DCAA Throws Another Monkey Wrench Into DOD Acquisition
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.
FAR Revised to Enhance Transparency and To Add Additional Mandatory Reporting Requirements
On July 8,
2010, FAC 2005-44 was published in the Federal Register, implementing FAR Case 2008-039 (“Reporting Executive
Compensation and First-Tier Subcontract Awards”) as an interim rule, “to implement section 2 of the Federal Funding Accountability
and Transparency Act of 2006, as amended by section 6202 of the
Government Funding Transparency Act of 2008, which requires the Office
of Management and Budget (OMB) to establish a free, public, website
containing full disclosure of all Federal contract award information.”
Well, then.
What does the rule require? There
are two fundamental requirements:
- Prime contractors
will need to report “executive compensation” (see 31.205-6(p) for limitations on the allowability of executive
compensation) for its five most highly compensated executives. In
addition, the prime will need to report the compensation for the top
five most highly compensated executives of its first-tier
subcontractors.
- Prime contractors will
need to report all first-tier subcontract awards valued in excess of
$25,000.
The new rule revised FAR Part 4.14
(including renaming the section from “Reporting Subcontract Awards” to “Reporting Executive Compensation and First-Tier Subcontract
Awards”) and implemented a new solicitation provision/contract clause
(52.204-10, “Reporting Executive Compensation and First-Tier Subcontract
Awards”). The solicitation provision/contract clause is to be included
in all solicitations and contracts valued at $25,000 or more, except
for classified contracts and contracts with individuals.
Qualifying contractors must report annually on the executive
compensation of the entity’s top five most highly compensated employees
to http://www.ccr.gov. Qualifying contractors include those who, in the preceding
fiscal year—
- Received 80 percent or more of its annual gross revenues from
Federal contracts (and subcontracts), loans, grants (and subgrants) and
cooperative agreements; and
- Received
$25,000,000 or more in annual gross revenues from Federal contracts (and
subcontracts), loans, grants (and subgrants) and cooperative
agreements; and
- The public does not have access to information
about the compensation of the executives through periodic reports filed
under section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m(a), 78o(d)) or section 6104 of the Internal Revenue Code of
1986.
Prime contractors must also report
the executive compensation of their qualifying first-tier subcontractors
top five most highly compensated employees to http://www.fsrs.gov. First-tier subcontractors qualify for reporting based on
the same three conditions listed above.
With
respect to the second requirement (i.e., reporting awards of first-tier
subcontracts), the new rule provided—
- Until September 30, 2010, any newly awarded
subcontract must be reported if the prime contract award amount was
$20,000,000 or more.
- From October 1, 2010, until February 28, 2011,
any newly awarded subcontract must be reported if the prime contract
award amount was $550,000 or more.
- Starting March
1, 2011, any newly awarded subcontract must be reported if the prime
contract award amount was $25,000 or more.
The
following information must be reported (subject to the above phase-in
requirements)—
- Unique identifier (DUNS Number) for the subcontractor
receiving the award and for the subcontractor's parent company, if the
subcontractor has a parent company.
- Name of the
subcontractor.
- Amount of the subcontract award.
- Date of the subcontract award.
- A
description of the products or services (including construction) being
provided under the subcontract, including the overall purpose and
expected outcomes or results of the subcontract.
- Subcontract number (the subcontract number assigned by the
Contractor).
- Subcontractor's physical address including street address,
city, state, and country. Also include the nine-digit zip code and
congressional district.
- Subcontractor's primary performance location
including street address, city, state, and country. Also include the
nine-digit zip code and congressional district.
- The prime contract number, and order number if applicable.
- Awarding agency name and code.
- Funding
agency name and code.
- Government contracting office code.
- Treasury account symbol (TAS) as reported in FPDS.
- The applicable North American Industry Classification System
code (NAICS).
The new rule applies to contract
actions below the simplified acquisition threshold, acquisitions of
commercial items, and acquisitions of commercially available
off-the-shelf (COTS) items. Failure to comply with the new reporting
requirements—
The contracting officer shall
exercise appropriate contractual remedies. In addition, the contracting
officer shall make the contractor's failure to comply with the reporting
requirements a part of the contractor's performance information under
Subpart 42.15.
We also note that the new rule has a
powerful definition of first-tier subcontract. Historically, the FAR
has lacked such a definition; there is a definition in Part 44 but it is
not especially useful. Accordingly, we were pleased to see the FAR
Councils tackle the potentially contentious issue. Here is how the new
rule defines “first-tier subcontract”—
First-tier subcontract means a subcontract awarded directly by a
Contractor to furnish supplies or services (including construction) for
performance of a prime contract, but excludes supplier agreements with
vendors, such as long-term arrangements for materials or supplies that
would normally be applied to a Contractor's general and administrative
expenses or indirect cost.
Here’s a great
write-up of the new rule, published by the
law firm Crowell & Moring.
When we looked
at the rule, on first blush it appeared that the new requirements are
going to be burdensome. But on second look we’re not so sure. First,
most of the larger contractors will be exempted from the compensation
reporting requirements because they already publish executive
compensation information to the Securities & Exchange Commission.
Second, some of the commercial contractors will be
exempted from the compensation reporting requirements because they
don’t receive more than 80 percent of their revenue from the Federal
government. Finally, the very smallest contractors will be exempted
from the compensation reporting requirements because they receive less
than $25 million in annual Federal revenue. Those exemptions are going
to reduce significantly the number of entities for whom exemption
compensation information will need to be reported. That will leave the
requirement to report first-tier subcontract awards, which will be borne
by the prime contractors. And they should be able to handle the
additional reporting requirements. We hope.
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DCAA Director Patrick Fitzgerald Discusses His First Eight Months
On July 8, 2010, Robert Brodsky of
GovExec.com interviewed Patrick Fitzgerald,
Director of DCAA. It was Mr. Fitzgerald’s first interview since taking
the helm of the drifting auditing agency back in November, after the departure of April Stephenson. The interview, which was characterized
by Mr. Brodsky as being “upbeat, but occasionally guarded,” focused on
the changes undertaken by the new regime. According to Mr. Fitzgerald,
“the agency has … increased training, revamped the promotion and hiring
process, and introduced a pilot program that will put a single DCAA
manager in charge of major contractor audits.”
The article states that Mr. Fitzgerald attributes lingering
audit problems to the “crushing workload” facing the audit agency. To
address the workload issues, DCAA “has hired 500 new auditors and will
add 1,000 more by fiscal 2015, a 37 percent staffing increase. DCAA also
is planning to shed several low-priority services and place more
emphasis on high-risk contracts.”
Despite the
foregoing, the article notes that the number of audits DCAA expects to
accomplish this year will be “dramatically lower” than in prior years.
The article reports that, “In fiscal 2008, the average time to complete a
contractor pricing review was 28 days, compared with 72 days in fiscal
2010.” So perhaps it’s not really the workload that’s causing
“lingering audit problems,” but might be instead the process by which audits
are being executed?
Rank and file auditors “remain
skeptical about the agency’s course,” according to the article. (We
reported on this skepticism several months ago, here.) The article reported that—
They [auditors] said managers have overreacted to the GAO
reports and now are obsessively focused on documenting their audit
opinions and submitting perfect working papers. In some cases, DCAA
employees said they were being told to fix minor typos or grammatical
errors, bogging down the process. In addition, Stephenson introduced a
policy that requires a field office manager to sign off on all audits,
which employees said has compounded delays that hamper price
negotiations with contractors.
Mr.
Fitzgerald recognized that he has a problem at the field auditor level.
The article reported that—
To
address morale problems, [he] established an internal review division to
tackle complaints from employees and has subsequently beefed up the
office's staff to 23 employees, including a senior executive. The
director also has taken to the road during the past two months to hold
17 town hall meetings.
‘One
of our big challenges is that we have to restore the trust between DCAA
management and the workforce,’ he said. ‘I sense that's not there today.
And it's going to take some time to do that.’
One only need examine the comments on the GovExec.com website,
submitted in response to the article, to see that Mr. Fitzgerald has
deeper issues to address than simply auditor morale problems. For
example, here are two comments from DCMA contracting officers:
- DCAA no longer
provides a useful service for contracting officers. It takes less time
to justify why I do not need a DCAA audit than it takes to wait months
for the audit. It might be worth the wait if the report had useful
information. But no more. The reports are so highly qualified with too
much unsupported costs to be useful. So I just provide the request to
DCAA and when they give me a due date of 90 days for a proposal audit, I
document the file that the audit could not be completed in time for
award and cancel the audit request. I have 10 contracts to be awarded by
the end of September, 6 for sole-source fixed price. I could have used
an audit, but given the 72 average days mentioned in this article, I
will just document the file and move on. Thank you Fitzgerald for the
documentation that DCAA takes at least 72 days for forward pricing. With
this type of cycle time, DCAA will be out of the forward pricing audit
business in no time. Sad because I used to get useful reports with a lot
of questioned cost.
- I am appalled that the Director would think that 72 days for an
audit of a forward pricing proposal is something to be proud of. The 72
days is an average and I can attest that I usually receive reports in
about 3-4 months. The proposal is outdated by the time I get the report.
The report usually had too much unsupported costs to be useful. In the
end, I waste a lot of time waiting for an audit that is not useful. To
put the 72 days in perspective, for any awards that need to be made by
the end of FY 2010, the audit report would already need to be in our
hands. This is not feasible. Often times we do not get the requirements
until May or June and then to factor in 72 to 120 days for an audit is
not practical or useful. DCAA had some documentation issues and then
went way overboard and now is not a useful organization. DCAA is not the
GAO or IG that can take months for audits. Awarding contracts is very
time sensitive and Mr. Fitzgerald needs to retool DCAA to complete
audits in 30 days or less. Frankly, contracting officers liked the prior
metric of 30 days or less for proposal audits. It provided a more
useful report. In the end, many COs will be like me and any contracts
that are negotiated this summer will be without the benefit of DCAA
audits. We just cannot delay the awards waiting for the audit. Please
someone resolve the lack of a sense of urgency with DCAA audits for
forward pricing proposals.
But yes, it
is true that auditors have some concerns with the lack of progress made
by Mr. Fitzgerald in charting a new course. Here are a couple of many
comments submitted by (alleged) DCAA auditors (unedited)—
- Fitzgerald, let me
clue you in on something regarding the depth of the audits. The reason
audits are taking longer is that we are spending more time on working
paper documentation and responding to reviewer comments, not that we are
performing a more comprehensive audit. In fact, I believe we are doing
the opposite. Auditors are performing more superficial audits because it
is easier to document the findings and judgements than when we use
criticial thinking and more analytical skills. It is also eaiser to get
the audit through management review. It is much more time consuming and
difficult to pass the QA reviews when we reach conclusions based on
in-depth analysis. Not to mention that the skill level of the auditors
is much lower than needed and as a consequence, the auditors are more of
a verifyer and spent their time ticking and tieing numbers rather than
actually performing more in-depth auditing analysis. You should perform a
few audits and then you will get a better idea of just how superficial
DCAA has become. Town hall meetings may be fine, but spend several weeks
on an audit and then you may get it.
- During the Bill Reed administration at DCAA, the
montra was "more with less" as DCAA downsized, performed more audits and
had higher questioned cost and net savings. Pat Fitzgerald will be
known for "less with more." Staffing will be increased to new levels
while the number of audits will be less than the past 20 years,
questioned cost will be less as well as net savings. Good job
Fitzgerald, what a way to protect the taxpayers dollars. By the time you
get done, auditors will be performing about 2-3 audits per year rather
than 2-3 audits per months. You will get a pat on the back from Congress
and the Pentagon because contractors will no longer be complaining
about DCAA. Contractors will be happy as a clam and you will get many
rewards. You will go down in history as the Director that instituted the
"perfect" audit and guess what, DCAA
effectiveness will be nonexistent. Contractors will sing your praises
and they will probably offer you a well paying job when you retire. Good
legacy to leave on the Agency. What a way to protect the taxpayers
dollars. Might as well just give the money away to contractors, it would
cost less.
There are plenty more comments where
those came from – go see them at the link above. But before we move
on, here’s another perspective. The highly
respected Government Contracts attorneys over at Sheppard Mullin
Richter & Hampton have this to say about Mr. Fitzgerald’s interview—
Just three months ago … DCAA Director Patrick
Fitzgerald told contractors and acquisition agencies that his agency’s
new mode of operations would aim at developing ‘mutually beneficial
relationships’ with both contractors and DOD acquisition agencies. DCAA
would spring ‘no surprises’ on contractors; it would conduct ‘more
frequent communication with’ them; DCAA would assure the provision of
‘responsive and timely services to agency stakeholders’; and – in a
marked sea change from its traditional attitude, DCAA would abide by DOD
direction that, while ‘the contracting officer and auditor work
together… it is the contracting officer’s ultimate responsibility to
determine fair and reasonable contract values.’
Some contractors hoped that
Director Fitzgerald’s purported ‘new mode’ would actually lead to
reasonably cooperative relationships and more frequent communication
with agency auditors, to include continuing communications through
interim conferences during and informative exit conferences upon
completion of the auditor’s fieldwork. .... [But]
within weeks of Director Fitzgerald’s announcement, DCAA began shutting
down communications with contractors, forcing at least some to fight
just to have interim conferences with auditors, and informing others
that post-audit exit conferences will now be held only after the auditor
has written the draft report and it has been reviewed and approved by
the Supervisory Auditor and the Branch Manager or Regional Auditor – in
other words only after the report’s conclusions are
set in stone and impossible for the contractor to change, even when
shown to be based on erroneous factual conclusions. …
Those contractors and
acquisition agency personnel who entertained hopes that Director
Fitzgerald would keep his promises were not being entirely foolish –
those promises were, after all, wonderfully consistent with provisions
of the DCAA Contract Audit Manual (“CAM”) Chapter 4-300 … which, like
the Director’s promises, were published within the last three months. …
It is difficult to know what
to make of an agency that describes itself on its home page as
‘Dedicated To Providing Timely and Responsive Audit and Financial
Advisory Services In Support of Our National Defense,’ yet behaves in a
manner directly contrary to its own explicit—and
newly-minted—instructions.
So while
Director Fitzgerald speaks about progress being made and changes being
implemented, his own auditors question his motivations and effectiveness
while DCMA contracting officers are learning to do their jobs without
auditor input. Even knowledgeable attorneys—who might be expected to be
a bit more academic and objective about the situation—think there’s a major
disconnect between the platitudes that Headquarters publicly proclaims
and the actions its auditors are directed to take in the field.
Washington, we have a problem here.
U.S. Army Major/Contracting Officer Gives Himself Extra Pay, Now Faces Jail Time
Life in a
warzone is stressful, not to mention dangerous. That’s why contractors
who deploy there often get hazardous duty and danger pay salary
uplifts. But typically, such salary uplifts are provided pursuant to
established policy and authorized by appropriate management levels. On
July 7, 2010, the Department of Justice (DOJ) announced that “U.S. Army Major
Charles E. Sublett, 46, of Huntsville, Ala., pleaded guilty today … to
making false statements to a federal agency.” According to the
indictment, Major Sublett smuggled into the U.S. “more than $100,000 in
currency, concealed in a shipping package” mailed from his duty station
in Iraq.
The DOJ
announcement provided more details, as follows—
Sublett was deployed to Balad Regional
Contracting Center on Logistical Support Area (LSA) Anaconda in Iraq
from August 2004 through February 2005. LSA Anaconda is a U.S. military
installation that was established in 2003 to support U.S. military
operations in Iraq. [While there] Sublett served as a contracting
officer while deployed to LSA Anaconda. As a contracting officer,
Sublett was responsible for, among other things, evaluating and
supervising contracts with companies that provide goods and services to
the U.S. Army.
Sublett admitted that … he sent a package from Balad, Iraq, to
Killeen, Texas, which was seized by U.S. Customs and Border Protection
officers in Memphis. Sublett admitted that, on the international air
waybill, he falsely described the contents of the package as books,
papers, a jewelry box and clothes with a total declared customs value of
$140 when, in fact, Sublett knew the package contained $107,900 in U.S.
currency and 17,120,000 in Iraqi dinar. Sublett also admitted that he
failed to file a currency or monetary instruments transaction report
(CMIR) as required by federal law when transporting currency in amounts
of more than $10,000 into or out of the United States. [Additionally}
Sublett admitted to making false claims to investigators regarding his
attempt to bring the currency into the United States in an effort to
impede their investigation.
This reminds us of a previous
article, where former U.S. Army Captain
Michael Dung Nguyen was sentenced to 30 months in federal prison for the
crime of theft of government property. Captain Nguyen, a purchasing
officer, mailed at least $690,000 in funds from the safe located in his
battalion’s station—the safe to which only he had the combination—and
mailed the ill-gotten loot home to himself in Oregon. Capt. Mike
proceeded to live it up until his new lifestyle came to the attention of
the IRS. Oops.
Capt. Mike stole funds from his
commander, his battalion, and the U.S. Government. He received a prison
sentence of less than three years duration. Major Sublett stole more
than $107,000 and is facing a sentence of five years in prison plus a
fine of $250,000. Capt. Mike was convicted of “theft of government
property” and Major Sublett pleaded guilty to one count of violation of
the False Statements Act.
What the
heck is going on here, Department of Justice? Are there no other
criminal statutes available to your prosecutors? We have lamented the
rise of corruption—both in the ranks of government officials and in the
ranks of contractor employees. We have scolded the Department of
Defense for a lack of internal controls and a lack of common
sense-inventory management procedures which, if they had been
implemented, possibly would have detected or even prevented these brazen
thefts of military funds. Now we look at Attorney General Eric H.
Holder, Jr.—and we ask why his prosecutors don’t make some examples of
these miscreants?
Maybe it’s okay to do the crime,
when you can be pretty sure you won’t do the time.
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