Redstone Government Consulting Blog | DCAA Audit Support (15)

In the recently published ASBCA Nos 59508 and 59509, the ASBCA agreed with the contractor and dismissed the government claim (final decision) which had disallowed $116,789,631 (subcontractor costs as components of direct costs claimed by the prime contractor).   The premise for the (failed) final decision was DCAA’s assertion that the prime contractor had breached its contractual duty to “manage” the prime contractor’s subcontracts and subcontractors.   The reference is FAR 42.202(e)(2) which states that the prime contractor is responsible for managing its subcontracts. In context, that clause makes it clear that the government (Contracting Officer) is only responsible for administering the prime contract. In contrast, and only by implication and a legal theory created by a DCAA auditor, the prime contractor assumes certain FAR Part 42 responsibilities for subcontracts.

The question of when and how DCAA will again perform audits for non-DoD agencies remains open, irrespective of that agency’s proposed reauthorization by the FY 2017 National Defense Authorization Act (NDAA). When, because among other things we have not yet seen final passage of the FY 2017 NDAA. And how, because we wonder if non-DoD agencies will allow DCAA to follow their own internal guidance for selection of annual incurred cost submissions for audit (or more controversial, those deemed low-risk and not audited). Of course, selection of submissions to be audited is not entirely at DCAA’s discretion since non-DoD audits are requested and funded by the non-DOD agency. However, once requested, DCAA may or may not reject requests based upon factors to include risk and dollar thresholds. From a budgetary and funding standpoint, since all non-DoD audits are subject to reimbursable funding to DCAA, it doesn’t make sense to reject any non-DOD requests for audit(s). But, for discussion purposes, let’s assume DCAA honors all requests without any limitations.

On September 30, 2016, DCAA issued the following MRD (Memorandum for Regional Directors): Update – Audit Guidance on the Impact of the National Defense Authorization Act on DCAA’s Audit Support to Non-Defense Agencies.   For the record, there isn’t anything captioned “the” National Defense Authorization Act; in this case, it happened to be referring to the 2016 Act, which was presumably “the” Act (to DCAA) because it included Section 893, which prohibits DCAA from providing audit support to non-defense agencies.  

The incurred cost proposal is required for cost type and time and material contracts subject to the FAR 52.216-7, “Allowable Cost and Payment.” Cost type and time and material contracts have a cost reimbursable element that needs to be trued up (i.e. final indirect rates), hence the reason for the incurred cost proposal. There are many subsections, which are listed within the clause (52.216-7(d), thus defining the required schedules for an adequate indirect cost rate proposal.

MMAS (Material Management and Accounting System reviews are a very complex undertaking for both the company involved and auditors assigned.  MMAS encompasses several areas, which by themselves can be difficult to grasp, but when combined into one overarching system can present issues often not encountered in other business system audits. DCAA auditors themselves usually do not have day-to-day exposure to most of the automated aspects of an MMAS such as with ERP systems, MRP, or grouping pegging and distribution. Through no fault of their own, the vast majority of auditors do not use or even understand the inner workings of these systems, do not use them in their review duties, and are not trained to properly address the various aspects of them. Sure, they may become exposed to them via the reviews of certain reports generated by ERP type systems, but in almost all cases, they do not understand the underlying computerized aspects of them. Most contractor personnel will have a more extensive knowledge of the various systems, but in actuality, most are only vaguely familiar with most areas other than the functional discipline they are assigned to.

Cost-type contracts invoke FAR 52.216-7, Allowable Cost and Payment Clause, and that FAR clause requires the contractor to prepare, certify, and annually submit a final indirect cost rate proposal (ICPs).   Although the majority of these ICPs are dispositioned without any DCAA audit (DCAA’s Low Risk Sampling Policy), for those unlucky enough to be audited by DCAA, there is the thrill of receiving a draft audit report with new and novel audit assertions. Translated, cost questioned for unexpected and sometimes incomplete and/or inaccurate interpretations of the underlying FAR cost principles (FAR Part 31).

Practically speaking, DCAA’s performance/productivity has been abysmal for several years. Irrespective of what DCAA’s Management reports on the state of its operations, it cannot justify an average of one audit report issued per auditor per year, or approximately 4,000 total audit reports. Compare those statistics to a time in the not-too-distant past, when the Agency as a whole annually issued over 44,000 audit reports with slightly fewer auditors. There are many reasons for this reduction, not the least of which is DCAA’s own overreaction to GAO reports issued in 2008 and 2009, as well as recommendations around the same time frame by the Wartime Commission.

In our blog “Blended Compensation Rate Guidance: Steps to Success”, posted on March 4, 2016, we provided the steps a contractor should take to determine if and how the compensation cap applies.  The reference is FAR 31.205-6(p) which establishes a statutory cap on allowable compensation, notably the methodology for determining the cap was changed as was the cap (reduced to $487,000) effective on contracts executed on or after June 24, 2014.  The reference to blended rates pertains to a contractor incurring costs in 2014 on contracts executed before June 24, 2014, as well as on contracts executed on or after June 24, 2014.   The “old” contracts subject to the previous (more contractor-friendly) regulation with a 2014 cap of $1,144,888 and the “new” contracts subject to the artificially low (and highly political) cap of $487,000.

Although the 2017 NDAA (National Defense Authorization Act) is a work in progress, as it stands, it includes Section 820 which would repeal subsections (a) and (d) of Section 893 of the 2016 NDAA (section 893 was discussed in a previous blog dated January 13, 2016). If portions of Section 893 are repealed, DCAA would have the renewed ability to perform audits for non-Defense Agencies without any reduction in DOD funding.

DCAA’s Inevitable Link with an Inadequate Accounting System

There is no specific regulatory authority that can be cited which requires work authorizations as a part of a contractor’s Labor/Timekeeping System. This argument, although accurate, is not the rationale which will be used by a DCAA auditor when “disclosing” deficiencies in a contractor’s labor system during a routine labor floor check. The auditor will ultimately render an opinion of inadequacy with respect to the accounting system citing DFARS 252.242-7006(c)(1), which states “The contractor’s system will provide for a sound internal control environment, accounting framework, and organizational structure”. You may and, probably will, ask where is there a mention of work authorizations anywhere in DFARS 252.242-7006 Accounting System Administration? The short answer; there isn’t. The DCAA answer, and the only one it thinks matters, is that the regulation it cites does not have to specifically address work authorizations but a link can be inferred within the highly general requirement for a “sound internal control environment”.