Redstone Government Consulting Blog | Government Compliance Training (5)

The Department of Defense (DOD) June 28, 2013 “Performance of the Defense Acquisition System” annual report states that little difference exists between fixed price and cost-plus contracts when it comes to predicting or controlling costs. 

President Obama will purportedly send to Congress proposed legislation this week which will cap reimbursement of all government contractor employee annual salaries at $400,000, the President’s annual (base) salary.  The proposed legislation is an expansion of the FY 2013 National Defense Authorization Act (NDAA) approved in early CY 2013, applicable only to Department of Defense Contracts, which would ostensibly apply to all government contracts awarded by civilian government agencies, and elevate the cap from the previously debated ceiling of $230,700 (Vice-President’s salary) to the $400,000 amount. 

In a recent DCAA audit policy, DCAA makes note of the 2013 NDAA (National Defense Authorization Act) which requires DCAA to track requests and contractor responses for internal audits and to ensure that DCAA does not use contractor internal audit reports for any purpose other than evaluating and testing the efficacy of contractor internal controls and the reliability of associated contractor business systems.  The reason the NDAA mentions this “limited use” is to diffuse contractor concerns and allegations that DCAA will misuse access to internal audits for so called fishing expeditions.

Loss of Memory or In-Denial?

As most contractors (subject to DCAA incurred cost audits) are aware, DCAA and DCMA were soundly “defeated” in terms of ASBCA rejections of DCAA FAR 31.205-6(b) compensation reasonableness challenges (Reference to J.F. Taylor, ASBCA Cases 56105, 56322 and Metron, ASBCA Cases 56624, 56751, 56752).

Has the Government Learned Its Lesson?  Your Feedback is requested.

Perhaps the most subjective cost allowability determination process utilized by the Defense Contract Audit Agency (DCAA) is that associated with determining reasonableness of Government contractor employee compensation, more specifically the wages and benefits of senior managers and executives. Government contractors more likely to endure examination and challenging of such compensation are those with cost reimbursable contracts which invoke the audit of annual incurred cost proposals (ICP) via contract payment clauses. The audit review is a highly subjective process with the purpose of determining if annual compensation exceeds a hypothetical “reasonableness” benchmark, using ambiguous criteria contained in FAR 31.205-6(b)(2), i.e., measured to wage surveys reflecting compensation for same job position within companies of same size, same industry, same geographic area, and engaged in same type of non-government work as performed under government contracts. 

The continuing trend toward the diminution of pay and benefits for Government employees will have a negative impact on DCAA for many years to come.  Over recent years, and especially the past few, DCAA has lost and will continue to lose its experience and knowledge base.  Once those who can retire and those who can find employment elsewhere do so, the “preeminent” government audit agency with the primary goal of contract audits will be a mere shell of its former self, and many would argue that has already come to pass.  Pay freezes, furloughs, changes in retirement benefits, and overall lack of leadership have had devastating effects on the DCAA auditor rolls and contractors are now seeing the impact of this “Brain Drain.”  These actions, coupled with the Agency’s overreaction to recent GAO and DoD-IG criticism, have resulted in at best inappropriate interpretations and at worst inaccurate uses of government regulations and internal DCAA guidance by auditors with very little experience or direction that in past years was provided by more senior people.

As one more indication that DCAA is the puppeteer and the DAR Council are the puppets, the DFARS Final Rule (DFARS Case 2011-D042) requiring a proposal checklist was issued on March 28, 2013.  The proposed checklist and the substance of the final checklist were eerily similar to DCAA’s proposal checklist, which “was” an unconstrained embellishment of anything actually required in the regulations.  The checklist is form over substance and just one more unnecessary document solely to make life easy for DCAA (although not quite as bad as FAR requirements for contractors to provide DCAA with SEC filings as if DCAA auditors are incapable of retrieving these from the readily accessible internet).  The absurdity of the DFARS proposal adequacy checklist rule is self-evident in one public comment and the DAR Council response:

DPAP (Defense Procurement and Acquisition Policy) recently issued a class deviation—Prohibition on the Use of Cost-Type Contracts for Production of Major Defense Acquisition Programs.  The “prohibition” actually provides for exceptions including certifications (provided to congressional defense committees) of the need which justifies a cost-type contract and steps to limit cost type pricing to portions of the contract which require this contract type.  The class deviation, by reference to a DOD Instruction, defines certain key terms including a major defense acquisition.