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Apogee Consulting Inc

Read the Contract

Nick Sanders
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Honestly, we cannot give better advice than “read your contract.”

Read it before you ask questions. Read it before you get into an argument with your customer.

Read the contract.

You want to know when title passes to your customer so that you can claim revenue?

You want to know whether you can justifiably invoice for pre-contract or post-Period of Performance costs?

You want to know whether a cost can be justifiably claimed in an invoice?

The answer to all those questions—and more—starts with reading the contract.

What does it say?

You would be amazed at the number of people who don’t read their contracts. You might be similarly surprised at the number of people who think a consultant can give good advice without first knowing what the contract says.

Everything starts with the contract—and many things end with the contract as well.

As a good example of what we’re talking about, let’s look at a recent decision at the U.S. Court of Federal Claims, written by Judge Horn. Normally we wouldn’t discuss the decision, because it involves a dispute between the State of California and the Department of Interior (DOI). The DOI awarded the California State Controller’s Office (SCO) a cooperative agreement but then refused to reimburse the SCO for $296.5K in invoiced costs allegedly incurred pursuant to that agreement, because the costs were not allowable under the terms of the agreement.

California sued the DOI, claiming breach of contract. As Judge Horn wrote—

Part 6.4 of the Agreement governed ‘Payment of Reimbursable Costs.’ Under Part 6.4(B), the DOI was responsible for reimbursing the SCO ‘for approved costs incurred under this Agreement in accordance with 43 CFR 12(A) Administrative and Audit Requirements and Cost Principles for Assistance Programs.’ At the time the parties entered into the Agreement in September 2010, 43 C.F.R. Subpart 12(A) prescribed the administrative requirements and cost principles for grants and cooperative agreements entered into by the DOI. … The regulation at 43 C.F.R. § 12.2 (2010) indicated that a cooperative agreement with a state is subject to several Office of Management and Budget (OMB) Circulars, including OMB Circular A-87, which established principles and standards for determining costs incurred under grants, cost-reimbursement contracts, and other agreements with state, local, and Indian tribal governments. … Additionally, Part 8 of the Agreement, titled ‘Standard Award Terms and Conditions,’ stated that ‘[a]wards are based on the application submitted to, and as approved by DOI, and are subject to the terms and conditions incorporated either directly or by reference in the following: . . . 43 C.F.R. 12(A) . . . 43 C.F.R. 12(C). . . ‘

In addition—

The Agreement at Part 6.5(C) stated, “[f]ringe benefits shall be allowed in accordance with the State’s established accounting system.” Pursuant to Part 6.5(D) of the Agreement, “[o]verhead rates shall be allowed in accordance with the State’s established audited accounting system.” Part 7.1(D), however, required that the SCO “maintain complete cost records for the Agreement period in accordance with the Generally Accepted Accounting Principles (GAAP). Such records shall be in sufficient detail to clearly demonstrate the total actual costs associated with the project . . . .”

Using methodology that had been documented in the California State Administrative Manual (SAM) for more than 30 years, California calculated a single hourly rate for each of its employees working on the cooperative agreement. That single hourly rate “merged an employee’s salary, fringe benefits, and indirect costs” together.

Some unnamed DOI entity issued an “Attestation Report” that asserted that California’s methodology led to an overstatement of incurred costs. The State of California disagreed, stating that DOI “has no contractual authority to dictate California’s polices and accounting practices and control. The Department of Interior cannot require the State to develop a costly separate accounting of its federal royalty program.”

In other words, the State of California was simply using its accounting system—the same accounting system that it had in place for 30 years. The DOI contract that imposed cost allowability principles and standards could not require California to change its accounting system.

(Sound familiar? This is exactly what is required of any business that wants to accept a cost-reimbursement government contract.)

From what we can tell, the problem was, fundamentally, the way the CA SCO calculated the quantity of direct labor hours. If the parties could have agreed on that issue, they may well have been able to resolve the application of indirect rates to the resulting direct labor dollars. However, the DOI asserted that “that every hour billed after reaching the ‘actual working hours’ of 144 causes an overstatement of costs.” The problem seemed to be that some of the “excess” hours were how California recovered some of its employee fringe benefit costs. (It’s complicated because California also applied a separate fringe benefits percentage.)

Before the Court of Federal Claims, both parties filed Motions for Summary Judgment, asserting that there was no genuine dispute as to any material fact and the prevailing party would be entitled to judgment as a matter of law. In this case, the parties differed with respect to their interpretations of the contract language. In essence, they were asking the Court to interpret the contract for them.

As Judge Horn wrote—

In its motion for summary judgment, defendant [DOI] argues that OMB Circular A-87 applies to the Agreement because Part 6.4 and Part 8 of the Agreement expressly incorporated by reference 43 C.F.R. Subpart 12(A), which incorporated by reference OMB Circular A-87. … plaintiff [CA SCO], in its cross-motion for summary judgment, simply asserts … that it was entitled to calculate fringe benefits and indirect costs in accordance with California’s State Administrative Manual, and that the DOI incorrectly ‘required California to use OMB’s method of accounting for costs.’ In its filings, the plaintiff concludes that it is ‘entitled to summary judgment under the specific language of § 6.5.C of the Agreement,’ which plaintiff believes is ‘clear, unambiguous and dispositive.’

Thus, Judge Horn needed to decide which of the parties’ interpretation was correct. In issuing the Court’s decision, Judge Horn quoted from many precedents. We’re going to quote some of those, as follows:

  • “Contract interpretation starts with the language of the contract.”

  • “The starting point for any contract interpretation is the plain language of the agreement.”

  • “In contract interpretation, the plain and unambiguous meaning of a written agreement controls.”

  • “Terms must be given their plain meaning if the language of the contract is clear and unambiguous.”

  • “In addition, we must interpret the contract in a manner that gives meaning to all of its provisions and makes sense. Further, business contracts must be construed with business sense, as they naturally would be understood by intelligent men of affairs.”

  • “A reasonable interpretation must assure that no contract provision is made inconsistent, superfluous, or redundant.”

Judge Horn concluded that the contract language was not ambiguous. She wrote—

The plaintiff [CA SCO] should have calculated its fringe benefits and indirect costs in accordance with 43 C.F.R. Subpart 12(A), including the OMB Circular A-87, and, permissibly, California’s State Administrative Manual. Part 6.4(B) of the Agreement provided that the DOI would reimburse the SCO in accordance with 43 C.F.R. Subpart 12(A) … and Part 8 … also indicated that the Agreement was subject to the provisions of 43 C.F.R. Subpart 12(A). Thus, the Agreement unambiguously incorporated 43 C.F.R. Subpart 12(A) into the Agreement by making several explicit references to ‘43 CFR 12(A).’ … With the exception of the regulations specifically pertaining to fringe benefits and overhead rates, the administrative regulations and cost principles prescribed in OMB Circular A-87, however, still applied to the SCO’s requests for reimbursement, even if the SCO chose to bill utilizing California’s State Administrative Manual. … When the SCO opted to use the accounting system contained in California’s State Administrative Manual, the DOI was required to reimburse the SCO for its costs, only if those costs met the requirements for reimbursement contained in both California’s State Administrative Manual and OMB Circular A-87.

In other words, the State of California should have read its contract.

 

 

Resolving Disputes

Nick Sanders
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I like the contract cost accounting and compliance side of government contracting more than I like the contracting and subcontracting side of government contracting.

There. I said it. Deal with it.

I’ve done most of what can be done in the field—at least, what can be done as a contractor. I’ve never been a government employee. I’ve managed prime contracts; I’ve managed subcontracts. I even ran a procurement shop for a relatively brief while. I’ve been a program manager for a multi-million CPAF task order and came close to getting 100% of the available award fee from the US Navy. I did Small Business reporting and I ran the company’s Mentor/Protégé Program, and I received some awards that said I did well. Once, in a fit of madness, I agreed to oversee the company’s Government Property Management System. I even led development of a new subcontracting/procurement tracking and reporting system for a multi-billion-dollar engineering services provider, which linked acquisition transactions to the property system to eliminate all the duplicative data entry that had been going on for more than a decade.

So I’ve held many acquisition-related roles in my long career.

I didn’t really enjoy those roles.

That’s not to say I didn’t learn or gain valuable experience from those assignments. I certainly did. But “experience is what you get when you didn’t get what you really wanted.” I performed my responsibilities with diligence, but over time I realized it wasn’t what I wanted to be doing.

I wanted to be dealing with the finance side, not the contracting side.

The reason I didn’t find the acquisition roles especially enjoyable is that dispute resolution was difficult.

If you have a prime contract matter in dispute, you have your contract’s Disputes clause and you have FAR Part 33. Things aren’t too bad. The main problem is that 95% of all contractors don’t want to exercise their contractual rights because they are afraid to upset the customer. Thus, you typically fall back on negotiation and persuasion—which is fine in most cases. But if you run into a difficult Contracting Officer then you are going to end-up caving more often than not—in the name of “customer relationships.” (Why you would want to continue a relationship with such a difficult customer remains a mystery to me.)

If you are in a prime/subK relationship, things are more muddied and disputes are more difficult to resolve. In fact the hardest aspect of being a subcontractor is when you know you are right but the prime simply refuses to listen. If you have a difficult subcontractor manager there is almost nothing you can do about it, short of going to court. As a consultant, a decent percentage of my workload involves advising subcontractors on strategies to deal with disputes with their primes.

Client confidentiality prohibits me from giving too many details in support of my assertions. But I will say that I had one memorable situation where I was asked to advise on a multi-million-dollar prime/subK dispute where the prime contractor and subcontractor were sister divisions of the same company. That’s right—they were actually in an inter-organizational transfer (IOT) situation and not in a prime/subcontractor relationship—and yet the “prime” continued to treat the “subcontractor” as if it were managing a FFP subcontract. (It clearly wasn’t; see FAR 31.205-26.) Months passed, and we could not get the “prime” to understand the true relationship. That’s an example of how dispute resolution is so much more difficult than it needs to be when there is a problem between a prime and a subcontractor. (Also: see our articles on litigation between primes and subKs. There are several of them on the site.)

In contrast, on the financial side of things, there is a defined route for dispute resolution. If you have a disagreement with auditors, you can write a Contractor’s Response, which goes into the audit report. If necessary, you can write another rebuttal directly to the Contracting Officer. (Sometimes you are even required to do so.) If that doesn’t work you have defined appeal rights, either at a Board of Contracting Appeals or at the U.S. Court of Federal Claims. Sure, the latter course of action involves attorneys and is expensive (and frustratingly long), but if you care enough (and there is sufficient money at stake) you can avail yourself of the Judicial Branch of our government, in the hope that somebody will put a check on the rapacious grasp of some Executive Branch bureaucrats.

No matter if you're dealing with a difficult audit report or a difficult CO, you can actually force a Contracting Officer to make a decision, as Fluor Federal Solutions LLC (Fluor) recently demonstrated at the Armed Services Board of Contract Appeals. The dispute is interesting and I’ll discuss it here, but readers need to know that there is not yet a resolution. I’m writing about the decision because it illustrates how contractors have opportunities to force governmental action.

Fluor had a contract with the US Navy and, during performance, submitted a large Request for Equitable Adjustment (REA). According to the Board’s decision, the REA was a consolidation of many other, smaller, REAs that had already been submitted. Judge Woodrow, writing for the Board, found that—

The 96 page consolidated REA included a detailed narrative of the facts giving rise to the REA and was accompanied by 70 attachments and 2 appendices. The consolidated REA addressed matters that had all been raised in a series of separate REAs that Fluor submitted in 2013 and 2014, which the Navy either rejected with little or no comment, or failed to address at all. Seven months later, the Navy, on 3 February 2016, denied Fluor's consolidated REA, stating that additional information provided in the REA submission had not warranted the government to reverse its original denials of the earlier REAs. Fluor then submitted its consolidated claim on 30 September 2016.

(Internal citations omitted.)

Judge Woodrow used the terms “REA” and “claim” to describe different aspects of the Fluor/Navy dispute. Let's dig into those two terms. Fluor submitted a consolidated REA in late June, 2015, which was denied in February, 2016. Fluor then submitted a “claim” on the same facts and alleged entitlements on September 30, 2016. Essentially Fluor gave up more than a year’s worth of interest by treating an REA as being separate and distinct from a claim. That’s consistent with how many contractors approach dispute resolution with their government customers. Many contractors like to think that an REA is relatively benign, and that a certified claim is an escalation from an REA, which is triggered by an impasse between the parties.That viewpoint isn't necessarily correct, nor has it been since 1995 As Vern Edwards has pointed out in one of his WIFCON blog articles—

The determination of whether a contractor’s submission to a CO is or is not a claim does not depend on what the parties call it. The mere fact that a contractor calls its submission a claim will not make it a claim if it lacks any necessary element of a claim. And calling a submission an REA does not mean that it is not a claim if it possesses all of the necessary elements of a claim. Claims and REAs are not categorically different things. It is the content of a submission, not what the parties label it or call it, that determines whether it is a claim. …

An REA valued at more than the simplified acquisition threshold that includes the REA certification, but not the claim certification, is an REA that is not a claim, because it lacks one of the necessary elements of a claim. If the same REA is certified as a claim, and has the other necessary elements of a claim, then it is an REA that is a claim.

What if a contractor includes both the REA certification and the claim certification? Assuming that the REA has all of the other necessary elements of a claim, it is an REA that is a claim, notwithstanding the inclusion of the REA certification. However, the dual certification might indicate some confusion on the part of the contractor and make its intentions unclear.

Bottom line: An REA is a claim if it has the required elements of a claim as defined in FAR 2.101. An REA that lacks any required element of a claim is not a claim.

Vern’s 2012 blog article at WIFCON is outstanding, chock full of important information relevant to the topic of dispute resolution, and I’ve quoted just a bit of it. I urge readers to follow the link and read the entire article. Consider printing it out and saving it. It’s that good.

Anyway, back to Fluor and its claim.

Even though the Navy denied Fluor’s original consolidated REA after seven months of considering it, the CO took the claim a bit more seriously. The Navy CO told Fluor that DCAA would audit the claim. The Contracting Officer promised to issue a decision on Fluor’s claim by April 28, 2017—seven months after Fluor had submitted it.

“Beginning in November 2016 through 15 May 2017, Fluor organized and participated in multiple in-person meetings and telephone conferences requested by DCAA regarding the claim, and provided written responses to DCAA's written requests.” However, DCAA didn’t complete its procedures in time (surprising nobody who reads this blog), and the CO told Fluor that the DCAA audit completion date had slipped to July 31, 2017—and that a Contracting Officer Final Decision (COFD) on the merits of Fluor’s claim would be issued by December 31, 2017—fourteen months after Fluor had submitted it and 29 months after Fluor had submitted its original REA (that apparently was not a claim).

Meanwhile, the DCAA audit had come to a halt and there was no interaction between auditors and auditee for four months. Finally, on September 21, 2017, “DCAA repeated requests to which Fluor had already responded in writing on 20 January and 15 March 2017. Fluor responded to DCAA's request on 25 September 2017, repeating its previous responses, which explained it did not maintain certain records in the manner DCAA requested and expressed Fluor's willingness to answer specific questions regarding the data used to price the claim and provide DCAA an additional walkthrough of the data.”

The situation described above is not that unusual. DCAA often requests data to be prepared in certain formats in order to facilitate the audit. The “art” of audit liaison often lies in preparing unique reports and/or giving the auditors what they want, but not necessarily in the manner in which it’s been requested. However, that didn’t seem to work in this case, because the next interaction between Fluor and DCAA was when Fluor received a “Formal Request for Access to Records,” in which DCAA asserted that Fluor had records to which auditors were not being given access. (Typically, receipt of that document sets of another chain of dispute resolution that can—but shouldn’t—end with receipt of a subpoena.)

According to the Board’s Statement of Facts: “Fluor repeated, in a letter to DCAA dated 31 October 2017, its earlier offers to respond to any DCAA concerns, as Fluor had provided all of the information available and was willing to meet with DCAA representatives. DCAA never responded [to that letter].” A month later, DCAA informed Fluor that it was canceling its audit.

Fluor took the Navy to court to force the Navy CO to issue a Final Decision.

Judge Woodrow wrote—

The Navy contends that Fluor is largely responsible for the CO's inability to issue a final decision and Fluor should not be rewarded for this behavior. … The Navy also argues that Fluor has refused to provide DCAA access to all relevant factual data.

Fluor … disagrees with the Navy's assertions that it has not cooperated with DCAA. … According to Fluor, DCAA has requested data and reports organized in a specific format that is inconsistent with how Fluor ordinarily maintains the data and according to the FAR, is under no obligation to create records for DCAA … Fluor emphasizes that the Navy has had more than two years since the submission of its consolidated REA …to develop its position on entitlement. During this time, Fluor asserts that it has made numerous attempts to meet with Navy representatives to discuss the claim but has been rebuffed and that it has made every reasonable accommodation in responding to DCAA inquires, but has no obligation to reorganize its records or to create records to suit DCAA.

After reciting the Statement of Facts and the parties’ contentions, Judge Woodrow wrote—

Here, the consolidated claim is clearly large and complex. However, the Navy has had the information regarding the consolidated REA and claim for over two years. Given the history and number of promised COFDs and the present situation where it is unclear when the CO will be issuing a final decision, it seems the parties have reached a stalemate which most likely will not be broken by agreement. Accordingly, the Board hereby directs the CO to issue a decision on the contractor's claim by 31 January 2018.

I didn’t set out to make this article about Fluor’s battle with the Navy. But it seems to be a good illustration of what works in dispute resolution, as well as some of the potential process pitfalls. Of course this is a story of a dispute between a prime contractor and its government customer. As we noted, that’s a relatively easy situation to resolve, compared to a dispute between a subcontractor and a prime contractor. Regardless of what situation you are in, if you have a dispute to resolve, start by reading your contract (or subcontract). Understand the dispute resolution process the contract/subcontract outlines. Understand your rights and your rights of appeal. Understand the differences between an REA and a claim. Then get good advice (hopefully you will get a good attorney to advise you), and follow the dispute resolution path toward conclusion.

 

 

Apogee Productivity Stats

Nick Sanders
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We’ve recently expended a lot of umbrage pointing the finger at DCAA and tsk tsking about audit quality and lack of productivity. How about we turn that magnifying glass on ourselves?

It’s only fair, after all. If we’re going to complain about the inefficiencies of government auditors, we should at least have the courage to put our own metrics out there, perhaps for others to tsk tsk about our inefficiencies. We don’t perform audits but we do consulting projects and we publish blog articles from time to time. So how did we do in 2017?

Records show that we served seven different clients in 2017. One or two of those clients were tiny efforts, hardly worth mentioning. But a couple of those clients represent larger engagements. We made three separate trips to the Pacific Northwest to help one client with a project to develop an adequate cost accounting system suitable for cost-reimbursement contracts. We supported another client throughout the year, as it attempted to resolve multiple disputes with its prime contractor. (We expect to continue to support that client well into 2018.) Is seven a lot? No. Not by any means. But it kept us busy throughout the year.

Perhaps a more important metric is the number of blog articles written and published. This article marks the 101st article published in 2017. That’s nearly two per week. Is that a lot? Well, yes—especially for a year in which the FAR and DFARS revisions essentially stopped dead because of the new Administration’s insistence that rules be removed rather than added.

Let’s compare 2017 to 2016. During 2016 we published 89 articles. Thus, the 2017 output was 13 percent higher than the 2016 output.

What about 2015? In 2015 we published 111 articles – so both 2016 and 2017 were somewhat lower than 2015 in terms of productivity. In fact, we should say that productivity has generally fallen over the years. For example, in 2010 we published 210 articles, meaning that in 2017 we are only half as productive as we were seven years ago.

In our defense, many of the earlier articles were much shorter than they are today. Some of the early articles were little more than a caption and a link, or perhaps just a nice picture we liked. It’s quite likely that the total output is comparable between 2010 and 2017, if one is counting published words rather than the number of articles. (Don’t worry: we’re not going to actually do that comparison.)

At this point, we believe we are averaging 1,000 words per article, or even more. Almost no article is less than 500 words in length, and many are well in excess of 1,000 words long. 2,000 words or more per week may not sound like much, but we invite you to try it.

In fact, we’ve been waiting for an article from our technologist, one discussing the number of website hits and the sources. We noticed some anomalies on certain articles this year, and we asked him to see if we were being hit by bots or something. (The answer, according to him, is “no.”) Anyway, he agreed to write an article on the topic around Thanksgiving. More than a month later, we’re still waiting.

Which is basically why nearly every single article on this website was written by one person.

There is only one person who has the—what shall we call it?—gumption to type article after article after article. We have more than one consultant but only one blog author.

So there you go. Productivity may be down but we’re still here, eight years in, still typing and publishing blog articles about topics we find to be of interest.

We trust you find the articles to be of interest as well.

Happy New Year.

(Editorial Note: This article was slated for publication on Friday December 29, but publication was delayed by the webmaster for nefarious reasons of his own. Doesn't matter; we're still counting it as a 2017 article.)

 

And the hits keep on coming…

Mark Sewall
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These days Apogee blog articles get an average of 25 hits over the initial week of publishing. Hits are tracked at actual clicks on the article, either to look more closely at it or to print it out. So when a couple of new articles suddenly registered more than 2,000 hits in just over 24 hours, it raised some flags.

They like me, they really like me

Had we suddenly become super popular? Were we swept up in a tidal wave of traffic caused by some big kahuna website linking to our website? Had there been a software malfunction?

Or had there been a surge in hacking?

Just the facts ma'am

Our investigation started with Google analytics to see if we had actually gotten a surge in visitors. The Google platform records the visits of anyone who has not turned off Javascript and gone into stealth mode

We can assume that a higher than normal amount of visitors do so in stealth mode, given the nature of our editorial focus, but 1800+? No man I don’t think so.

Catch a wave and you’re sitting on top of the world

It’s not uncommon for a wave of traffic from a big site to crash upon the shores of a small island of the internet like ours. The picture below shows which sites link to our site.

Inbound_links

As you can see, we do get a significant amount of link traffic from wifcon.com. The picture shows 63 links from that site; so this could be our big kahuna, but 63 was not enough to generate the spike in article hits that we saw.

The next step was to look at our total raw traffic.

One report to rule them all

Website server statistics record every request made be it bot or bureaucrat. So if we have a surge of requests this is where we will find them.

Monthly_Traffic_Report

While we can see, in the above picture, some fluctuation in the month to month statistics, no increase in raw hits correlates to a higher than usual blog post request from the database. That wasn’t it, but if it wasn’t a higher frequency than it must lie in the individual requests.

Quick -- to the Apache logs!

Monkey see Monkey hack

Up until now, we have been looking at abstractions of the data. As we take step after step through these meaningful groupings our answer has eluded our grasp. Thus, we must delve past the reports and charts into the transaction logs of our Apache web server.

Apache logs are a record of every action taken to access information on the site. We churned through 250,000+ records and found that some of our fine visitors had been using various hacking tricks like SQL injection to get past the site's defenses. In their failed attempts, they triggered requests for the blog posts and those requests inflated the individual article hit counter.

As it turns out we were not sudden rock-stars. We were just another site being attacked.

Who Are you?

geo_data_final

In the last two years, there have been one or two news events that you may not have noticed. To recap, some email got wikileaked and western democracy was hacked. So who seeks to break in like some looter during a riot? As it turns out everyone from Russia to the great state of Kansas. Those of you that know your geography with notice, in the picture above, that we field attention from Korea, Iran, and France too.

Would you like to play Thermonuclear War?

As we settle into the post-nuclear age -- a time where the next world war will be fought with cyber armies in “non-kinetic” battles (and if you have been paying attention), it's clear that the war has already started. When your work focuses on U.S. Government issues; it seems that hack attempts are simply a cost of doing business.

In conclusion, as Doctor Who might say: Stay calm and encrypt everything!

 

Annual Article on DCAA

Nick Sanders
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More than seven years ago, I wrote an article for Contract Management magazine, NCMA’s magazine for its membership. The article was called “The Year of Change for the Defense Contract Audit Agency.” (Note that when I titled the article there was a question mark at the end; it was removed by the CM editors.) The subtitle was: “A recap of some of the significant events of 2009, which may one day be viewed as a pivotal year in the history of defense contractor oversight.” The article recapped what I’ve come to call “the DoD Oversight Wars,” and serves as a historical reference for the “he said/she said” arguments that took place in 2009 between the various stakeholders. Re-reading it again as background for this 2017 article, I think it still stands up as a valuable resource, a decade later. (The article was published in the April 2010 edition of CM, for those who care to evaluate my opinion of my own writing.)

Quoting from the final two paragraphs of that 2010 CM article—

As the defense acquisition community moves into 2010, observers are hopeful that much of the conflict will abate. Of course, Fitzgerald still has quite a challenge in front of him, as he continues audit agency reform efforts aimed at generating high-quality audits that will provide contracting officers and buying commands with timely, useful information that support business decisions. It is clear that both DCMA and DCAA are under-resourced, and both agencies will need to develop training plans for incoming employees.

The conclusion of the story is not yet written, but the signs seem to point toward a satisfactory (if not completely happy) ending. If 2009 was the year of pain and the year everything changed, is it not fair to say that all parties hope 2010 will be the year of rebirth and the dawn of a new age?

If nothing else, the series of 1,100 blog articles on this site documents the history of DCAA’s attempts to recover from those 2009 criticisms, and to reach a state where the audit agency is able to deliver high-quality audits that provide contracting officers and buying commands with timely, useful information that support business decisions.

We’ll leave it to our readership to determine the extent to which DCAA has reached that desired state.

In this article we want to review DCAA activities over the past year. We want to summarize and discuss DCAA’s calendar year 2017 accomplishments, for the historical record. We’re not going to link to stuff we wrote, but you can find the articles associated with our summary via keyword search, if you’re so inclined.

Stuff We Wrote About

  • In 2017 DCAA continued to issue audit reports that expressed conclusions without sufficient evidentiary support for those conclusions. The DoD Office of Inspector General found that 37 percent of the DCAA audit reports it reviewed had one or more deficiencies with GAGAS (or GAS as they seem to be calling it now). In early 2017, we wrote about the Lockheed Martin Integrated Systems (LMIS) decision at the ASBCA—where the Judge criticized DCAA for reporting unsupported conclusions and advancing “plainly invalid legal theories” instead of sticking to the facts. In the case of Technology Systems, Inc. (TSI), DCAA withdrew from its audit and issued a “Decrement Memo” that contained recommendations that were based on nothing—at least, nothing that was compliant with GAGAS. Despite not completing audit procedures and providing a recommendation that was based on nothing more than HQ policy direction, DCAA failed to explain clearly to the Contracting Officer that its recommendation could not be relied upon, that it was essentially worthless even though four separate auditors had spent months performing an audit. Because DCAA did a poor job of explaining the basis (or lack thereof) for its arbitrary decrement recommendation—and then failed to communicate adequately with the CO during negotiations—the CO felt constrained to stick with “the audit as written” even though it wasn’t an audit—which led to litigation. Litigation that could have and should have been avoided.

  • In 2017 DCAA continued to obsess with the Cumulative Allowable Costs Worksheet (CACWS), also known as ICE Model Schedule I. We wrote about one contractor that found itself in court because it couldn’t support values in the CACWS years after the costs were incurred. (That contractor won its dispute.) In 2017, DCAA issued MRD 17-PIC0-001, discussing “final voucher services” and including a 41-slide PowerPoint attachment that included a discussion of the CACWS. We outlined some possible (very aggressive) strategies for avoiding an update of the CACWS after negotiation and finalization of annual billing rates. Regardless of whether readers took our advice or continued to update the CACWS after rates were finalized, let’s be very clear: when DCAA forced the 2011 FAR revision to 52.216-7 it was pushing work from its own auditors to the contractor. It was requiring the contractor to perform work that DCAA auditors had performed for literally decades before. Yet despite continuing to reduce its workload at the expense of DCMA and contractors, the audit agency still cannot complete its audits in a timely fashion.

  • And speaking of audit statistics, in 2017 we reported that DCAA continued to manipulate its metrics to be able to certify to Congress that it had reduced its embarrassing backlog of unperformed “incurred cost” audits to an acceptable level. As we noted, the position that a 2-year backlog is “acceptable” was invented wholly by DCAA HQ—and we were pleased to see that fiction soundly refuted by Congress in the 2018 NDAA. Still, in 2017 we reported that DCAA continued to close out two-thirds of all audit assignments without issuance of a formal report expressing an opinion based on GAGAS/GAS-compliant procedures. And we reported that DCAA has decided to change the way it measures audit duration. DCAA formerly measured duration from assignment opening to assignment completion; now it plans to measure duration from entrance conference to report issuance—which is a misleading statistic because it ignores the duration associated with risk assessment, which can vary from several days to several months. As we reported, DCAA is going to change its measurement of audit duration because it casts the audit agency in a more favorable light.

Stuff We Didn’t Write About

  • While we wrote about the missing Post-Award Accounting System audit program for Major Contractor, we didn’t write about the new CAS cost impact proposal “adequacy tool.” It is a checklist intended “to assist the auditor in identifying issues to consider during the risk assessment” associated with reviewing a contractor’s proposed cost impact related to a change in cost accounting practice. Despite the ostensible objective limiting scope to the risk assessment, the checklist concludes with the following direction: “Does the proposal appear sufficient to resolve the cost impact? Considering the proposal in its entirety, including the collective effect of the identified inadequacies, is there enough adequate and accurate supporting information to estimate the general dollar magnitude of the cost impact, or the impact by contract for a DCI. If not, coordinate with the CFAO return the inadequate proposal and obtain a cost impact proposal that contains the necessary information and format.” Furthermore, the “adequacy tool” tells auditors “If the GDM cost impact proposal is insufficient to resolve the cost impact, consider advising the CFAO to request a DCI in lieu of a GDM.” In other words, if the GDM proposal was inadequate, “consider advising” the CO to request a more detailed cost impact format. That direction seems a bit punitive to us.

  • We didn’t write much about DCAA audit guidance (i.e., Memoranda for Regional Directors). That’s because the audit agency isn’t publicly posting its MRDs the way it has done for most of its post-Internet history. By our count, DCAA published five MRDs on its website in 2017. One (dealing with subcontractor cost/price analyses) was publicly available for a couple of weeks before being removed. In 2017, the “PPD/PSC” nomenclature seems to have been replaced with a “PAC/PIC” nomenclature. Does that matter? Not really. But looking a bit more closely, it seems that DCAA issued at least five “PIC” audit alerts in 2017, of which three are still available to the public. DCAA issued at least eight “PAC” pieces of audit guidance in 2017, of which only one may still be accessed by the public. Where did the missing MRDs go? Well, one thing is for sure: they were not incorporated into the Contract Audit Manual (CAM). As of this date the CAM hasn’t been updated since September 2016—with the sole exception of Chapter 2, which was updated in June 2017. Removing MRDs without incorporating them into the CAM seems to violate DCAA’s own direction to its auditors about how to locate the most current audit guidance. Removing MRDs without incorporating them into the CAM seems to make it more difficult for contractors to understand what the auditors are going to be looking for and preparing for audits. We invite readers to think about those issues and how they may impact audit quality.

Non-DCAA Stuff Worth Noting

  • While we noted in 2017 that the official CAS Board had gone missing in the new Administration (and really, it had gone missing for months if not years before the new Administration was elected), we didn’t write much about the new Department of Defense CAS Board. The DCASB was created by the GFY 2017 NDAA and, really, who thought anything would come of that? Did anybody with a whit of historical perspective think that the people who brought us the DoD CAS Working Group—with all the problems its “papers” created for the acquisition community—were the right people to create Cost Accounting Standards for the Department of Defense? No. The answer is a resounding “no.” The quicker that the DCASB is relegated to the trash heap of failed Congressional ideas, the better.

  • While we devoted an article to the Section 809 panel’s Interim Report, we didn’t really have much more to say about that group’s efforts to streamline and improve the defense acquisition environment. That’s because nothing else happened. The Panel met several times during the year, but for the most part those meetings were “closed”—i.e., they were held in secret, away from the public’s eyes. The GFY 2018 NDAA extended the Panel’s mandate for another year, so perhaps we’ll have something to report on in 2018. We certainly hope so.

 
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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.