CAA Issues a Delinquency List and Guidance Regarding the Assessment of Unilateral Rate Determinations for Overdue Indirect Rate Proposals

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The Defense Contract Audit Agency (“DCAA”) recently issued a Memorandum for Regional Directors (“MRD”) which accompanies a “delinquency list” and guidance regarding the steps that DCAA and the Defense Contract Management Agency (“DCMA”) will take this year in connection with certain outstanding final indirect rate proposals.  The MRD indicates that DCMA may unilaterally establish contract costs in mid-2015 for hundreds of contractors that allegedly have not timely submitted such rate proposals.  FAR 42.703-2(c) and FAR 42.705(c) permit unilateral rate determinations in limited circumstances.  Even where such a determination is authorized, however, the unilateral rate must bear some reasonable relationship to the contractor’s allowable costs and anticipated final rates.  While an unreasonable unilateral rate determination might support a contractor appeal disputing such an action under FAR 52.216-7(d)(4), the likely best course is securing an agreement with the cognizant government administrative contracting officer on the timing of a submittal and/or submittal of rate proposals as soon as practicable.

The MRD, entitled “Updated Audit Guidance on the Treatment of Overdue Indirect Rate Proposals,” is dated February 12, 2015. MRD 15-PPD-002(R).  Attached to the MRD is a list of allegedly delinquent contractors that, as of January 5, 2015, have final indirect rate proposals from contractor fiscal year 2013 or earlier that are more than six months outstanding.

For the contractors on this list, DCAA explains that DCMA plans to either: (a) obtain an adequate price proposal, or (b) unilaterally establish contract costs.  The MRD asserts that when establishing the contract costs, “[w]hether to apply a unilateral cost decrement, and how much to apply, are judgments at the discretion of the Contracting Officer.”  Moreover, the MRD informs contracting officers that they may apply a 16.2 percent total contract cost decrement that is “based on an Agency-wide analysis” if historical information related to the contract fiscal year is unavailable.  To the extent that this occurs and your historical experience does not justify this level of reduction, the reduction may be disputed.  Notably absent from the MRD, for example, is any recognition by DCAA that imposing a unilateral rate determination based upon “questioned” DCAA costs may bear little or no relationship to the amount of  “questioned” costs that historically are determined unallowable based upon the parties’ prior negotiation history or sustained as unallowable through operation of the disputes process.

DCAA states in the MRD that it will close the incurred cost assignments for the listed contractors on June 30, 2015 if the contractor still has not provided an incurred cost submission, presumably triggering a DCMA unilateral rate determination.  However, DCAA will not close those assignments in which the contracting officer has granted a valid extension or where the parties are engaged in “ongoing coordination that would warrant DCAA leaving the assignments open.”  If DCAA receives a certified incurred cost submission after the closure, it may reopen the incurred cost assignment upon DCMA request.

In light of this DCAA guidance, contractors should review their operations and the DCAA list to determine whether they are at risk of receiving unilateral contract cost determination(s).  Contractors with outstanding final indirect rate proposals for the years covered under the MRD may consider seeking an extension from the contracting officer in order to ensure that DCAA does not close the relevant incurred cost assignment on the June deadline.  Additionally, in the event that the contractor does not submit the certified incurred cost proposal prior to a government closure, the contractor may wish to provide DCMA with the incurred cost submission as soon as practicable and request that DCMA reopen the impacted incurred cost assignment.

To learn more about this topic, sign up for the April 14 Financial Forum Webinar: Preparing and Defending Your ICS and Avoiding the Deficiency List, Disallowances and Penalties. 

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