The NASA Office of Inspector General just issued an audit report to Congress, in response to a requirement imposed by Section 864 of the FY 2009 National Defense Authorization Act (NDAA). Section 864 required revisions to the FAR regarding use of cost-reimbursement contract types, and also required agency IGs to report on “the use of cost-reimbursement contracts by such agency for compliance with such regulations.” So that’s exactly what the NASA IG did.

Only we can’t figure out what the audit report means.

The IG team looked at 39 cost-reimbursement contracts and one cost-reimbursement task order, with a combined value of $2.5 billion. According to the report, the universe was 382 contracts, which included task orders valued at $1 million or more. We assume those were 382 cost-reimbursement contracts, but the audit report doesn’t say so. In any case, about 10 percent of NASA’s recent contract activity was reviewed.

Based on its review procedures, the NASA IG concluded that “we found that NASA generally complied with the Duncan Hunter Act and related guidelines of the Federal Acquisition Regulation (FAR) by properly documenting during acquisition planning the rationale, risks, and resources for the use of other than firm-fixed-price contracts (such as cost-reimbursement contracts); assigning contracting officer’s technical representatives (COTRs) prior to contract award; and validating the adequacy of contractors’ accounting systems.”

However, the NASA IG also noted “several instances of noncompliance,” including—

• 4 contract files that did not contain written acquisition plans or documentation of all required acquisition planning elements

• 2 files that did not contain documentation of the rationale for the type of contract selected

• 5 instances in which COTRs were not appointed until after contract award

• 1 case in which the IG was unable to determine when the COTR had been appointed

• 5 five cases where NASA had not validated the adequacy of the contractor’s accounting system.

In case you’re wondering, 5 instances of noncompliance out of a sample of 40 transactions is an error rate of almost 13 percent. So according to the NASA IG, that’s an acceptable error rate; and such an error rate does not undermine at all the conclusion that NASA is generally complying with FAR requirements for use of cost-reimbursement contract types.

Okay, then. Moving on….

We were interested in the NASA IG’s findings related to the adequacy of a contractor’s cost accounting system. Here’s what the NASA IG reported to Congress—

Government contracts are subject to a set of rules known as Cost Accounting Standards (Cost Standards) by which contractors estimate, accumulate, and report costs. Agency contracting officers are responsible for validating contractors’ accounting systems and compliance with the Cost Standards. The interim FAR rule states that agencies may only use cost-reimbursement contracts when the contractor’s accounting system is adequate for determining costs. The rule also requires contracting officers to ensure that contractor accounting systems remain adequate during the entire period of performance for the contract and are able to timely develop accurate cost data. The adequacy of the contractors’ accounting systems affects the quality of the data the Government needs to perform effective oversight of contractor performance.

Well, that’s a bunch of nonsensical gobbledygook, isn’t it? Excuse us while we go take some aspirin.

Okay, we’re better now. Pop quiz: How many errors can you find in the paragraph we quoted? Here are some that we found:

• The acronym for Cost Accounting Standards is CAS and trying to twist CAS to make it more applicable to the adequacy of a contractor’s cost accounting system by calling it “Cost Standards” is misleading, to say the least.

• Not all government contracts are subject to CAS. In fact, there are many exemptions.

• CAS is not solely focused on the estimation, accumulation, and reporting of costs. There are 19 Standards and, between them, they cover a lot of ground.

• The adequacy of a contractor’s cost accounting system is generally documented in the Standard Form (SF) 1408. The SF 1408 does not require compliance with CAS in order to have an adequate cost accounting system. That’s because a contractor can have a perfectly adequate cost accounting system and not comply with CAS—because it’s exempt from CAS requirements.

• Contracting Officers are not responsible for “validating contractors’ accounting systems” but they are responsible for determining that a contractor is responsible, as that term is defined at FAR 9.104. Similarly, Contracting Officers are not responsible for “validating compliance with CAS” but they are responsible for making a determination of CAS noncompliance when an issue is brought to their attention. “Validation” implies that the COs are doing the audit work, which they are not.

• As we’ve reported to our readers, the interim FAR rule at 16.301-3 states that “The contractor’s accounting system is adequate for determining costs applicable to the contract.” That’s a subtle but nonetheless critical difference from what the NASA IG wrote.

Okay, that’s six errors in one paragraph. How did you do?

Seriously, in our view those types of errors call into question the accuracy of the NASA IG’s conclusions. (If the acceptable error rate already didn’t do so.) But before we totally write-off this audit report as an example of “those who don’t know, audit” we want to wade through some details regarding NASA’s problems in making determinations of accounting system adequacy.

The NASA IG wrote—

In one of the five cases, acquisition officials indicated that they contacted the Defense Contract Audit Agency (DCAA) by phone for verification of the adequacy of the contractor’s accounting system. However, there was no documentation from DCAA in the contract file to support this assertion. Acquisition officials stated that because DCAA could not immediately perform the audits due to the organization’s existing backlog, NASA acquisition officials decided they would request a formal audit prior to exercising any contract options. In another case, the contractor’s accounting system was found to be adequate by a 2001 audit by DCAA; however, a 2009 audit report indicated the contractor’s overall accounting, internal control, and billing systems were inadequate. A June 2011 interim report by DCAA indicated the inadequacies remained but it appeared the contractor’s corrective actions were appropriate to address the deficiencies. However, the final report showing the updated status of the contractor’s accounting system was not provided by the conclusion of our fieldwork. According to NASA acquisition officials, DCAA canceled the follow-up audit because the contractor had since implemented a new billing system; however, the adequacy of the new billing system had not been evaluated by the completion of this review. For the remaining three cases, NASA acquisition officials were unable to explain why documentation to support validation of the contractor accounting systems was not in the contract files.

So NASA threw DCAA under the bus, stating that DCAA’s backlog and resource prioritization created a situation where the adequacy of the contractor’s accounting system was unknown. But NASA IG (to its credit) didn’t buy that excuse. The NASA IG wrote—

Ultimately, assessing and validating a contractor’s accounting system is the contracting officer’s responsibility. Occasionally, a contracting officer may delegate the task to the Defense Contract Management Agency or DCAA, but that delegation does not relieve the contracting officer of responsibility for ensuring validation occurred and documenting the validation in the contract file. Contracting officers’ failure to validate contractor accounting systems leaves NASA susceptible to the risk of relying on inaccurate or unreliable contractor data.

There’s no easy answer to the problem faced by the NASA COs. They had to determine that contractors’ accounting systems were adequate in order to award a cost-reimbursement contract, but DCAA wouldn’t (or couldn’t) give them timely or clear input. So they did nothing and hoped that their contracts wouldn’t be one of the ten percent selected for audit. Oops!

But we think the real issue here is the apparent cluelessness of the NASA IG auditors. Really, is that the level of quality that goes into a typical NASA IG report to Congress? Is that the level of quality we want our legislators to be receiving? Really?

Maybe DCAA isn’t so bad, after all….