DCAA Continues Productivity Trends
How do we choose what to write about? How can we find topics that seem interesting (at least to us) in this small world of government contracting, cost accounting, and compliance?
Well, some topics choose us.
For example, every six months the Department of Defense Office of Inspector General (DoDOIG) publishes its Semi-Annual Report to Congress (SAR). And every six months we review Appendix E (Contract Audit Reports Issued) and Appendix F (Status of Action on Post-Award Contracts) to see what insight can be gleaned regarding DCAA performance. If we see something interesting (at least to us), then we write about it. Thus, every six months we get an article essentially “pushed” to us from the DoDOIG.
And every two SAR reports gives us a full government fiscal year’s (GFY) worth of data.
What does the latest DoDOIG SAR, covering the six-month period April 1, 2017 through September 30, 2017 (and completing GFY 2017) have to tell us?
It tells us that DCAA is continuing to experience declines in productivity.
Clearly, this trend is not news to our readership. Clearly, this trend is not news to anybody who supports DCAA audits in any significant volume. Further, this trend is not news to Congress, which has, for the past two or three years, been “helping” DCAA reduce its embarrassing backlog of unperformed audits of contractor annual proposals to establish final billing rates (also known as “incurred cost” audits).
The news is that there is no news. DCAA has not turned around its productivity. Auditors continue to do less, year after year.
Let us be more specific.
Of course, the issuance of audit reports doesn’t tell the whole story, because DCAA doesn’t issue audit reports for every assignment it completes. In fact, in GFY 2017, 69 percent of all DCAA audit assignments were completed without issuance of a formal report. (It was 68% in GFY 2016.) Roughly two-thirds of DCAA's audit assignment workload is being completed without issuance of a formal audit report—which means that only one-third (at most) of all DCAA activity is subject to GAGAS (or GAS as they are calling it this year). Remember that statistic, because it will come up later.
If the issuance of audit reports doesn’t tell a fair story, would you accept total number of assignments completed? Because that trend isn’t so hot either.
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In GFY 2017, DCAA completed 11,068 assignments. We don’t have a report showing number of auditors yet, but if we assume flat staffing then 4,023 auditors completed 11,068 assignments—for a ratio of 2.75 reports per auditor per year. (We’re not claiming that’s an accurate number, but we believe it is definitely in the ballpark. Call it a ROM.)
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In GFY 2016, DCAA completed 13,520 assignments. That means that the number of completed assignments in GFY 2017 was 2,452 less than was completed in GFY 2016. There was a YOY drop of 18 percent.
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In GFY 2015, DCAA completed 15,715 assignments. In GFY 2014, DCAA completed 15,837 assignments. You get the picture. (Though in fairness, GFY 2014 was an improvement from GFYs 2011 and 2012. But in GFY 2010, DCAA completed 17,159 assignments. You really don’t want to compare GFY 2017 to GFY 2010, because that drop looks really really bad. Hint: in GFY 2010 DCAA completed 3.8 assignments per staff workyear.)
What about dollars examined? Can that trend tell us anything about DCAA?
Let’s look:
In GFY 2017, DCAA examined $281.05 billion dollars of contractor costs through various audits. That’s quite a lot, no doubt about it. But in GFY 2016, DCAA examined $286.8 billion dollars. It you put the all the stats reported so far together, you see that DCAA audited roughly the same amount of dollars YOY, and completed roughly the same amount of assignments but issued 19 percent fewer audit reports.
In fairness, DCAA examined a bit less in GFYs 2014 and 2015, so we need to give that to the audit agency. Further, it should be fairly clear that DCAA cannot control the dollar value of what it audits. Fluctuations are to be expected.
Maybe looking at dollars examined doesn’t tell a complete story.
Would you accept a trend about dollars questioned? What about dollars questioned as a percentage of total dollars examined? What might that tell us?
(Before we go there, we have to tell you that we are including DCAA’s findings in its pre-award proposal audits, which it calls recommendations for “funds put to better use.” They are not officially questioned costs but we are including those values in our analyses—because if we didn’t do so, then we would have to exclude all the numbers related to “forward pricing proposal” audits from all the statistics we’ve reported so far.)
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In GFY 2017, DCAA questioned $7.15 million, or 2.55 percent of total dollars examined. In GFY 2016, DCAA questioned $9.98 million, or 3.5% of total dollars examined. DCAA questioned roughly one percent fewer dollars, YOY, for every dollar auditors examined.
Do we need to go on?
If you look only at the category called “incurred costs, operations audits, special audits,” the trend is even more stark. In GFY 2017, DCAA questioned almost exactly one percent of dollars examined in those audits. In GFY 2016, DCAA questioned 1.82 percent of total dollars examined. In GFY 2015, DCAA questioned 2.45 percent of total dollars examined. In GFY 2014, DCAA questioned 2.81 percent of total dollars examined in those audits. In GFY 2013, DCAA questioned 6.35 percent of total dollars examined.
Do we need to go on?
What about sustention rates, we hear you asking.
Well, there’s a bright spot for DCAA. In the second half of GFY 2017, contracting officers sustained 30.7% of dollars questioned by DCAA, an increase from the first half value of 25.5%. By our rough math (which includes forward priced proposal findings), the GFY 2017 value was about 29 percent. Which is okay, perhaps, until one realizes that more than 70 percent of all DCAA questioned costs are not being sustained.
Or until one realizes that, historically, sustention rates have been much higher.
For example, the GFY 2016 sustention rate was about 34.4%. The GFY 2015 sustention rate was about 48 percent. The GFY 2013 sustention rate was about 71.5%.
In other words, even though DCAA questioned costs rates are falling, CO sustention of those questioned costs is falling as well. If you compare GFY 2017 to GFY 2013, that represents a complete reversal of sustention rates. Instead of sustaining more than 70 percent of questioned costs, COs are now non-sustaining more than 70 percent of questioned costs.
Where is that coming from?
Well, perhaps one driver is the lack of DCAA audit quality.
Even though roughly two-thirds of all DCAA audit activity is completed without issuance of a formal audit report—which would subject the audit to a review for compliance with GAGAS/GAS—the roughly one-third of audit reports that are issued are full of deficiencies.
What do we mean? We wrote about it here.
In that article, we explored the latest external peer review performed on DCAA’s quality control system. That review—which was (perhaps not coincidentally) performed by the DoDOIG—found that nearly 40 percent of all DCAA audit reports had one or more quality deficiencies. In other words, although DCAA is subjecting only one-third of its activity to scrutiny, nearly 40 percent of that one-third failed the external quality audit. (Yet, as we wrote, DCAA passed its external peer review, baffling people who deal with audits for a living.)
Thus, if 40 percent of DCAA’s best audit reports are no good, then perhaps that explains why contracting officer sustention rates keep falling, year-over-year.
In summary, the latest DoDOIG SAR confirms the trends that we’ve been reporting on for years. Auditor productivity down. Audit quality down. Sustention rates down.
Not a pretty picture.
But that picture didn’t stop the U.S. Department of State from recently amending its Acquisition Regulation (DOSAR) to make DCAA the official auditor of choice for audits of contractor annual proposals to establish final billing rates. As the notice of rule-making stated, “The Department has an interagency agreement with the Defense Contract Audit Agency (DCAA) to perform incurred cost audits on cost-reimbursement contracts.” DOSAR Part 604 was revised “to specify the office through which audits are coordinated, from the Office of the Inspector General to the Audit Team in the Office of Acquisitions Management's Quality Assurance Branch.”
Thus, regardless of our view of DCAA’s trend lines, the Department of State is happy to continue to use DCAA as its “go-to” audit agency.
Two Flavors of Procurement Fraud
Stories of fraud aren’t that interesting unless they contain little nuggets of “lessons learned.” If our readers can’t learn something from such stories, we tend to not discuss them. Today we present two stories that might provide fodder for more managerial oversight or perhaps for process improvements. Unfortunately both stories involve CEOs. What do you do about a corrupt CEO?
The first story is simple. If you submit an invoice to the U.S. Government, and that invoice includes subcontractor costs, and you never paid the subcontractor, then you may be accused of committing fraud.
Which is a lesson learned by M. Cleve Collins who, on November 30, 2017, entered a guilty plea admitting to one count of “major fraud” after two days of a court trial. Collins was indicted a year ago for executing “a scheme to defraud the United States on a construction contract valued at approximately one and one-half million dollars … for the replacement of the roof and the air conditioning system at the Ed Jones Federal Courthouse and Post Office in Jackson, TN. As part of the scheme to defraud, Collins caused the roofing subcontractor, a small Memphis-area business, to perform work for which he was never fully paid. Additionally, Collins filed false and fraudulent certifications with the U.S. Government indicating he had, in fact, paid the subcontractor. The value of the funds obtained because of this scheme was over $580,000.”
From the DOJ press release: “‘Federal contractors are obligated to follow through on their promises to make payments to their subcontractors,’ said GSA Inspector General Carol Fortine Ochoa. ‘When contractors fail to meet their obligations, we will hold them accountable.’"
FAR 32.009-1 provides that the government “shall ensure” that prime contractors pay subcontractors on an accelerated schedule to the maximum extent practicable, when the primes receive accelerated payments. There is a contract clause (52.232-40) that implements this policy. Clearly, the government is concerned that small businesses get paid. Prime contractors may also want to review the FAR at 32.112, especially 32.112-1 (“Subcontractor Assertions of Nonpayment”).
Early payment is better; on-time payment is tolerated. But if a prime contractor isn’t paying its small businesses on time or—worse yet—not paying them at all, there may well be trouble ahead.
In the case of Cleve Collins, he seems to be a smallish construction contractor who thought he could float his company’s cash flow on the back of his small-business subcontractor. That plan didn’t work out for him.
Our second story is a bit more complex.
Global Services Corporation (Global) was founded in 1997 and employs about 150 people, many of them veterans, to provide various services to the Department of Defense. A noble undertaking, perhaps; but one that was tainted by the actions of its owner, Philip Mearing. Mearing was Global’s President and sole owner since 2007. In June, 2017, Mearing pleaded guilty to overbilling the U.S. Government though a fairly complex scheme, according to this article at the Virginia-Pilot, written by Scott Daugherty. The article states that Global billed the government “for $13.6 million in work that was never performed” and also “conspired to double-bill the government for nearly $3 million in work that was already performed under another contract.”
Apparently the primary scheme started in 2004 (prior to Mearing taking over the company) and ran until 2014. Putting together the Virginia-Pilot story with the DOJ press release, our perception is that Mearing conspired with another Global “executive” (Kenneith Deines) to allow two fake companies, both owned by the same person, to bill Global for services that were never provided.
The two sham companies (Tempo Consulting and Bricker Property Management) were both owned by Ken Bricker. Global paid Bricker $13.6 million over the ten-year period for … nothing. Indeed, neither company had any employees. Hundreds of false invoices were submitted from the two companies and paid by Global. Bricker kept about five percent of the payments ($558K) and then transferred 95% of the payments “to Mearing or [another] company owned by Mearing.” That other company, DeShas, was an Ohio LLC that Mearing controlled. Fortunately (or unfortunately, depending on your point of view), Bricker paid Mearing or DeShas via check, leaving a nice paper trail easy to follow, and easy to show a jury.
Mearing was sentenced on December 1, 2017, to five years in prison.
Getting back to the question at the top of this article … how do you detect and/or prevent a conspiracy to commit procurement fraud in which one of the conspirators is the company CEO? How do you deal with a problem where the President or even the Vice-President is a big part of it?
Those are tough questions. In both of these stories, there were no checks and balances. The company President was the sole owner and you did what he said or you found another job. In larger corporations, there would be a Board of Directors or a General Counsel to whom one might go with suspicions of misconduct at the highest levels.
Looking at controls, we have to ask who approved the fictitious invoices? Was it Mearing or was it Deines? (And we don’t know Deines’ role, other than that he was an “executive.”) Who normally approves subcontractor invoices, and who makes sure that services were delivered as being claimed? Are those the same people? What evidence is retained to show that services were delivered? FAR 31.205-33 requires that all consultants provide some evidence of work product. Certainly, that’s a pain and a problem during DCAA audits of claimed incurred costs; but maybe there’s a good reason for that requirement.
Did anybody perform a background check on DeShas LLC, which perhaps would have revealed that the LLC was controlled by Mearing?
These stories could happen in your company. What would you do if they did? Would you shut up and carry on as if nothing out of the ordinary were happening, or would you report the wrongdoing? Where does your personal boundary of integrity lie? It’s something that (thankfully) doesn’t come up too often; but when it does, you had better know where you stand.
In the meantime, we suggest you think about what you can learn from these two stories in the design and implementation of control activities within your procurement and accounts payable systems.
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The 2018 National Defense Authorization Act—IP Stuff
Continuing the series of articles exploring the 2018 NDAA, courtesy of Bob Antonio’s annual analysis of the final language. As noted in the prior article, we are not going to talk about every single little thing. We’re going to talk about stuff that interests us. You may want to do your own research, using the link above. Today’s article is going to focus on stuff related to Intellectual Property.
As you may know, 2016 and 2017 saw a number of attempts by the DoD to attack contractors’ ownership and control of their IP rights. Let’s see how the 2018 NDAA reacts to those attempts.
Section 803 requires the Secretary of Defense and the USD (A,T&L) to—
… develop policy on the acquisition or licensing of intellectual property--(1) to enable coordination and consistency …in strategies for acquiring or licensing intellectual property and communicating with industry; (2) to ensure that program managers are aware of the rights afforded the Federal Government and contractors in intellectual property and that program managers fully consider and use all available techniques and best practices for acquiring or licensing intellectual property early in the acquisition process; and (3) to encourage customized intellectual property strategies for each system based on, at a minimum, the unique characteristics of the system and its components, the product support strategy for the system, the organic industrial base strategy of the military department concerned, and the commercial market.
What all that seems to mean is that we should expect to see DFARS rule-making focusing on IP decisions “early in the acquisition process,” and acknowledging that one size does not fit all in these matters.
Section 803 further requires SECDEF to “establish a cadre of personnel who are experts in intellectual property matters [so as to] ensure a consistent, strategic, and highly knowledgeable approach to acquiring or licensing intellectual property by providing expert advice, assistance, and resources to the acquisition workforce on intellectual property matters …”
There is very explicit direction in Section 803 telling SECDEF and USD (A,T&L) how to go about creating this cadre of IP experts, and what they should be doing, and how they should be doing it.
Almost as if Congress doesn’t trust DoD in this area.
Section 835 requires the DOD “to work with contractors to determine prices for technical data the Department plans to acquire or license before selecting a contractor for the engineering and manufacturing development phase or the production phase of a major weapon system. Additionally, this provision would encourage program managers to negotiate with industry to obtain the custom set of technical data necessary to support each major defense acquisition program rather than, as a default approach, seeking greater rights to more extensive, detailed technical data than is necessary.”
In our view, Section 835 seems to complement Section 803 nicely.
Section 871 focuses on technical data in acquisition of software. Section 872 directs SECDEF to have the Defense Innovation Board initiate a study on “streamlining software development and acquisition regulations.” The DIB report is due one year after SECDEF provides direction to the DIB.
Congress is (apparently) so concerned about software development that Sections 873, 874, and 875 each provide for “pilot programs” to streamline the process and (by direction) lower program costs. What’s up with all this concern? According to the Conference Report—
The conferees note that the Department of Defense’s warfighting, business, and enterprise capabilities are increasingly reliant on or driven by software and information technology. The conferees note with concern that the Department is behind other federal agencies and industry in implementing best practices for acquisition of software and information technologies, to include agile and incremental development methods. The conferees note that existing law and acquisition regulation provide significant flexibility to the Department and that the Department has explicitly provided for tailoring in its acquisition directives and instructions. The conferees note with concern that the organizational culture and tradition of acquiring capabilities using a hardware-dominant approach impedes effective tailoring of acquisition approaches to incorporate agile and incremental development methods.
As always, we strongly suggest you do your own research. The three separate articles we’ve authored this year are what caught our eyes; perhaps you will find something we missed. If so, feel free to bring it to our attention.
The 2018 National Defense Authorization Act—Acquisition Stuff
Continuing the series of articles exploring the 2018 NDAA, courtesy of Bob Antonio’s annual analysis of the final language. As noted in the prior article, we are not going to talk about every single little thing. We’re going to talk about stuff that interests us. You may want to do your own research, using the link above. Today’s article is going to focus on acquisition stuff—i.e., stuff that impacts contractor prime contracts.
Changes to Thresholds
Section 806 raised the micro purchase threshold from $3,000 to $10,000.
Section 805 raised the Simplified Acquisition Threshold to $250,000. From the House Conference Report, it appears that Congress wants the new SAT to be implemented governmentwide. Consequently this may lead to changes to the FAR, rather than to the DFARS.
Section 811 raised the TINA threshold for non-competitive prime contracts, modifications of such contracts, subcontracts, and modifications of subcontracts would increase from $500,000 to $2.0 million, while the threshold for modifications to legacy contracts would increase from $100,000 to $750,000. This section also modifies statute to require offerors to submit other than certified cost or pricing data sufficient to determine price reasonableness when certified cost or pricing data is not required. Interestingly, the Senate language would have required DCAA “to provide more clarity on the cost effectiveness of different types of audits … require DCAA to report separately for incurred cost, forward pricing, and other audits with regard to the number and dollar value of audits completed and pending, sustained questioned costs, the costs of performing audits, and the return on investment of conducting audits.” The Senate language would also have established “a standard definition for [DCAA’s] reporting on its backlog … DCAA should include any individual incurred cost audit that has not been completed within 18 months after receipt of a qualified proposal as part of the incurred cost audit backlog.” The Senate language related to DCAA was eliminated during conference negotiations.
Section 812 permitted the Secretary of Defense to waive a certification of cost or pricing data “for a foreign military sale where there is already an existing U.S. Government contract for the same or similar item or service” if “the Secretary determines that the Federal Government has sufficient data and information regarding the reasonableness of the price.”
Section 821 modified U.S.C. Title 41 to ensure that, as prime contractors’ thresholds change, as they do every five years based on an analysis of inflation over that period, then subcontractor’s thresholds must change as well. The new thresholds must be applied “to a contract, and any subcontract at any tier under the contract, in effect on that date without regard to the date of award of the contract or subcontract.” That seems … challenging.
Commercial Items
Section 848 required that “a contract for an item acquired using commercial item acquisition procedures under part 12 of the Federal Acquisition Regulation shall serve as a prior commercial item determination with respect to such item for purposes of this chapter unless the senior procurement executive of the military department or the Department of Defense as designated for purposes of section 1702(c) of title 41 determines in writing that it is no longer appropriate to acquire the item using commercial item acquisition procedures.” (Emphasis added.) Further, this Section limits the use of FAR Part 15 procedures to acquire commercial items previously acquired under FAR Part 12 procedures, unless certain circumstances are found to apply.
Despite the title, Section 847 did not impact “commercial items” as defined at FAR 2.101. Instead, it clarifies that “nondevelopmental items are commercial items when the procuring agency determines, in accordance with conditions in the Federal Acquisition Regulation, that the item was developed exclusively at private expense and has been sold in substantial quantities on a competitive basis to multiple foreign governments.”
Section 846 has been termed “the Amazon provision” in that it mandated establishment of a program “to procure commercial products through commercial e-commerce portals … through multiple contracts with multiple commercial e-commerce portal providers, and shall design the program to be implemented in phases with the objective of enabling Government-wide use of such portals.”
Other Stuff
Section 815 prohibited unilateral definitization of Undefinitized Contract Actions (UCAs) valued at $50 million or more, unless “the service acquisition executive for the military department that awarded the contract, or the Under Secretary of Defense for Acquisition and Sustainment if the contract was awarded by a Defense Agency or other component of the Department of Defense, approves the definitization in writing.” Even so, the contractor has 30 days after receipt of the written approval to respond.
Section 818 established minimum contractor debriefing topics and clarified that “the 5-day period described in subparagraph (A)(ii) does not commence until the day the Government delivers to a disappointed offeror the written responses to any questions submitted pursuant to section 2305(b)(5)(B)(vii) of title 10.”
Section 820 is interesting. It modified the definition of “subcontract” “in certain circumstances.” As readers know, we have often pointed out the problems with FAR/DFARS definition of “subcontract” and “subcontractor.” Here is the full text of Section 820: “Section 1906(c)(1) of title 41, United States Code, is amended by adding at the end the following: ‘The term does not include agreements entered into by a contractor for the supply of commodities that are intended for use in the performance of multiple contracts with the Federal Government and other parties and are not identifiable to any particular contract.’.”
Section 822 limited the circumstances in which DoD may use a Lowest-Price-Technically-Acceptable (LPTA) acquisition strategy. (Also see Section 832.)
Section 824 modified Section 836 of the 2017 NDAA, to give the DoD authority to close-out contracts awarded at least 17 government fiscal years before the current government fiscal year, via negotiated settlement, without performing additional reconciliations—but only under certain circumstances.
Section 837 addressed “should-cost” reviews. It requires such reviews to be codified in the DFARS, and that the regulations address, as a minimum, the following elements: “(1) a description of the feature distinguishing a should-cost review and the analysis of program direct and indirect costs; (2) establishment of a process for communicating with the contractor the elements of a proposed should-cost review; (3) a method for ensuring that identified should-cost savings opportunities are based on accurate, complete, and current information and are associated with specific engineering or business changes that can be quantified and tracked; (4) a description of the training, skills, and experience, including cross functional experience, that Department of Defense and contractor officials carrying out a should-cost review should process; (5) a method for ensuring appropriate collaboration with the contractor throughout the review process; and (6) establishment of review process requirements that provide for sufficient analysis and minimize any impact on program schedule.”
The final article in this series will address intellectual property matters in the 2018 NDAA.
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