For years, DCAA has promised Congress it would get current on its incurred cost backlog. For years, it has failed to deliver on that promise. Logically, you would have expected DCAA to address the quality of their audits (or lack thereof) and eliminate the inefficiencies caused by, among other issues, (i) failure to adequately assess risk, (ii) performance of unnecessary procedures due to fears of failing the internal quality control reviews, regardless of risk, (iii) inadequate understanding and misinterpretation of regulatory requirements, and (iv) failure to have sufficient communication with the contractor to understand the issues. Unfortunately, that has not been DCAA’s approach. Instead, DCAA chose to increase the thresholds for the incurred cost submissions selected for audit, write off millions in lieu of audit, and claim victory. That strategy failed once they ran out of low hanging fruit to write off and still needed to do actual audits.
Congress, having tired of DCAA’s excuses, decided to tackle the problem by hitting DCAA in the wallet. Section 893 of the National Defense Authorization Act (NDAA) prohibits DCAA from performing any audits for non-defense agencies (e.g. NASA) unless DOD certifies that DCAA is current on the ICP backlog. “Reimbursable” non-defense agency work is a significant portion of DCAA’s budget. (Also see previous blogs: 2016 Defense Authorization Act Section 893 and Congress Section 893 (2016 NDAA) and DCAA The Saga Continues on DCAA’s Incurred Cost Backlog)
Sadly, DCAA still hasn’t recognized that the fault is in their audits. As reported in earlier Redstone blogs (DCAA Rewrites FAR 42.202: Primes Now Responsible for Auditing Subcontractors), DCAA has now issued a new and completely unsupported interpretation of FAR 42.202(e)(2) language to make the requirement to “manage” subcontracts a requirement to “audit” subcontracts. To make things worse, their distortion of the language in FAR 42.202(e)(2) is receiving DCMA support as well. This is likely an attempt by DCAA to further reduce the incurred cost backlog, not of course by performing better audits, but by shifting audit responsibility for subcontractors to the prime contractor. Quite possibly, DCAA will still claim credit for auditing these subcontract dollars as part of their audit of prime contractor incurred costs even as they are removing them from the incurred cost backlog without conducting a DCAA audit(s).
The Department of Energy (DOE), unable to accept DCAA’s ineptitude and constant delays, has been moving away from DCAA audits for several years and hiring independent accounting firms to conduct incurred cost audits. In addition, DOE has been quietly slipping specific requirements into some prime contractor awards as part of a “Cooperative Audit Strategy” requiring the prime contractor to audit the subcontractor. Unlike DCAA and DCMA, DOE now has a specific contract clause to hold these prime contractors responsible for conducting/obtaining subcontractor audits rather than simply misinterpreting the FAR 42.202 language.
Most prime contractors do not have sufficient internal audit resources to perform audits of all of their subcontractors. Recognizing the significant expertise available at Redstone, many of our clients have requested us to provide subcontract audit services in addition to our consulting services (but obviously not at the same client/contractor). In response, we have added these services, and Redstone Government Consulting has been and is actively engaged in subcontractor reviews and/or audits on behalf of prime contractors, particularly for civilian agency prime contracts. We will be updating our website for these services in the near future.
The government continues to focus more and more on subcontract management at prime contractor levels, holding the prime contractor more and more responsible for areas previously considered to be DCAA or procurement office responsibilities. We do not see this trend changing anytime soon.
Redstone has scheduled a 1 hour webinar on February 25, 2016 to discuss evolving trends applicable to prime contractor management of subcontracts and address questions related to subcontract management responsibilities.
