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Apogee Consulting Inc

Training Contracting Officers

Nick Sanders
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Recently the Department of Defense (DOD) announced significant changes to the way in which its contracting officers will be trained. For months, DOD evaluated how to obtain increased performance in its acquisition system, striving to move at the “speed of relevance” instead of the traditional plodding pace in which it literally took longer to acquire a replacement handgun for the US Army than it did to fight the entirety of World War II.1

Thus, in September, 2020, the USD (A&S), Ms. Ellen Lord, issued a memo announcing that DOD was going to get “back-to-basics” (BtB) when training its acquisition workforce—i.e., those “who develop, acquire, and sustain operational capability.” (Acronym: AWF.) Her memo announced (and we are not making this up) “the BtB 21st Century AWF talent management framework, beginning on October 1, 2020 with full deployment by October 1, 2021.”

So: BtB 21st Century AWF talent management framework. Because what had been passing for training up to that time just wasn’t getting it done.

At Apogee Consulting, Inc., there always seems to be a blog article. That’s what we get for writing about this stuff for more than a decade. Anyway, in 2011 we wrote about the lack of skills at DCMA. Both GAO and DCMA expressed concerns with loss of key skillsets between 2000 and 2010, as the DCMA workforce shrank precipitously. With our usual diplomatic nuanced language, we wrote that GAO was calling-out DCMA for “mismanagement,” which we also characterized as “sabotage” of the acquisition workforce (now called the “AWF”).

We wrote in that 2011 article (link above)—

What we’re saying is that you can look at this from (at least) two points of view. One point of view says DCMA mismanagement created a lack of necessary skill sets (including knowledge and experience) which led to ‘cost risks’ in the pricing of DOD contracts. The other point of view says DCMA mismanagement created a lack of necessary skill sets that made effective management and administration of those contracts nearly impossible.

At that time, DCMA announced that its plan to address those gaps in necessary skillsets was to centralize command and control. As GAO reported—

Ironically, this focus on providing CMOs the flexibility to meet their customers’ needs as well as the absence of specific guidance and procedures resulted, according to DCMA officials, in a level of confusion among their program office customers. … Relatedly, the decentralized nature of DCMA guidance led each product division to develop and execute its own policies and provided CMOs the leeway to develop additional policies and procedures to respond to their own customers’ needs. This led to inconsistent oversight and surveillance activities among CMOs. Another unintended consequence was inefficiencies in how CMOs operated. For example, CMOs in close proximity but under different product divisions sometimes did not share resources or expertise and thus did not leverage their workforces to help meet workload surge requirements.

We’re not going to rehash that decade-old blog article any more. You can follow the link above if you want to read it. However, those points are foundational for understanding that DCMA centralized its command and control in order to curb AWF flexibility, while at the same time training the AWF using sub-optimal methods. Flash-forward a decade to 2020, and the DOD announcement of “the BtB 21st Century AWF talent management framework” now has some context. Also, keep in mind the centralization theme, as it’s going to come in handy later on.

Let’s talk about that 2020 memo.

In late 2020, when USD (A&S) Lord made her announcement, the Defense Acquisition University (DAU), which had been responsible for implementing the suboptimal training, called the memo “perhaps the most significant update to the Defense Acquisition Workforce certification construct and governance we've seen in many years.” Which is a bit disingenuous because it was DAU’s failure to adequately train the AWF that led to the need to significantly restructure AWF training.

Let’s move on to today.

A year later, a new memo issued by the new Principal Director of the Defense Pricing and Contracting (DPC) Directorate, provided details of the new BtB training plan. His focus was on one of the six new AWF functional areas: contracting. His memo focused on the training of DOD contracting officers. After seven months of detailed planning, his memo announced the new training plan for those people who acquire billions of dollars of goods and services for the DOD and its warfighters.

As we understand the new plan, DOD is now adopting NCMA’s Contract Management Standard. There will be one certification, a certification that requires only “foundational training” and an examination. You pass—you’re certified. The exam will cover “the American National Standards Institute/National Contract Management Association (ANSI/NCMA ASD 1-2019) accredited Contract Management Standard.”

In addition—

The Contracting Competency Model represents a set of competencies that are foundational and common among the Contracting workforce, regardless of the organization or mission area, and will form the basis of the Contracting training program. In addition to achieving certification in Contracting, a workforce member may earn credentials and complete specialty training relevant to the needs of their current job assignment, and will engage in continuous learning throughout their career. All positions in the Contracting Functional Area will follow the DoD Acquisition Workforce requirement to achieve 80 Continuous Learning points within a two-year period.

But wait, there’s more (or less, if you will)—

Under the new structure, mandatory training for Contracting certification has been significantly reduced from approximately 650 hours to 200 hours. Beginning on 1 October 2021, the new training courses for certification will be: CON 1100 Contract Fundamentals; CON 1200 Contract Pre-Award; CON 1300 Contract Award; and CON 1400 Contract Post-Award. Additionally, there will no longer be a requirement for a baccalaureate degree as part of the DoD Contracting Professional Certification; however, 10 U.S. Code § 1724 requires a baccalaureate degree for 1102 series positions and similar military positions.

(Emphasis added.)

So basically, less training is now required. You don’t even need a college degree unless you want to be an 1102-level contracting officer. Take a test and you’re in. Already have a DAWIA Level I, II, or III certification and you’re in.

We’re sure this new approach will not have any deleterious impacts on the skillsets or competency of future contracting officers.

But maybe the next generation of contracting officers won’t need as much training or, at least, not as much training in things such as contracting. Maybe their training should focus on following written direction.

What do we mean? Well, remember that DCMA has spent the past decade centralizing its command and control. Back in the ancient days of yore, there was a “One Book,” which was a resource for all contracting officers. That’s long gone. Instead, now there are a myriad of Instructions that prescriptively tell DCMA contracting officers exactly what to do. If a contracting officer follows their Instructions, they won’t be criticized, even if nothing gets done. But if they try to take initiative and make things happen outside of those prescriptive Instructions, then they are at risk.

Evidence in support of that assertion was recently provided by the DOD Office of Inspector General via Audit Report No. DODIG-2021-056, dated February 26, 2021. The audit focused on how DCMA contracting officers dispositioned DCAA audit findings at “two of the largest DoD contractors.” The IG auditors looked at 30 DCAA audit reports to see whether the contracting officers “complied with applicable Federal Acquisition Regulation (FAR), DoD Instruction 7640.02, and DCMA policy” when they dispositioned those reports. Spoiler alert: In about half of the 30 audit reports (14/30), the contracting officers did not—

… adequately document or explain why they disagreed with $97 million in questioned costs from eight DCAA incurred cost audit reports, as required by FAR subpart 42.7; or comply with FAR 30.605 when they addressed six DCAA CAS audit reports.

The DOD IG audit report lists a number of Instructions with which contracting officers must comply, including:

  • DOD Instruction 7640.02 (“Policy for Follow Up on Contract Audit Reports”) establishes policy, assigns responsibilities, and includes reporting requirements and follow-up procedures for DCAA audit reports, including incurred cost audit reports, CAS audit reports, and business system deficiency audit reports. It also “requires the contracting officer to indicate whether the contracting officer agrees with each DCAA finding or recommendation and, if not, to document the rationale for the disagreement in the negotiation memorandum” and “establishes recordkeeping and reporting requirements for reportable contract audit reports.”

  • DCMA Instruction 108 provides procedures for the administration of the CAS, including how to process CAS noncompliances and how to resolve the cost impact of a noncompliance.

  • DCMA Instruction 125 requires the contracting officer to evaluate all DCAA findings, appropriately settle final indirect rates, and document the results in a negotiation memorandum. The instruction also requires the contracting officer to retain documents associated with the settlement of the final indirect cost rate proposal.

  • DCMA Instruction 126 “reiterates the requirements of DoD Instruction 7640.02 for taking action on all DCAA findings and recommendations and emphasizes that contracting officers must include sound rationale in the negotiation memorandum when they disagree with audit findings and recommendations.”

  • DCMA Instruction 131 “requires the contracting officer to determine the acceptability of the contractor’s business system in accordance with DFARS business system criteria and approve or disapprove the contractor’s business system.”

According to the DOD Inspector General, in 14 out of the 30 audit reports reviewed, the cognizant contracting officer failed to comply with either the FAR or the appropriate Instruction. Specifically the contracting officer did not—

… adequately document or explain why they disagreed with $97 million in questioned costs from eight DCAA incurred cost audit reports as required by FAR 42.705-1(b)(5)(iii) and DoD Instruction 7640.02; or comply with FAR 30.605 and DCMA Instruction 108 when they took action to settle six DCAA CAS audit reports.

(We note that there was no opinion expressed on the quality of the DCAA audit reports and whether the findings within those reports had merit.)

Why such a high failure rate? The IG cited three causes:

  1. DCMA contracting officers did not obtain a required legal review.

  1. DCMA supervisors did not provide effective oversight of DCMA contracting officer actions to settle the DCAA audit reports.

  1. DCMA contracting officers did not maintain detailed contract file documentation, such as documents provided by the contractor during negotiation to support not upholding DCAA audit report findings and recommendations.

Importantly, the audit report stated—

DoD Instruction 7640.02, Enclosure 3, paragraph 3(b), and DCMA Instruction 126 require that DCMA contracting officers consult legal counsel and document the legal basis when their disagreement with DCAA findings or recommendations is based on an interpretation of law or regulation. In all four instances, the DCMA contracting officers’ disagreement was based on an interpretation of the FAR that differed from the DCAA’s interpretation and should have had a legal review.

There it is. Remember that centralization policy? This is the result. Essentially, DCMA contracting officers must not exercise independent thought or action without appropriate reviews. They must follow their Instructions or risk criticism.

And the Director of DCMA agreed with the findings and the recommendations, which included “Review the contracting officer’s decision to not uphold the $97 million in [DCAA] questioned costs and determine whether the costs are unallowable in accordance with the Federal Acquisition Regulation.”

Given all of the above, doesn’t it make sense to stop training contracting officers in critical thinking skills and judicial interpretations of the regulations? Why train them in something that they will never use or, worse, be criticized for using? Just train them in the fundamentals (e.g., “what is a contract?”) and focus on making sure they understand the Instructions that will guide their day-to-day decision making. Make sure they escalate any judgment calls to the appropriate centralized authority so that they can then be told what to do. Document, document, document.

Meanwhile, DOD Leadership wonders why the acquisition system can’t move any more quickly.

1 Hat tip to Vern Edwards for that piece of shocking information.

 

Problems with Text Messages

Nick Sanders
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Long time readers may recall that use of text messages can be problematic for wrong-doers. We’re not talking about FAR 52.223-18 which, when inserted into a solicitation or contract, “encourages” a contractor to “adopt and enforce policies that ban text messaging while driving.” No, we’re talking about people engaged in criminal activity who think that using text messages to communicate is somehow going to shield them from law enforcement attention.

In 2011, we wrote about a NAVSEA Program Manager who “regularly sent … text messages and e-mails seeking weekly payments of $3,500” as part of a scheme to solicit corrupt payments in return for awarding a contractor “millions of dollars” of Navy contracts. The Program Manager (as well as the other participants in the scheme) pleaded guilty and he was sentenced to 10 years in Federal prison. The contractor employee who made the payments was sentenced to three years.

So maybe text messages and emails aren't the best way to conduct your corruption. Just sayin' ….

In today’s article we want to discuss an individual who got into trouble for deleting text messages. Would you like to know more? Let us offer some information from the inevitable Department of Justice press release.

To understand the situation, you need to know that William Thompson, of Sneads Ferry, North Carolina ran a company called C&D Painting and Construction. C&D did work at Marine Corps Base Camp Lejeune (MCBCL), located in Jacksonville, North Carolina. Somebody called Public Official 1 (PO1) was a civilian employee of the U.S. Marine Corps who directed the procurement of information technology services and equipment to be used by the Marine Corps at MCBCL and elsewhere.

In March 2018, agents of the Naval Criminal Investigative Service (NCIS), FBI, and IRS-Criminal Investigation (IRS-CI) interviewed Thompson. During the interview, law enforcement agents informed Thompson that they were investigating an alleged bribery conspiracy concerning work that C&D Construction completed as a subcontractor at MCBCL, and about renovations that Thompson performed at PO1’s residence. At the time of the interview, the investigation was covert and not known to all subjects, including PO1.

On the same evening of the interview and the following morning, Thompson exchanged several text messages with PO1 in which Thompson informed PO1 that the FBI, NCIS, and IRS-CI were investigating PO1’s involvement in contracting matters while PO1 was employed by the Marine Corps.

Here’s the kicker:

After informing PO1 of the ongoing federal investigation, Thompson deleted the relevant text messages from his phone, despite knowing that the messages constituted evidence related to the federal investigation into bribery and procurement fraud at MCBCL.

Thompson pleaded guilty to one count of obstruction of justice, for destroying records in connection with a federal investigation of bribery and procurement fraud. He was sentenced to serve 18 months in prison.

Eighteen months in prison for deleting text messages from his phone. Bad messages to be sure, but still.

The next time you want to win a wager in a bar, just assert that somebody can be sentenced to prison for deleting text messages. See who wants to bet you.

 

Why Won’t Contracting Officers Settle Questioned Direct Costs? (Part 1)

Nick Sanders
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A couple of friends and I will be starting a podcast soon, discussing government contracting things. Looks like it will be available every two weeks. The other two participants are former contracting officers and former DAU instructors. I think the only reason they asked me to participate is for comic relief.

I’m supposed to bring “two or three topics” to each podcast. We’ll see how that goes. I may be like the SNL castmember who doesn’t return after their first season. Anyway, one of my topics for the first podcast will be the recent Department of Defense Inspector General audit report where – once again – the offer criticism of DCMA contracting officers for not doing what DoDIG thinks they should be doing. In this case, it concerns settlement of direct costs questioned by DCAA during their “incurred cost” audits (which should really be called audits of “proposals to establish final billing rates,” but we’ll get into that later in this article.)

In DoDIG Audit Report No. DODIG-2021-047 (“Evaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs”), the auditors offered a conclusion regarding whether “the actions taken by DoD contracting officers on questioned direct costs reported by the Defense Contract Audit Agency (DCAA) complied with the Federal Acquisition Regulation (FAR), DoD Instructions, and agency policy.”

Before we get into the audit report, though, you need to know that the DoD IG has a long history of sniping at DCMA contracting officers—most of which has been documented on this blog. This particular audit report noted that it was following-up on a 2017 audit report. We discussed that audit report in this article. As with the prior audit report, in this audit report the DoD IG accepted DCAA findings as being accurate, and criticized DCMA contracting officers for not addressing DCAA’s findings timely and therefore “DCMA contracting officers may have reimbursed DoD contractors up to $231.5 million in costs that may be unallowable on Government contracts in accordance with the FAR.” May have being the key phrase. The IG auditors don’t know. But it sure makes a good headline, right?

Here’s some other stuff you need to know before we get into the audit report:

Each contract has a cognizant contracting officer (often called the “procuring contracting officer” or PCO), but contract administration functions may be “assigned” (or delegated or transferred) to a Contract Administration Office (CAO). The entire post-award contract administration function, or portions of it, or “specialized services” may be assigned from the PCO to the CAO. Contract administration functions are listed in the FAR, at 42.302. There are 82 of them. In addition, DFARS 242.302 lists a few more contract administration functions.

There are certain functions that are “normally delegated” to a CAO (71 out of 82) and there are certain functions that must be delegated to a CAO. Functions that are mandatory for delegation include:

  • Negotiation of forward pricing rate agreements

  • Establish final indirect cost rates and billing rates for those contractors meeting the criteria for contracting officer determination

  • Administer Cost Accounting Standards (CAS) matters

  • Determine the adequacy of the contractor’s accounting system

Those functions must be performed by a CAO contracting officer, and not by a PCO. The rationale should be fairly obvious: those are cross-cutting issues that affect all contracts (perhaps contracts awarded by another agency) and administration of those issues requires a bigger picture than a PCO would typically get. The CAO contracting officers that handle those issues are typically called “Administrative Contracting Officers” (ACOs). But there are different flavors of ACO; some ACOs are called ACOs but others are called Divisional Administrative Contracting Officers (DACOs) and still others are called Corporate Administrative Contracting Officers (CACOs). A DACO handles cross-cutting issues for a contractor segment or division or sector (or whatever the contractor calls it) whereas a CACO handles cross-cutting issues across an entire corporation, and coordinates the activities of multiple DACOs and/or ACOs.

One thing we’ve noticed is that neither the FAR nor the DFARS actually describes the role of a DACO or ACO. The regulations are silent on what those functions do and how they differ from each other. As we will see, that gap gave the DoD IG auditors some wiggle room to create audit findings.

The DoD IG audit report states, “For DCAA incurred cost audit reports, the DCMA is generally responsible for determining whether the DoD contractor’s claimed indirect and direct costs are allowable in accordance with contract terms and FARs Subpart 31.2 and for negotiating a final indirect cost rate agreement that will be used to close the contractor’s contracts.” Now we are going to quote from the audit report because what follows is the central thesis of the DoD IG auditors:

DCMA Manual 2201-03 [“Final Indirect Cost Rates,” February, 14, 2019] requires DCMA divisional administrative contracting officers (DACOs), who are usually the primary recipients of a DCAA incurred cost audit report, to settle any questioned indirect costs and prepare the final indirect cost rate agreement. According to DCMA Manual 2201-03, DCMA administrative contracting officers (ACOs) must settle any questioned direct costs. DCMA Manual 2201-03 does not indicate whether DCMA DACOs have the authority to settle direct costs. However, the Manual does state that the DCMA DACO must coordinate and obtain settlement results from DCMA ACOs, DoD Component contracting officers, and Government agency contracting officers, who have the responsibility for settling DCAA questioned direct costs relating to one or more of their contracts. The DCMA DACO and DCMA ACO are collectively referred to in this report as DCMA contracting officers.

(Emphasis added.)

Because the regulations (and DCMA guidance) are silent on the varying roles of ACOs, DACOs, and CACOs, the IG auditors felt free to lump them all together and call them, collectively, “DCMA contracting officers.” When that happens, then an opportunity arises to criticize the “contracting officers” for not following guidance.

The issue is who has the authority to settle questioned direct costs. There is no question that an ACO or DACO or CACO must settle indirect cost rates. There is no question that an ACO must settle questioned direct costs. There is no question that a DACO (or CACO, we assume) must “coordinate” the activities of the ACOs in effectuating settlement of questioned direct costs. But do DACOs (or CACOs) have the authority to settle direct costs on their own? The guidance doesn’t say. But the IG auditors will assert that they do have that (unwritten) authority, and will then criticize them for not exercising it.

The DoD looked at DCAA audit reports and examined how DCMA “contracting officers” dispositioned or settled the audit findings. The audit report stated:

We selected 26 DCAA audit reports from a universe of 68 DCAA audit reports that each questioned over $1 million in direct costs and were reported as settled in the CAFU system by DoD contracting officers between October 2017 and September2018. The DCAA issued the 26 DCAA audit reports for settlement between February 2006 and September 2017. In total, the 26 DCAA audit reports identified $597.4 million in questioned direct costs because the auditors determined that the costs were unallowable in accordance with FAR subpart 31.2. Common reasons for the DCAA questioning the direct costs included instances where contractors did not provide sufficient supporting documentation of the costs or where DCAA auditors determined that the costs were unreasonable in accordance with FAR 31.201-3.

DCAA questioned nearly $600 million in direct costs through issuance of 26 audit reports over a nearly 11-year period. But wait! Should they have? Should those audit reports have been issued?

Let’s ask the question “should DCAA have been looking at both direct and indirect costs in the same audit?” This would seem to be a reasonable question, because of the bifurcated settlement process discussed above. Some CAO contracting officers settle indirect cost rates, and others settle questioned direct costs. Given the disparate nature and responsibilities associated with dispositioning DCAA audit findings, one might reasonably think that two audit reports would be created, addressed to the appropriate contracting officer. Such is not the case.

But should it be the case? At least one distinguished body thought so, and made that recommendation.

In the next blog article, we’ll explore the Section 809 Panel’s recommendations in this area, and continue our criticism of the DoD IG criticism of the DCMA contracting officers who, the auditors asserted, had failed to execute their (unwritten) responsibilities.

 

Why Won’t Contracting Officers Settle Questioned Direct Costs? (Part 2)

Nick Sanders
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We were discussing a recent Department of Defense Inspector General audit report that criticized DCMA contracting officers for not settling direct costs questioned by DCAA auditors during their audits of contractor “incurred cost” submissions.

Readers may recall that DoDIG Audit Report No. DODIG-2021-047 (“Evaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs”) opined that “DCMA contracting officers may have reimbursed DoD contractors up to $231.5 million in costs that may be unallowable on Government contracts in accordance with the FAR.”

When the DoD IG auditors say “DCMA contracting officers,” they are pointing the finger at an amorphous group of contracting officers in a Contract Administration Office (CAO), a group that includes ACOs, DACOs, and perhaps CACOs. We noted in the previous article that the roles and responsibilities for each of those positions is fairly opaque and undefined. About the only thing we know is that “According to DCMA Manual 2201-03, DCMA administrative contracting officers (ACOs) must settle any questioned direct costs.” One problem is that DCMA Manual 2201-03 does not indicate whether DCMA DACOs have the authority to settle direct costs. It only states that the DCMA DACO must coordinate and obtain settlement results from DCMA ACOs, DoD Component contracting officers, and Government agency contracting officers, who have the actual responsibility for settling DCAA questioned direct costs relating to one or more of their contracts.

Thus, DACOs/CACOs are expressly responsible for (1) coordinating and (2) obtaining settlement results from other contracting officers, but they do not have express responsibility and/or authority to settle questioned direct costs on their own. That’s the job of the other contracting officers—typically an ACO. The DACOs and CACOs are busy settling indirect cost rates, negotiating Forward Pricing Rate Agreements, and administering CAS.

One problem here is that DCAA issues one “incurred cost” audit report that covers both indirect cost rates and direct costs. The findings in that audit report must be bifurcated so that each contracting officer can adjudicate, negotiate, and/or settle the questioned costs. One (or more!) ACO looks at the questioned direct costs while another ACO looks at questioned indirect costs.

We ended the previous article by asking whether DCAA should have been looking at both direct and indirect costs in the same audit? Should DCAA really be conducting two separate audits and issuing two separate audit reports to two (or more!) groups of contracting officers?

The Section 809 Panel thought so, and they recommended that DCAA change course. Had DoD adopted that recommendation, we’d have a lot less confusion about settlement roles and responsibilities, in our view. We discussed the relevant Section 809 Panel recommendations in this article.

To be clear, here is what the Section 809 Panel had to say about DCAA’s audit of contractor incurred costs. (Reference Panel Report, Volume 1, Recommendation 15.)

The term incurred cost proposal is not defined within federal acquisition regulations, the effect of which has been to create unnecessary burdens on both the Government and contractors. Incurred cost proposal is the government contracting community’s shorthand way of referring to a contractor’s final indirect cost rate proposal. An annual final indirect cost rate proposal, the elements of which are defined in FAR 52.216‐7(d), is necessary for the contractor and the government to establish final indirect cost rates for purposes of settling provisionally billed (i.e., estimated) indirect costs on flexibly priced contracts. The government’s responsibilities for negotiating or establishing final indirect cost rates is set forth in FAR42.705.

Although the final indirect cost rate proposal necessarily includes details regarding all contract costs (indirect and direct), direct costs are included because (a) the government needs to verify the completeness and accuracy of the contractor’s total costs to avoid double‐counting and (b) direct costs are the most common means by which contractors allocate indirect costs to contracts. A final indirect cost rate proposal is not a claim for direct costs incurred and billed during contract performance. FAR 42.702 indicates that an audit of the final indirect cost rate proposal is performed for the sole purpose of negotiating final indirect cost rates.

In recent years, DCAA began auditing direct costs, as well as indirect costs, during its incurred cost audits. Before then, DCAA’s audit procedures concerning direct costs were limited to verifying their completeness such that final indirect cost rates are calculated accurately. In general, expanding the scope of incurred costs audits may increase the time it takes DCAA to complete incurred cost audits and increase the time it takes contracting officers to address and resolve the results of DCAA’s audits.

…

The allowability of contractor direct costs is also an important compliance requirement. It is not, however, the purpose of DCAA’s evaluation of contractor final indirect cost rate proposal. Rather, a contracting officer may request DCAA to audit the direct costs of a contract pursuant to FAR 52.216‐7(g), which is an entirely different oversight request than a final indirect cost rate proposal audit. If DCAA performs adequate voucher reviews, which has always been one of DCAA’s important responsibilities, there should be no cause for concern.

(Emphasis added.)

The Section 809 Panel recommended that DCAA perform two separate audits—one on the contractor’s indirect cost rates, and the other on the contractor’s claimed direct costs. Had DoD implemented that recommendation, we don’t think there would be the current level of confusion regarding which contracting officer is responsible for settling what.

Exactly what confusion are we talking about? Well, back to the DoD IG report ….

  • DCMA contracting officers did not comply with DoD Instruction 7640.02 and DCMA policy because they did not settle, or coordinate the settlement of, $231.5 million in questioned direct costs.

  • The DCMA DACOs closed the associated records in the CAFU system for the 12 audit reports even though the $231.5 million of the $258 million in reported questioned direct costs were not settled.

Why? Let’s quote from the audit report:

  • DCMA lacks adequate guidance for identifying and coordinating with other contracting officers who are responsible for settling questioned direct costs. Although DCMA Manual 2201-03 requires the DCMA DACO who receives a DCAA audit report to coordinate with other contracting officers who are responsible for settling the questioned direct costs, it does not provide any guidance on how to identify all responsible DoD contracting officers. Furthermore, DCMA Manual 2201-03 does not provide any guidance for addressing situations when the other DoD contracting officers do not respond to the DCMA contracting officer’s repeated requests to provide settlement results of the questioned direct costs.

  • DCMA Manual 2201-03 states that DCMA ACOs (which does not include DCMA DACOs) must settle questioned direct costs. DCMA Manual 2201-03 does not indicate whether or not DCMA DACOs have the authority to settle questioned direct costs. We spoke to several DCMA DACOs who stated that, based on their interpretation of DCMA Manual 2201-03, the DCMA has not granted them the authority to settle questioned direct costs. DCMA Manual 2201-03 does not authorize DCMA DACOs to settle questioned direct costs based on the DCMA’s interpretation of FAR 42.302(a)(9). FAR 42.302(a)(9) states that the contracts administration office (typically the DCMA) is responsible for establishing final indirect cost rates; however, the FAR does not specifically identify who is responsible for settling direct costs. The DCMA typically tasks DCMA DACOs with the responsibility for establishing indirect cost rates in accordance with FAR 42.302(a)(9). However, because the FAR lacks specificity for establishing responsibility over direct costs, DCMA Manual 2201-03, section 3.11, implements policy that only allows the DCMA ACOs assigned to each contract to settle questioned direct costs. When the DCAA questions a contractor’s direct costs, the questioned costs can involve dozens of contracts and several different DCMA ACOs. Additionally, questioned direct costs can involve contracting officers from the DoD and other Government agencies.

According to the IG auditors—

FAR 42.302(a)(9) does not prohibit DCMA DACOs from having the authority to settle direct costs. The [DPC] representatives explained that direct costs are an integral part of an indirect cost rate because the direct costs are used as the base (denominator) to calculate the indirect cost rate. Therefore, the representatives stated that when a DCMA DACO settles indirect cost rates, the DACO should give due consideration to the DCAA questioned direct costs.

Well, that’s a bit misleading, isn’t it? We mean, since all direct costs must bear their proportionate share of indirect costs, it really doesn’t matter at all whether those direct costs are allowable or unallowable. The indirect cost rate is exactly the same, either way. Thus, either the DoD IG auditors do not understand the requirements of CAS 405 and FAR 31.201-6, or they chose to ignore those requirements when writing the audit report.

The DCMA Director disagreed with the audit findings. The audit report states—

The DCMA Director agreed that the current version of DCMA Manual 2201-03 does not adequately clarify the different contracting officer roles and authority in settling DCAA questioned direct costs. However, the DCMA Director maintained that DCMA contacting officers only have the authority to settle DCAA questioned direct costs when delegated the authority by a DoD Component contracting officer.

In addition, the DCMA Director does not interpret FAR 42.302(a)(9) as conferring DCMA contracting officers the authority to settle or negotiate DCAA direct costs. The DCMA Director stated that the FAR grants DCMA ACOs and DACOs only the authority to establish final indirect cost rates and billing rates. The DCMA Director further stated that the FAR does not extend questioned direct costs settlement authority to DCMA contacting officers because DoD Component contracting officers are better suited to settle DCAA questioned direct costs because they negotiate the contract terms with the contractor, award the contract, and understand the expectations of the parties. Finally, the DCMA Director stated that this report unfairly implies that DCMA ACOs are responsible for the failure to settle direct costs questioned by the DCAA.

Naturally, the DoD IG auditors disagreed with DCMA’s position, citing to FAR 1.102-4(e), which basically states that any action in the best interests of the Government may be taken unless expressly prohibited. Since the FAR does not expressly prohibit DCMA ACOs and DACOs from settling DCAA questioned direct costs, they should do so.

More importantly, the DoD Inspector General believes that the failure of those DCMA “contracting officers” to use their implied authority to settle questioned direct costs is a valid reason to criticize them.

 

2021 NDAA Analysis

Nick Sanders
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Somebody I follow asserted that 2021 didn’t actually start until January 21, 2021. I want that to be true, because January 6th belongs with 2020, doesn’t it? Regardless of your position on the matter, for defense contractors 2021 could be said to have started on January 1, 2021, which is a nice alignment with the calendar. That’s the date when the William M. (Mac) Thornberry National Defense Authorization Act (NDAA) for Fiscal Year 2021 became public law.

The 2021 NDAA became public law on that date because that’s the date Congress voted to override the President’s veto of the bill. It was President Trump’s tenth veto of a bill during his four-year term, but the first veto to be overridden by Congress. The date of the override becomes the date of the public law, or so we’re told.

For the twentieth year in a row, Bob Antonio at WIFCON.com published his invaluable analysis of the NDAA, section by section. As has become tradition here, we’ll take a look at his analysis and bring certain highlights to your attention. But if you want to know more, there is no better source than his analysis, and we encourage you to go read it.

The most relevant section for compliance folks would be Section 806. In that Section, Congress directed significant changes to the contractor business system administration regime. Well, we think they’re significant. You be the judge. Anyway, Congress make revisions to the 2011 NDAA language that first established the contractor business system administration rules, replacing the term “significant deficiency” with “material weakness” to better align audit/review findings with other audits/reviews of internal controls, thus reducing confusion among practitioners and (hopefully) reducing confusion among those who have to deal with audit/review reports and findings.

We’ve spent a decade dealing with “significant deficiencies” and most of us have learned that a significant deficiency inexorably leads to a contractor business system being determined to be inadequate. During that decade, contractors have argued (largely unsuccessfully) with auditors and contracting officers about whether or not a deficient is actually “significant” or not. So what’s changing?

Here’s the official definition of “material weakness” from the NDAA:

The term `material weakness' means a deficiency or combination of deficiencies in the internal control over information in contractor business systems, such that there is a reasonable possibility that a material misstatement of such information will not be prevented, or detected and corrected, on a timely basis. For purposes of this paragraph, a reasonable possibility exists when the likelihood of an event occurring--

(A) is probable; or

(B) is more than remote but less than likely.

The linkage to the more traditional audits/reviews of contractor internal controls should be obvious. But let’s break that definition down a bit more:

  • A single deficiency or a combination of deficiencies

  • In internal control over information in contractor business systems

  • Leading to a reasonable possibility

  • That a material misstatement

  • Will not be prevented

  • Or detected and corrected

  • On a timely basis

  • Where “reasonable possibility” cannot mean a remote possibility

Points likely to lead to a disagreement include: (1) What is a “material misstatement” and (2) what is a “timely basis”. With respect to “material misstatement” we have fairly recent DCAA guidance on how to quantify materiality. While that guidance only applies (formally) to contractor’s incurred costs, informally most people (including DCAA leadership) agree it can—and should be—applied more broadly. We see no reason that the materiality guidance could not be extended to DCAA audits of contractor business systems. As for DCMA, there is materiality guidance found in FAR Part 30, which is applicable to CAS cost impact proposal analysis and related determinations. Again, there is no reason that materiality guidance couldn’t be extended to DCMA reviews of contractor business systems. We very much hope it will be.

Which leaves “timely basis.” What does that mean in the context of government contracting? We don’t have much in the way of authoritative answers, and the correct answer will probably depend on the context. For example, with respect to calculating indirect cost rates, we would hazard the position that “timely” means “before the end of the contractor’s fiscal year.” But with respect to complying with Limitation of Cost/Limitation of Funds requirements, “timely” could well mean something else. There are other contexts to consider as well, including Truthful Cost or Pricing Data requirements (aka “TINA”). So we’ll just have to wait and see what the contracting parties make of it.

Getting back to the NDAA, Congress continues to play with the increase in the TINA threshold. Section 814 formally increased the threshold at which certified cost or pricing data must be submitted to “a standard $2.0 million threshold for application of the requirements of the Truthful Cost or Pricing Data statute (commonly known as the Truth in Negotiations Act) with respect to subcontracts and price adjustments.” (Of course, this is the value assuming no exception applies.)

There are dozens of other Sections to be reviewed, but most of those are pointed at the Department of Defense in general, and we expect any impacts to contractors will be primarily indirect in nature. The two above are the ones that struck us as being most worthy of discussion. That being said, you shouldn’t rely on our judgment; you should follow the link we provided and do your own research.

 
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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.