Accounting System, Cost And Accounting, DCAA Relations, Department of Defense News, Incurred Cost Proposals

Twist and Turns in Government Contracting and DCAA in 2012

January 1, 2013

The current crisis facing government contractors dates back to 2009 when a GAO report  identified widespread problems with the DCAA audit process and claimed that DCAA was afraid of contractors. The DCAA director resigned and the new director promised change.

Initially the change came by directing all of DCAA’s energy toward addressing the problems raised by the GAO report. Many offices suspended all work on Incurred Cost Proposals (finalizing contractor rates) in favor of proving DCAA could properly evaluate contractor business systems. DCAA reports to Congress stated that they were saving billions of dollars in forward pricing agreements and did not keep track of the backlog on incurred cost proposals.

I wondered how real the savings were given the relationship between forward pricing and incurred cost proposals. DCAA claimed savings by forcing contractors to reduce rates, say the fringe rate from 49% to 45%, but the incurred cost proposal determines if DCAA or the contractor had it right and the loser pays. In other words, if the incurred cost proposal shows the fringe rate was actually 47% half of the savings DCAA claims vanish.

2012 proved the year where progress, both real and illusionary towards resolving the crisis transpired. DCAA saw many of the changes they fought for implemented but also came under the harsh light of reality checks as GAO, DOD OIG, and a professor from Baltimore all brought to light the lack of progress in many areas.

Again, DCAA did make progress and the staff auditors continue work daily to protect tax dollars as the rug they stand on displays more moves than any flying carpet in an Aladdin tale.

I was not surprised that I could find twelve significant stories for 2012. I was also not surprised to discover they could fit into twelve chapters of the year with a stirring climax in December.

January

The year began with the Armed Services Board of Contract Appeals throwing out DCAA’s methods of determining executive compensation limits in several cases, my favorite being 56624, 56751, and 56752 under the appellant’s name Metron.

What makes the Metron case interesting is DCAA’s decision to take on a company headed up by a gentleman with a PhD in statistics from Princeton who documented all of his decisions with thoroughness the government should support not attack.

Thoroughness the Board did not find in DCAA’s own work to determine executive compensation levels for small businesses. The Board referred to DCAA’s work as “fatally flawed’ in one case and ‘unreasonable” in one case.

The issue never proved simple. Although Congress sets limits of allowable executive compensation, the FAR requires DCAA to determine levels for smaller businesses. The Board rejected the methods employed by DCAA several times in 2012 beginning in January.

February

In February the Washington Post covered DCAA’s plans to add as many as 1,612 new staff members.  I wondered what the pay rate would be as many vacancies within DCAA proved difficult to staff, even in this economy.

One of the interesting sections of the 2009 GAO report mentioned previously was the previous DCAA management objective to reduce the agency’s per hour costs in order to be competitive with commercial alternatives.

The easiest way to reduce per hour costs is to pay people poorly, provide little or no training, and provide little supervision and here I thought I was simply getting older and crankier.

March

In March the government published final rules on Accounting System Administration in the DFARS 252.242-7006.

The regulation matched the early drafts in all but one key area.  C(8) was expanded to require some form of internal audit. This fell in with GAO’s recommendation that DCAA begin to use contractor internal audit reports to help with DCAA’s audit work.

One cannot use what does not exist. Now the DFAR says ‘management reviews’ or ‘internal audit’ are required for an adequate accounting system and guess who wants copies of all the reports and work papers?

April

In a case involving Raytheon (Raytheon Company v. United States COFC No 09-306C April 2012) the federal courts ruled that the government cannot go back past six years in an attempt to recover money.

The cheers stopped a few moments after we realized this worked both ways.

May

In May the word came out that a law professor from Baltimore,  a former legal counsel for the CAS, published an article “DCAA – Is  Anyone Home?”.

Mr. Loeb’s extensive analysis reaches two main conclusions:

1) There has been a 400 percent reduction in completed audits since 2008 despite the number of DCAA employees increasing during this timeframe.

2) The Current backlog of DCAA audits exceeds One Trillion dollar (Not a huge surprise as DCAA finally  admitted to 558 billion back in August of 2011).

Mr. Loeb places a great deal of blame on what he calls the “Clericalization” of DCAA as documentation of the process appears to be more important than actually completing the process.

I will add a couple of thoughts from my vantage point of working with several DCAA locations across the country:

1) After the devastating GAO reports criticizing DCAA’s lack of ability to successfully manage the audits of accounting systems, I heard from DCAA supervisors in 2010 that DCAA would not do any incurred cost proposal audits and only do accounting system audits. I inferred this was a dedication of resources to refute the GAO findings. It is important to note that by DCAA’s own requirements there was a backlog in this area also although it could not be qualified in monetary terms. DCAA internal standards called for the review of contractor accounting systems every two years.

2) Skip ahead to 2012 as word of the incurred cost proposal backlog begins to circulate, and DCAA schedules an entrance interview with a client of mine on the East Coast for an accounting system audit only to tell us during the first few moments of the audit that DCAA has suspended all work on accounting system audits and now will be focusing only on cost audits. This is a complete reversal of DCAA’s 2010 decision to focus only on accounting systems.

AND now for the math¸ the numbers Mr. Loeb publishes indicate that each DCAA auditor is only completing 1.775 audits a year and 80% of those are comparatively simple forward pricing audits.

June

For the second time, DCAA publishes a new model Incurred Cost Electronically (ICE), their preferred version of the incurred cost proposal, during the week that the vast majority of the proposals are due to DCMA/DCAA.

Yes, incurred cost proposals are due six months after the contractor’s fiscal year which for the majority of contractor’s is June 30th.

To add insult to injury DCAA begins to reject submitted incurred costs proposals for not following the new format published just a few days before.

July

For the first time since 2005 DCAA updates Information for Contractors.   There is a reduction in the amount of material covered and a push to have contractors provide DCAA with everything in an electronic medium.

August

This FAR clause had been there for a while but I first ran across it looking at an Army contract.  Everything else aside, I find the section (d), the requirement to include it in your subcontracts a little annoying.

52.223-18  Encouraging Contractor Policies to Ban Text Messaging While Driving.

As prescribed in 23.1105, insert the following clause:

Encouraging Contractor Policies to Ban Text Messaging While Driving (Aug 2011)

(a) Definitions. As used in this clause—

“Driving”–

(1) Means operating a motor vehicle on an active roadway with the motor running, including while temporarily stationary because of traffic, a traffic light, stop sign, or otherwise.

(2) Does not include operating a motor vehicle with or without the motor running when one has pulled over to the side of, or off, an active roadway and has halted in a location where one can safely remain stationary.

“Text messaging” means reading from or entering data into any handheld or other electronic device, including for the purpose of short message service texting, e-mailing, instant messaging, obtaining navigational information, or engaging in any other form of electronic data retrieval or electronic data communication. The term does not include glancing at or listening to a navigational device that is secured in a commercially designed holder affixed to the vehicle, provided that the destination and route are programmed into the device either before driving or while stopped in a location off the roadway where it is safe and legal to park.

(b) This clause implements Executive Order 13513, Federal Leadership on Reducing Text Messaging While Driving, dated October 1, 2009.

(c) The Contractor is encouraged to—

(1) Adopt and enforce policies that ban text messaging while driving—

(i) Company-owned or -rented vehicles or Government-owned vehicles; or

(ii) Privately-owned vehicles when on official Government business or when performing any work for or on behalf of the Government.

(2) Conduct initiatives in a manner commensurate with the size of the business, such as—

(i) Establishment of new rules and programs or re-evaluation of existing programs to prohibit text messaging while driving; and

(ii) Education, awareness, and other outreach to employees about the safety risks associated with texting while driving.

(d) Subcontracts. The Contractor shall insert the substance of this clause, including this paragraph (d), in all subcontracts that exceed the micro-purchase threshold.

(End of clause

September

DCAA published new audit programs including one that focused on checking on consultant’s work. In many ways the programs were significant improvement over the vague programs of the past.

Yet, the new audit programs still showed DCAA needed to improve the quality assurance issues as one audit program assumed all contractors received 1099s and seemed to assume that professional services and subcontracting were identical from an audit perspective (i.e. you hire your lawyer in the same manner you look for laundry soap).

In other news, DCAA announced 42M withheld from contractors because of inadequate accounting systems while the Department of Justice settlement with Applied Research Associates showed that even then sloppy contractors were bilking the Department of Defense.

The truth is that quality audit work is always a work in progress and DCAA acknowledges this as upper management works to provide guidance and training.

I remind contractors all the time that few of the staff at DCAA never stood in their shoes. They never processed a payroll, worried about an accounts receivable, or set up a billing system.  Good contractorseducate DCAA auditors on these issues, build trust, and strengthen the system.

October

The backlog issues with DCAA are nothing new. In my years I experienced at least three of these cycles of  these overwhelming backlog. The two previous cycles occurred when DCAA’s efforts were largely manual and not automated. How these previous backlogs magically disappeared always proved a question of wonder and joy in my mind.

I knew with the database system now in place that most such magical solutions were no longer possible. This proved true when DCAA made attempts in 2011 and 2012 to claim first there was no backlog, then to claim that the backlog was five hundred billion (as opposed to Loeb’s analysis placing it at twice that amount), and to assure us that none of the overdue incurred cost proposals went past the new federal court date of six years (2006). I have client still waiting for 2003 audits.

DCAA made the courageous act to face the backlog and come up with a solution. Utilizing a complicated set of formulas they simply decided that most small contractors would get a pass while not assuring them of a pass. This would allow DCAA to focus on the large contractors (where they believed the money was) and to catch up within two years.

November

The Department of Defense’s Office of Inspector General (OIG) took exception to DCAA’s plan to clean up the backlog. The OIG asserted that DCAA had failed to do anything but claim that the proposed system would work and taxpayers would actually benefit from the catch-up. The OIG demanded numbers and analysis to back up DCAA’s conclusions on the savings or cost to taxpayers.

A significant portion of DCAA work is actually in support of other agencies such as Department of Energy (DOE). DCAA offered to bring them along for the backup clean up ride but many hesitated. I listened into a conference call with a DOE official, who by coincidence was a former DCAA auditor, who made it very clear his opinion of DCAA’s current efforts and his section of DOE’s decision to hire one of the final four accounting firms to take over DCAA’s efforts.

This presents a couple of problems.

Independence

While no one working with DCAA will hold them up as a model of independence, the alternatives may be worse. DCAA at least has to pretend to follow auditing standards and government contracting compliance. Cost Analysts have no such standards or experience. I argued with an Army auditor who demanded the contractor move away from Total Cost Input (TCI) to Value Added because TCI benefited the Air Force more than the Army. I told him that since he was trying to stand in DCAA’s shoes he was obligated to represent the government and not just his branch.

Do we really think that outside audit firms are not anxious to make their client the government happy at the expense of independence? It has the makings of Enron all over again.

Accountability

DCAA ultimately got into this mess because they were accountable up the chain of command. Every action reviewed all the way to the top (in theory).  This theory does not even exist with DCAA out of the picture as government officials are making decisions without any formalized method of review.  DOD’s OIG started to raise the alarm on this area in a recent report.

Experience

No one in government enjoys the experience with accounting compliance held by DCAA, even former DCAA auditors working in other branches of the government who cannot take advantage of DCAA’s internal peer and supervisory review systems

Another example of the lack of experience is a recent example of a cost analyst trying to change an argument about allocation to allowabilty without realizing that this raises the issue of fraud or at least penalties.

Relationships

There is a fine line contractors must watch between getting along with the government and not letting the government walk all over them.  The very institution of DCAA helped with this. Time after time I would argue with DCAA about various issues and on occasion they would issue audit opinions sticking to their guns. In almost every case, DCMA and the contract people were ignorant of the arguments and could have cared less. Unless there were substantial issues involved, DCAA’s opinion was usually compromised.

Now with DCAA out of the picture these ‘discussions’ are coming a little too close to home as contractors must make their arguments with contracting officers and cost analysts. Contractors are now forced to argue too close to their customer as opposed to arguing with DCAA.

**********

I am sure there are some contractors benefiting from the removal of DCAA from the process. I am equally sure this is not what taxpayers want to hear. I am also sure just as many are not benefiting as they have to deal with:

  • Lack of Independence (even more than usual)
  • Accountability with the lack of second opinions and formalized systems
  • Lack of experience and knowledge
  • Possible damage to the customer relationship with the government.

Not sure this is the government contracting world we want.

December

The GAO now chimes in with criticisms of DCAA’s plan to address the backlog. Buried in the report were some real numbers about if the plan was even viable.

First, the numbers indicate that DCAA overestimated the number of contractors scheduled to receive a ‘pass’ on the audit of the contractor’s incurred cost proposal by as much as 250%.

“Additionally, it is too early to tell whether DCAA will achieve its goal of

eliminating the backlog by 2016, in part because DCAA does not yet

know how many proposals under $250 million ADV will be determined low

or high risk and its initial estimates have proven inaccurate. DCAA reports

that its auditors have completed risk assessments on 13,522 contractor

proposals that had an ADV of less than $15 million—out of a universe of

approximately 20,000 proposals—as of September 2012. Of 13,522 risk

assessments completed, DCAA determined that 7,815 proposals were

high risk, or about two-and-a-half times more than anticipated”

GAO-13-131 Contract Closeout (p 17)

 

Simply put, by their own plan to reduce the number of audits, already criticized by the OIG as a risk to taxpayers, DCAA will need to complete two-and-a-half times more audits than planned.

Second, the audits are taking longer than anticipated.

“DCAA’s ability to reach a steady state by 2016 will also depend on

whether DCAA completes its audits within anticipated time frames.

However, DCAA was not able to complete the number of audits it planned

to in 2012. Specifically, DCAA planned to address 4,065 incurred cost

proposals in fiscal year 2012 by, for example, completing an audit or desk

review, but the agency reported that it addressed 2,930 as of the end of

September 2012.”

GAO-13-131 Contract Closeout (p 17)

Final Thoughts

It is clear the crisis continues but, if nothing else, it is better defined and understood.

I had the privilege of serving as an infantry sergeant in the 82nd Airborne Division. By nature airborne troops are placed in situations where the odds are overwhelming and the task close to impossible. After the Battle of the Bulge in WWII many reporters asked paratroopers from both the 82nd and the 101st if they were happy when General Patton’s Third Army showed up and relieved them. Almost uniformly the answer was no, the airborne did not require any help. Those troopers would be happy to hear the same attitude prevailed when I served and I am sure it exists within the 82nd today.

Bravo aside, the truth is that when a division is in trouble you send reinforcements. Last I heard, DCAA was part of the DOD, and I simply wonder if anyone explored the possibility of pulling other auditors out of the Army, Navy, and Air Force to provide relief to the backlog overwhelming DCAA. Hell, the current DCAA director spent a couple of decades as an Army auditor, maybe he has some telephone numbers he could call.

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