Estimating System Deficiencies
In its recent report (DODIG 2015-139), the DOD-IG (Inspector General) found that DCMA Contracting Officers failed to comply with DFARS timing requirements related to contractor business systems (DFARS 215,407-5-70 and DFARS 252.242-7005. In this case, the IG evaluated actions (or more accurately inactions) on 18 DCAA audit reports related to contractor estimating systems which are subject to the criteria in DFARS 252.215-7002. The DFARS Business Systems rule includes no time frames concerning government audits of contractor systems; however, once a government audit report is (finally) issued, DFARS has the following time-requirements (“requirements” used loosely because due dates applicable to the government are routinely ignored as evidenced in the IG report):
- Initial determination within 10 days of the DCAA report
- Obtain contractor’s written response within 30 days of the initial determination
- Evaluate the contractor’s response (rebuttal and/or corrective action plan) and issue a final determination within 30 days
- Withhold payments (immediately) if the system is determined to have one or more significant deficiencies.
In a table within the IG report, the noncompliance rates ranged from 28% (withholds) to 77% (final determination within 30 days of receiving the contractor rebuttal). In its discussion of its findings, the results suggest that the contracting officers not only missed the (timing) mark, but in many cases, the contracting officers never accomplished the “required” action. For example, initial determinations were never made for 6 of 18 reports and for the remaining 12, the average time was 98 days (for an initial determination). The results were similar for final determinations in which case the contracting officer failed to issue any final determination and for those (8) with final determinations, these were on average 236 days after receiving the contractor’s written response. If one adds it all up, the DFARS requirements implicate a final determination within 70 days of the audit report (10 for the initial determination, 30 for the contractor response and 30 for the final determination); in contrast, for those with a final determination, the average number of days was slightly off the mark at 399 days.
Although the IG report reflects negatively on DCMA contracting officers, of far more importance to government contractors are the DCMA responses to:
- Take all appropriate actions in response to estimating system deficiencies including issuing final determinations and disapproving systems that have significant deficiencies (noting that the complexities of the issues may require additional time beyond the DFARS time-lines)
- Implement payment withholds on disapproved systems
- Improve internal controls and training (which will include a contractor business system tracking tool)
Although prior DOD-IG reports have noted similar findings, those reports have been focused on a single contractor (stemming from a hotline allegation). The more recent IG report is far more comprehensive and it also involves a new DCMA Director who has committed to adherence to the requirements (qualified for complex issues which could extend the time-lines). Thus, one should assume that there will be far more actions by DCMA contracting officers; however, no one should assume that every final action will involve withholds. There will be more “determinations”, but it remains to be seen if any of DCAA’s reported “significant deficiencies” will survive robust contractor rebuttals (not to mention the fact that DCAA reports anything and everything, seemingly disregarding concepts of materiality). Now more than ever, it is incumbent on defense contractors to self-assess for compliance (before a government audit or review) and to closely track ongoing audits for implications of system deficiencies (i.e. attend to audit or reviewer statements suggesting business system issues such as unsupported costs included in a DCAA audit of a contractor bid proposal). As with the sports cliché, the best defense is a proactive offense, in this case a self-assessment which yields objective conclusions and equally important a mapping from business systems criteria to a contractors policies, procedures and documented practices which demonstrate compliance.
Mike Steen is a Emeritus Advisor with Redstone Government Consulting, Inc. and a specialist in complex compliance issues to include major contractor cost accounting & business system regulations, financial compliance, resolution of DCAA audit issues, Cost Accounting Standards application, litigation support, and claims preparation. Prior to joining Redstone Government Consulting, Mike served in a number of capacities with DCAA for over thirty years, and upon his retirement, he was one of the top seven senior executives with DCAA. Mike Served as a Regional Director for two DCAA regions, and during that time was responsible for audits of approximately $25B and 800 employees. In October 2001, he was selected for the Senior Executive Service and in 2006 he received the Presidential Rank Award. During Mike’s tenure with DCAA, he was involved in conducting or managing a variety of compliance audits, to include cost proposals, billing systems, Cost Accounting Standards, claims, defective pricing, and then-evolving programs such as restructuring, financial capability and agreed-upon procedures. He directly supported the government litigation team on significant contract disputes and has prepared and presented various lectures and seminars to DCAA staff and business community leaders. Since joining Redstone Government Consulting in June 2007, Mike has developed and presented training and seminars on Government Contracts Compliance to NCMA, Federal Publications Seminars and various clients. Mike also is a prolific contributor of written articles to government contracting publications, as well as to our own Government Insights Newsletter. Mike also serves as the director of our training service offerings, with responsibilities for preparing and developing course content as well as instructing our seminars to clients and general audiences throughout the U.S. Mike also serves as a faculty instructor for the Federal Publications Seminars organization. Education Mike has a BS Degree in Business Administration from Wichita State University. He is also a graduate of the DCAA Director’s Fellowship Program in Management, and has a Masters Degree in Administration from Central Michigan University. Mr. Steen also completed a number of OPM’s management and executive development courses.