Senator Scott Brown (R-MA) prodded the Defense Contract Audit Agency (DCAA) to finish more incurred cost audits and decrease its backlog at the Senate Homeland Security and Government Affairs Subcommittee on Contract Oversight hearing on Tuesday. Incurred cost audits are used by a contracting officer before he or she closes out cost-reimbursement or other flexibly priced contracts to ensure the government is paying reasonable, allowable, and allocable costs.
“The current system is not working the way it was intended and this is evidenced by the backlog in audits that prevents contracts from being closed on in a timely manner,” Brown said. “This delay in closing out contracts increases cost to contractors and to the government.”
DCAA Director Patrick Fitzgerald said the backlog of incurred cost audits has quadrupled over the last ten years. Fitzgerald, however, said he did not know the actual amount of the backlog at the hearing—a bit shocking considering how significant the problem is.
As Brown pressed the issue, asking why the backlog has grown despite the addition of 500 new DCAA auditors, Chairwoman Claire McCaskill (D-MO) jumped in to Fitzgerald’s defense (find the exchange further below, along with transcripts for the first and second panels).
But Brown has a point. Take a look at the numbers:
If DCAA was conducting two to four times as many incurred cost audits in years prior to FY 2010, then the slowdown to only $34 billion in incurred cost audits in FY 2010 means the backlog is getting bigger at a faster clip. Why? Because DoD contracting hasn’t slowed down, whereas DCAA has put the brakes on doing audits. In FY 2010, the DoD alone awarded $104 billion in cost-reimbursement contracts, and $162 billion was awarded government-wide, according to USAspending.gov.
According to Shay Assad, a high-level DoD acquisition official, a huge backlog and untimely incurred cost audits are a bad thing because it gets harder to do the audit well. “An incurred cost review that is not completed in a reasonable period after the costs are incurred loses contemporaneous support—employees of the contractor and the Government leave, some records are lost or are placed in deep storage,” Assad said in written testimony in 2009 (see page 45 of the 101 of this House Armed Services Committee hearing transcript).
Despite its name, DCAA is the primary contract auditor for the entire government, as McCaskill’s subcommittee made clear in a fact sheet released Tuesday. At the Department of Energy (DOE), DOE Director of Management Ingrid Kolb said DCAA’s growing timeliness problems have led to problems with contract close-outs. The problems are so bad, she said, that DOE is turning to private firms to do the audits instead, even though private firms cost significantly more on an hourly basis than DCAA auditors.
“Over the past few years, as DCAA has experienced challenges with an increasing workload and fewer resources, which have caused some concern for the Department of Energy, our ability to obtain cost-incurred audits in a timely manner has diminished,” Kolb said. “In some instances at some procurement sites this has caused a backlog of closeouts for our contracts.”
Both Kolb and Fitzgerald said threshold increases are being considered to focus away auditing from contracts with smaller dollar figures. With a stroke of the pen, the backlog might be reduced by a significant percentage. The problem is this means more taxpayer dollars will go out the door faster with less scrutiny. There will be even less assurance that taxpayers are not getting ripped off.
But to go back to Brown’s earlier points, why is the backlog getting worse as DCAA expands its workforce?
It’s a good question. Clearly DCAA has been reeling from two very critical Government Accountability Office reports and two Senate hearings that slammed the DCAA for emphasizing quantity over quality. But has the pendulum swung too far the other way? Any DCAA folks out there want to chime in? Please do.
Here’s the exchange between DCAA Director Patrick Fitzgerald and Senators Brown and McCaskill:
MR. FITZGERALD: Well, Senator Brown, to be very upfront with you, our cost-incurred audits, which are the audits that we do at the end of the contract and many times they're needed to do to close out the contract, that workload -- that backlog has quadrupled over the last 10 years. So, again, that's why we're using a --
SEN. BROWN: Quadrupled from what to what just in rough numbers so everyone knows? Approximately. You don't need an exact number. I mean, has it come from like one to, you know four?
MR. FITZGERALD: No, no. It's been -- it's a significant backlog that we have to work. I could give you the --
SEN. BROWN: The reason I -- the reason I'm kind of zeroing in on this particular area because, you know, we have a lot of Massachusetts companies that deal in this type of work and not only are they waiting for (cause of it ?) it's costing them real money -- real dollars. So in addition to the -- you know, the health care bill and the taxes they're paying and the regulations that they're dealing with and now they have audits. So it's like, what's next? You know, they need closure and they need certainty and they need closure, and is there a way -- is there something that we can provide you or is there -- is there -- is there something that we can -- that you need that we're not giving you to get these things done? They've been going on, some of them, for years.
MR. FITZGERALD: Senator, we have to get after that backlog. Hiring 500 new auditors over the -- over the last two years will be helpful in that and I would add -- not to mitigate that at all but we do work closely with the contracting officers to make sure that their billing rates are appropriate so that there's no overages or shortages so that the contractors get the money that they need to be paid as we monitor the billing throughout the contract before we do a final cost- incurred audit.
SEN. BROWN: You know --
MR. FITZGERALD: We work closely to try to make sure that's a minimum amount.
SEN. BROWN: Sure. You know, it's interesting. You're saying you're hiring 500 new auditors. Can you believe it, folks? We're doing 500 new auditors in addition to the thousands of other new auditors in various agencies, and I mean, at what point do we actually just like hire new workers like new construction folks, new -- you know, just a regular, you know, private sector employee? The fact that we're hiring 500 new auditors just smacks to me as saying wow, something's broken somewhere. We -- there's a disconnect somewhere. So we're hiring 500 new auditors to deal with a backlog that's been quadripled -- quadrupled, sorry -- after, you know, a period of time. Some of these audits have gone on for years. So I guess at what point do we -- do we say my gosh, there's -- something's broken. We're -- are we auditing the proper folks that need to be audited -- the entities that need to be audited? Where's the breakdown? It's just -- it's not kind of working for me really.
MR. FITZGERALD: Senator, just to try to put it a little in perspective, you know, the DOD procurement budget just exploded from 2000 to 2010. DCAA's workload was flat throughout that period. In the early 90s, the Defense Contract Audit Agency was about 7,000 folks. So steadily went down and then stayed flat. We're working to get -- to both adjust to workload requirements and build the workforce capacity to get a good balance there so that we can effectively provide a quality product which is, in my opinion, a timely product -- is a quality product.
SEN. BROWN: Any --
SEN. : Is there a next round?
SEN. MCCASKILL: Well, and I wanted to point out that Senator Brown was not yet a senator when all hell broke loose at DCAA. To say that Mr. Fitzgerald had a challenge is an understatement. Then it was determined that DCAA was not meeting Yellow Book standards for government auditing. There was some real management challenges. Not that there aren't -- and I want to say this on the record -- thousands of wonderful auditors at DCAA. I don't mean to disparage the wonderful people that work at DCAA because literally we wouldn't have known about the problems if somebody at DCAA hadn't come forward. But they had some real management issues and Mr. Fitzgerald was drafted to take over an agency which had -- traditionally only had people move up in the organization to head the organization. I think it may have been -- I don't know, was it the first time, Mr. Fitzgerald, that somebody came from outside the organization to head it?
MR. FITZGERALD: Yes. Yes, Senator.
SEN. MCCASKILL: Yeah. So they never had anybody come from outside in a management capacity. So I don't mean to -- I'm usually not the one making -- and I don't mean to sound like I'm making excuses but I know the challenges that he faced and while I don't think they're there yet they have made significant progress in, I think, turning around the management capacity at DCAA since his arrival. So for what's that worth --
SEN. BROWN: May I just make a note on that?
SEN. MCCASKILL: Sure.
SEN. BROWN: And listen, I don't disagree and I'm aware. I've obviously done my homework and aware of your challenges. I just want to make sure that we're auditing the right entities and that we're not wasting our money and that the audits that are -- you know, that we're participating in, you know, it affects real people, real jobs, real companies, not only in my state but in yours and, you know, that's why I asked is there something that we can do to --
SEN. MCCASKILL: Right.
Nick Schwellenbach is POGO’s Director of Investigations.