We previously posted our opinion of the FAR Councils’ proposed rule whose intent was ostensibly to “improve” the contract closeout process. As we noted at the time, the proposed FAR revisions would “significantly expand the powers of DCAA, and will force contractors to comply with arbitrary DCAA demands or risk monetary penalties.”
The public comment period closed October 19, 2009. The comments received by the FAR Councils were published on the Federal rulemaking site (www.regulations.gov). What did the commenters think about the proposed rule?
From LeGacy Resource Corporation (a Woman-owned 8(a) business currently under contract with NASA to perform contract close-outs):
Overall evaluation: The proposed changes may facilitate closeout in that additional guidance may reduce the number of inadequate indirect cost proposals. However, procurement regulations only address one side of the problem. To significantly improve the closeout process, government need to emphasize its role in closeout including the timely finalization of indirect rates which include that DCAA completing audits of indirect cost proposals and administrative contracting officers settling rates, signing off on reports, doing plant clearances, etc. etc.
From Mildred Klee (private citizen):
Adding the term ‘adequate’ to ‘the contractor shall submit …an adequate indirect cost rate proposal’ is inappropriate because DCAA has assigned a unique meaning to the term, a meaning inconsistent with other sections of the provision. DCAA has historically interpreted the term ‘adequate’ to mean identical to DCAA’s incurred cost model regardless of need, risk, or materiality. DCAA typically ignores provision requirements for flexibility, for considering business size and type and working ‘together’ to make the process as efficient as possible. As presented, the DCAA incurred cost model is an example; the model was never intended to dictate information content.
*****
The provision requires the cognizant auditor to make a written determination of adequacy but does not state a time limitation for doing so, nor does the provision require the auditor to explain determinations of inadequacy. Time limitations are required for the same reason limitations are placed on contractors; timely close-out reduces cost and risk. Moreover, time limitations should be established for completing audits.
*****
The proposed statement that ‘The proposal must be supported with adequate supporting data, which may be required subsequent to proposal submission’ is repetitious and unnecessary. The need for supporting data is well understood; there is little need to state the obvious. Moreover, the statement adds a level of subjectivity as contractors guess at what information ‘may be required’ subsequent to submission.
From Beason & Nalley (a regional accounting firm):
Although the proposed rule is ostensibly to streamline contract closeout, it appears to be a regulation to legitimize DCAA’s long standing insistence that an adequate final indirect cost rate proposal be inclusive of several mandatory schedules and supplemental information as represented by DCAA within its Model Incurred Cost Proposal (ICP), as stipulated in the DCAA Pamphlet No. 7641.90.
Subsequent to the FAR Council’s publication of FAC 97-03, which rejected DCAA’s suggestion for a number of mandatory schedules, DCAA has made numerous revisions to the Model ICP with such revisions operating outside the bounds of the rulemaking process. Nonetheless, DCAA field auditors and field offices continue to assert that its Model ICP is a contractual requirement based upon the current wording in FAR 42.705 and the then current Model ICPpublished in a DCAA document. Given DCAA’s track record of misinterpreting existing regulations, it is inconceivable that FAR 42.705-1 would also be revised to solely assign DCAA the responsibility of determining the adequacy of contractor ICPs. In fact, assigning DCAA sole responsibility will be in direct conflict with FAR 42.705-1(b)(1) which states ‘The contractor, contracting officer and auditor must work together to make the proposal, audit, and negotiation process as efficient as possible’. As currently interpreted by DCAA and as stated in FAR Case 2008-020, the definition of an adequate final indirect cost rate proposal is designed almost exclusively for audit efficiency regardless of the administrative cost and inefficiencies for a contractor to develop certain schedules and regardless of the lack of any demonstrated connection to streamlining contract closeout.
*****
Although the Model ICP requirements have long been asserted by DCAA as a key component in solving contract close-out issues, there is little empirical evidence supporting that assertion. There has been success in closing out large numbers of contracts; however, the single factor in achieving such success had little or nothing to do with the expansive ‘requirements’ for extensive cost schedules identified within the DCAA Model ICP. In fact, the most noteworthysuccess was merely the application of common sense in closing out huge numbers of task orders (individually a contract); specifically, the use of audit sampling applied to batch processing of final vouchers as opposed to audits of 100% of the task orders. Similarly, quick close-out rates appropriately used have facilitated contract close-outs.
*****
… access to records and the associated audit(s) should be of the contractor’s ‘books and records’ as was the case for years before DCAA created and continuously modified the Model ICP to primarily achieve audit efficiencies with no regard for the hidden costs for contractors faced with constantly changing definitions of adequate ICPs.
*****
… the Model ICP (the required and the supplemental schedules) should be recognized for its primary purpose which has only a tangential connection to facilitating contract closeouts. The majority of the schedules were designed or otherwise evolved to shift resource costs from DCAA to the contractor at a time when DCAA was faced with declining resources. The strategy is to require the contractor to complete a schedule(s) in a very specific DCAA format, thus reducing or eliminating DCAA auditor time to perform an audit step.
From Rockwell Collins (a mid-size defense contractor):
The Performance Standards published at FAR 1.102-2 list (a) minimizing administrative operating costs, (b) risk avoidance versus risk management, (c) the exercise of discretion and sound business judgment, and (d) the desire to maximize efficiencies by promulgating rules, regulations and policies only when their benefits clearly exceed the costs of their development, implementation, administration and enforcement. The volume of information required, and the level of detail required by the proposed rule is unprecedented, unreasonable, far beyond that required to protect the interests of the Government, and clearly does not comply with the intent and spirit of FAR Part 1 in general and FAR Subpart 1.102-2 …
*****
FAR 1.102-2(c)(3) provides that all contractors will be treated fairly but need not be treated the same. FAR 1.102-4(d) provides that the FAR system will foster cooperative relationships between the Government and its contractors. Using the regulatory process to mandate over-reaching, intrusive audit guidance violates these overarching principles.
From the National Defense Industrial Association (NDIA):
The approach taken fails to improve the process and unnecessarily creates additional and very significant process and administrative problems. It:
- Creates a review process within which there is little latitude for contracting officers to resolve administrative disagreements between auditors and contractors,
- Does not define time requirements which all parties, not just contractors, must meet,
- Establishes excessive and unnecessary data requirements, and
- Creates a punitive set of penalties which appear to be based on the predetermined assumption that only one party, the contractor, is delaying the process.
*****
The Councils state that these changes do not impose additional information collection requirements to the paperwork burden. We do not concur. The specific requirement that the myriad of schedules must be completed in order to receive a determination of adequacy, the specificity of each schedule requirement and the lack of flexibility for the contracting officer to mitigate a requirement which is even greater than what is currently only a suggested format will result in significant additional effort to produce reports that contractors, in part, do not now produce.
*****
We believe that the proposed rule will result in a significant reduction in the number of contracts that can be closed out using this procedure and thus, instead of improving the contract closeout process, will achieve the opposite effect.
From the Council of Defense and Space Industry Associations (CODSIA):
… the proposed rule is disappointing because it fails to balance the shared contractor, contracting officer, and auditor responsibility for the contract closeout process. Instead, the proposed rule shifts contract closeout from a collaborative process to a confrontational one by mandating fee withholds, allowing auditors to make unilateral determinations and imposing submission of unrelated data requirements for final indirect cost rate proposals, which go beyond the definition of a ‘record’ necessary to support those proposals.
*****
Preparing and providing unnecessary information would be a costly and counterproductive distraction and would likely degrade the timeliness of indirect rate settlement agreements.
*****
The Federal Register notice states that ‘The Councils do not expect this proposed rule to have a significant economic impact on a substantial number of small entities … because the rule does not impose any additional requirements on small businesses.’ We disagree strongly with this conclusion. By requiring preparation and submittal of DCAA’s Model Incurred Cost Proposal and by withholding fees this proposed rule will have a significant economic impact on a substantial number of small entities.
From Darrell Oyer & Co (Government contract accounting consulting firm):
Some of the information proposed to be required for an adequate submission is not necessary … The purpose of the Indirect Cost Submission is not to prepare work papers for the cognizant auditor. Preparation of work papers is the purview of the auditor, whose independence could be challenged if a contractor is required or permitted to prepare the work papers.
From the Defense Contract Audit Agency (DCAA):
We do not believe that the proposed revision … to the Quick-closeout limitation relating to unsettled costs protects the Government’s interests. The current FAR limitation states that the unsettled indirect costs allocated to the contract cannot exceed 15% of the total contractor unsettled indirect costs. The proposed rule states that unsettled direct and indirect costs cannot exceed 20% of the total contract costs. DCAA believes that setting the limitation at 20% of contract costs violates the intent of the quick-closeout provision and places the Government in a position of unacceptable risk. … Although we concur that the base for determining the significance of costs should be revised to contract costs in lieu of the contractor’s total costs, we believe the percentage is too high. We recommend a percentage of 10 percent or less. … The Government should not sacrifice due diligence in protecting the taxpayers from potential overcharges with the need for contract closeout. [Emphasis in original.]
Based on the foregoing, it seems clear that the majority of commenters opposed the proposed FAR revisions. We can only hope that the FAR Councils are listening to the public input, and that they make significant revisions to the proposed rules before finalization. Better the current molasses-like state than the prescriptive, restrictive, and wholly unworkable structure outlined in the initial rulemaking effort.
See all the public comments here.
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