Contractors Getting Shortchanged on Past Performance Ratings

The purpose of Performance Assessment Reports (PARs) is to provide source selection officials with information on contractor past performance. Government officials prepare PARs in CPARS (Contractor Performance Assessment Reporting System). Most Government contractors are familiar with PARs/CPARS, having had the opportunity to review and respond to performance information loaded up on Government databases.

The DoD, Office of Inspector General (IG) recently published its capstone report on DoD compliance with PAR regulations. Over a number of years, it reviewed 238 PARs prepared by Army, Navy, Air Force and Defense organizations. While the IG found that officials generally registered (or had valid reasons for not registering) contracts and prepared corresponding PARs, they did not consistently comply with preparation requirements. Besides the fact that a third of them were prepared an average of 73 days late, 200 of the 238 PARS were deficient in terms of complying with FAR regulations and the CPARS Guide. Specifically, DoD officials did not:

• prepare written narratives sufficient to justify the ratings given
• rate required evaluation factors, and
• prepare sufficient contract effort descriptions.

The IG found reasons for these deficiencies. They included

• assessors were not adequately trained and organizations lacked effective procedures for timeliness and reviews of the PARs (there it is, the "more training" recommendation - you see this in every IG report)
• there was a lack of internal controls within CPARS - no system requirement to write a narrative and insufficient explanations for the different ratings,
• the CPARS guide did not contain sufficient information related to the utilization of small business.

Now the big "so what". Why should contractor's care about these deficiencies? Well, without access to timely, accurate, and complete past performance assessment information, contracting officers will not have past performance information needed to make informed decisions related to contract awards. This could work against contractors whose good work on prior contracts are not considered in the selection process. We would also suggest that it could work against the Government as well if past poor performance was not documented.

As recommendations, the IG recommended more guidance, more training, and enhancements to CPARS that will require written narrative along with other information.

You can read the entire IG report here.

Charged with a CAS Noncompliance? No Worry - Good Chance the Contracting Officer Will Ignore It

The Defense Contract Audit Agency (DCAA) is responsible for testing contractor compliance with Cost Accounting Standards (CAS) and report any noncompliances to the cognizant contracting officer, usually someone from the Defense Contract Management Agency (DCMA) to resolve the potential noncompliances.

FAR (Federal Acquisition Regulations) Part 30, Cost Accounting Standards Administration, contains the regulations on what should happen after issuance of CAS noncompliance reports. The Department of Defense, Office of Inspector General (DoD-IG) initiated an audit to see how well contracting officers were complying with these regulations. Its report was issued last week.

The IG selected 27 DCAA audit reports addressing noncompliances with CAS 403 (Allocation of Home Office Expenses to Segments), CAS 410 (Allocation of Business Unit G&A to Final Cost Objectives), and CAS 418 (Allocation of Direct and Indirect Costs) to determine whether contracting officers' actions taken in response to the 27 reports complied with FAR 30.6 (and DoD Instruction 7640.2, Policy for Follow-up on Contract Audit Reports).

The results, from a taxpayer's perspective, were disappointing. The IG found

• 12 instances in which contracting officers did not issue a Notice of Potential Noncompliance within 15 days, 
• 16 instances when contracting officers failed to complete all actions on the reported noncompliances within 12 months,
• 3 instances in which contracting officer did not have adequate documentation or rationale for determining that the DCAA reported noncompliances were immaterial,
• 8 instances in which contracting officers did not obtain a legal review of their CAS determination (as required by DCMA guidance)

As a result, correction of reported CAS noncompliances was delayed and contractors were inappropriately reimbursed for additional costs resulting from the noncompliances.

The IG recommendations included more training (of course, more training is the IG's solution to every problem) and more effective controls to ensure contracting officer compliance with the regulations. DCMA, of course, concurred with the recommendations, and why wouldn't they? Those recommendations are extremely benign.

You can read the entire IG report here.

Contractors Need Not Worry About Cited Business System Deficiencies

The Department of Defense, Office of Inspector General (DoD-IG) issued its report last week on how well the Defense Contract Management Agency (DCMA) has complied with DFARS (DoD Federal Acquisition Regulation Supplement) requirements when business system deficiencies are reported at DoD Contractors. The six contractor business systems that are of the most interest to the Government are Accounting (obviously), estimating, material management, purchasing, earned value management, and government property. The focus of the DoD-IG report was on accounting system deficiencies identified by the Defense Contract Audit Agency (DCAA).

The DoD-IG reviewed 21 audit reports issued by DCAA that identified deficiencies in contractors' accounting systems. In every single case, the DoD-IG found that DCMA contracting officer actions did not comply with one or more DFARS requirements when deficiencies were reported. For example, the audit found that DCMA contracting officers did not

• Issue timely initial determinations,
• Issue timely final determinations,
• Obtain contractor responses,
• Adequately evaluate contractor responses, and
• Withhold a percentage of contractor payments.

In 17 of 21 cases, the contracting officer did not issue final determination letters within 30 days as required. On average, contracting officers took 252 days to issue final determinations. In 8 of 21 cases, contracting officers did not withhold a percentage of contractor payments as required by regulation. 

It didn't take a DoD-IG audit to tell us there are systematic deficiencies in DCMA's resolution process. Talk to just about any DCAA auditor and they'll have stories about how seriously audit reports sent over to DCMA are taken. "Like shooing flies off the dinner plate", according to one former DCAA auditor. There are many reasons for contracting officer ambivalence toward contractor business system deficiencies. For one thing, contracting officers do not usually appreciate the importance of sound internal controls to the extent that auditors do. It is not intuitively obvious to them that strong internal controls will result in cost savings and reduced oversight. Second, contracting officers have a lot on their plates. The listing on contract administration functions in FAR 42.302 is 71 items long.

DCMA's response to DoD-IG's cited deficiencies was to hold more training. Yep, we're sure that will take care of the problem. You can read the entire DoD-IG report by clicking here.

Inspector General Blasts "Spares" Buying Process

The DoD Inspector General (DoD-IG) issued a report late last month criticizing the Department for ineffectively managing its spare-parts inventories. The report itself has not been made public but a synopsis of the report is available on the IG's website.

Based on its audit, the DoD-IG found that DoD maintained excess inventories of $1 billion and did not effectively manage its spare-parts inventories because of the following:

• DoD did not review other existing sources and enforce inventory reduction before it purchased spare parts from private sources.
• DoD did not verify proper spare-part requirements were established for weapon systems.
• DoD did not include essential inventory management metrics and use accurate metric data and calculations established in the contract requirements.
• DoD did not provide sufficient oversight and enforce contract requirements.
• DoD did not report the inventory on its annual financial statements.

There are myriad problems with spare parts inventories not only within the Government but in private industry as well. When spare-parts inventories are dispersed as they are within the DoD, the inefficiencies in managing them become magnified. Every deployment requires spare parts and the military cannot wait around for spare-parts to arrive from a centralized warehouse somewhere in the world. Also, once a unit has spare-parts, it is reluctant to share those with others, even though someone else might have a more pressing need.

DoD has undertaken new strategies to reduce spare-parts inventories. The Department, of course, issued an inventory management improvement plan. They also formed a working group to establish inventory management metrics. They issued new policies. And, they also "drafted" guidelines to manage and account for Government-owned spare-parts inventories controlled by contractors (lets blame the contractors, shall we?)

No one really expects these significantly improve spare-parts management. The DoD-IG, since 1999 has issued 36 reports related to spare-parts inventories. In 33 of those 36 reports, the DoD-IG reported the same finding; DoD did not effectively manage its spare-parts inventories. The correcting action plans were of the same ilk; issue a memo,

Another DoD-IG Review of DCAA Audits

Last September, the DoD Inspector General issued another one of its oversight reports on the quality and adequacy of DCAA (Defense Contract Audit Agency) audits. The IG reviewed 16 audits that were completed between 2011 and 2013. They found significant inadequacies in 13 of the 16 audits including deficiencies in i) audit planning, ii) evidential matter, iii) working paper documentation, and iv) supervision. They made 96 recommendations of which DCAA agreed with 72. Not happy with the concurrence rate, the IG wants DCAA to reconsider their response to the remaining 24 recommendations.

Someone should try to get through to the DoD-IG's office that DCAA's audits, by any reasonable measure, are pretty darn good. Experienced DCAA auditors have an innate ability to quickly ferret out audit risks and to develop audit procedures commensurate with those risks. Audits are designed to provide "reasonable" assurance that a proposal price is based on adequate cost or pricing data or that incurred costs are allowable, allocable, and reasonable. The IG's expectation seems to be that DCAA should provide "absolute" assurance.

Someone should also tell the IG that no one really cares about their audits of DCAA any longer. Congress has long since lost interest and the press certainly doesn't cover their ad nauseam reports on DCAA any longer. Seriously, is it really a National interest that an auditor somewhere did not comply with GAGAS (Generally Accepted Government Auditing Standards) because he failed to initial off on a working paper. Is National security at stake? Will the defense budget become overrun as a result? The public doesn't understand GAGAS nor will they ever take the time to do so - especially when there's IRS abuses, illegal immigration, and the rising cost of health care premiums to worry about. Come on IG, get a life. You've had your 15 minutes of fame back in 2009. Time to move on.

Compliance audits have got to be the most mundane of any audit type. Picture the (highly paid) IG auditor who sits in a room and pours over a DCAA audit work package - looking for even the most minute infraction. Where's the job satisfaction in that? Are they adding value to the procurement process? In many cases, the IG auditors spend more time reviewing individual DCAA working paper packages than the auditor spent on the entire audit. How does that pencil out? Could private enterprise survive under such circumstances?

We think its time for the Department of Defense to redirect the Inspector General's office toward more productive activities.

DoD Inspector General Blasts DCMA for Inadequate Contract Case Files

Beating up on DCAA (Defense Contract Audit Agency) has become somewhat passe' so the DoD-IG (Inspector General) is turning its focus on DCMA (Defense Contract Management Agency). In a recently issued report, the IG was heavily critical of DCMA's practices and procedures for reviewing contractor indirect expense rates - rates which were used to negotiate at least $70 billion in contracts.

Basically, the IG's criticism involved the lack of documentation - so much so that it was unable to ascertain whether the contracting officer responsible for negotiating indirect rate agreements knew what they were doing. It was certainly not evident from the working papers (the IG calls them Contract Case Files) that the Government's interests were protected in six of the eight DCMA offices reviewed. In fact, the IG stated that the working papers were so deficient that it could not determine whether the Government (or, they should have said "taxpayers") achieved fair and reasonable pricing.

This breakdown was foreseeable. First of all, DCMA has never emphasized the importance of working papers. One former contracting officer quipped that if he could not write the information down on his cuff, he didn't need it. DCAA, on the other hand, has always stressed the importance of adequately documenting in working papers the risks and the planning and the actual work performed. Bur, more importantly, the Government has always been at a disadvantage when it comes to figuring out the propriety of contractor indirect expense rate forecasts. The Government could never match the hoards of contractors' minions with insider knowledge involved in the preparation of rate forecasts. But when you remove the most important piece to understanding and attesting to the reliability of these rates (i.e. DCAA), the Agency with the expertise, the background, the continuity, the historical perspective, and the professional standing (e.g. CPAs), an awful void is left that is hard to fill.

It's not that DCMA isn't trying. They've done a lot over the past few years to advance their knowledge, skills, and abilities in evaluating indirect costs and indirect expense rates (including hiring away a lot of DCAA auditors) but that is not their strong suit. They are not (generally) accountants and they do not have a propensity for understanding job costing, adjusting journal entries, or accounting accruals. Sure, they can tally up a list of numbers on a spreadsheet, but to understand the meaning of those numbers often requires someone with accounting expertise. DCAA was best suited for that job.

You can read the entire IG audit report here.

DoD Inspector General Rips Missile Defense For Disregarding DCAA Audit

In what could be construed a sad commentary on how contracting officers value the input of DCAA (Defense Contract Audit Agency) when negotiating contracts, the DoD-IG (Inspector General) released an audit report last week criticizing the Missile Defense Agency (MDA) for awarding a $1 billion contract without an audit.

The IG undertook the audit as a result of a hotline call, probably from someone within DCAA who took umbrage with MDA's actions. It wasn't as if MDA had failed to request an audit - they dutifully requested DCAA to audit the contractors proposal. But they didn't wait for the audit before concluding negotiations. As a result of failing to wait for DCAA input, the IG estimated that MDA could have negotiated a significantly lower contract price and saved "millions of dollars in reduced contract fees".

During the course of the audit, DCAA had requested additional time to issue its final report because it wanted to include the results of an assist audit of a major subcontractor. MDA granted a one month extension even though it knew the revised audit due date was beyond its deadline for negotiating the contract. MDA didn't bother to inform DCAA as to the negotiation deadline. Neither did MDA notify DCAA that the scope of the contract had been cut in half due to budget constraints. So DCAA was going merrily on its way auditing a proposal that was already obsolete and ultimately useless because it was timed to be issued after contract negotiation.

It was pretty obvious that MDA didn't care about an audit nor did they value DCAA enough to even inform the Agency of the negotiation deadline or that the proposed scope of work had been cut in half. What did they intend to do with the audit results - paper their files? It would seem that MDA has not bought in to DCAA's vision statement: "Dedicated professionals working together to deliver top-quality audit services to support the Department and the warfighter, and to protect the taxpayer's interest."

What were the recommendations and corrective actions as a result of the IG review? More training! (Training solves every ill, no?) The IG was happy with that corrective action.

You can read the full IG report here.

Contractors Should Love This Contracting Officer

Two days ago, we discussed a recently published report by the DoD Inspector General (DoD-IG) on its investigation of a hotline complaint alleging that high level management from DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) had exerted undo influence in settling a case for $500 million less than the Government's estimate of damages. The charge was that the Government chose to settle for an amount that was agreeable to the contractor, not what was fair to the taxpayer. Click here if you missed that posting.

While we're on the subject of DoD-IG reports, the Agency issued another report last week involving DCAA and DCMA and a hotline complaint. In this case, the "large DoD contractor" was not named. Here's what happened.

The complainant alleged that the DCMA contracting officer did not take timely or appropriate action on several DCAA audit reports covering the business systems of a large DoD contractor. (any doubt that the complainant was a frustrated DCAA auditor?)

The hotline complaint was substantiated. Even though DFARS (DoD FAR Supplement) states that the contracting officer should make a final determination with 30 days, the contracting officer has so far take up to 1,373 days and still counting. As of the date of the report (June 20, 2014), the contracting officer had still not issued a final determination. Additionally, the DoD-IG investigation revealed that the contracting officer had not implemented withholdings for significant deficiencies. But DCAA also shared some blame. The DoD-IG reported that DCAA did not obtain sufficient evidence in support of a memorandum that stated the contractor "appeared" to have implemented adequate controls for the remaining estimating system deficiencies.

The DoD-IG recommended that the Director of DCMA instruct the contracting officer to make a final determination on the compensation system, ensure the contracting officer implements withholding for any disapproved business systems and develop a written corrective action plan for improving DCMA quality assurance procedures to help ensure timely final determinations and implementation of monetary withholds for significant deficiencies. DCMA agreed.

The DoD-IG recommended that the Director of DCAA rescind its "appearance" memorandum and initiate follow-up audits of the reported business system deficiencies. DCAA did not agree with most of the DoD-IG recommendations.

We've seen many cases like this. As former auditors ourselves, we were often frustrated by the contracting officer's lack of responsiveness in resolving audit issues and identified deficiencies. In most cases, that reluctance was primarily because the contracting officer remained unconvinced that the deficiencies were material or the deficiencies were backed up with adequate facts and data.

New DoD Inspector General Nominated

Last Friday, the White House announced the nomination of Jon T. Rymer for the Inspector General, Department of Defense. Here is Mr. Rymer's bio that accompanied the announcement.

Jon T. Rymer is the Inspector General (IG) of the Federal Deposit Insurance Corporation, a position he has held since 2006. From May 2012 to January 2013, he was also the interim IG of the Securities and Exchange Commission. From 1997 to 2004, he was a Director at the accounting firm of KPMG LLP. He was executive Vice President at Boatman's Bank of Arkansas from 1992 to 1997, and Executive Vice President at First American National Bank of Tennessee from 1981 to 1992. Mr. Rymer is a 33 year veteran of the active and reserve components of the U.S. Army. He is a Command Sergeant Major in the U.S. Army Reserve. He serves on the Council of Inspectors General for Integrity and Efficiency as a Member of the Executive Council and as Audit Committee Chairman. Mr. Rymer received a B.A. from the University of Tennessee and an M.B.A. from the University of Arkansas at Little Rock.

The nomination is currently under consideration by the Senate Committee on Armed Services.

This is an important position as the IG sets the organization's agenda and sets the tone at the top. A lot of folks are wondering whether under new leadership, the DoD-IG will continue its bitter internecine feud with DCAA (Defense Contract Audit Agency). The IG has been extremely and exuberantly critical of DCAA in general and the quality of its audits in particular.

Comments we've seen on this nomination have been mostly postive. His tenure at FDIC and SEC garnered much praise.

DoD Engages in Self-Flagellation

Late last week, the DoD Inspector General's office (DoD-IG) issued their long-awaited and long-delayed audit report on audits conducted by DoD's Contract Audit Agency (DCAA). Perhaps you read about it already - it made some news.

The DoD-IG found that DCAA "did not exercise professional judgment in performing 37 (74 percent) of the 50 assignment reviewed." Among the deficiencies disclosed were:

• external impairments to independence (allowing the contractor to withhold requested information)
• inadequate planning 
• poor communications with the requester and contractor
• insufficient evidence (to support conclusions and recommendations)
• unsupported or untimely reports (a case of the pot calling the kettle black)
• poor documentation
• ineffective supervision
• ineffective quality control

We haven't read the entire 100 page report and if we get around to it, we may want to provide additional coverage here in this blog. In the meantime, we have a couple of observations regarding this report.

This stuff is very old. The DoD-IG reviewed 50 reports issued in Fiscal Year 2010. Much of the actual audit effort was performed earlier than that. Many were begun in Fiscal Year 2009 which means that work could have begun as early as October 2008. The DCAA of 2013 is not the same as the DCAA of 2008, 2009, or even 2010. A lot of changes have occurred - new leadership, revised policies, more rigorous quality control, and significantly more time allocated to each audit. Someone should ask how DCAA is doing today, not how it was doing four or five years ago.

Perspective. The DoD-IG found deficiencies in 37 of 50 reports. Big deal. Give us a few years with 50 reports and we could find some kind of deficiency in all of them (including our own). But what is the significance of those deficiencies? Do they rise to the level where the overall audit conclusions and recommendations are invalid? So, if an auditor finds that a contractor is has poor timekeeping practices (e.g. employees do not complete their timesheets in a timely manner), does it matter to the overall finding that the auditor did not document supervisory discussions? Someone needs to put these deficiencies into perspective.

Impact on taxpayers. DCAA audits are advisory to contracting officers. The contracting officers use the information to make decisions, negotiate contracts, and ultimately, ensure that taxpayer dollars are well-spent. If the contracting officers do not have confidence that DCAA's reports are any good, they won't be sticking their necks out to support the audit position. Even now, there is doubt among contracting officers over whether DCAA audit reports have merit. Why cast additional doubt on the veracity of audit positions/recommendations when such doubt is not merited?

Contractor Defense. The first thing a contractor is going to ask when presented with a DCAA audit report with findings is what steps has the contracting officer taken to ensure that the DCAA audit findings are valid, responsible, proper in the circumstances, and whether the audit was "adequate" - i.e. based on the application of Generally Accepted Government Auditing Standards - or whether the report were such that if the DoD-IG reviewed it, would recommend that it be rescinded. In other words, contractors will undoubtedly use this DoD-IG report to cast doubt on the validity of future DCAA reports.

You can read the entire DoD-IG Audit Report here.