf life (see Sec 822).

Additionally, the new NDAA will prohibit the use of LPTA techniques for the engineering and manufacturing development contract of a major defense acquisition program (see Sec 832).

It is apparent that the heyday of LPTA is over. That should be a good thing because it will allow prospective contractors to offer products as other than lowest prices.

2018 NDAA - TINA Threshold to Increase to $2 Million

The threshold for requiring certified cost or pricing data is currently set at $750,000. This applies to the award of negotiated contracts, subcontracts and modifications (see FAR 15.403-4). This threshold is set by statute, a couple of statutes actually. 10 USC 2306A - Cost or pricing data: truth in negotiations sets the threshold at $500,000 while 41 USC 3502 - Required cost or pricing data and certification allows for that threshold to be adjusted for inflation every five years. There have been a number of adjustments since the 1994 baseline to bring the original threshold up to the current $750,000.

That threshold is about to increase significantly. Sec 811 of the 2018 NDAA (National Defense Authorization Act) which includes the enhanced reporting requirements for DCAA (Defense Contract  Audit Agency) discussed yesterday (see 2018 NDAA - New DCAA Reporting Requirements) also includes a provision that increases the TINA (Truth in Negotiations Act) threshold from $750,000 to $2,000,000. The adjustment provisions every five years still apply.

This is good news for a lot of contractors and prospective contractors and should facilitate proposal preparation and contract award. It is not a license for contractors to prepare shoddy proposals however. Contracting officers must still ensure that negotiated prices are fair and reasonable and will still, in many cases, require cost or pricing data - just not certified cost or pricing data. This also means that the Government will have a much smaller universe of contracts on which it can conduct Defective Pricing audits.

2018 NDAA - New DCAA Reporting Requirements

Section 811 of the 2018 National Defense Authorization Act (NDAA) covers several topics. One concerns the increase in the dollar threshold for the submission of certified cost or pricing data which we will cover in more detail tomorrow. The other appears to be a slap on the wrist of DCAA (Defense Contract Audit Agency) for obfuscating some of their performance data.

Is DCAA "current" in performing incurred cost audits? The Agency says it is and that's why they are once again performing incurred cost audits for non-DoD agencies. But was does "current" mean? And how did DCAA achieve currency? In DCAA's parlance, current means 18 months as in the Agency needs to complete incurred cost audits withing 18 months of receiving an adequate contractor submission. But the 18 month time-frame is also an average which means some will take longer that 18 months to complete and some will take less. Which answers the second question of how did the Agency achieve the 18 month average in such a short time when just a few years ago its backlog was four to six years (depending on who you talk to). Easy, the Agency simply "wrote off" what it determined were low risk contractors by accepting the final indirect rates as proposed - and that included the preponderance of contractors. Eureka! No more backlog.

But Congress didn't quite buy that and it was deeply concerned with writing off the preponderance of contractors without performing any type of audit. In Sec 803 of the 2018 NDAA which we discussed here, Congress instituted a plan for private audit firms to begin sharing the incurred cost audit workload with DCAA and mandated that these audits would be completed with a year of receiving an adequate submission.

Now here in Sec 811 of the 2018 NDAA, Congress wants to get to the bottom of DCAA's performance. It is requiring DCAA to revise its Annual Report to Congress to provide clarity on the cost effectiveness of different types of audits. Under the 2018 NDAA, DCAA must now break down its statistical tables by type of audit. Though "type of audit" is not defined, it presumably includes (i) incurred cost (ii) forward pricing, (iii) defective pricing, (iv) and internal control/business systems. But here are the added reporting requirements:

1. The total number and dollar value of incurred cost audits completed, and the method by which such incurred cost audits were completed (i.e. was an audit performed or was it written off as low risk).
2. The aggregate cost of performing audits, set forth separately by type of audit
3. The ratio of sustained questioned costs to the aggregate costs of performing audits, set forth separately by type of audit, and
4. The total number and dollar value of audits that are pending for a period longer than one year as of the end of the fiscal year covered by the report, and the fiscal year in which the qualified submission was received, set forth separately by type of audit

This information, if nothing else, will prove interesting.

DCAA Must Report to Congress on the Education, Qualifications, and Certifications of its Staff

Of all the things that DCAA (Defense Contract Audit Agency) can be criticized for, the educational qualifications of its staff is not one. Virtually all auditors have Bachelor's Degrees and a 40 percent of them have advanced degrees. On top of that, a quarter of them (more than 25 percent) are CPAs (Certified Public Accountants). The Agency actively encourages its auditors to pursue advance degrees and CPA status. The Agency has a robust training program as well. In their first year, auditors can expect four or more weeks of intensive training and because the Agency is engaged in Yellow Book audits (i.e. GAGAS or Generally Accepted Government Auditing Standards), auditors are expected (and required) to meet minimum CPE (Continuing Professional Education) requirements at Government expense. Consider the following table that comes from DCAA's annual report to Congress.

With this in mind, one of the outcomes of 2018 NDAA Conference Committee seems somewhat odd. The conferees directed the DCAA Director, in consultation with the Under Secretary of Defense (Comptroller) to brief the Congressional defense committees in six months with the following agenda items:

1. The current education, certifications, and qualifications of the Defense Contract Audit Agency workforce, by supervisory and non-supervisory levels and type of position.
2. Shortfalls (if any) in education, qualification, or training in the DCAA workforce, by supervisory and non-supervisory levels and type of position and the reason for those shortfalls.
3. The link (if any) between DCAA workforce skill and experience gaps and the Agency's backlog of audits.
4. The link (if any) between the effectiveness of DCAA regional directors and their education, certifications, and qualifications
5. The number of DCAA auditors who have relevant private sector experience, including from industry exchanges while at DCAA and from prior employment experiences, and the perspective of DCAA on the benefits of those experiences
6. Ongoing efforts and future plans by DCAA to improve the professionalization of its audit workforce, including changes in hiring, training, required certifications or qualifications, compensation structure, and increase opportunities for industry exchanges or rotations.

DCAA does not need six months to write this report. It could do so right now. While auditor educational achievements and training programs are exemplary, turnover tends to be high - possibly because of better compensation opportunities - which creates an experience gap. Also, too much meddling by outside agencies such as the Inspector General and GAO has resulted in a degree of paralysis because of fear of criticism which in turn, has caused the Agency to jettison common sense risk assessments.

DCAA still predominately relies on homegrown staff - hiring them at entry level and progressing them through the organization. There are very few that come into the Agency with a significant level of auditing experience. Those that do often have other motives for joining. We know of two who joined because they had serious health issues and the Government's health insurance offered better benefits than that of their previous employers. Another sold his private CPA practice and needed a place to hang out for a couple of years until his covenant not to complete expired. A couple had bounced around numerous jobs and it became quickly apparent why they were not valued members of previous employers' staffs.

Its too bad there wasn't some kind of rewind button. We could go back to 2005 when DCAA was just fine and was considered a valued member of the procurement team.

A Few Contractors May Have to Reimburse DoD for Bid Protest Costs if Protest Denied

Here's an update to a post from last July where we wrote that the Senate version of the 2018 NDAA (National Defense Authorization Act) would require large defense contractors to reimburse the Defense Department for failed bid protests (see Large Contractors May Need to Reimburse the Defense Department for the Cost of Bid Protests). That provision has been greatly watered down in the newest version of the NDAA.

Sec 827 of the House and Senate NDAA compromise bill which has passed the House and is now waiting Senate passage replaced the Senate provision with one that calls for a three-year pilot program, a study and a report. Specifically, the provision requires the following:

1. The Defense Department shall carry out a pilot program to determine the effectiveness of requiring contractors to reimburse the Department of Defense for costs incurred in processing covered protests (see below for definition of covered protests).
2. The pilot program shall be three years beginning two years after the date of enactment of the NDAA and ending five years after the date of enactment.
3. After the pilot program ends, the Defense Department must provide a report to Congress assessing the feasibility of making permanent such pilot program.

In the context of Sec 827, a covered protest means a bid protest that was denied in an opinion issued by GAO (Government Accountability Office) filed by a company with revenues in excess of $250 million during the previous year. The Senate version set the threshold at $100 million.

This current version is significantly different than the original Senate provision which provided detailed statutory mechanisms for the payment of costs for defined protests. This one does not provide details on what procedures that program should include. But, the Defense Department has a couple of years to work out those details - probably through DFARS (DoD FAR Supplement). Of course, two years to implement this provision also gives Congress two years to tinker with the requirement through future NDAAs.

Contractors with sales greater than $250 million (in its prior fiscal year) may find it more cost-effective to pursue bid protests though the U.S. Court of Federal Claims which carries no such requirement.

Law Allowing Contractors to Procure Their Own Incurred Cost Audits Rescinded

Sec 804 of the 2018 NDAA (National Defense Authorization Act) repeals a provision that became law under the 2017 NDAA. 10 USC 190 was a new section that requires the creation of a Defense Cost Accounting Standards Board (DCASB). But appended to DCASB coverage was a new requirement that concerned the use of commercial auditors to perform audits of Defense contractors. Specifically, section (f) reads (paraphrased):

Defense contractors may present, and DCAA shall accept without performing additional audits, a summary of audit findings prepared by a commercial auditor if the auditor previously performed an audit of the allowability, measurement, assignment to accounting periods, and allocation of indirect costs and such audit was performed using relevant commercial accounting standards and relevant commercial auditing standards established by the commercial auditing industry.

Further, DCAA may audit direct costs and shall rely on commercial audits of indirect costs without performing additional audits, except in the case of companies or business units that have a predominance of cost-type contracts as a percentage of sales, DCAA may audit both direct and indirect costs.

The intent of this provision is to allow contractors to go out and retain their own auditors for purposes of expediting audits of incurred costs and closing old contracts. The provision becomes unnecessary with Sec 803 commercialization initiative we discussed the past three days. Anyway, no one could ever articulate a practical implementation of the provision. Its not practical to separate audits of direct and indirect costs. Auditors need to assess both in order to make recommendations concerning final indirect expense rates.

The remaining portion of 10 USC 190 dealing with the Defense Cost Accounting Standards Board has been retained.

DCAA to Share Audit Function With Commercial Firms - Part 3

This is the third part in our series on Section 803 of the 2018 NDAA (National Defense Authorization Act) which will require the Defense Department to begin utilizing private audit firms to augment the ability of DCAA (Defense Contract Audit Agency) to complete incurred cost audits in a timely manner. Though some may see it differently, this provision is not a rebuke of DCAA's performance in completing incurred cost audits in a timely manner. It is more a recognition that DCAA is not sufficiently staffed to conduct the full range of audits that the are required by procurement regulations.

Incidentally, the 2018 NDAA has now passed the House and its on to the Senate where passage is also expected.

Today we will focus on the implementation schedule for this new provision.

In Fiscal Year 2018, the Defense Department has to come up with a plan. The plan needs to include a description of the incurred cost audits that are appropriate to be conducted by qualified private auditors including the approximate number and dollar value of such incurred cost audits. Although not specifically prohibited, the large Defense contractors such as Boeing, Lockheed, Raytheon, United Technologies, General Dynamics, and Northrup Grumman will not be part of this list. DCAA will retain those contractors for itself. The plan must also include the number and dollar value of incurred cost audits for each of the following six fiscal years (fiscal years 2019 through 2025). By April 1, 2019, private audit firms must be under contract.

In order to improve the quality of incurred cost audits (and reduce duplication), the Defense Department is authorized to provide qualified private auditors with information on past or ongoing audit results or other relevant information on the entities the qualified private auditor is auditing.

The working papers generated by qualified private auditors will become the property of DoD except the qualified private auditor will be allowed to retain complete copies.

DoD is also required by Section 803 to implement numeric materiality standards for incurred cost audits to be used by auditors that are consistent with commercially accepted standards of risk and materiality. In developing such standards, DoD must consult with commercial auditors that conduct incurred cost audits, the Section 809 Panel, and other governmental and nongovernmental entities with relevant expertise. Whatever the outcome of this study, it is almost certain that the materiality and risk factors used by DCAA now, will change. Maybe that's good, maybe not.

So, who would you rather have come in and conduct your audits? Are you comfortable with the status quo (i.e. DCAA) or would you rather take your chances with a QPA (Qualified Private Auditor).

DCAA to Share Audit Function With Commercial Firms - Part 2

Yesterday we introduced the Section 803 provision in the 2018 NDAA (National Defense Authorization Act) that will require the Defense Department to begin farming out some of its incurred cost audit functions to commercial firms. Though the probable soon-to-be law does not specify a particular percentage or dollar value of audits to be shaved off of DCAA's (Defense Contract Audit Agency's) current workload, the general tenor of the provision sounds like the sharing will be substantial and on-going.

For example, yesterday we reported that the new provisions require that audits be completed within one year from submission of an adequate incurred cost proposal (for information on what constitutes an adequate incurred cost proposal, see Annual Incurred Cost Submissions - Adequacy or DCAA's Checklist for Determining Incurred Cost Proposal Adequacy). But what happens if the audit is not completed within a year? Section 803 contains a provision that states if audit findings are not issued within one year after the date of receipt of a qualified incurred cost submission, the audit shall be considered to be complete and no additional audit work shall be conducted. That would result in significant risk to the Government and will probably necessitate the transfer of a substantial number of audits from DCAA to commercial auditors - particularly since DCAA has not had much success in completing incurred cost audits in a year.

Another Section 803 provision that makes the number of commercialized audits substantial and on-going is the requirement that DoD maintain an appropriate mix of Government and private sector capacity to meet the current and future needs and to ensure that qualified private auditors perform incurred cost audits on an ongoing basis. Sounds to us like the program is to be set up for the long haul.

There are certain qualifications that commercial firms must meet in order to participate in the program. There can be no conflicts of interest, the auditors must be independent, they must sign non-disclosure agreements to protect proprietary or nonpublic data, they cannot use proprietary data for other purposes, and must protect it. Also, and significantly, the firms performing the audits must have a peer review with an "acceptable" rating ("acceptable" is as good as you can get in a peer review).

DCAA To Share Audit Function With Commercial Firms - Part 1

The 2018 NDAA (National Defense Authorization Act) Conference Report has been published. The Conference Report refers to the final version of a bill that is negotiated between the House and the Senate via conference committee. It will still need to be submitted to each Chamber for its consideration for approval or disapproval but in the past, NDAA conference reports are routinely passed by both the House and Senate. So, assuming the President signs the bill, it will become law.

Our coverage of the NDAA focuses on contracting matters - provisions that will affect contractors or prospective contractors. And this year's NDAA is going to change the way many Government contractors are audited. The Department of Defense will be making a major shift toward using commercial audit firms to conduct incurred cost audits instead of exclusively relying upon DCAA (Defense Contract Audit Agency) to perform their incurred cost audits. We can't foresee whether this is good news or not such good news for contractors.

The good news is that audits will be completed much quicker than they presently are. Audits will need to be completed within a year after the Government receives an adequate incurred cost submission from the contractor. More good news includes the fact that the Government and contractors will be able to close out contracts much quicker. The big uncertainty for contractors however is the unknowns that come with a new audit organization. Will the audits be more detailed or less detailed in scope? Will commercial auditors have the same materiality threshold as Government auditors?

We will spend a few days unpacking the content of the new bill. There's a lot to it. But here's the essence: To support the need of the Defense Department for timely and effective incurred cost audits, and to ensure that DCAA (Defense Contract Audit Agency) is able to allocate resources to higher-risk and more complex audits, the Secretary of Defense shall use qualified private auditors to perform a sufficient number of incurred cost audits;

1. To eliminate any backlog of incurred cost audits by October 1, 2020.
2. Ensure that incurred cost audits are completed not later than one year after the date of receipt of a qualified incurred cost submission
3. Maintain an appropriate mix of Government and prive sector capacity to meet the current and future needs of DoD to perform incurred cost audits
4. Ensure that qualified private auditors perform incurred cost audits on an ongoing basis to improve the efficiency and effectiveness of incurred cost audits
5. Limit multi-year auditing (obviously you cannot perform multi-year auditing and achieve one year turn-around)

Privatization of the incurred cost audit function under this bill is not a one-time shot to help DCAA eliminate its backlog. The bill intends privatization to be a permanent, on-going, and substantial part of contract audits.

2018 NDAA - Public Comment Submitted to Congress

The Professional Services Council (PSC) has weighed in on some of the provisions of the 2018 National Defense Authorization Act (NDAA) now that the House and Senate bills have moved on to conference committee for reconciliation. Among their concerns is the provision in the Senate version requiring losing bid protesters to pay the processing costs incurred by DoD (see Large Contractors May Need to Reimburse DoD for Bid Protest Costs). The PSC "strongly objects" to this provision. But PSC's letter also covers major concerns over provisions related to DCAA's (Defense Contract Audit Agency's) incurred cost backlog. PSC writes:

The backlog of incurred cost audits under the Defense Contract Audit Agency (DCAA) has wide-ranging, consequential, and negative impacts for the government and the contractor community— both of whom have an interest in moving rapidly to close out contracts. For the contractor, the government commonly withholds significant funds that should be reconciled and paid in a more timely manner. The government should be able to collect any money that might be determined to be due from the contractor, while there is still time and funds available to be collected. Unfortunately, DCAA’s backlog—and improper accounting of the backlog—prevents either from meeting these goals. GAO’s September 2017 major report confirms the current unacceptable backlog still remains. 

PSC goes on to recommend that Congress take further actions to reduce the backlog of incurred cost audits by including targeted reforms that allow for the use of independent, third-party auditors. The House version repeals provisions of the 2017 NDAA that allowed for commercial auditor findings for certain DoD contractors to be submitted and accepted by DCAA if the audit adheres to Generally Accepted Government Auditing Standards (GAGAS). But, as PSC noted, that provision contradicts Section 802, the goal of which is to expand the use of supplemental audits performed by public accounting firms.

Whatever happens, it is obvious that no one has confidence that DCAA can reduce its backlog of incurred cost audits while diligently watching over the taxpayer dollar. Civilian agencies are not encumbered with contract audit arms and are free to go out and procure their own contract audit services from private/commercial firms. It seems like some parties would like the Defense Department to go the same way.

You can read the entire PSC letter here.

2018 NDAA - Increase in TINA Threshold

Earlier this week, the Senate passed its version of the NDAA (National Defense Authorization Act) for fiscal year 2018. The House passed its version earlier this summer. Now the differences will need to be worked out in a joint compromise committee before it is forwarded to the President.

Both bills have provisions that increase the threshold for the requirement to furnish certified cost or pricing data. Currently, the threshold sits at $750 thousand. Under the House version of the NDAA, the threshold will rise to $2.5 million (Section 803). Under the Senate version, the threshold will rise to $1 million.

We have no idea why the need to raise the TINA threshold as it is already adjusted for inflation every five years. The Senate committee report contains the following explanation that the provisions is intended to save money.

The committee recommends a provision that would amend Section 2306a of title 10, United States Code, to increase the threshold for certified cost or pricing data and truth in negotiation requirements to $1.0 million., Section 824 of the National Defense Authorization Act for Fiscal Year 2017 (Public Law 114-328) sets goals for the Secretary of Defense to follow in reducing reimbursable costs pertaining to bid and proposal submissions. This provision would aid the Department of Defense in realizing that goal.

The logic seems to be that if contractors are not required to submit certified cost or pricing data, the cost of preparing and submitting proposals will be reduced. Perhaps that's true. Without the requirement to certify that cost or pricing data is current, complete, and accurate, contractors can be less diligent in preparing their proposals. But, does the Government really want to encourage contractors to be less diligent in their estimating practices?

2018 NDAA Passed by Senate

By a wide margin, 89-8, the U.S. Senate passed its version of the fiscal year 2018 National Defense Authorization Act (NDAA) yesterday. The House passed its version back in July. Now conferees from the House and Senate will meet to reconcile the differences in the competing versions.

Although the total authorizations are not significantly different, $700 billion for the Senate bill and $696.5 billion for the House bill, there are substantial differences in what gets funded and other provisions.

According to reports, there is no threat of a Presidential veto to either the House or Senate version so we will expect to see a final bill on the President's desk in short order.

You can read about some of the provisions included in the Senate version in the following posts:

• Large Contractors May Need to Reimburse the Defense Department for the Cost of Bid Protests
• 2018 NDAA - Additional Work for DCAA?
• Have Contractor's Been Complaining About DCMA's "Should-Cost" Reviews?
• 2018 NDAA - Changes to DCAA's Annual Report to Congress

White House Does Not Want DoD to Commercialize its Incurred Cost Audits

After the House passed its version of the fiscal year 2018 NDAA (National Defense Authorization Act), the White House issued its "Statement of Administration Policy" listing provisions it liked and many more that it did not like.

One of the provisions the White House does not like is the one requiring the Department of Defense to subcontract out 25 percent of required incurred cost audits (and related provisions). See Transitioning from Government Auditors to Commercial Auditors for Incurred Cost Audits and 2018 NDAA Passes House - Now On to the Senate to read more details about these provisions.

Here's what the White House has to say:

Performance of Incurred Cost Audits: The Administration objects to multiple provisions in section 802. Mandating the acceptance of the claimed costs in their entirety if audit findings are not issued within one year of proposal receipt, restricting the use of multi-year audits, mandating that an arbitrary 25 percent of incurred costs be audited by qualified private auditors in lieu of a data-driven process, and mandating materiality thresholds will result in significant inefficiencies in the DOD audit process and result in significant unallowable costs being paid to contractors. Further, the materiality thresholds are significantly more prescriptive and detailed than defined in commercial or Government audit standards and are not risk-based.

As a reminder, there are no similar provision in the Senate's version of the 2018 NDAA so the differences will need to be compromised in committee. With the Administration's objections on the table, there is some doubt that these provisions will make it into the final bill. Perhaps a watered-down version is still possible.

2018 NDAA - Changes to DCAA's Annual Report to Congress

Since 2011, the Defense Contract Audit Agency has published an annual report to Congress. This report was mandated by an earlier NDAA (National Defense Authorization Act) and codified in 10 USC 2313a(a)(2). We've reported on these reports about the time they were issued (see the latest discussion: DCAA's Fiscal Year 2016 Report to Congress).

One of the required elements for DCAA's annual report has been for a statistical table showing an "...assessment of the number and types of audits pending for a period longer than allowed pursuant to guidance of the Defense Contract Audit Agency."

That requirement turned out to be poorly worded because DCAA did not have such guidance. So, the Agency did not need to fess up as to how long it takes them to complete audits. In its latest report, DCAA, in lieu of statistical information, included the following narrative to the requirement to disclose the number of overdue audits:

The timeline for an audit is based on audit type, dollars involved, level of risk, and needs of the requester. As a result, DCAA does not have specific or mandatory time requirements for audit completion; instead, we assess what is necessary to conduct an audit that will meet professional audit standards and provide value to contracting officials. DCAA works closely with contracting officers to set reasonable due dates based on the requirements of the audit and the needs of the buying commands. Additionally, DCAA and contracting officers work as a team to set priorities, create milestone plans, and decide on agreed-to dates. Once these agreements are reached, DCAA assesses timeliness based on meeting those targets.

And that brings us to the Senate's version of the fiscal year 2018 NDAA. The NDAA contains a provision that replaces the requirement that DCAA disclose the number of audits pending longer than allowed pursuant to its guidance with the number of audits pending for a period longer than 18 months. The provision reads:

... the total number and dollar value of audits that are pending for a period longer than 18 months as of the end of the fiscal year covered by the report including a breakdown by type of audit.

That language is still not as tight as it could be as it leaves open the determination of the start date for an assignment. For example, for an incurred cost audit, is the start date the date that DCAA receives the contractor's submission or the date that it starts the audit of that submission? Historically, those two dates have been years apart. DCAA's answer has been, the date that audit work begins.

Have Contractor's Been Complaining About DCMA's "Should-Cost" Reviews?

Unless you're a very large contractor, you may not have heard of "should-cost" reviews. Should-cost reviews are a specialized form of cost analysis. They differ from traditional evaluation methods in that they don't assume that historical costs reflect efficient and economical operation. Instead, should-cost reviews evaluate the economy and efficiency of the contractor's existing work force, methods, materials, equipment, real property, operating systems, and management.

These reviews are conducted by a multi-functional team of Government contracting, contract administration, pricing, audit and engineering representatives. The objective of should-cost reviews is to promote both short and long-range improvements in the contractor's economy and efficiency in order to reduce the cost of performance of Government contracts.

There are two types of should-cost reviews - program reviews and overhead reviews. A program review focuses on significant elements of direct costs, usually associated with the production of major systems. You can read about should-cost reviews more fully in FAR 15.407-4.

We have not had direct experience with should-cost reviews but we've been around the fringes enough to know that contractor's dread them, not for the potential findings and recommendations but because they require a tremendous amount of contractor resources to support and the "team's" lackadaisical approach to completing the engagement is the exact antitheses to what the Government wants to accomplish - i.e. improvements in economy and efficiency.

Which brings us to the Senate's fiscal year 2018 National Defense Authorization Act (NDAA) and a provision designed to make the Government more accountable in performing should-cost reviews - to use the tool appropriately in a manner that his transparent, objective, and provide for the efficiency of the acquisition process.

The NDAA provision, if passed, will require DoD to amend its FAR Supplement (DFARS) to include the following:

1. A description of the features distinguishing a should-cost review and the analysis of program direct and indirect costs.
2. Establishment of a process for communicating with the contractor the elements of a proposed should-cost review.
3. A method for ensuring that identified should-cost savings opportunities are based on accurate, complete, and current information and are associated with specific engineering or business changes that can be quantified and tracked.
4. A description of the training, skills, and experience, including cross functional experience, that Department of Defense and contractor officials carrying out a should-cost review should possess.
5. A method for ensuring appropriate collaboration with the contractor throughout the review process.
6. Establishment of review process requirements that provide for sufficient analysis and minmize any impact on program schedule.
7. A requirement that any separate audit or review carried out in connection with the should-cost review be provided to the prime contractor under the program.

We think these proposed enhancements to the should-cost program are reasonable and a positive step in ensuring that should-cost reviews are well-planned and staffed with trained and qualified individuals.

2018 NDAA - Additional Work for DCAA?

Yesterday we began a four-part series on provisions in the Senate version of the fiscal year 2018 National Defense Authorization Act. (Click here to read Part 1 concerning the provision that might require large contractors to reimburse the Department of Defense for its cost of administering bid protests).

In pursuing the NDAA, we came across a new requirement impacting the Congressionally Directed Medical Research Program (CDRP). The CDRP manages Congressional Special Interest Medical Research Programs encompassing breast, prostate, and ovarian cancers, neurofibromatosis, military health and other specified areas and since 1992, has managed over $7.7 billion in Congressional appropriations. Through fiscal year 2013 (most recent year data is available) approximately 12,423 awards have been made. You can read more about the CDRP program here.

The provision in the NDAA requires a three audits by DCAA (Defense Contract Audit Agency); two before award is made and one before payment is made. The two audits before award include (i) accounting system adequacy and (ii) audit of the proposal. The third audit is an incurred cost audit where the amounts claimed are traced back to the books and records of the awardee.

We don't know what prompted this provision. Perhaps there was an audit that found deficiencies in the way that the Defense Department administered the program. Perhaps scandals were uncovered.

Currently, as far as we can discern, DCAA does not have any guidance on how these audits should be conducted. It is no doubt a new audit area for the Agency and one that will give auditors some work to as commercial auditors begin to take over much of the Agency's traditional incurred cost audits.

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Here's the provision in its entirety:

SEC. 893. OVERSIGHT, AUDIT, AND CERTIFICATION FROM THE DEFENSE CONTRACT AUDIT AGENCY FOR PROCUREMENT ACTIVITIES RELATED TO MEDICAL RESEARCH.
The Secretary of Defense may not enter into a contract, grant, or cooperative agreement for congressional special interest medical research programs under the congressionally directed medical research program (CDMRP) of the Department of Defense unless the contract, grant, or cooperative agreement meets the following conditions:
     (1) Prior to obligation of any funds, review by and certification from the Defense Contract Audit Agency regarding the adequacy of the accounting systems of the proposed awardee, including a forward pricing review of the awardee’s proposal.
     (2) Prior to any payment on the contract, grant, or cooperative agreement, performance by the Defense Contract Audit Agency of an incurred cost audit. 

Large Contractors May Need to Reimburse the Defense Department for the Cost of Bid Protests

Both the House and Senate have passed their own versions of the 2018 National Defense Authorization Act (NDAA). Thee are, as always, differences in the two bills which will now have to be worked out in conference committee. The provision in the House version requiring the Defense Department to contract out 25 percent of its incurred cost audits in lieu of performing them in-house by DCAA (Defense Contract Audit Agency) is not in the Senate version (see 2018 NDAA Passes House). For the rest of this week, we will examine a few provisions that appear in the Senate version that are not in the House version.

A provision that will certainly cause some contractors to think hard about their bid protest strategies is a requirement to reimburse the Defense Department for the Department's cost in processing a protest at the Government Accountability Office (GAO).  Two things have to happen. First, all of the elements of the protest are denied in an opinion issued by the GAO. And second, it applies only to contractors with revenues in excess of $100 million in the previous year. That is $100 million in total revenues, not $100 million in revenues from Government contracts or $100 million in revenues from cost-type contracts.

No one really knows how much it cost the Government to process a bid protest case. The Government does not collect the hours spent on such activities. However, one would suspect that it is significant. And what is the Government's billing rate? DCAA's billing rate is greater than $150 per hour so that might give a clue. So if the Government spends 100 hours processing a case, the bill to the contractor, assuming it is a large contract and its claims are denied, would be $15,000 (that estimate is probably significantly understated). Perhaps this provision will be a deterrent to frivolous bid protests.

The precise wording the Senate bill reads as follows:
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‘‘§ 2340. Government Accountability Office bid protests

     ‘‘(a) PAYMENT OF COSTS FOR DENIED PROTESTS.—

          ‘‘(1) IN GENERAL.—A contractor who files a protest described under paragraph (2) with the Government Accountability Office on a contract with the  Department of Defense shall pay to the Department of Defense costs incurred for processing a protest at the Government Accountability Office and the Department of Defense.

          ‘‘(2) COVERED PROTESTS.—A protest described under this paragraph is a protest—

               ‘‘(A) all of the elements of which are denied in an opinion issued by the Government Accountability Office; and
               ‘‘(B) filed by a party with revenues in excess of $100,000,000 during the previous year.

     ‘‘(b) WITHHOLDING OF PAYMENTS ABOVE INCURRED COSTS OF INCUMBENT CONTRACTORS.—

          ‘‘(1) IN GENERAL.—Contractors who file a protest on a contract on which they are the incumbent
contractor shall have all payments above incurred costs withheld on any bridge contracts or temporary contract extensions awarded to the contractor as a result of a delay in award resulting from the filing of such protest.

          ‘‘(2) DISPOSITION OF WITHHELD PAYMENTS ABOVE INCURRED COSTS.—

               ‘‘(A) RELEASE TO INCUMBENT CONTRACTOR.—All payments above incurred costs of a protesting incumbent contractor withheld pursuant to paragraph (1) shall be released to the protesting incumbent contractor if—
                    ‘‘(i) the solicitation that is the subject of the protest is cancelled and no subsequent request for proposal is released or planned for release; or
                    ‘‘(ii) if the Government Accountability Office issues an opinion that upholds any of the protest grounds filed under the protest.

               ‘‘(B) RELEASE TO AWARDEE.—Except for the exceptions set forth in subparagraph (A), all payments above incurred costs of a protesting incumbent contractor withheld pursuant to paragraph (1) shall be released to the contractor that was awarded the protested contract prior to the protest.

               ‘‘(C) RELEASE TO DEPARTMENT OF DEFENSE IN EVENT OF NO CONTRACT AWARD.— Except for the exceptions set forth in subparagraph (A), if a protested contract for which payments above incurred costs are withheld under paragraph (1) is not awarded to a contractor, the withheld payments shall be released to the Department of Defense and deposited into an account that can be used by the Department to offset costs associated with Government Accountability Office bid protests.’’.

2018 NDAA Passes House - Now On to the Senate

Earlier today the House passed the fiscal year 2018 National Defense Authorization Act (NDAA) by a wide margin; 344-81. Now, the Senate needs to act on its version. The House version calls for $696 billion in spending while the Senate version sits around $700 billion. Both spending proposals exceed the President's $603 billion defense plan.

The bill that passed the House still contains the provision requiring DoD to subcontract at least 25 percent of its incurred cost audit workload in lieu of requesting DCAA (Defense Contract Audit Agency) to perform the audits (see Transitioning from Government Auditors to Commercial Auditors for Incurred Cost Audits for additional details on this provision).

It is not clear who will pay for these audits. It almost seems like an unfunded mandate. Audits conducted by DCAA are authorized in the NDAA (nearly $600 million in the Fiscal Year 2018 House budget). But if DCMA (Defense Contract Management Agency) must pay for the audits that it awards to commercial audits (perhaps as much as $100 million per year), it is going to need to find a source for those funds. It's unlikely that the Agency will want to fund them from operations.

Perhaps DCAA could pay for the audits. After all, they'll be able to save that amount by hiring fewer auditors since their workload will diminish when commercial auditors take over.

One note concerning the 25 percent target. It is measured on costs charged to flexibly priced contracts, not 25 percent of contractors. To get to 25 percent of incurred cost dollars, there will have to be at least a few of the major Defense contractors thrown into the mix.