Lockheed Martin Links Government Requirements to Overhead Costs
Our thanks to “Cadillac Cowboy” who brought this article to our attention. As he noted, “This ties in with some of your recent blog posts.” Indeed it does.
The article was straight-forward. It reported that Lockheed Martin CEO Bob Stevens told an investor conference that the company’s ability to cut its overhead costs was hindered by increased government demands for data.
This is a phenomenon that we’ve pondered for a while, and even mentioned a time or two in these blog articles. We’ve discussed some of the following points—
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Creation by DCMA and DOD’s new Pricing Directorate of databases intended to give DOD pricing analysts and contracting officers the ability to negotiate forward pricing rate agreements without reliance on a DCAA audit report. You know the data going into those new databases have to come from somewhere, right? The databases don’t just populate themselves. Since the government (by and large) doesn’t have the data, guess who they ask to provide it?
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Recent DOD emphasis on “should-cost” analysis, where government analysts assess how their contractors can reduce costs, based on review of lots of detailed contractor cost information. Where do you think all that cost information comes from? Guess who they ask to provide it?
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Recent DOD and DCAA emphasis on strict adherence to the proposal format of FAR Table 15-2, even when common sense would tell a reasonable negotiator that after two decades or so of production, more cost information was not going to be significantly different from what had transpired. Making the contractor submit a full-up TINA-compliant cost proposal in such circumstances struck us as being essentially “make work” that added little value but added a lot of costs. And then—to add insult to injury—the government found the contractor’s proposal to be “inadequate” and stalled negotiations as a result, leading to workforce impacts.
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DCAA’s impossible backlog and how delays in audit performance lead to contractors having to retain documents to support those audits. Guess who pays for storage costs?
Anyway, the point is that CEO Stevens is saying what’s been on our mind for some time. And he’s saying it in public. Here is how the article quoted Mr. Stevens—
Lockheed Chief Executive Bob Stevens said his company was working hard to drive down overhead, but the government's ‘should cost’ initiative meant the company needed more people to generate thousands of pages of additional paperwork.
‘The more the government asks us to do, the more pressure that puts on having the overheads … What won't work in my mind is an ever increasing set of demands by the government for more and more and more information and responsiveness, and an increasing expectation that the facilities that are available to meet those increasing demands ought to be reduced and reduced and reduced.’ …
Stevens said Lockheed took the Pentagon's concerns about overhead costs very seriously and … it … remained focused ‘on every expense account, every capital request, every individual ...job that we have in the company, how to reduce and how to streamline.’
But he said Lockheed was telling U.S. defense officials to be more focused in their requests for additional data.
‘It falls a little bit into the domain of help us help you. If you want us to continue to focus on overhead reduction, then maybe we ought to look at how we work together with one another and exactly what is needed and be more specific and more tailored and more focused,’ he said. …
Stevens said the Pentagon's focus on what weapons programs ‘should cost’ - as opposed to estimates focused on what they ‘would cost’ - had resulted in increasing requests for more certified cost and pricing data.
Lockheed submitted 6,000 pages of data with its initial F-35 proposal, but had been required to generate an additional 7,000 pages of data for the negotiations in recent months, he said.
Part of the “Better Buying Power” initiative is to assist contractors in reducing their indirect costs through cutting “non-productive processes and bureaucracy.” Dr. Carter wrote—
Industry has its own internal unproductive processes which add to project costs, but these are in some part a reflection of the requirements which the government imposes. A great number of the inputs I received from industry were directed at what was viewed as excessive overhead expenses based solely on non-value-added mandates and reporting requirements which may have been relevant at some point in time, but have little relevance in the world in which we now find ourselves. In order to identify and reduce these costly requirements, I am directing the Director of Industrial Policy, with support from DPAP, to more fully survey our industrial base to identify, prioritize, and recommend a path forward to unwind duplicative and overly rigorous requirements that add to costs, but do not add to quality of product or timeliness of delivery. As we remove these requirements, I will expect a decline in the overhead charged to the Department by our industrial base that reflects these reduced costs.
(Emphasis in original.)
President Obama has ordered reviews that aim to weed-out “outmoded, ineffective, insufficient, or excessively burdensome” regulations so as to reduce burdens on those being regulated.
According to Lockheed’s CEO, none of these top-down directions are working. Instead, he sees a growing and insatiable demand for data—while at the same time contractors are being told to cut costs associated with the functions that provide the government with the data they demand. He sees a fundamental contradiction—and we see it as well.
We as an industry have known for decades that compliance with regulatory requirements carries with it a cost, and that DOD’s insistence on certain requirements means that they (and the taxpayers) pay more for goods and services than they otherwise would, had their requirements not been imposed. Now for the first time in memory, we are experiencing increased regulatory burdens and data demands while that price premium is being attacked. It’s not logical, but it’s real nonetheless.
Illegitimi non carborundum
DCAA Audits and the Contract Disputes Act Statute of Limitations
We start these types of articles with our usual disclaimer: We are not attorneys; we are not giving legal advice. You should obtain legal advice from a licensed attorney. That said, the fact that we are not attorneys does not keep us from reading legal decisions and thinking about how they may implicate government contract cost accounting and compliance matters. Indeed, anybody who is serious about such matters needs to have a solid layperson’s understanding of relevant case law. If all one did was read the FAR and contract clauses, one would know the language, but be sadly uninformed about the meaning of the regulations and clauses—because it is only through judicial interpretation that the regulatory language is parsed and given meaning. (For an example of what we mean, see our article discussing how the U.S. Court of Federal Claims clarified the distinctions between CAS 418-50(d) and 418-50(e) as they pertained to a dispute between Sikorsky Aircraft Corporation and the Department of Defense.)
Today we want to address the Statute of Limitations (SoL) found in the Contract Disputes Act (CDA). This is not the first time we’ve discussed the CDA’s SoL. By now, readers should understand that the CDA’s SoL runs for six years from the time that the aggrieved party “knew or should have known” it had suffered damage. The entity filing a claim under the CDA has six years from that moment in time to file its claim and to have that claim heard by a court. Any claim filed after that time will be rejected.
The primary reason for creating a Statute of Limitations (according to Wikipedia) is that, “over time, evidence can be corrupted or disappear, memories fade, crime scenes are changed, and companies dispose of records. The best time to bring a lawsuit is while the evidence is not lost and as close as possible to the alleged illegal behavior.” Keep that in mind as we discuss this issue.
In our most recent article on the topic, we took the government to task for continuing to litigate SoL cases, even though they were racking up an impressive string of losses (each of which we discussed in a separate blog article). We asked, “Boeing has won twice at the ASBCA; now Raytheon has won at the Court of Federal Claims. When will the Government get the message that the CDA’s statute of limitations will be strictly enforced by the Courts?”
We were, perhaps, being overly harsh on government attorneys, because the truth is that not every aspect of the CDA’s SoL has been litigated. In particular, nobody knows for sure when the SoL starts running with respect to a contractor’s final indirect rate proposals (aka “incurred cost submissions”). Does the six-year clock start running when the contractor’s fiscal year ends, or when it submits its certified proposal roughly six months later? Or does it start running when the proposal is determined to be adequate for audit? Or perhaps when the audit starts? Or maybe when the audit report is drafted? Or maybe when the audit report is issued? Or what about when the cognizant Administrative Contracting Officer receives the audit report? Nobody knows the answer to those questions because the courts haven’t squarely addressed the issue and given the contracting parties a “bright line” answer.
So in the meantime, parties with unresolved disputes file claims with either the ASBCA or the Court of Federal Claims. The lawyers are busy these days; very busy indeed.
The issue of the application of the CDA SoL to contractors’ final indirect rates matters a heckuva lot. We have written several recent blog articles on the unbelievably huge backlog of unaudited and/or unissued DCAA audit reports in this area. We told readers that, at its current level of audit report output, DCAA has on hand nearly 70 years’ worth of audits to grind through—and it’s taking DCAA almost three years to audit a single year’s worth of contractor cost information. Richard Loeb touched on it in his now famous article—at some point there’s no sense in auditing the contractors’ cost information because any enforcement action will not be heard by the courts (because the CDA SoL precludes any claim). Professor Loeb wrote—
Without a significant course correction in the manner that DCAA conducts its audits, which seems unlikely given the 400-percent decrease in audits performed by DCAA since 2008, one does not have to be a statistician to conclude that DCAA will not reduce the backlog in any meaningful manner. It is very likely that for many of the contracts, the statute of limitations for recouping overpayments will run out before DCAA gets around to completing the audits, resulting in a significant loss of savings to the taxpayer.
As we reported, the official DCAA spokesperson pooh-poohed Professor Loeb’s assertion, telling reporters that “few audits in the current backlog are at risk of running up against the six-year limitation [though] an exact number could not be immediately determined.” Essentially, then, the official DCAA position is that they have not aged the 24,000 unaudited contractor proposals for final indirect cost rates that are in its possession. But nobody should worry, because “few” of them are going to exceed the six-year CDA SoL.
Well, readers, perhaps one reason that DCAA and DCMA and DOD are not too worried about the SoL is because they think the courts are going to rule that the six-year clock doesn’t start running until after DCAA issues its audit report. In that case, why worry? If DCAA takes 70 years to get around to questioning some contractor costs and recommending some final indirect cost rates to be used to close contracts (which will, hypothetically, be disputed by the contractor), then they think the courts will hear the matter. And if they’re wrong, then all the DCAA and DCMA and DOD SES policy-makers will be long, long, long retired by that time. It will be somebody else’s problem to deal with.
The thing is, we can’t say with any certainty that they’re wrong. In fact, a recent ASBCA case cast significant doubt into what we thought we already knew about this issue.
Lockheed Martin appealed a final decision by its cognizant Divisional Administrative Contracting Officer (DACO) that found LockMart to be in noncompliance with CAS 418, 420 and the Cost Principle at FAR 31.205-18, because the company had claimed as Independent Research and Development (IR&D or IRAD) costs that were required in the performance of a contract. The government demanded that LockMart hand over roughly $30 million (plus interest) for its alleged noncompliances. LockMart appealed and moved for summary judgment, asking the Judge to find that the government’s demand was time-barred because it was filed after the CDA’s six-year SoL time period.
Here’s a high-level chronology of the events, as we understand them.
In 2001, LockMart submitted a proposal for an Air Force Advance Targeting Pod (ATP) system. In its proposal, the company told the Air Force that it would be performing concurrent IR&D efforts that it did not consider to be required in the performance of the ATP contract. Importantly (according to the Judge), LockMart did not clearly identify its IR&D efforts as IR&D; instead, they were labeled as “company-funded”. (The Judge’s decision offers a solid lesson learned in that respect. Readers might want to train management and business development staff on the significant differences between the phrases “company-funded out of profit dollars” and “indirect costs to be allocated to contracts”.)
A firm, fixed-price contract was awarded to LockMart in 2001. On December 31, 2002, DCAA issued a letter to LockMart (the DACO received a copy) asserting that costs associated the company’s concurrent IR&D efforts were not allowable as IR&D expenses because the efforts were required in order for LockMart to perform its contract.
Importantly, the Judge found that, in DCAA’s letter—
DCAA recommended a net downward adjustment to LMC's proposed G&A expense pool and an upward adjustment to direct costs and associated indirect costs in the G&A base pools …. [But] DCAA did not identify any overbillings or increased costs paid by the government resulting from the alleged inappropriate charges.
[Emphasis added.]
LockMart disagreed with DCAA’s position, though DCAA continued to assert its findings in subsequent letters and audit reports to the DACO. Finally, in September 2005, DCAA issued a “draft/preliminary report” that calculated a cost impact associated with the various alleged noncompliances. In that report, “DCAA calculated the impact of the noncompliance on appellant's G&A rates for CFY 2001, 2002, and 2003, and stated that appellant's noncompliance resulted in overbillings to the government.” The final report was issued in February 2007; roughly eighteen months after the draft report had been issued.
The DACO issued the final decision in September 2008, roughly eighteen months after the final audit report had been issued and three years after the draft report had been provided by DCAA—and nearly but not quite six years after DCAA’s initial 2002 letter. In that final decision, the DACO demanded that LockMart calculate its own cost impact, which was provided in March 2009. LockMart’s analysis calculated a $13 million cost impact, less than half of DCAA’s calculated number.
The DACO ignored LockMart’s calculations and issued a final decision/demand letter in December 2010 (almost two years after receiving LockMart’s cost impact and more than five years after receiving the draft DCAA audit report—and almost exactly eight years after receiving DCAA’s initial 2002 letter). LockMart filed a claim at the ASBCA, appealing the DACO’s final decision and monetary demand.
Judge Delman wrote—
For purposes of this appeal, the government claim before us is the DACO final decision dated 8 December 2010, timely appealed to this Board, in which the DACO asserted a monetary claim against appellant for CAS noncompliance. …
When the DCAA questioned the IR&D costs in late December 2002 … appellant's subsequent billings and the government's payments under the Sniper contract in late 2002 and thereafter also did not necessarily make known to the government any potential monetary CAS claim to recover increased costs because the Sniper contract was a firm fixed price contract. The record also does not show that the government knew or should have known at this time that the contract price itself was increased as a result of the alleged misallocation of these costs. … Appellant has not persuaded us on this record that the government knew, or should have known of any injury to the government at or around the time of the 31 December 2002 DCAA letter arising out of the Sniper contract. As for the impact of the costs questioned by DCAA on appellant's other government contracts during this period, the record also does not show that the government knew, or should have known of any injury to the government on those contracts at that time.
It is true that DCAA's letters to appellant of 31 December 2002 and 30 March 2004 recommended adjustment of certain accounts of appellant some downwards and some upwards -for CFY 2002 and CFY 2003 but there were no statements in either letter regarding overbillings to, or overpayments made by the government on government contracts …. As far as this record shows, it was the DCAA draft/preliminary report of September 2005, copied to the DACO, that indicated that appellant's CAS noncompliance resulted in overbillings to the government …. The CO's 8 December 2010 final decision asserting the government's monetary claim was issued within six years of this report.
Based on the foregoing, the Judge refused to dismiss the appeal.
Well. That’s the kind of decision that makes us question what we thought we already knew, and keeps parties going back to the litigation bar instead of negotiating resolutions. According to Judge Delman, a letter from DCAA alleging CAS/FAR noncompliance and recommending downward adjustments to indirect costs is insufficient information for the government to understand it has suffered a monetary injury and has a claim to assert against the contractor. Instead, the DCAA letter/report must clearly state that, as a result of the noncompliance(s), the contractor had over-billed the government. Only those magic words can invoke the CDA Statute of Limitations.
In our view, the Judge’s decision gives short shrift to all the words in the applicable regulatory language, which is that the SoL clock starts running when the injured party knew or should have known that it had been injured. The Judge’s decision eviscerates the “should have known” test. There is no doubt in our minds that the DCAA auditors understood that their assertions that LockMart had overstated its indirect costs and understated its firm, fixed-price contract costs led to a situation where the government had been over-billed. Nor do we doubt for a minute that the DACO understood the same thing.
To think otherwise is to assert that neither DCAA auditors nor the warranted DACO understood the nature of the firm, fixed-price contract type. To think otherwise is to assert that neither the DCAA auditors nor the warranted DACO understood that the claimed allowable G&A expenses that were (allegedly) increased by means of noncompliant cost accounting practices meant that the invoices submitted on flexibly priced contract types contained overstated G&A expense rates, or that those invoices with the (allegedly) overstated G&A expense rates had been paid, creating a situation where the government had been overbilled and had paid the costs. To call that position naïve is to understate its preposterousness; instead, we think it’s insulting.
To think magic words must be included in DCAA correspondence in order to invoke the government’s knowledge of an injury is to insult the men and women who work at DCAA and, most especially, the men and women who work at DCMA as warranted contracting officers. They receive lots and lots of training and, in order to receive a warrant, a contracting officer must meet certain coursework and knowledge standards. The auditors and the DACO involved in this case had to know the implications associated with overstated IR&D expenses and understated FFP contract costs. Either they knew or they were incompetent.
While we often take issue with agency policy guidance and individual decisions from auditors and contracting officers, the fact is that most of these people are not stupid. Nor are they incompetent. Judge Delman’s decision is predicated on the assumption that they are.
We hope LockMart appeals this decision. In fact, we think a demand for a written apology from Judge Delman to the cognizant DACO would not be too far out of line. But in the meantime, the decision does impact our understanding of the CDA SoL and gives support to the notion that the CDA Statute of Limitations does not start running until DCAA issues an audit report containing magic words.
So to those who think 70 years is too long to wait for the parties to know whether or not they have an injury requiring redress under the Contracts Dispute Act, we say—“We know; we get it. We feel your pain and frustration.” But we also say, “Tell it to the Judge.”
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We Do NOT Have Paranormal Abilities—But GSA Might Think We Do
Well, it was not the best feeling in the world to learn that we’d made a mistake at the very moment we were on a larger stage with the spotlight shining on us. Not a good feeling at all.
As you know (because we told you), when we thought that Jeff Neely’s spending spree at GSA was connected with excess Industrial Funding Fee (IFF) receipts from contractors, we were wrong. That article got picked up in a blog with a larger readership than this one has … and then it got picked up at Forbes.com. And then several people—some of them with official GSA connections—pointed out that Neely was part of GSA’s Public Buildings Service while the MAS contracts that generated the excess IFF receipts were part of GSA’s Federal Acquisition Service. PBS handles management duties related to Federal buildings while FAS handles MAS contracts and other procurements. Two independent silos, one agency. We got that wrong.
Both silos receive funds from the public at large that offset a large part of the agency’s operating costs—PBS receives rent payments and FAS receives IFF payments. Because of those receipts, GSA requires relatively small amounts of taxpayer funds. Had we known better, we could have linked Neely’s lavish spending to the general agency culture. After all, an agency that has a documented history of retaining excess funds in its reserves and not giving those funds back to the taxpayers (or to the U.S. Treasury) has a serious cultural problem, and it would not be terribly surprising to see certain individuals within the agency develop an idea that the funds were theirs to use as they wished, rather than being treated as taxpayer-provided Congressionally appropriated funds—which in large part they were not.
We could have written the article around that theme, but we didn’t—because we didn’t understand GSA’s organization well enough to see that there were two independent silos.
When our error was pointed out, we spent a fair amount of time on the GSA website. One thing we noticed was that the agency had a very complex organizational structure—it looked to us like a matrix, with operations organized by Region as well as by the independent silos. We were getting a bit defensive at that point, and we were tempted to write about the potential redundancies in the structure that we saw, and the lack of clarity (on the website) regarding why GSA needed to structure its management along both Regional and Product Line axes. But the better angels of our nature took over and we simply apologized as sincerely as we could, and then moved on as quickly as we could.
And that should have been the end of it.
But then Federal Times ran a story on May 16, 2012—exactly one week after we published our red-faced apology over mistakes in our original article (published April 23, 2012)—in which it was reported that “the agency will likely merge portions of its two main divisions — the Public Buildings Service, which manages federal buildings and building leases, and the Federal Acquisition Service, which oversees many federal contracting programs.”
The article reported recent interview remarks from acting GSA Administrator Dan Tangherlini as follows—
‘I think just integrating GSA better is one of the things we are particularly interested in,’ [Tangherlini] said. ‘As we looked at what took place at the Western Regions Conference … we saw that we hadn't struck the right balance between autonomy and accountability. Can we maintain the benefits of autonomy and innovation and different approaches that reflect the needs of customer agencies and regions while we enhance and improve the accountability? I think integration is a part of that.’
Merging portions of GSA's buildings division and contracts division — such as the information technology, finance and contracting operations — also will bring efficiencies and cut costs, he said.
Well, that was weird, right? Just one week earlier, we were being taken out to the woodshed for not getting the distinctions between PBS and FAS, and now GSA was announcing that “portions” of the two silos were going to be merged together—erasing some of those distinctions. Is that not eerie?
On May 17, Federal Times ran a follow-up story providing some more details from the Tangherlini interview. Tangherlini was quoted as saying—
Not having multiple organizations within our organization doing the same thing is going to allow us to be more efficient ourselves, deliver our services more effectively and reduce costs. I think they are closely tied together right now, but I think there are opportunities for them to work more closely together.
When we move in together into 1800 F Street … and the renovations are completed, the two sides will be together for the first time in modern history, and there will be real opportunities for best practices across the organization and to make sure we do things once, and do it well and do it more cost effectively. …
Are there places where we duplicate services that are being provided within the organization itself? One of the ideas we have already looked at is consolidating our internal finance shop and having one finance shop. We are looking at issues around [information technology] services within GSA and acquisition services within GSA, [and] PBS and [the Federal Acquisition Service] coming closer together and doing it once and doing it right as a way of reducing the cost of the services that we provide.
Look, we don’t want you to take this the wrong way. We were wrong. Wrong, wrong, wrong. PBS was not FAS and FAS was not PBS. Nobody in FAS (that we know of) was tainted by the 2010 Las Vegas “conference”. But still … we are seriously considering claiming that our original article was impacted by visions of the future state of the GSA organization. We are trying to muster the gumption to claim (with a straight face) that we are truly psychic and we saw this coming and that’s what we wrote.
Do you think anybody is gonna buy that?
More on DCAA’s Never-ending Backlog
As mentioned in our previous article on this topic, DCAA has dug for itself a ginormous, almost unbelievably deep, hole of a backlog. Not to pile on too much, but we have some further news and some further thoughts on this pressing topic that we believe merit another article. So here’s what’s new—
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It has been brought to our attention that Mr. Loeb’s original article (“DCAA—Is Anybody Home?”) contains some questionable math. When he wrote that DCAA’s productivity has declined by 400 percent over the past three years, he was perhaps inverting the numerator and denominator of the equation. In GFY 2008, DCAA issued 30,352 audits; while in GFY 2011, DCAA issued 7,390 audits, for a decrease of 22,962 audit reports issued. It is true that 30,352 / 7,390 = 410 percent; but we believe that’s not quite the correct way to calculate the productivity decrease. Instead, 7,390 / 30,352 = 24 percent, meaning that today’s DCAA is 76 percent less productive than it was in 2008. It doesn’t play as well in the media, but that’s probably the more correct way to express the situation.
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Similarly, when we used Mr. Loeb’s arithmetic on DCAA’s backlog of “defective pricing” audits, we reported a productivity decrease of 1,148 percent. Correcting our math, we see that DCAA’s GFY 2011 output of post-award audits was only 9 percent of its GFY 2008 output, meaning that today’s DCAA is 91 percent less productive that it was in 2008. (Thanks to “Bill O-5” for pointing out the math issues.)
In related news, Federal Times and Federal News Radio have picked up the story. Here’s a link to the Federal Times story. Key quotes from that story include:
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DCAA officials attribute the slowdown to their focus on quality and thoroughness in their audits.
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… spokeswoman Lt. Col. Elizabeth Robbins said in an e-mail [that] … few audits in the current backlog are at risk of running up against the six-year limitation … an exact number could not be immediately determined, she said.
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While DCAA is issuing fewer audit reports than in the past, the agency is questioning more costs and producing greater net savings, Robbins said. … ‘Clearly, 2011 was more effective for the taxpayer,’ Robbins said.
First, we were completely unaware that DCAA—a civilian agency within the Department of Defense—now employed a military spokesperson. Second, we believe that Lt. Col. Robbins may have been misinformed regarding the number of incurred cost proposals running up against the six-year statute of limitations contained in the Contract Disputes Act. Third, we can hardly disagree more with her assessment that DCAA’s 2011 was “clearly” more effective for the taxpayer. We wrote a whole blog article taking issue with DCAA’s assessment of its GFY 2011 as “successful.” In fact, we judged it to be “pathetic.”
Our frenemies over at the Project on Government Oversight (POGO) ran the story as well. What’s interesting about the POGO blog article is the comments from self-identified current and former DCAA employees. We counted about twenty comments as of the time we wrote this article. All but one were supportive of Mr. Loeb’s article and called for significant reforms at DCAA. Here’s a smattering to give you the idea (unedited except for length).
“John” wrote –
As a manager of DCAA, I am truely embarrassed with our performance. My office has not completed an incurred cost audit or ICAPS audit since 2009. We were required to develop a plan to get current on our incurred cost by 2016 and it is a phoney plan. There is no way we will get current without approving incurred cost claims with no audit (defeats the purpose of having an audit agency). … We are worse than ever! The numbers presented in the article speak for themselves. The reality is that we spend millions of dollars on management reviews that are meaningless. We are so inefficient that it is embarrassing. My office accomplished more audits in one month in 2007 than we accomplished for 12 months in 2011. If I was eligible to retire, I would be out the door today. I am truely embarrassed to say I am a manager in DCAA. I used to be proud.
“DCAA Auditor” wrote—
… The agency is controlled by fear. A fear of being second guessed by the internal police. So what do people do? We do nothing but document files to an insane level. Managers have work piling up on their desks as they agonize over approving a risk assessment. God forbid we don't have the perfect fomat. How do these managers make the decision to get out of bed in the morning? How can they be sure they don't slip in the shower, have a car accident? Is it worth the risk? Why not just lay in bed, it's not worth the risk.
Mr. Loeb's article is spot on. The truth hurts and Mr. Loeb has pretty much told it like it is. …
“Ed” wrote—
Excellant article and blog by POGO. Time to expose DCAA. … the findings that we are counting as questioned cost are not real questioned cost. We count unsupported cost as questioned cost which we never did in prior years so we do not have an apples-to-apples comparison. Third, this approach completly misses the reason for DCAA. We are suppose to audit cost-type contracts after contract award. We have stopped auditing contract costs after award. We do not audit internal controls or compliance with CAS. There are no questioned dollars with these assignments so Fitzgerald does not want us to waste our time with these audits. But these audit are exactly why DCAA exists. Loeb is correct that we need to get back to our core mission and audit contract costs and stop the wasteful spending on proposals. We need to accomplish the internal controls, CAS, and costs incurred on cost-type contracts. … So we have a perfect forward pricing audit. In the meantime, overpayments are occuring all over the place and DCAA is no where to be found. …
“Mike” wrote—
… The battle used to be with the contractor. Now the battle is with management and the DCAA CIGIE police. We spend more time defending the risk assessment, audit steps, working paper documentation, and stat sampling, than we spend on the audit. We waste so much time on nonvalue effort that there is no time for actual audit work or the audit is so late that it is of no use. …
“Lauren” wrote—
… The entire risk assessment phase of audits has to be re-worked. You can't treat a Raytheon the same way you treat a three person company but we do. The B-02/risk assessment is make work, then we have to document what was done there in the detailed work papers. So much time killing non value added work. … We have many hard working young smart people at DCAA who are already defeated by the DCAA make work mentality. Until DCAA works for the taxpayer in mind and not some mid level bureaucrat within the DCAA bureaucracy, nothing will change.
“Gerry” wrote—
… We need to get back to the systems approach to auditing where each audit builds upon the next. We need to determine whether forward pricing needs to be completed as an audit under GAGAS or fiancial advisory services. We need to get back to having a sense of urgency and understand that customers cannot hold a procurement for 4-5 months waiting for an audit. …
Some of the POGO commenters offered insight into how DCAA might approach reducing its pile of unperformed audits.
“Roger Thornhill” wrote—
… Concerning the incurred cost workload, the plan for getting current is to sample the submissions that are less than $250M. Those that are less than $1M will likely never be audited because HQ views those audits as cost losers, which is no wonder given the amount of prepatory work (the risk assessment, increased transaction testing, and the greater number of reviews) now required. HQ is talking about more and more sampling (leaving more submissions completely unaudited), which will certainly incentivize some contractors to push the envelope when it comes to questioned costs. …
“Waiver Me and Count” wrote—
… DCAA wants to waive all possible incurred cost audits under $1 million too. And the metrics will show that we actually completed these audits. Waiving 1 low dollar incurred cost = completing 1 (only in DCAA does 0 = 1). Then there's our audit guidance - all of our audit guidance is being written for the largest contractors. Does our upper management get the risks at the nonmajors especially at a time when there is less spending and companies are going out of business or being bought out? … We can get plenty of these audits done if we had the prior audit programs that were geared towards non-major contractors. The new B2 is overkill and redundant. It's confusing. It's too much for a small contractor where an audit is performed by 1 person. Who really understands it? It's not user-friendly for auditors. Then it appears HQs wants to staff up the largest contractors with more people because that's the only places where risk exists to them. Are those contractor personnel going to be able to respond quickly to all the requests being thrown at them at one time? What are the idle auditors going to do? What are the auditors in the mobile branches going to do? Travel money seems to be going away. So what are the auditors in the mobile branches going to be doing? What is the plan? At the mobile places, the staff knows there is audit risk that shouldn't be overlooked. … The upper management is holding FAOs accountable for compleing so many incurreds each month. A very stressful situation for those in charge of issuing the most incurred cost reports - you constantly get the emails ‘how many are you going to get done? How many? Some supervisors have none and others have numerous reports. Then there's the cancelled assignments. How many audit hours were wasted on cancelled assignments this year? Might be enough to complete those ‘possible waiver’ nonmajor audits. …
There’s one more point we want to discuss before we close this out. It’s about the next generation of DCAA auditors. We have posted (more than once) our opinion that DCAA has capable, experienced auditors who should be allowed to exercise judgment in the performance of their audits. Unfortunately (as we know all too well) that’s not the case these days. Between SAQs and IRRs and multiple levels of review, there is essentially no chance for an auditor to exercise judgment. What are the implications of this top-down quality control regime?
It is common wisdom that most defense contractors and, indeed, the entire civilian workforce of the Defense Department are in the midst of a human capital crisis. The majority of employees are retirement-ready now.
Soon, the senior, experienced, auditors who are capable of exercising judgment without multiple levels of oversight will retire and the next generation of auditors will take their place. What skills and knowledge will the next generation bring to the table?
Mr. Loeb wrote in his article—
Sadly, given the direction of DCAA, it does not appear that it is training its auditors in the art of auditing and sifting through records to find overcharges. Rather, DCAA is developing a generation of auditors that understand the art of working paper documentation and having team discussions.
The time is now for DCAA to develop its next generation of auditors. And yet, rather than seek to develop auditors capable of exercising discretion and professional judgment, the agency seems to have chosen to develop auditors who are masters of risk assessments and working papers. And we think that’s a damn shame.
DCAA: time to change direction. Right now, before it’s too late.
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