Defense Contract Audit Agency: What Do They Do and How Does It Affect ME as a Resource Manager? (Breakout #63)

Defense Contract Audit Agency: What Do They Do and How Does It Affect ME as a Resource Manager? (Breakout #63) Pat Fitzgerald Director Defense Contract Audit Agency The views expressed in this presentation are DCAA's views and not necessarily the views of other DoD organizations Page 1

Presentation Outline DCAA Mission and Impact DCAA Organization Typical Audit Effort Forward Pricing Interim Billings and Incurred Cost Strategy Contract Closeout Page 2

DCAA Mission Established in 1965 by transferring the existing contract audit functions from each of the military services into a single contract audit agency (DoD Directive 5105.36). Single mission organization: Audit contractor accounting books and records and other submissions for contracting official s use. Audit at all stages of the contract life-cycle. Provides financial advice regarding contractors and regulations governing contract costs. Audits 7,000+ contractors every year and averages more than 6,500 audit reports which examine more than $150 billion of contractor costs. Page 3

Impact Supports Better Buying Power initiatives: Affordable Programs Controlling Costs Helps to keep the acquisition process moving effectively by reviewing contractor cost estimates and accounting systems. Our Recommendations to contracting officers help them reduce acquisition costs. We work to support the warfighter and protect the taxpayer s interest by obtaining better prices on products and services. Page 4

Department of Defense (DoD) Organization Secretary of Defense Deputy Sec of Defense Department of Army Department of Navy Department of Air Force Under Secretary (A T & L) Under Secretary (Comptroller) Inspector General Procurement Procurement Procurement DCMA DCAA Page 5

Internal Review Angela Janysek DCAA Organization Director Patrick Fitzgerald Deputy Director Anita Bales Executive Officer Joe Garcia General Counsel Defense Legal Service Susan Chadick Assistant Director, Operations Tom Peters Assistant Director, Policy & Plans Don McKenzie Assistant Director, Resources Philip Anderson Assistant Director, Integrity & Quality Assurance Gary Spjut Headquarters Regions Central Region Diana Graff Martha McKune Eastern Region Dave Johnson Mark Richards Northeastern Region Ron Meldonian William Adie Mid-Atlantic Region Ken Saccoccia Chris Andrezze Western Region Donald Mullinax Steve Hernandez Field Detachment Karen Cash Terry Schneider Page 6

Regional Boundaries Afghanistan Br European Br Iraq BO R R R Pacific Br R R No. of Field Audit Offices - 139 Eastern 24 Northeastern 22 Central 23 Mid-Atlantic 31 Western 24 FD 15 R = Regional Office Page 7

Typical Audit Effort Before contract award assistance to contracting officer: Audit contractor s bid proposal audit results are one piece of data used by contracting officials to determine fair and reasonable price. Audit contractor s accounting system verify contractor s system will accumulate and report costs in accordance with regulatory requirements. Cost type contracts costs are reimbursed based on actual costs incurred. Interim contract payments based on actual costs. Page 8

Typical Audit Effort During Contract Performance Business System audits. Annual audits of actual costs incurred. Contractor s compliance with Cost Accounting Standards. Review provisional interim payments when based on cost. Defective pricing audits under Truth-In-Negotiations Act. After Contract Completion Assist contracting officer in their determination of final contract costs for contract closeout. Equitable adjustment and termination claims. Page 9

About Forward Pricing Audits Forward Pricing audits are examinations performed in accordance with GAGAS. An examination provides a high level of assurance and consists of obtaining sufficient appropriate evidence to express an opinion on the contractor s proposal and supporting historical data. Objectives: Determine Adequacy of cost or pricing data/info other than cost or pricing data (FAR 15). Compliance with FAR 31 and CAS of the proposed amounts as well as the underlying estimates and supporting contractor books and records. DCAA also supports contracting officer negotiations, especially for complex submissions with significant audit issues. Page 10

Common Issues Areas Where DCAA Questions Costs Material Costs Issues include: Proposed costs are inflated over purchase history. Contractors do not consider cash or quantity discounts. Contractors do not determine if proposed materials are in surplus inventory. Contractors do not consider decrement on material costs that are based on quotes. Escalation Contractors propose escalation on both material and labor costs. This can be a significant cost for Army procurements because of the long performance periods. Contractors propose escalation that are not supported by historical rates or are based on estimates. DCAA uses commodity and labor specific escalation factors for out years. Subcontracts Prime contractors are not performing the required cost and price analysis of their subcontractors. Commercial Items DCAA is challenging Contractors on their proposed commercial items. Proposed commercial items often do not meet the FAR definition. Page 11

Example Proposal Audits Contractor: General Dynamics Land Systems Services Provided: Stryker Follow-on Production Total Proposed: $1.87B Questioned: $354.9M Sustained: $293.5M Significant Findings - Report issued May 6, 2009 DCAA provided extensive support at Army negotiations in some instances reviewing proposed material part by part. DCAA sustained $31.4M in labor costs due to use of improvement curves, and GD s incorrect application of labor support factors. DCAA sustained 194.2M in material costs due to: Differences between proposed prices and historical purchase orders. DCAA worked with TACOM to develop a composite escalation rate based on specific indices of each Stryker variant vs. GD s use of the broad based Industrial Commodities index. GD proposed a 1% contingency factor on materials. There was no basis for this factor and a large portion of the material had already been ordered/purchased. Page 12

$4.5 Annual Net Savings in Billions $4.2 $4.4 $4.0 $3.5 $3.5 $3.0 $2.9 $2.5 $2.5 $2.0 $1.5 $1.0 $0.5 $- 2002-2009 2010 2011 2012 2013 Represents more than a 75 % growth in Net Savings over the average 2002-2009 Page 13

DCAA - Return on Investment $8.00 $7.50 $7.30 $7.00 $7.00 $6.70 $6.50 $6.20 $6.00 $5.80 $5.50 $5.00 $5.40 $5.00 $5.20 $5.30 $5.10 $5.10 $4.50 $4.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Page 14

Contract Cost Cycle After contract award Indirect rates are established for billing purposes (e.g., G&A). Contractors bill on a periodic basis (e.g. every 2 weeks). DCAA audits the billing system and samples vouchers. End of contractor fiscal year cost type contracts Contractor adjusts indirect rates to actual year-end rates and submits an adjustment voucher. This true up of rates should reduce the amount contractors are owed at the end of the contract. Indirect cost rate submission due in 6 months. DCAA audits contractor s submission. DCMA settles annual indirect cost rates. Contractor submits an adjustment voucher. After contract is physically complete Repeat cycle of annual indirect rate submission & audit. Once indirect rates settled, final voucher submitted. Financial closure completed. Page 15

About Evaluations of Public Vouchers Under flexibly priced contracts, the contract auditor is the authorized representative of the contracting officer to: Receive reimbursement vouchers directly from contractors. Approve for payment those vouchers found acceptable. Suspend payment of questionable costs. The primary purpose of the evaluation and approval process is to evaluate whether the voucher is properly prepared and acceptable for provisional payment. This effort does not give an opinion on the allowability, allocability, or reasonableness of the costs. Page 16

Evaluation Process At a minimum, the review of sampled vouchers will include the following steps: Comparison of the information shown on the voucher with the related contract information. Test of the mathematical accuracy of extensions and footings. Verification that amounts claimed for reimbursement of indirect costs are computed using the billing rates acceptable to the cognizant auditor or contracting officer. Verification that interim fees claimed are computed by the formula or basis in the contract. Determination that the voucher has been properly prepared and that payment for the items listed on the voucher is not precluded by any contractual provisions. Verification of appropriate withholds, if applicable (e.g., fee). Coordination with the Contracting Officer (PCO and/or ACO) and the Contracting Officer s Representative (COR) to ascertain any known concerns or unusual circumstances or risk associated with the COR s contract performance surveillance responsibilities. Page 17

Evaluation Process DCAA uses a risk-based approach to reviewing vouchers in WAWF. WAWF uses an automated voucher selection process that routes interim public vouchers to the contract auditor for pre-payment evaluation and approval using risk-based sampling methodologies: Provides a more comprehensive sample of all vouchers. Enhances oversight of high risk vouchers. Allows a more efficient processing of the vouchers not selected for pre-payment evaluation. Page 18

Evaluation Process Examples of high risk vouchers include: first vouchers for contract/delivery/task orders. vouchers with amounts greater than a specified dollar threshold (dollar parameter). Remaining vouchers are routed to the approver using a sampling methodology (percent parameter). Dollar and percent parameters are set based on contractor risk assessments performed by the local office. Page 19

Contract Closeout FAR mandates time standards for contract closeout (e.g., 36 months for cost-reimbursement contracts). Facilitates early identification of excess funds available for use elsewhere prior to expiration. Facilitates early identification of amounts at risk of canceling and reduction of need for replacement funds from current appropriations. Minimizes administrative costs for both contractor and Government. Page 20

Contract Closeout Stakeholders Integrated Approach Services Funds Management Negotiation of Rates Complete all Closeout Actions Additional Funding Property Disposition Replacement Funds Product Acceptance ONE FOCUS Final Indirect Rate Audits Final Voucher Eval Reconciliations Final Payment Indirect Cost Rate Prop Year End Rate Adjustments Final Invoice//Vouchers Settle Subcontracts Page 21

Contract Closeout FAR 4.804-5 Procedures for closing out contract files Significant procedures for closing out contract files. Disposition of classified material is completed. Final patent and final royalty report is cleared. All interim or disallowed costs are settled. Price revision is completed. Subcontracts are settled by the prime contractor. Prior year indirect cost rates are settled. Contract audit is completed. Contractor s closing statement is completed. Contractor s final invoice has been submitted. Page 22

Contract Closeout - Common Barriers Delinquent contractor incurred cost proposals. Delayed audit/settlement of contractor final overhead rates: Lack of adequate support. Denial of access to records. Disallowed/Questioned Costs pending resolution (Form 1). Prime settlement of subcontract costs. Delinquent contractor final voucher. Reconciliations. Awaiting removal of excess funds. Litigation/Investigation pending.

Incurred Cost Strategy Developed a multi-pronged approach to working down backlog in a effective manner. Dedicated audit teams. Use of multi-year audit techniques. Increased staffing dedicated to Incurred Cost: Implemented a low-risk sampling approach to performing incurred cost audits (the subject of a recent GAO review). Eliminating the Incurred Cost Backlog is an initiative under DoD s Better Buying Power 2.0. The Agency s plan is to eliminate the current backlog by FY 2014 and be completely current by FY 2016. Page 24

DCAA is Making Progress - Completed Incurred Cost Years By Fiscal Year 9,000 8,636 8,000 7,000 6,300 6,000 5,000 4,000 4,088 3,000 2,000 1,000 654 487 0 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 Thru April Page 25

Status of Current Backlog Current backlog defined as all years 2009 and before. Original base line at the end of FY 2011 19,352. Since the end of FY 2011 more than an additional 1,300 submissions have come in (all more than 2 years late). New backlog baseline is 20,690 incurred cost years. DCAA has completed more than 14,000 or 67% of the backlog years. With the current pace, we believe the Agency will substantively meet the goal of eliminating the current backlog by the end of 2014. Page 26

Actions to Overcome Barriers Actions available after submissions are late: Establishing unilateral rates for late or uncertified proposals (FAR 42.703-2(c)(2), Certificate of indirect costs. Decrementing provisional billing rates for unsupported costs (FAR 31.201-2(d), Determining allowability). Establishing contract withholds for significant accounting system or related internal control deficiencies (DFARS 242-7502(a)(4), Contractor accounting systems and related controls). Page 27

Quick Closeout Procedures FAR 42.708 provides for quick closeout of contracts prior to agreement on final indirect cost rates. Quick closeout criteria: Contract is physically complete. Amount of unsettled direct and indirect costs on any one contract or delivery order is less than $1M or 10% whichever is less. Risk assessment is performed. Agreement can be reached on a reasonable estimate of allocable dollars. Settlement can occur before end of contractor FY. Powerful tool to close the last FY of a multi-year contract. Page 28

Final Vouchers The "Allowable Cost and Payment" clause, FAR 52.216-7(d) and 42.705, specifies that the contractor must submit a completion voucher within 120 days after settlement of the final indirect cost rates. If the contractor fails to submit a completion invoice or voucher within the time specified, the contracting officer may: Determine the amounts due to the contractor under the contract; and Record this determination in a unilateral modification to the contract. Page 29

Take Aways DCAA Supports Better Buying Power initiatives: Affordable Programs Controlling Costs DCAA can help Resource Managers save money and deobligate funds. DCAA is making progress in eliminating the incurred cost backlog. DCAA plays a critical part in the contract closeout process. Page 30

Defense Contract Audit Agency Additional information on DCAA and Points of Contact available at www.dcaa.mil Page 31