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Should DCAA Be Disbanded? The Clock is Ticking …

Nick Sanders
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“Should DCAA be disbanded?” This is a question we examine from time to time on this blog—the most recent example being this article. In the article, published about a year ago, we surveyed a number of commenters—some with more knowledge than others—and concluded with the following assessment:

So where does the DOD’s premier audit agency go from here? It has a growing backlog of unfinished audits, a demoralized workforce, and customers who are turning to outside audit firms (and paying more) in hopes of getting more timely audit reports. What should be done?

Look, we make our living dealing with DCAA auditors and helping contractors successfully pass DCAA audits. The status quo keeps us busy and puts money in our pockets. But in all intellectual honesty, we are forced to say, this agency needs to immediately turn a 90 degree course correction. If it can’t do that, then we think another agency needs to take its place.

Since then, we’ve been nibbling around the edges of the question, asserting from time to time that the new DOD Pricing Center has, as its primary goal, the objective of eliminating the need for DCMA Contracting Officers to rely on DCAA “forwarding pricing” audits. We think—and we’ve heard our supposition confirmed by senior DCMA leadership in so many words (without anybody expressly saying so)—that DCMA wants to be able to evaluate and negotiate contractors' cost proposals and forward pricing rate proposals without DCAA’s involvement.

We told our readers about Section 805 of the FY2012 National Defense Authorization Act, which requires the DCAA Director to submit a (new) annual report to Congress. That new report will contain a considerable amount of metrics and statistics, the kind of stuff that we subsequently opined “could be very useful for those assessing DCAA’s management direction.”

We also spent considerable word count acquainting readers with the recent report issued by the House Armed Service Committee’s Panel on Business Challenges within the Defense Industry. That report contained quite a few recommendations based on input from a number of sources (including defense contractors themselves). Many of the recommendations seemed designed to address perceived DCAA and DCMA shortcomings. For example—

  • Congress should direct the Secretary of Defense to increase oversight of the management, functionality, and operations of DCAA and DCMA to reduce the backlog of audits, and to improve the audit agencies’ relationship with the industrial base.

  • Congress should direct the Secretary of Defense to examine the Department’s organizational structure and assess the feasibility and advisability of reorganizing the Department to realign DCAA and DCMA to improve communications, audit performance, oversight, and management.

That’s pretty heady stuff. But perhaps the more telling recommendation is the following—

  • Congress should examine other alternatives, to include the establishment of a self-regulatory option, to providing auditing, accounting and advisory services regarding contracts and subcontracts and examine the feasibility of using such alternatives for the DIB to potentially reduce or eliminate many of DOD’s internal audit organizations while ensuring compliance with statutory, regulatory, and contractual requirements.

But that’s not all. We have seen several other, related, articles and op-ed pieces that suggest policymakers are considering a significant restructuring to DCAA.

This National Defense Magazine blog reviews the HASC report and reports—

Burdensome regulations and arcane auditing requirements are driving many companies to quit the defense market, and are deterring new suppliers, the report said. As a result, the panel will be asking the Pentagon to study options for outsourcing auditing responsibilities to independent agencies. …

The auditing reforms that [Representatives] Shuster and Larsen propose are likely to spark controversy, as they are a radical departure from the way the Defense Contracts Auditing Agency does business. But Shuster said he believes a FINRA-like model — where a financial industry-funded agency is in charge of enforcing regulations — could be applied to defense in order to relieve an overstretched DCAA work force. This approach would still allow for high-level government has oversight, he said. An outside group can ‘do things more efficiently,” said Shuster. ‘We are going to have to study this.’

Larsen cautioned that outsourcing auditing functions does not mean backing off anti-fraud initiatives. But when he heard that a company four years ago spent three days tracking down $58 he knew something was wrong. ‘That’s the other extreme,’ he said. ‘Perhaps there’s a happy medium.’ …

The defense contracting and auditing environment is as bad or worse than it was 10 years ago, said Shuster. ‘Program managers are more risk-averse than they were 10 years ago,’ he said. ‘And I don’t know that we can legislate that.’

The foregoing blog is published by an defense-related industry association (the NDIA) and its anti-DCAA reportage might be discounted on that basis. But we found another source, the Center for American Progress, whose progressive (and presumably liberal) credentials are above reproach. Here’s what they had to say about this issue—

Three years ago, as many as 30,000 audits of government contracts a year were conducted annually. That number has now plunged to 10,000 audits per year despite the fact that the dollar value of contracts issued has remained steady. The time taken to check up on proposed prices before a contract is awarded now stands at 72 days, up from 28 days only two years ago. …

DCAA responded to [GAO’s] criticisms by emphasizing additional work documentation, but now questions are being raised if the agency isn’t placing too much emphasis on following questionable practices that add little to the quality of audits, to the detriment of conducting hard hitting audits. ‘In a time of scarce government resources and an inadequate contracting workforce, the government must evaluate where it is most vulnerable and focus resources where they can most effectively protect taxpayer dollars,’ said Sen. Claire McCaskill (D-MO) at a recent congressional hearing on fixing the existing auditing system.

In response to the critical GAO report and Congressional hearings, the Defense Contract Audit Agency has attempted difficult shifts in its bureaucratic culture over the past three years. However, many believe that these changes have not been for the better, but have actually lessened oversight of government contractors. In particular, DCAA now seems to be focusing on fewer contracts, and this is clearly not good enough.

The foregoing was essentially a preface to the report on DCAA issued by the Center. The report “profile[s] the different reasons audits by the Defense Contract Audit Agency sometimes fail, and what’s been done to correct these failures in the past.” One of the recommendations contained in the report is to “evaluat[e] whether the Defense Contract Audit Agency should report directly to Congress rather than to the Pentagon as is presently the case.”

You can find the Center’s report right here. It contains little that’s new, but does provide some fascinating behind-the-scene details. For example—

Shortly before he retired, Bill Reed was fond of showing his staff a PowerPoint slide that claimed that the cost of a DCAA audit was $116.24 per hour in 2006 compared to the Big Four audit firms such as KPMG and Price Waterhouse, which billed an average of $162.81. But in reality, DCAA’s costs were lower for one simple reason—it had far fewer qualified auditors than the Big Four allowing it to pay lower salary costs. In 2011 Patrick Fitzgerald, the director of DCAA, estimated that just 28 percent of his staff were qualified CPA’s compared to a Big Four rate of closer to 50 percent.

The Defense Contract Audit Agency is also unusual in that many of its managers and supervisors are not qualified CPAs, yet they are required to sign off on audits, a practice that would be illegal in the commercial world. This practice has caused dissent in the ranks of the staff that are qualified to sign off on audits in public practice but prohibited at the agency, sending a signal that loyalty was promoted over competence.

‘By permitting non-CPAs to manage CPAs in audit work, DCAA culture has turned the established auditing profession on its head,’ a 20-year veteran of DCAA in northern California says. ‘It is the equivalent of a novice directing a journeyman on how to build a house or conduct any other trade or profession that has developed and refined its purposes and standards over the centuries.’ He estimated that in one year audits of $2.8 billion of the $4 billion were put under the responsibility of non-CPAs supervisors at the Peninsula branch office just south of San Francisco.

The report concludes—

Three years ago the Defense Contract Audit Agency came under fire for an obsession with getting through too many audits, too quickly. ‘We’re talking about serious sirens, bells and whistles all going off at the same time,’ said Sen. McCaskill at a 2008 hearing in Congress. ‘I think the system is failing. The culture is broken, the performance metrics are broken, and the oversight is broken.’

Today the opposite is true—contractors are now complaining about the auditors taking too long to determine prices. It is clear that the federal government needs more professionally qualified auditors to get the job done. ‘DCAA cannot always accommodate non-Department of Defense requests for audit support,’ said Thomas Skelly, the director of budget services at the U.S. Department of Education, in a recent congressional testimony. ‘Obtaining audit support from a non-governmental firm can be costly and time-consuming.’

While we do not agree with all (or even with many) of the report’s recommendations, we think it supports our assertion that DCAA is coming under scrutiny from many diverse stakeholders. We think it supports our assertion that DCAA is moving into the cross-hairs of a number of powerful parties, who may well seek to significantly restructure or even eliminate the audit agency altogether.

As if to reiterate and strengthen our assertions, Government Executive published this story on the testimony of Pratap Chatterjee (the author of the Center’s report) before the Senate Homeland Security and Governmental Affairs Ad hoc Subcommittee on Contracting Oversight. The story quoted Chatterjee’s testimony as follows—

Additionally, Chatterjee said, because most contracts come from Defense, the Defense Contract Audit Agency handles the lion’s share of all federal contracting audits. Since DCAA is nestled within the Pentagon, it is unable to maintain proper independence when making decisions about the fiscal responsibility of military contractors, he said.

Chatterjee would instead like to see a new Federal Contract Audit Agency, which would reside outside the Pentagon, allowing it to maintain independence when attempting to recover taxpayer dollars contractors spent improperly. However, he did not formally recommend such an agency in his report.

We think we’ve made our point.

 

 

DOD Reveals How Nonmajor Contractors Are Being Impacted by CAS 412/413 PPA Harmonization

Nick Sanders
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The “day of reckoning” that we predicted nearly two years ago has arrived.

The Honorable Shay Assad, DOD Director of Pricing, issued a memo on March 27, 2012 providing guidance to DCMA Contracting Officers on how to handle the recently enacted changes to Cost Accounting Standards (CAS) 412 and 413.

And Mr. Assad’s memo confirms what several industry insiders had long suspected: there is a class of government contractors who will miss out on the equitable adjustments to which they would otherwise be entitled if there were any real equity to be found in CAS administration. They will have to comply with the revised CAS requirements, but they will not be able to claim contract price adjustments for any increased costs associated with the revisions.

Let’s first define the class of contractors who are affected by the CAS 412/413 revisions. The affected contractors have defined-benefit pension plans. And they are required to comply with CAS 412 and 413 because they are either (a) fully CAS-covered or (b) subject to the FAR Cost Principles (namely the Compensation Cost Principle found at FAR 31.205-6(j). Let’s be clear: the majority of government contractors do not have defined-benefit pension plans; instead, they have defined-contribution pension plans. But enough do have such plans that the CAS revisions, intended to “harmonize” the CAS with the requirements of the Pension Protection Act of 2006, will create a fairly large ripple in the contract costs paid by DOD. Those contractors will be entitled (pursuant to the CAS administration regulations) to submit a “Request for Equitable Adjustment” (REA) that will make them whole from the cost impacts on their existing contracts from implementing the new pension cost accounting rules.

Now let’s define the class of contractors who will be screwed over by the CAS revisions. These contractors have defined-benefit pension plans but they are not subject to full CAS coverage. Instead, these contractors are required to comply with CAS 412 and 413 solely because they are performing on contracts that contain the Allowable Cost and Payment Clause (FAR 52.216-7), and the allowability of their pension costs is conditioned on complying with the requirements of CAS 412/413, because the FAR Cost Principle at 31.205-6(j) requires that they do so. The Assad memo confirms that these contractors will not be entitled to submit REAs to be made whole from the cost impacts on their existing contracts from implementing the new pension plan cost accounting rules.

Don’t believe us? Here’s the memo in question.

The memo states that, effective February 27, 2012, the Cost Principle at 31.205-6(j) “will be construed to reference the new CAS 412 and 413,” but “a cost-type contract awarded before February 27, 2012 that is not fully CAS-covered, will not have the calculation of the costs changed for the life of the contract…” (Emphasis in original.) The rationale for this approach is that “the Cost and Payment Clause specifies the FAR/DFARS cost principles in effect on the date of contract award as the standard for allowability.” (Emphasis in original.)

Now, in fairness we have to acknowledge that the number of contractors who will be (a) impacted by the CAS 412/413 revisions and (b) are not subject to full CAS-coverage is not that large. In fact, we have no ability to estimate whether there are scores of screwed-over contractors, or perhaps only one or two. But we bet if you are one of those unlucky contractors, you know who you are and are steaming mad about this situation.

The Assad memo contains a lot of meat regarding how the impacts of the CAS revisions will be implemented by the affected contractors. It discusses impacts to Forward Pricing Rates, how the REAs will be processed, an extension of the normal 60-day advance notification rule for changes to contractors’ Disclosure Statements, and how impacts by subcontractors are to be handled by the Primes. That’s all important stuff and if you are an affected contractor you need to understand all that. The rest of you won’t care, nor should you.

But what caught our eye was the treatment of the nonmajor contractors who are impacted by the rule but have no right of recovery because they technically are not subject to the CAS themselves. We have long argued that it makes little sense to exempt contractors from the burdensome requirements of CAS coverage, only to condition cost allowability on compliance with certain aspects of the Standards. And now, once again, we see the inequity of that situation.

Sorry guys, you’re out of luck on this one.

 

 

HASC Tells DOD to “Improve the Defense Business Environment”

Nick Sanders
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Change
Over the course of three or so years, we’ve published several articles discussing our view of the relationship between the Department of Defense and the contractors that comprise the “defense industrial base” (DIB).

We wrote in this article that –

The Pentagon’s policy problem may be described as one of ‘defense industrial policy’—i.e., how to effectively manage the defense industrial base to cut the costs of weapon systems, while at the same time preserving critical skills unique to the aerospace/defense industry and making sure key strategic suppliers don’t fold-up their tents and sneak away in the night, leaving landlords looking for back rent money.  It’s not a skill that the Pentagon historically has been known to possess.

Our most recent article is right here. In that article, we opined that—

If the DOD and its industrial base were in a marriage, we think it would be fair to say that we are long past the honeymoon phase. We think the current relationship might be fairly characterized as a ‘separation.’

But of course we’re not the only source of concerns with the relationship between DOD and its contactors. In fact, many others, ranging from Congressional committees to the Defense Science Board itself, have voiced similar concerns. The latest source is the House Armed Services Committee (HASC) and its Panel on Business Challenges within the Defense Industry, who just published a 114-page, comprehensive, survey of concerns with the state of DOD’s business environment—including many recommendations on what to do about those concerns.

The HASC has a history of influencing legislation affecting DOD and its contractors. For example, when the HASC Committee’s Panel on Defense Acquisition reform published its final report in April, 2010, it sparked reforms that made their way into H.R. 5013—including a little ditty about requiring DOD to establish criteria for the reviews of contractor business systems. And we know how that turned out, don’t we?

So when this HASC Panel issues a report, you need to review it closely. You may be reading the future of Defense contracting.

The current HASC Panel’s report, entitled “Challenges to Doing Business with the Department of Defense,” can be found here.

We like it. We like it a lot.

We don’t like it just because we agree with it. In fact, we don’t agree with every finding or with every recommendation. For example, the ones about Small Business don’t really float our boat, if you know what we’re saying. We like the report because it includes lots of input from members of the actual DIB. You know, the folks most affected by DOD policies? Yeah, the contractors.

We like the fact that the Panel gave industry a number of opportunities, via eight separate “industry roundtables,” to discuss their impressions of DOD policies—including opinions of DOD culture, DCAA audit policies, export controls, and many other facets of DOD contractor administration and oversight. Because the Panel members went out of their way to get lots of industry input, this document differs from others we have read in the past, in that it is more accurate and more thorough.

Now, we’re not going to rehash the entire report. You should go read it for yourself. But here are some of the highlights, as we see them.

First, the document is organized into five parts, as follows—

Part I The Defense Industrial Base

Part II The Use of Mandates and Incentives to Shape the Defense Business Environment

Part III Department of Defense Acquisition Environment

Part IV Barriers to Transitioning Technology

Part V Navigating the Defense Acquisition System

And there are twelve Appendices, many of which convey important information that was only alluded-to in the body of the document itself. We’ll cover that bit at the end of this article.

Each Part contains discussion, quotes from testimony, findings, and recommendations. We’re going to start with some of the quotes (because we like them).

“We need two things. We need budgets that produce programs that are profitable and that reach out to the talent we need, and we need an industrial base strategy that gives direction and predictability that the industry leaders need to make sound strategic business decisions.”--Fred Downey, Aerospace Industries Association

“There is no doubt that the DOD acquisition community is very risk-averse, and we have to find ways to meter that risk-aversion and reduce the bureaucracy and leverage this critical sector of our economy to meet our national security requirements.”--Mr. Joel L. Johnson Former Vice President, International Aerospace Industries Association of America, Inc.

“Contracting officers are often overworked and under-equipped. Collaboration between program and contract staff is poor. And, there is a lot of confusion on what Government can say to industry and when.”--Dr. Allan V. Burman President, Jefferson Solutions

“We don't have the experience base in our defense acquisition workforce today. And if there is only one thing that this panel does, you have got to reinforce the need and the efforts to rebuild the capability of that workforce, because we rely on their judgments in making those contracting decisions.”--David J. Berteau Senior Vice President and Director of International

Security Program, Center for Strategic and International Studies

“There are three big challenges facing the industry today. The first is the impact of the planned reductions and the budget reductions that are under way. The second is the importance to recognize that industry today, unlike industry in the past, has to remain competitive in the global financial markets. We can no longer rely on just the Federal Government to provide the funding for these companies. They have got to be competitive financially. And the third is where innovation is coming from in the 21st century, because we have a history of relying on defense contractors to come up with innovation.”--Mr. David J. Berteau Senior Vice President and Director of International Security Program Center for Strategic and International Studies

“Long procurement lead times typically encountered at DOD are also a barrier, particularly for commercial companies. They are unaccustomed to such long lead times and usually operate in environments using agile development in incremental models for short cycles of 6 months to a year. The DOD's 24-or-more-month lead times are not conducive to attracting the innovation these companies could bring to bear.”--Trey Hodgkins Senior Vice President

National Security & Procurement Policy TechAmerica

“Contract auditors measure their success by the numbers of costs that are questioned and the amount of those questioned costs that are sustained. What they really ought to measure their success by is the timeliness and value of the ultimate delivery of the results of those contracts.”--Mr. David J. Berteau Senior Vice President and Director of International

Security Program Center for Strategic and International Studies

“If there is anything more mysterious than FAR and DFARS, it is ITAR. And if there is anything that small companies know less about than FAR and DFARS, it is ITAR.”--Mr. Joel L. Johnson Former Vice President, International Aerospace Industries Association of America, Inc.

The executive summary of the report provides an illustrative example of the Panel’s findings. It said (in part)—

DOD has, in some cases, outsourced program management and divested itself of critical skills that are difficult to develop – contracting officials, cost estimators, and systems engineers. This reliance on private contractors can create a potential conflict of interest and blur the lines between what work must be performed by federal employees and what work is permitted to be performed by private contractors. The Panel notes that just as it takes many years to develop a military leader capable of commanding at the senior ranks of the operational force, it takes a similar amount of time to develop an acquisition professional with the knowledge, skills, and experience needed to manage large defense acquisition efforts. In addition, the Panel found that constantly changing regulations leads to unnecessary complexity, confusion, and poor execution, only furthering challenges for the acquisition workforce. The Panel also found that the DOD acquisition system lacks sufficient emphasis on small business participation.

The Executive Summary also stated—

The Panel also found that a number of hurdles make it challenging for companies to compete for defense contracts. The plethora of regulations specific to government and defense contracting dissuades many companies from competing for government contracts. The acquisition process is often bureaucratic and rigid, with insufficient flexibility to allow appropriate application of management, oversight, and monitoring of small businesses. The defense business environment is also complicated, and some argue hindered, by current export control requirements. The high rate of personnel turnover in government acquisition personnel, from program managers to Defense Contract Audit Agency (DCAA) auditors affects the quality and consistency of policies. Oversight and management agencies such as DCAA are under-resourced and lack consistently trained, skilled personnel, hampering the ability of these agencies to provide appropriate contract oversight and management. In addition, a backlog of audits has caused DCAA to prioritize work on high dollar contracts, leaving unresolved many of the open audits of small businesses who are holding small dollar contracts.

We want to focus on Part V of the report—“Navigating the Defense Acquisition System.” In this section, the report stated—

Contracting with the federal government is a highly regulated process governed by a myriad of statutes and regulations. These regulations govern such issues as how DOD solicits, negotiates, and awards a contract; what costs DOD will reimburse and how contractors must account for those costs; the information systems used by contractors; and how contractors must comply with rules regarding such socio-economic goals as affirmative action, trafficking in persons, and maintaining a drug-free workplace. The complexity of the regulations can make it difficult for some companies to enter the government contracting arena. As one observer noted, ‘contracting with the federal government is a highly regulated process with many traps for the unsuspecting.’ …

A number of analysts argue that the complexity of the acquisition system dissuades a number of companies from competing for government contracts.179 Small and midsize businesses, which often do not have the resources to hire in-house counsel or experts in government contracting, may find government contracting too difficult to navigate. Not only is the defense acquisition process complex, defense acquisition rules are constantly changing, making it challenging for companies to keep up with changes that can impact their business. …

The ever-changing nature of the laws and regulations governing defense acquisitions can make it difficult for companies with limited resources to stay abreast of the changes that could impact their contracts of business strategies. The extent of legislative and regulatory change has fueled a cottage industry dedicated to helping businesses stay informed of the most recent changes. Every year, books, seminars, and webinars are aimed at keeping business owners abreast of changes that could affect their business. Some analysts believe that companies may shy away from government contracts out of concern that the contracting rules could be changed in the middle of the game, making it more risky to pursue a business strategy geared towards winning government contracts.

The report also addressed “Management, Oversight and Audit Agencies.” In this section, the report stated—

In addition to the financial cost of complying with some regulations, the numerous audit and oversight bodies with jurisdiction to investigate DOD contracts may dissuade some companies from competing for DOD contracts. These oversight bodies include the Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA), GAO, Inspectors General (including in some cases the Special Inspector General for Iraq Reconstruction and the Special Inspector General for Afghanistan Reconstruction), and Congress itself in the form of hearings. On December 13, 2011, the Panel met with the Director of the DCAA, Patrick Fitzgerald and the Director of DCMA, Charlie Williams for a briefing to discuss challenges within the contracting community in the DOD. Over the past two decades, both the DCAA and DCMA have substantially decreased staffing while DOD spending and contracting increased exponentially. DCAA’s staffing has decreased by approximately 40% since 1990 while workload has increased approximately 140%. GAO officials reported in recent congressional testimony that DCMA’s workforce decreased from an estimate of about 24,000 in 1990 to a low of about 9,300 in 2008, that a rebuilding effort was underway but may require increased funding to sustain. Both Mr. Fitzgerald and Mr. Williams emphasized the need for regrowing their workforces to meet the demand within the Department and are making strides to do so.

One method of checking the effectiveness of DOD audit organizations is through a peer review process. According to the Department of Defense Inspector General, DCAA has not had an audit organization peer review in approximately five years. The DLA audit organization failed its peer review and some observers are concerned that defense audit organizations will also fail peer reviews.

The report offered many recommendations. (Remember when we told you that HASC report recommendations have a habit of becoming law?) Among the recommendations that caught our attention were the following—

  • Congress should direct the Secretary of Defense to increase oversight of the management, functionality, and operations of DCAA and DCMA to reduce the backlog of audits, and to improve the audit agencies’ relationship with the industrial base. The Panel is aware that DCAA executives have met with a variety of industry associations over the last few years to further ensure that they have effective communication with their contracting community. These meetings and other forms of engagement with industry should be continued into the future.

  • Congress should direct the Secretary of Defense to examine the Department’s organizational structure and assess the feasibility and advisability of reorganizing the Department to realign DCAA and DCMA to improve communications, audit performance, oversight, and management.

  • Congress should direct the Secretary of Defense to establish a small business advocacy office and a contract close out unit in DCAA and DCMA to ensure that the needs of small businesses are safeguarded and that all contracts are closed out in a timely fashion. Closing out contracts in a timely fashion is a key element in having auditable financial statements.

  • The Directors of DCMA and DCAA should ensure coordination between their agencies and the SBA when conducting audits that include factors of interest to or duplicative of reviews conducted by SBA. For example, SBA’s Commercial Market Representatives visit large contractors with subcontracting plans to assess compliance with the subcontracting plan. However, DCAA also looks at subcontracting as part of its cost audits, especially when subcontracting performance is related to a company’s award fee. Furthermore, DCMA also reviews subcontracting performance and processes. These three entities should coordinate their reviews to more efficiently conduct audits and to potential reduce the number of audits performed.

  • Congress should examine other alternatives, to include the establishment of a self-regulatory option, to providing auditing, accounting and advisory services regarding contracts and subcontracts and examine the feasibility of using such alternatives for the DIB to potentially reduce or eliminate many of DOD’s internal audit organizations while ensuring compliance with statutory, regulatory, and contractual requirements.

We think those are some very interesting recommendations, don’t you agree?

Before we conclude this rather long article, we want to discuss some of the “industry roundtable” comments regarding DCAA and DCMA. These comments didn’t make it into the body of the report; however, they may provide some background information as to why the Panel made some of the foregoing recommendations. Here are some quotes from those appendices.

  • Several participants indicated that continued and significant backlogs at DCAA and the complexity of incurred cost audits tend to hold up contract closeouts. A comment was made that one person was needed full time simply to support compliance/audit requirements and that it was difficult to self-audit.

  • Comments were made that lengthy contracting periods (3-5 years) on firm-fixed price contracts require industry to “guess” on costs to procure raw materials for the period of performance. While larger industry may be able to absorb price fluctuations, many small business do not have the cash flow to do so. Industry participants indicated that commercial sales contracts use a price index and/or review at the 2- and 4-year points to address this issue and suggest that DOD and the defense industrial base would benefit from adopting that model.

  • One participant cited an example of their company still working with DCAA to try to close out an audit from 2006. He mentioned that the environment with DCAA is very hostile and it appears as if they simply do not want any more suppliers. He went on to reference a 2007 DOD Directive that gave DCAA authority to subpoena information if a contractor failed to respond to a request in less than 3 days.

  • Another participant felt that DCAA is not satisfied when provided sufficient documentation – they want to know “why” a decision was made even when it was in scope of the contract and fully justifiable. He claimed that if one tried to question DCAA or otherwise disagree with their findings, the auditors threaten to broaden the scope of the audit to other contracts.

  • It was also stated that DCAA auditors used to sit down at the table with the business and go over the books, allowing for a dialogue and exchange of information that would not only clear up any audit concerns quickly, but would also help the business to learn the audit process so that they could do better in the future. It was noted that auditors seem to no longer do that and instead appear to be solely on a search for any bit of information that might cast a negative light on the business.

  • A participant felt strongly that DCAA needs to exist and plays an important role in oversight, ‘even as much as we [industry] hate spending 3 days to find $58 from 4 years ago.’

  • Several participants expressed frustration with DCAA’s failure to close out incurred cost audits in a timely manner. One company was last audited in 2005 and the audit was still open, costing the company an estimated $3-4 million in lost business over the last six years. The participant noted that the contracting officers requested indirect rate audits but DCAA was non-responsive and the company was prohibited from moving forward from a successful SBIR Phase II contract because the audit was still open. It was suggested that the Panel should consider mandating maximum turn-around times for audits such as 60 days for rate audits, and 6 months for incurred cost audits. It was also suggested that contracting officers should be allowed to issue letter contracts so that they can proceed with a contracting action while an audit is still open and make adjustments, if necessary, after the audit is closed. Another participant felt that turnover and inexperience with DCAA auditors was part of the problem. It was stated that every year they get a new auditor and they have to start all over because the new auditor uses different processes and has different audit requirements. In order to address this issue, it was suggested that DCAA should be required to report performance metrics in order to highlight regional shortcomings and more uniform [military member] involvement at DCAA was needed to balance the inexperienced civilian workforce.

  • A participant commented that DCAA is underfunded and is very slow to close out a contract. It was also stated that waiting nine months on DCAA [to complete an audit] can put a small business out of business.

  • A participant commented that innovative or creative program offices can ‘get slapped upside the head by leadership’. It was implied that more flexibility needs to be given to program offices in order to deal with many of the issues in the acquisition process.

  • A participant who was working to become a prime contractor commented that DCAA and DCMA were working to see which of them could make it harder on industry. It was stated that they have too many branches and that none of them talk to any of the others.

  • Another participant noted that DCAA had become more adversarial over the last two years and they are becoming increasingly inefficient. Frustration was expressed over their audit methodologies even when dealing with a known, proven product and a known supplier.

  • A participant cited grave challenges with DCAA and indicated that his business was at risk due to actions of a prior employee and DCAA audit response.

  • A participant noted that each of the military services do things very differently even when procuring the same item. An example was cited that in buying the same product the Army used a FAR Part 12 (commercial item) contract and the Air Force used a FAR Part 15 (negotiated acquisition) contract; one service considered the procurement to be a services contract and the other service looked at it as an end-item procurement. It was suggested that DOD needs to development an enterprise wide approach to contracting to improve efficiency.

According to the report, the Department of Defense reacted to the foregoing comments with the following comment of its own—

The report contains a summary the roundtable discussions held at different locations throughout the United States. These summaries contain several references to DCAA. Many of the references to DCAA in the roundtables were issues that reflected negatively on the Agency (i.e., audits taking too long to complete, backlog of incurred cost audits, issues with effective communications). If the Panel thought it would be productive, the Agency would like to follow-up of the issues described in the report to ensure these concerns have been resolved.

Readers, we have devoted considerable wordcount to this HASC report. This article is roughly four times as long as our average. From that fact, you may be able to glean that we view this report as extremely important. We very much hope that recent history continues and the Panel’s recommendations find their way into future legislation … and from there into the DOD’s acquisition regulatory framework.

 

 

Having Solved All Other Acquisition Problems, DOD Focuses on Healthcare Costs of Ineligible Dependents

Nick Sanders
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In 2004, when confronted with the procurement scandal caused by the illegal behavior of Darlene Druyun and the leaders of The Boeing Company, then Secretary of Defense Donald Rumsfeld famously opined that the root cause was “very little adult supervision” over Ms. Druyun’s decisions at the Pentagon. Rumsfeld was quoted as saying—

‘So what you had with all these vacancies over a 10-year period . . . the only continuity was that single person, who's now pled guilty and is going to go to jail. … When you have that long period of time, with . . . no one above her and no one below her, over time I'm told that what she did was acquire a great deal of authority and make a lot of decisions, and there was very little adult supervision.’

We were once again reminded of Rumsfeld’s opinion of Pentagon leadership when the Defense Contract Management Agency (DCMA) issued a guidance memorandum on March 23, 2012, concerning “Unallowable Costs for Ineligible Dependent Healthcare Benefits.”

We’ve written about this topic several times before, most recently right here. That article discussed a policy memo issued from Mr. Shay Assad (Director, Defense Pricing) to two colleagues: the Director of DCAA and the Director of DCMA. We had some problems with Mr. Assad’s memo, and we weren’t particularly shy in expressing them. In that article, we concluded as follows—

In our view, this has always been ‘much ado about nothing’ and we are sad that the DOD policy-makers can’t move on to something more important, like contractor defined-benefit pension costs.  Like a dog with a bone, they keep worrying and worrying at it.

Maybe they should just bury this particular bone in the ground for a while.  We’re quite sure there are more meaty issues around to deal with.

Perhaps it’s just the normal policy flow-down, but DCMA’s guidance memo, issued a month after Mr. Assad’s memo, brought back the feelings of amazement, frustration, and pity that we feel every time this issue is dealt with by DOD leadership.

Really? This is how they choose to spend their time? This minor ankle-biter of an immaterial annoyance, this piffle, this nothing—this is the top priority right now in contractor oversight? Have Messrs. Assad, Williams and Fitzgerald nothing better to do with their time? (Hint: we believe they do.)

Certainly taxpayers deserve far better than this.

But let’s pull the plug on the ranting. (Just for a minute: we’ll get back on our soapbox in just a paragraph or so.) Let’s take a look at this latest policy memo and see what it tells DCMA Contracting Officers to do with their FAR-given “independent business judgment.”

According to the DCMA policy memo, DOD “will continue to disallow ineligible dependent healthcare benefit costs.” We’ve discussed the various theories as to why those costs might or might not be allowable, and whether they did or did not affect pricing of DOD contracts, and whether inclusion of such costs did or did not result in “defective pricing” under TINA. (See our previous articles on this subject.) So we’ll not rehash those theories here. Suffice to say, we think the DOD’s position on allowability has a foundation that’s on very thin ice.

Moreover, we continue to wonder with some trepidation at what this direction portends for the future of DOD oversight. We are concerned by the rather unusual phenomenon of DCMA Headquarters directing Contracting Officers to find a certain category of costs unallowable, without permitting those COs to weigh the individual facts and circumstances of each contractor’s situation. Either the COs have authority to make the decision, or they do not. If they don’t have the authority, then let’s all stop pretending that they do. Let’s have Charlie Williams, Jr. make all contracting decisions via email or some other electronic medium that facilitates the kind of autocracy that seems to be developing at Fort Lee.

The DCMA policy memo magnanimously clarifies that penalties will not be assessed on the costs that HQ has determined to be unallowable. Too bad it’s a false concession—i.e., DCMA is conceding something that is a certain loser in Court. There is no way that these costs are “expressly unallowable” and subject to penalty. And DOD knows it—which is why they have decided not to pursue penalties … at this time.

The policy memo notes that the Defense Department will pursue “application of penalties under FAR 42.709” when “DFARS is amended to make future ineligible dependent health care benefit costs explicitly expressly unallowable.” Let’s explore that phrasing.

The Shay Assad memo stated that it was DOD’s “intention to amend the DFARS to make future ineligible dependent health care benefit costs expressly unallowable and thus subject to penalties.” Okay. We had some choice words about the decision to solve, by regulatory rule-making, a problem that Mr. Assad himself admitted had been “largely corrected” and was no longer a problem. We thought then, and continue to think today, that it is a colossal waste of time and resources.

But notice that the current DCMA memo takes a bit of a different tack. While Mr. Assad discussed an “intention,” the DCMA memo assumes that intention is a done deal. In other words, DCMA is telegraphing that it expects to ram the rule through the public comment process and ignore any public input that might point out what a colossal waste of time and resources this whole issue is. Obviously, we’re speculating here without much supporting evidence. But you wait and see what happens with the upcoming DFARS Case on this issue. See if we’re not being a little prescient here.

One final thing.

DCAA has asserted that inclusion of the costs of ineligible healthcare dependents is a noncompliance with Cost Accounting Standard (CAS) 405. We disagree with that assertion. The DCMA policy memo continues the DCAA charade, directing DCMA COs to “obtain a cost impact proposal from the Contractor identifying the amount of the unallowable ineligible dependent health care costs that were included in indirect cost proposals for all open years.” Upon receipt of that cost impact proposal, the CO is directed to “negotiate the amount of unallowable ineligible dependent health care cost or when negotiation is not feasible, make a written decision that states the sum certain is unallowable.”

Readers, you must understand that the costs involved here generally are very minimal. It’s pretty clear that not more than two or three percent of a contractor’s total population is actually ineligible for healthcare coverage. But more importantly, jn some cases, there is almost no additional cost associated with the ineligible dependents. For example, if you already have family medical coverage for five dependents—one of whom is ineligible—the difference in cost between four and five dependents is truly de minimis. In other words, this entire issue is a “tempest in a teapot” and not worthy of any more time spent trying to solve it.

SecDef Rumsfeld thought that inadequate “adult supervision” led to a situation where one DOD acquisition official had too much authority and too little oversight. As a result of the lack of adult supervision, several people went to prison and several major defense programs were significantly impacted. One would have hoped that DOD leadership would have learned from that situation, and taken steps to implement better reviews over the decision-making of such officials.

Yet here we are, eight years later, faced with a similar lack of adult supervision. We have two or three members of the Senior Executive Service (SES) who have embarked on a course of action that wastes the time, money, and resources of all involved. They have created a problem that exists only in their own minds, and refuse to let it go.

Where is the adult supervision at DOD?

 

 

George Lucas Does DOD’s Business System Rule

Nick Sanders
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Our readers know that Lockheed Martin was the first company to be hit with payment withholds under the new DFARS Business System rule. A professional colleague of ours (whom we shall call “Jay-P”) was so moved by LockMart’s plight that he created a little scene, set in the Star Trek universe, of how the payment withhold was implemented down at the company’s Fort Worth site. It was great stuff—funny and sad and ironic, all at the same time. We liked it—only we thought Jay-P set his scene in the wrong science fiction universe. We thought he should have asked George Lucas to set the scene in the universe of Star Wars. And so we started dreaming of how George Lucas might have handled the new DFARS Business Systems rule ….

Princess Leia Contracta:                   Darth Fitzgerald. Only you could be so bold. The Senate will not sit still for this. When they hear you’ve disapproved –

Sith Lord, Darth Fitzgerald:                Don’t act surprised, Your Highness. You weren’t on any mercy mission this time. We know you only want profit and more profit. Several billing errors were transmitted from this site to DFAS. That’s a significant deficiency. I want to know how they happened.

Leia Contracta:                                    I don’t know what you’re talking about. Those “errors” were the result of delays by the Contracting Officer in reporting funding in MOCAS.

Darth Fitgerald:                                    You are part of the defense industry and a crook! (To the StormAuditors) Issue that report! (They do so.)

StormAuditor Daine Jir

 (to Fitzgerald):                                     Issuing that report is dangerous. If word of our methodology gets out, it could generate sympathy for her in the FAR Council.

*****

Later, Old Ben-Kenobi and Luke Skywalker find an R2 unit and play a hologram message from Princess Leia Contracta.

Leia Contracta:                                    General Kenobi. Years ago, you served my father in the Acquisition Reform Wars. Now I beg you to help me in my struggle against the DCAA. I regret that I am unable to present my request to you in person, but my accounting system has fallen under attack and I'm afraid my mission to bring you to Washington has failed. I have placed information vital to the survival of the defense industrial base into the memory systems of this R2 unit. My attorney will know how to retrieve it. You must see this droid safely delivered to him at the Pentagon. This is our most desperate hour. Help me, Obi-Wan Kenobi. You're my only hope. [looks to the side quickly, then crouches to end the message]

Ben Kenobi:                                          [to Luke] You must learn the ways of the FAR if you're to come with me to the Pentagon.

Skywalker:                                            The Pentagon? I'm not going to the Pentagon. I've got to go home. It's late, I'm in for it as it is.

Ben Kenobi:                                          I need your help, Luke. She needs your help. I'm getting too old for this sort of thing.

Skywalker:                                             Listen, I can't get involved! I've got work to do! It's not that I like the Bureaucracy, I hate it, but there's nothing I can do about it right now. It's such a long way from here.

Kenobi:                                                  That's your uncle talking. [pleading] Learn about the FAR, Luke.

Skywalker:                                             Look, I can take you as far as Fort Worth. You can get a transport there to Bethesda or wherever you're going.

Kenobi:                                                  [resigned] You must do what you feel is right, of course.

*****

Later, in the DCAA Branch Office Death Star:

StormAuditor:                                       And until this Branch Office is fully operational, we are vulnerable. The defense industry is too well equipped with lobbyists. They're more dangerous than you realize!

General Charlie Williams:                 Dangerous to your Audit Agency, Commander, not to this Branch Office.

StormAuditor:                                       The contractors will continue to gain a support in the FAR Council, until...

Grand Moff Shay Assad

[walking in with Fitzgerald:                The FAR Council will no longer be of any concern to us. I have just received word that the USD, AT&L has dissolved the Councils permanently. The last remnants of the Old Administration have been swept away.

StormAuditor:                                       That's impossible! How will the Secretary of Defense maintain control without the bureaucracy?

Assad:                                                   The Director of Pricing now has direct control over ACOs, DACOs, and CACOs. Fear will keep the local contractors in line. Fear of this Branch Office.

StormAuditor:                                       And what of the industry associations? If the contractors have obtained a complete legal readout of the audit program, it is possible - however unlikely - that they might find a weakness and exploit it.

Darth Fitzgerald:                                   The plans you refer to will soon be back in our hands.

Williams:                                               Any legal attack made by the Contractors against this Branch Office would be a useless gesture, no matter what legal data they've obtained. This station is now the ultimate power in the universe! I suggest we use it.

Darth Fitzgerald:                                   Don't be too proud of this Business Systems terror you've constructed. The ability to destroy a contractor, or even a whole industrial sector, is insignificant next to the power of the FAR.

Williams:                                                Don't try to frighten us with your auditor's ways, Lord Fitzgerald. [Fitzgerald walks toward Williams, then slowly raises his hand] Your sad devotion to GAGAS has not helped you conjure up the stolen data tapes [begins to sound strained] or given you clairvoyance enough to find the Contractors' hidden fort- [grasps his throat as if he is being choked]

Darth Fitzgerald:                                  I find your lack of faith disturbing.

Assad:                                                   Enough of this. Fitzgerald, release him!

Fitzgerald:                                             As you wish. [drops his hand and Williams’ head hits the table as he regains his breath]

Assad:                                                   This bickering is pointless. Lord Fitzgerald will provide us with the location of the Contractors’ fortress by the time this Branch Office is operational. We will then crush the Defense Industrial Base with one swift strike.

*****

Princess Leia Contracta:                   Director Assad. I should have expected to find you holding Fitzgerald's leash. I recognized your foul stench when I was brought onboard.

Assad:                                                   Charming to the last. You don't know how hard I found it, signing the order to terminate your contract.

Leia:                                                       [sarcastically] I'm surprised you had the courage to take the responsibility yourself.

Assad:                                                   Princess Leia, before your execution, I would like you to be my guest at a ceremony that will make this Branch Office operational. No contractor will dare oppose the Secretary now.

Leia:                                                       The more you tighten your grip, Assad, the more contractors will slip through your fingers.

Assad:                                                   Not after we demonstrate the power of this Branch Office. In a way, you have determined the choice of the weapon system that will be cancelled first. Since you are reluctant to provide us with the location of the Contractors’ base, I have chosen to test this FAO's destructive power on your largest program.

Leia:                                                       [shocked] No! Our program is within budget and on schedule. We have no outstanding CARs. You can't possibly–

Assad:                                                   You would prefer another target? A military target?! Then name the system! [stepping closer to Leia and pinning her against Darth Fitzgerald] I grow tired of asking this, so it will be the last time. Where is the Contractors’ base?

*****

Later, on the ice planet Hoth, Luke is stranded in a snowstorm.

Obi-Wan Kenobi:

[voice comes out of nowhere]            Luke. Luke!

Luke Skywalker:                                  [weakly] Ben?

Obi-Wan Kenobi:                                You will go to the Federal Publication Seminars.

Luke Skywalker:                                  Federal Publication Seminars?

Obi-Wan Kenobi:                                 There you will learn from Manos, the Legal Master who instructed me.

*****

Later, on the new Branch Office, still in construction.

[DarthFitzgerald steps out of his shuttle on the Death Star.]

Branch Manager:                 Lord Fitzgerald. This is an unexpected pleasure. We are honored by your presence.

Darth Fitzgerald:                  You may dispense with the pleasantries, Manager. I am here to put you back on schedule.

Manager:                              I assure you, Lord Fitzgerald, my auditors are working as fast they can.

Fitzgerald:                             Perhaps I can find new ways to motivate them.

Manager:                               I tell you that the business system review will be completed as planned.

Fitzgerald:                             The Secretary does not share your optimistic appraisal of the situation.

Manager:                               But he asks the impossible! I need more auditors!

Fitzgerald:                             Then perhaps you can tell him yourself when he arrives.

Manager:                               [alarmed] The Secretary's coming here?

Fitzgerald:                             That is correct, Manager, and he is most displeased with your apparent lack of progress.

Manager:                               We shall double our efforts.

Fitzgerald:                              I hope so, Manager, for your sake. The Secretary is not as forgiving as I am.

*****

Will the story end happily? Only time—and George Lucas—will tell!

 
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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.