Guest Authors: Capital Edge Consulting (http://capitaledgeconsulting.com/):
The recent GAO report on the backlog of audits of Incurred Cost Proposals is unfocused.
The conclusion highlights the fundamental issue at hand in the statement, “DOD has fallen far behind in closing out its contracts, in part due to the large backlog of incurred cost audits that must be performed by DCAA…” The GAO’s “Recommendations for Executive Action” include recommending DCAA, “…assess whether its incurred cost backlog initiative is achieving the objectives of reducing the incurred cost audit backlog…” With this suggestion, GAO is recommending DCAA engage in the same metric type exercise that landed it in hot water in 2009 (GAO Report 09-468, September 2009). Clearly, the GAO’s recommendations lack substance on how to increase the rate of completed Incurred Cost Proposal reviews and contract closeouts. For the various military departments, GAO suggests they, “…increase visibility and enhance management attention on closing out contracts within their departments…develop baseline data and performance measures for closing out contracts, including consideration of the use of quick closeout procedures…” Without mention of a specific plan of action, it is unclear what that recommendation really entails.
The report does however identify several options and ideas that would allow the military departments and DCMA the flexibility to relax criteria and requirements necessary to close out contracts; presumably circumventing the requirement to wait on the completion of an audit of the contractor’s proposal. This approach does not address the requirement for an audit of a contractor’s Incurred Cost Proposal needing to continue as long as the contractor has contracts which have not been closed out (with the exception of “quick closeouts”). The relaxed contract closeout procedures suggested would have to be applied to all of the outstanding overage contracts to lessen the impact of the backlog.
The GAO report states that DCAA has implemented an initiative to focus on “high risk” contractor’s proposals.
DCAA has found that there are 2 ½ times more high risk proposals than expected, which could be for a few reasons. First, there just may have been 2 ½ times more high risk proposals than anticipated and DCAA guessed wrong. However, the likely reason can be found in the “Prior Work” section of the GAO report, where GAO mentions its 2009 report wherein it severely criticized DCAA for the lack of sufficient testing to support audit reports and opinions. That report and other factors resulted in several significant departures from DCAA, including its Director. DCAA reacted to that experience by migrating to the other extreme with their current approach to audits (specifically Incurred Cost Proposal audits) which is to minimize materiality considerations to practically zero. The Risk Assessment process intended to establish the scope of substantive testing during the audit, now frequently consumes more time and resources than the entire audit may have taken in the past. This hypersensitivity to risk assessment and substantive testing likely contributed to the discovery of 2 ½ times more high-risk proposals than expected and has complicated the effort to eliminate backlog. When you consider DCAA’s current approach, along with the fact that they report a backlog of 25,000 Incurred Cost audits, the reasonable conclusion is that they don’t have a chance of meeting their own established timetable for becoming current, much less DoD’s expectations.
The GAO report appears to reveal that the Government may be looking for a “wholesale” approach to make the problem go away.
We predict the DoD will ultimately significantly reduce requirements to be met to close out (overage) contracts. We further anticipate that DoD will pressure DCAA to raise the threshold for requiring an audit of an Incurred Cost Proposal. This prediction is not unreasonable. The GAO report mentions that the Government has found itself in this position before, in 2000, when there were over 350,000 overage contracts in the MOCAS system. In that instance, the Deputy Under Secretary of Defense at the time directed military departments and the Defense Contract Management Command to “…develop comprehensive plans to close out all completed contracts…” Essentially wipe the board clean. Problem solved. We will watch this one with interest, as we continue to slog through the marathon audits of the extensive backlog of Incurred Cost Proposals.
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