We (and others) have lamented before and yet again about the sad state of the current DOD acquisition environment.  This time around, we’ll try to avoid overly dramatic wailing and gnashing of teeth.  But permit us a level-setting sentence or two, if you will. 

Ever since DCAA came under fire from nearly every stakeholder in the defense acquisition process, it has reacted by circling the wagons, battening-down the hatches, and hunkering down while waiting for the political firestorm to pass.  Auditors must now document every audit step (including audit steps not taken) to a demanding level of detail.  And multiple layers of management review every aspect of the audit before a draft report is issued to the contractor.  If observed in an individual (as opposed to an entire agency), such a reaction might well be sufficient to obtain a clinical diagnosis of Obsessive-Compulsive Disorder (OCD).  (We would have said paranoia but the paranoia was probably justified, given that so many were actually out to get the agency.) 

The effect of such behavior on the acquisition process is clear:  DCAA is now issuing fewer audit reports, and those it does issue take dramatically longer to reach the customers.  (See our article, containing unedited opinions of (alleged) DCMA Contracting Officers, here.) 

Not to be outdone by DCAA’s “conservatism,” the Defense Contract Management Agency (DCMA) has instituted multiple “Boards of Review” (BoRs) that must be convened to review and approve key Contracting Officer decisions before they are implemented.  As a result, Contracting Officers are subject to a vastly increased workload (as they must document and prepare for multiple BoRs), while being simultaneously hamstrung, since they cannot issue decisions without the required approvals.  What used to take 60 or 90 days, now takes a C.O. as much as six or nine months—and that’s assuming all the required BoRs approve the proposed action.  We’ve heard of one situation where three separate BoRs (meeting over many months) approved a proposed action, but that the proposed action subsequently was disapproved at the Defense Procurement and Acquisition Policy (DPAP) level and remanded back to the C.O. for a redo.

The DOD acquisition system is breaking-down, gentle readers, and we’re watching it happen in slow motion, just like a train-wreck shown on a reality TV show.  But perhaps that’s getting a bit overly dramatic, so let’s get to the meat of this article.   Here’s the punchline:  If you thought the process was slow now, you ain’t seen nothing yet.

On June 4, 2010, DCAA issued revised audit guidance via the usual method—a Memorandum for Regional Directors (MRD).  Published to the audit agency’s website (and to the public) five weeks later, it details how the audit agency will handle the situation where a contractor uses indirect cost rates not yet audited in a cost proposal.  Here’s the MRD in full.

Let’s summarize some of the key points –

• Where an audit of the contractor’s proposed indirect cost rates has not yet been performed (or completed) by DCAA, then “the auditor should disclaim an opinion on the proposal taken as a whole.” 
• Auditors should take care not to opine on any forward pricing rates “that are significant to the proposal” unless a DCAA audit of the rates has been completed.  “The results of audit section (including the opinion and exhibits) will not address or contain amounts associated with those rates.”
• Where forward pricing indirect cost rates are significant to the proposed costs, and DCAA has not yet completed its audit of the rates, then the DCAA audit report should “recommend that contract price negotiations not be concluded until the audit of the rates is completed and the results are considered by the contracting officer.”
• When the contractor’s proposed rates are based on a Forward Pricing Rate Agreement (FPRA) or Forward Pricing Recommended Rates (FPRR), but those rates have not yet been audited by DCAA, then the rates “should be audited as part of the current pricing proposal audit, if possible.”  Moreover, “An examination of forward pricing rates includes detailed testing of the contractor’s assertion (i.e., proposal and basis of estimates) and, when appropriate, analytical procedures (e.g., regression or trend analysis).”
• “In cases where DCAA has performed an audit of forward pricing rates and DCAA’s audit was utilized by the ACO in negotiating the FPRA, the FAO may opine on these rates in the pricing proposal audit report. This is true even if there are differences attributable to the negotiation process between the rates per DCAA’s audit and the FPRA rates.”
• But where the auditor “believes the ACO did not fully consider the DCAA audit results and there are significant differences between the DCAA recommended rates and the FPRA or FPRR,” then the auditor should elevate the disagreement pursuant to the DCAA/DCMA dispute resolution process.
• “If the pricing proposal audit report must be issued prior to resolving this disagreement, the audit opinion should reflect the DCAA recommended rates.”

So why does this particular MRD upset us?  Well, let’s recap, shall we?  We already know that DCAA audits are taking three times as long as they ever did and that the audit reports are less useful to DCMA Contracting Officers than they’ve ever been.  (See the link in paragraph 3, above.)  Now DCAA has decided it can’t issue an audit report to DCMA on a contractor’s cost proposal, unless it has performed appropriate “detailed testing” and other “analytical procedures” on the indirect rates being utilized in the bid.  Moreover, if the DCMA Administrative Contracting Officer (ACO) disagrees with DCAA’s opinion on the correct rates that the contractor should be bidding, then the auditor is to drop a dime on the ACO and “elevate” the dispute.  Moreover, DCAA will continue to utilize its “recommended rates” in its audit reports, even though the ACO (the person with the authority) may have negotiated different rates.

Wow.

The only good news—if there is any—is the little ray of hope provided at the end of the MRD.  It says—

If requested, FAOs may provide available unaudited rate data to contracting officers to assist them in their negotiations generally following the procedures in CAM 9-107. This information should be furnished in a separate memorandum and it should clearly state that the rate data provided has not been audited.

So the burden is now on the DCMA Contracting Officer to request “unaudited rate data” – which we suspect the contractor has already provided as part of its submitted “cost or pricing data” – so that negotiations can commence.  Meanwhile, the DCAA auditor will be on the phone, whining to Fort Belvoir and perhaps to the Pentagon about being ignored.

We predict this MRD will paralyze the DOD acquisition process even more.  The average DCMA Contracting Officer will be caught between meeting the needs of its buying commands (and the warfighters) by negotiating contracts timely, and waiting for DCAA to finish its audit of the contractor’s indirect cost rates—which could take months.

The train wreck continues.