Department of Defense Has a Problem with Audits (Their Own)

The Department of Defense has failed an audit - five in a row, to be exact. Federal law mandates audits for all federal agencies, and until 2017, the Department of Defense was never able to satisfy this requirement. It is a very tall task – auditing an agency that controls over half of the discretionary spending in the United States. But in 2017, DoD underwent a financial audit for the first time. They did not pass, but that was never expected. There have also been audits each year since, and while the Agency has not yet passed an audit, it has improved each time.

Why Should Government Contractors and Government Acquisition Personnel Care about this Financial Audit?

One glaring issue each year has been how the Department accounts for their sizable assets – well over $3 trillion in total. And why is this important to government contractors? Because many billions, if not a trillion, dollars of those assets are in the hands of contractors in the form of Government property. The DoD Inspector General identified a material weakness as government property in the hands of contractors. This particular weakness could lead to a misstatement of the Agency’s financial records. What is the issue? That’s a great question and can’t be answered in a single response.

One might think that this would all be the contractor’s fault. But one major issue is the lack of communication between Government property administrators and contracting officers. Contracting officers need to know what Government-furnished property (GFP) should be in contracts. This is critical not only for the Agency but also for the contractor. The contractor should verify this GFP listing in the contract. Contractors need to know: How much of the GFP is serialized versus non-serialized? Have records been initiated in PIEE? Is the GFP labeled per IUID standards?

A common question we receive is, “How do I know if I am supposed to track Government property?” The answer really comes down to one FAR clause: FAR 52.245-1 is the main overarching Government property clause that gives instructions to government contractors. The contract and property types determine whether that clause is present or should be present. Without getting too far into the weeds with this blog, Government-furnished property (GFP) must continuously be tracked – no matter the contract type. And with Government-furnished property, not only should you see FAR 52.245-1, but also a host of DFARS clauses that pertain only to GFP. The property requirements for contractor-acquired property (CAP) normally only show up in cost-reimbursable contracts. There are a few scenarios where CAP must be tracked under fixed-price contracts, producing an end-item being the biggest one, but again – not getting in the weeds here. So, we should see property clauses for all contracts with GFP and all cost-reimbursable contracts where there will be CAP.

What if you don’t see the clauses in your contract and know there are GFP or CAP requirements? This is more of an issue than you might think. Contracting officers aren’t perfect, and again, sometimes don’t realize there will be GFP or CAP requirements in the contracts. If you have any questions, particularly if GFP is issued or CAP is involved, always ask your contracting officers.

What Does This Mean for Government Contractors?

Yes, you guessed it…more property audits. The Property Management System Analysis (PMSA) is the audit mechanism used to analyze a contractor’s property management system. It is also the business systems audit that contractors, especially smaller ones, are most unprepared for. There are no dollar thresholds like in many of the other DFARS business systems. Many contractors don’t even know they are required to have an adequate property management system and just assume they will be under a dollar threshold that does not exist. This all starts with understanding the property requirements in each contract. Make sure you read your contracts to understand all clauses, including the Government property clauses.

At Redstone Government Consulting, our objective is to ensure your company has a property control system that is transparent and accountable for all government property in your possession. We provide assessments to identify and address gaps in property management systems, develop comprehensive government property policy manuals, conduct contractor self-assessments, offer training on compliance requirements, help contractors address Corrective Action Requests (CARs), and provide assistance with contract closeout and property disposal.