Cost And Accounting, DCAA Relations, Incurred Cost Proposals

Confusing Adequacy and Audit – Incurred Cost Proposal Fiction and Reality Part One – A Messy History

FAR 52.216-7(d) – Allowable Cost and Payment

“2(i) The Contractor shall submit an adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years.”

The last decade proved largely unkind to DCAA as it received constant criticism from Congress, other government auditors (GAO, DOD OIG), other areas of Government (DOD, DOE, NASA, GSA, etc.) and the occasional contractor.

A great deal of the criticism, and two ACTS OF CONGRESS, focused on DCAA’s simple inability to complete audits and address contractor costs through timely audit of contractor’s incurred cost proposals (ICPs). An ICP is a contractor annual report accounting for the money spent and allocated to a government contract.

DCAA’s primary defenses are the increase in work due to almost two decades of war, a recent focus on more complex audits, and inadequate staffing.

Over the years I employed one simple breakdown to illustrate DCAA’s work efforts. According to DCAA’s own Report to Congress, DCAA employed 4,167 auditors. According to the same report, DCAA completed 3,581 audits in 2017. This works out to less than one audit per year per auditor (.86 audits per auditor). In the 2011 report (the oldest on DCAA’s website), the number of auditors was higher at 4,225 and the number of completed audits stood at 7,390 for a ratio of 1,75 audits per year per auditor.

Apparently 58 more auditors made a huge difference.

Skewing this analysis is the number of incurred cost proposals DCAA closes without audit. In 2107, DCAA closed 22.5% of their incurred cost proposal by audit (1,527 out of 6,786). What happened to the other 5,259 contractor ICPs? The government accepted the contractor’s proposed rates without audit.

Yes, the vast majority of work the AUDIT Agency does each year is not audit.

DCAA often justifies this lack of audit by comparing itself to the IRS and the IRS’s procedures[1]. The IRS does not audit most taxpayers, so why should DCAA?

I do not agree with the comparison for several reasons. I believe such comparisons are like comparing oranges and Italian race cars.

One simple reason is that the IRS is in possession of enormous amounts of collateral data on taxpayers. A huge advantage not enjoyed by DCAA. The IRS receives a copy of your W2 from your employer, your interest income from your bank, even information on your health insurance. The collateral information for businesses is even larger to include payroll tax filings, SEC reports, and more.

In other words, when the IRS gambles on taxpayer cheating, they know a great deal more information then DCAA does when they gamble on contractors with taxpayer’s money.

I realize that the majority of contractors rose up and began dancing behind their desks at the idea that there is about a one-five chance of DCAA showing up to audit your incurred cost proposal.

While I do not wish to throw any contractor in front of the bus filled with DCAA auditors, I believe we are all better off with an active viable DCAA audit function. The friction of the audit process helps both contractors and the government. Contractors gain wisdom about compliance, the ability to make audits smoother and when to draw the line on ridiculous and even unlawful auditor requests, such as copies of employee’s birth certificates. The government gets practice at their job and, hopefully, learn not to make ridiculous and even unlawful requests[2].

A viable active DCAA audit effort also helps keep the government out of mischief. The decline of the audit function and the resulting backlog of incurred cost proposals reaching monstrous numbers, has resulted in some changes in DCAA methods that I will categorize as mischief: 1) DCAA expanding their ‘model’ (in their minds) incurred cost electronically and; 2) DCAA confusing adequacy and audit.

NEXT – “Good Intentions and an Honest Effort to Avoid Work”.

 

 

[1]DCAA Director Bales’ testimony before Congress on Apr 6, 2017 (page r) https://docs.house.gov/meetings/AS/AS06/20170406/105777/HHRG-115-AS06-Wstate-BalesA-20170406.pdf

 

[2] I received my second request from different audit offices for contractor’s home addresses this morning. The previous request was a couple of years ago.

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Department of Defense News, Running Your Business

Common Sense, Policies & Procedures, Hand Grenades, and a Corvette

Most of what we address in policies and procedures are common sense. What little that is not is government “sense”. I bet you wondered why I included hand grenades and a corvette. Let me tell you a tale from my youth.

DRF1

I served in the 82nd Airborne division as an infantry soldier during the cold war. One of the primary responsibilities of the 82nd (along with the 101st  and the 24th) was the ability to send a battalion size force anywhere in the world within two hours. Since the 82nd was burdened with parachutes and not helicopters (101st was not airborne when I served) or armored vehicles (24th), the primary burden fell on the 82nd.

The division was divided into 9 units of readiness status called “DRF” for Defense Readiness Force”. The highest status was DRF 1 which meant that the battalion needed to be able to assemble within two hours. For us, it meant no leave and we had to be within a half hour of the base at any time, ready to gear up and deploy.

Of course, Deployments happened for real and deployments happened for training, and God Bless the US Army, someone was always trying to figure out a way to improve the deployment process.

One of the slowdowns was issuing out ammo to the DRF 1 force. For example, as a grenadier, I carried seven 30 round magazines of 5.56 for my M203, about twenty 40mm grenades for the launcher, a belt of 7.62 for one of the platoon’s M60 machine guns, a couple of hand grenades, and other odds and ends in addition to food, water and my regular gear. I also carried half of a M47 anti-tank missile.

Multiple this load by 800 other guys with similar loads then add odds and ends such as mortar rounds, .50 caliber rounds, TOW rounds, etc.… and it adds up to several tons for us to carry and deploy. In addition, the force must deploy with adequate reserves, at least two or three times the amount we carried. two or three times that amount in reserve.

Half of a Brilliant Idea

This bottleneck led to half of a brilliant idea by someone in the chain of command. Why not pre-issue the ammo to the DRF 1 force? The immediate challenge this presented was how to secure the tons of deadly material. There really was not a warehouse within a DRF 1 unit for this purpose.

Well, all the units were across the street from a small area of woods fondly referred to as “Area J”. The battalions utilized Area J for quick training, physical training, and harassing new members of the division. “Smith, would you go and ask Top for the keys to Area J?”.

The idea some unknown person came up with was to issue the ammo and take the ammo out to Area J. Security? Put three strands of concertina wire around it and let put a squad to guard it. This is what they did the next time my battalion went on DRF 1.

I do not remember being told that we were going to have guard duty on top of everything else associated with DRF 1 status, but my squad came up on rotation and we got in a deuce and a half and deployed into area J and the ammo dump.

We were a tight squad and worked well together, my squad leader was busy with something else when we arrived and asked me to talk to the sergeant of the squad we were reliving.

Looking at the large number of crates around us, I asked the sergeant for the inventory form. He replied, “What inventory form?”

“What Inventory Form?”

Apparently, no one else shared my shock and I am sure the rest of the squad got tired of my complaining about this for the rest of the night. Yes, they agreed with me that it was a stupid idea, but bureaucracies, and the Army was often a bureaucracy with weapons, was full of stupid ideas.

We finished our guard duty, turned the ammo over to the next squad, and went back to the barracks. We heard nothing more about inventory for several months.

The Art of the Deal

The story we heard later was that a guy from one of the other companies in our battalion attempted to buy a car from a local dealership and failed to close the deal. He later decided to express his anger by returning to the dealership at night and chucking a hand grenade into it. The only injury, as we heard about was to a corvette.

What our young soldier did not realize, is the spoon of a hand grenade contains identifying numbers that allowed law enforcement to track the hand grenade back to one of the boxes issued to our battalion during the DRF 1 readiness period.

Consequences

The Army immediately locked our battalion down, bringing in all the guys who lived off post and putting them on the floors of our barracks. All the cars were searched, including mine, and no one was going anywhere until the hand grenades were located or at least accounted for.

It took several days for the culprits to confess (sometimes peer pressure is a wonderful thing), and the story was that they stole at least one CRATE of hand grenades.

I assume they were courtmartialed, or if the Army wanted to keep it quiet – an Article 15. I was just happy to return to a normal life.

Common Sense

Maybe it was asking too much for infantry grunts to think about inventory, although in my young mind it was the word “accountability”.  I often wondered how the ammo got checked back in without an inventory, or just who the hell signed for it.

Accountability is a critical concept is government and business and this is one of the stories that led to my development of Single Point of Responsibility (SPR) as an essential management tool.

Government personnel and contractors should always think in terms of accountability and responsibility in their actions. It does not matter if it is hand grenades, dollars, or even human beings you are responsible for. Developing systems of accountability is simply common sense.

 

 

 

 

 

 

 

 

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Cost And Accounting, DCAA Relations, Incurred Cost Proposals

Be Fair to DCAA

One of the consequences of the new law requiring DCAA to accept of reject a contractor’s incurred cost submission within sixty (60) days is a possible DCAA conclusion that it must reject the proposal instead of simply calling the contractor and asking a few questions. The loop of question response, question response can eat up the clock pretty quick, especially when about 90% of the proposals are submitted on the sane day.

Some examples I am seeing:

a. Did you really mean that the contract reported on Schedule O is ready to close.

b. Are you missing any contracts on Schedule H, we think you might be.

c. We see that you got labor reconciled on Schedule L but we are not sure how you did it. We will go ahead and reject and let you explain it with the resubmission.

Please feel free to share your examples.

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