DCAA Relations, Department of Defense News, Incurred Cost Proposals

A World Without DCAA – Now a Reality

Consequences — Rates and Rate Structure

The recently passed Department of Defense funding bill prohibits DCAA from working outside the Department of Defense until the Defense Secretary certifies DCAA’s backlog is under eighteen months

This does not come as a surprise and in many ways DCAA checked out in 2009. I wrote an extensive article on this in 2012 titled “A World Without DCAA”.

Although detail after detail remains uncertain (cognizance for example), it is not too early to start discussing some of the consequences of this legislation. Let begin with concerns about contractor rates and rate structure.

A couple of years ago, the Army could not get DCAA out to audit a client’s accounting system in anticipation of an award regarding critical research. In coordination with DCMA, the Army sent out its own auditor. This Army auditor recommended approval of the contractor’s accounting system and DCMA signed off on the report.

The one argument between the Army auditor and I arose out of cost allocation methodology or bases and pools. The contractor worked on two cost type contracts. The first, already in place, with the Air Force, involved mainly services. The second, the proposed Army contract, involved significant material purchases.

The Army objected to the allocation of administrative (G&A) over all other costs (Total Cost Input or TCI) as this allocation method would assign more administrative costs to the Army contract.

I persuaded the Army auditor that the guidance required the government to establish that the allocation method was inequitable to the government not the contract. As much as I loved the Army, as a former paratrooper, I could not change the allocation method for each contract.

This type of argument is familiar to everyone working in government contracting accounting. Time and time again, local contracting officers will attempt to impose cost allocation and rates on individual contracts. Refusal to pay G&A costs on direct travel is a classic example. Wanting a separate pool/rate of materials and/or subcontractors is another example. One Air Force contracting office tried to tell me with a straight face that he had never approved a G&A rate above ten percent.

This is one area where DCAA provided a service to the small contractor as DCAA would swoop in and make pronouncements, right or wrong on the contractor’s rates and rate structure. It also underlines the critical importance of an excellent cost accounting system to provide the data necessary to understand what the choices cost.

Who will make these decisions now? You can bet that arguing about it is going to cost both the contractor and the government.