Declining DCAA Role in Oversight of Tens of Billions of Pentagon Contract Dollars

POGO has obtained a Defense Contract Audit Agency (DCAA) memo showing that the Pentagon has radically reduced oversight of tens of billions of contract dollars. From our press release today:

According to the memo, contracting guidance “now limits contracting officer requests for audit services to Fixed-price proposals over $10 million and Cost-Type proposals over $100 million, unless there are exceptional circumstances.”

These audit services are reviews of cost data (referred to as “reviews”) and they entail an examination of a contractor’s cost proposal to the government. In these proposals, contractors estimate how much it will cost them to accomplish work on a contract.

Previously, there was no dollar threshold for reviews on fixed-price contract proposals, but contracting officers would limit requests for DCAA reviews of proposals over a threshold tied to the submission of cost or pricing data, which is currently $700,000. The old threshold for reviews of cost-type proposals was $10 million, but could be lower if the contractor has systemic problems estimating costs.

As POGO Director of Investigations Nick Schwellenbach suggests in a statement today, this move could run counter to the Pentagon's cost savings goals:

“POGO has long feared contractors and their government allies would block DCAA from exposing contractor ripoffs,” said Nick Schwellenbach, POGO’s director of investigations.  “Why are billions of dollars being put at risk when Secretary Gates is demanding cost savings?”

We'll have more on this memo next week, so stay tuned. For now, dive into the wonky details here—and be sure to let us know what you think in the comments section below.

-- Bryan Rahija

Comments

[GovConMaven]

Folks, you don't have to be a genius to figure out what's going on. The contractors don't like being audited -- especially field pricing reviews on fixed-price contracts; DOD acquisition types (tomorrow’s contractor executives) have long hated DCAA; the acquisition reform movement has denigrated our work for fifteen years; and now, the Comptroller and Deputy Secretary don’t support us. So they put in a new Director who is essentially a penmanship teacher. Instead of focusing on audit findings and the substance of what we review, the focus will be on how neat looking our work papers are, sort of like what your third grade penmanship teacher looked at.

Say what you will about Stephenson, she was interested in doing the work and not a contractor lackey. Until there are people in the Department who actually want to see audits of contractor pricing proposals (and audits of anything else related to contracts or contractors), don’t expect to see much positive change – except for the neatness of the work papers.

[Common Sense]

The average DCAA auditor will do about two audits a year now, perhaps even less. But yes those Workpapers will be beautiful and the engagement letter to the company is to die for. I just hope Sen. Claire McCaskill is a little nicer to Mr. Fitzgerald than she was to Ms. Stephenson when the DCAA house of cards is exposed yet again. I hope Mr. Fitzgerald gets a job like April over at the pentagon collecting his 160K after he gets exposed. I hear April is writing a White Paper on how many sides the pentagon building has.

[Joe]

It is a shame that the only reason that DCAA gave away proposal audits under the stated PGI threshold is so that we can put more time in working paper documentation. Not that our audits will be any better or that we will question more cost. No, just the opposite. We gave away millions of dollars of proposal work just to have more time to document our work. Such as waste of effort. This is definately contrary to Secretary Gates efficiency initiative. I am dispoointed that Fitzgerald did not have a backbone and went along with AT&L on this one. Stephenson never would have given away work just to have more time for those picture perfect working papers. What's next, $500 million and $50 million. Before we know it, Fitzgerald will have each auditor completing only one audit per year. I imagine that Policy is already examining how to raise the desk review incurred cost threshold to $100 million per year. Here's a clue how to deal with the gap between the audit work that needs to be accomplished and the current funding, provide DCAA more funds. Simple, issue solved. DCAA saves dollar for dollar more than it costs, period. So why won't Comptroller Hale provide DCAA more money? Oh I get it, he does not want oversight of contractors and neither does our lobbyist Deputy Secretary of Defense. I get it now. We need a change of administration and fast!

[Carol]

The blog comments are 100% on the mark. In essence, pricing evaluations by DCMA for FFP under $10 million and cost type over $100 million will become nothing more than a rate check. DCMA is not staffed to perform a full price analysis of proposals under these thresholds. This represents a high volume of proposals. Rather DCMA will call DCAA for the latest rates and that will be the extent of the price analysis. It will not matter than the rates are 2-3 years old or perhaps no rate information. The message was been sent by AT&L, pricing actions under these thresholds are immaterial and become a blank check for contractors. I am curious about the independence comment made by Frank. I thought that the Defense Business Board in its October 2008 report stated that DCAA should perform any audits it felt necessary regardless of the DPAP guidance, FAR, DFARS, CAS, etc. How can DPAP decide the audits to be performed by DCAA? This seems to be an independence issue. The PGI guidance was not revised due to a change in law or other legal statute. Perhaps Fitzgerald is confusing Army Audit with DCAA where in Army Audit the Secretary of the Army may decide the audits that are performed. But in DCAA, the responsibility is on the DCAA Director to decide the audits that are necessary, no one else has that responsibility. I believe we have a GAGAS noncompliance. POGO, could you research the independence issue. This could be very serious.

[John]

Agree with Frank and Mike. The Pentagon has wanted DCAA to get out of the forward pricing audit business for years. Contracting officials want to place as much money on contract as possible and do not want to have to address audit findings while negotiating contracts. However, I would argue that the new thresholds really do not matter because many forward pricing reports are issued too late to be of use to the contracting officer and many others are never issued because the supervisor, manager, region, QA reviewers have an issue with the working papers such as the entrance conference was not thoroughly documented or the sample was too small. All the while, real dollars are wasted especially on FFP contracts. Assignments are cancelled all the time. I recall a time when the FAO had a prepare a detailed explanation for the region when it cancelled an assignment. Now we cancel more assignments that we complete. POGO, you should ask for the number of cancelled assignments for the last five years, you should see a significant increase in FY 2010. Not to mention the millions that have gone unaudited and thousands of audit hours wasted. I guess Army Audit has a very liberal cancellation policy.

[Jan]

Here's the next scandle, DCAA spends twice as much to do 25%of the audits. Overpayments and fraud triple due to no oversight. GAO and IG find DCAA's audit working papers are perfect, but gig DCAA for performing marginal analytical procedures. Wake-up Fitzgerald, you have many hearings in your future so start practicing the opening statement on how the Pentagon made you do it and how important it is to ensure that all the i's are dotted and t's are crossed. Oh, and do not forget, you are responsible for DCAA and cannot use the Pentagon or anyone else as an excuse. The independence issue is squarely on you. Keep in mind that Under Secretary Hale and Deputy Lynn will not be around forever to protect you.

[Mike]

This action is very short-sighted by Director Fitzgerald. The ratio of questioned cost to dollars examined on the smaller dollar pricing actions is generally greater than the larger dollars especially the fixed price effort. These are generally smaller, less experienced contractors that do not have adequate pricing systems in place and are not knowledgeable of the FAR and CAS. Last month my office issued a report on a FFP $8 million proposal. We questioned half of the proposed amount ($4 million) because the contractor charged all indirect costs to the Government contract and none to its commercial customers. Reason, the commercial customer would not pay for the indirect costs, but they tried to get the Government to pay it. The CO sustained 100% and reduced the negotiated price accordingly. DCMA does not know contractor accounting records at the level of detail as DCAA and would not have had this finding in their price evaluation. Result, $4 million down the drain. POGO stay with this one, it has scandle written all over it.

[Frank]

It is an impairment to DCAA's independence for the Pentagon to dictate the audits that DCAA will perform. If there is a risk such as an inadequate estimating system, history of overbillings, or even fraud referrals, DCAA should be able to perform the pricing audits. This is just the Pentagon's way of reducing the oversight of contractors. DCMA is not equipped to handle the significant workload associated with pre-award pricing effort on cost-type contracts under $100 million and fixed-price under $10 million.