Redstone Government Consulting Blog | DCAA Audit Support (10)

DoD-IG Goes After DCMA for not Supporting DCAA Findings

On February 26, 2021, the DoD-IG issued an audit report raising significant concern about the actions taken by DCMA Administrative Contracting Officers (ACOs) in relation to DCAA audit findings. The Finding section of the DoD-IG report found that out of 30 DCAA audit reports at two of the largest DoD contractors, 14 were not properly addressed per Federal Acquisition Regulation requirements by the cognizant ACO. Our guess and POGO believes the large DoD contractors are Lockheed Martin and Boeing – but this is only our guess. The DoD-IG report goes on to state that: “As a result, DCMA contracting officer actions on the eight audit reports may have resulted in improperly reimbursing DoD contractors up to $97 million in unallowable costs on Government contracts. In addition, because DCMA contracting officers did not take timely action on six audit reports, they delayed the correction of CAS noncompliances and the recovery of any increased costs due to the Government.” The report goes on to state that: “The Defense Contract Management Agency Director agreed with all five recommendations,” including reviewing ACO decisions to “Disallow and recoup any unallowable costs not previously disallowed.” (Evaluation of Defense Contract Management Agency Actions Taken on Defense Contract Audit Agency Report Findings Involving Two of the Largest Department of Defense Contractors – DoD-IG-2021-056, Dated February 26, 2021)

Where does DCAA’s View of the Contractor and their Role in Acquisition Come From?

DCAA Auditor Training

DCAA website provides that new auditors receive in-depth professional training from DCAA’s Defense Contract Audit Institute (DCAI), along with on-the-job training at their assigned field audit office. DCAI is located in Atlanta, GA and provides auditors with an excellent basis on which to start their careers in contract audit. Many at Redstone GCI can speak from personal experience that, once you get past the exciting MARTA ride from the airport, the instructors at DCAI provide a good hands-on learning environment. However, we are not sure if it is a subliminal message piped into the classroom or local indoctrination at assigned field offices, but the auditors are coming away with the impression that no contractors can be trusted, and a good audit opinion has to include questioned cost.

What’s New in this Long-Standing Area?

The FAR Council at long last issues final rule to implement the Trump Executive Order 13881, Maximizing Use of American-Made Goods, Products, and Materials. Only a few days later a Biden Executive Order 14005, Ensuring Future of America is Made in America by all of America’s Workers, hit the streets.

Contractors with cost reimbursable contracts that include the Allowable cost and payment clause, FAR 52.216-7 or Payments under Time-and-Materials and Labor-Hour contracts clause, FAR 52.232-7, are required to submit an Incurred Cost Proposal for each fiscal year costs were incurred on any cost reimbursable contract. This incurred cost proposal is provided to your Administrative Contracting Officer (ACO) and Defense Contract Audit Agency (DCAA) with a deadline of six months after the Contractor’s fiscal year end. Once the Incurred Cost Proposal is received by DCAA, they review it for adequacy. DCAA provides a notification to the Contractor, typically via email, that the proposal is deemed adequate for audit or outlines changes DCAA believes are necessary. That is great to know it is adequate for audit but what does that mean? This means that DCAA has reviewed the incurred cost proposal and determined that the schedules are properly completed for them to begin the audit potentially.

A Little Background

FAR Part 31, Cost Principles, is the regulation that government contractors must follow in order to account for cost on most government contracts. Within FAR Part 31 is FAR 31.205, Selected Costs. This part of the cost principles regulation specifically spells out unallowable cost that the government will not pay for under a government contract. This section starts at FAR 31.205-1 and goes all the way up to FAR 31.205-52. However, it should be noted that FAR 31.205-2, 5, 9, 24, 45, and 50 are “Reserved” – These reserved cost areas went the way of the dinosaur over time, hopefully not to return. For example, FAR 31.204-2, Automatic Data Processing Equipment Leasing Costs, required an annual demonstration that leasing computer equipment was cost-effective, i.e., lowest cost to the Federal Government.

Here are the Details

DoD issued DFARs Final Rule D2019-D029 – Treatment of Commingled Items Under $10K, effective October 1, 2020, to implement several sections of the National Defense Authorization Act for Fiscal Year 2017 that addresses treatment of commingled items purchased by contractors and services provided by nontraditional defense contractors as commercial items. This blog only addresses the DFARS change relative to the treatment of commingled items purchased by a contractor. The final rule is applicable to all solicitations and contracts, including solicitations and contracts using FAR Part 12 procedures for the acquisition of commercial items and solicitations and contracts valued at or below the simplified acquisition threshold.

Here are the Details

DoD issued a DFARs Final Rule D2019-D029 – Services Provided by Nontraditional Defense Contractors, effective October 1, 2020, to implement several sections of the National Defense Authorization Act for Fiscal Year 2017 that addresses treatment of commingled items purchased by contractors and services provided by nontraditional defense contractors as commercial items. This blog only addresses the DFARS change related to services provided by nontraditional defense contractors as commercial items.

Defense Pricing Memo – September 30, 2020

Acting Principal Director, Defense Pricing and Contracting, Mr. Kim Harrington issued a memo on September 30, 2020 to announce that the Defense Contract Management Agency (DCMA) has a new Defective Pricing Pilot Team to provide support to Procuring Contracting Officers (PCOs) to resolve and disposition Defense Contract Audit Agency (DCAA) Truth in Negotiations Act (TINA) compliance audits. DCAA’s new favorite audit it appears. Reading a little into the memo (ok – not too much reading as the memo uses the word – backlog) DCAA has apparently created a new backlog for DoD of what they affectionately call TiN audits. Not a real surprise as DCAA created a TiN team a few years back. DCAA historically had an extensive workload development process to audit all large fixed priced contracts and sample smaller ones that created more audits than resources could accommodate. As we have reported before, now that DCAA is looking for work, the rush appears to be on for DCAA auditors to get back into more defective pricing audits.

Let us Set the Stage

On June 11, 2020, the Internal Revenue Service (IRS) put out a Notice (2020-46) that allowed employees to donate unused leave to charitable groups supporting the COVID-19 National Emergency. Under the leave-based donation program, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations. The notice provides that employee’s donation of leave will not be taxable income to the employee, however the employer will still treat the cost of the leave granted to the employee as either ordinary and necessary business expense or a charitable contribution. This applies to donations made before the end of the 2020 calendar year.

DCAA Takes the Lead Over Office of Federal Procurement Policy (OFPP)

In 2013, Congress put in place a new process for the calculation and publication of the compensation limitation (Cap) for all federal contractor employees. The process places the responsibility to calculate and publish the cap using the Bureau of Labor Statistics (BLS) Employment Cost Index (ECI) data on the Office of Federal Procurement Policy (OFPP). OFPP has failed in this responsibility for the last few years.