Current DCAA Initiatives
NCMA Boston Chapter
March 14, 2012
Recent Events Shaping Current Actions
GAO Reports:
July 2008 (GAO-08-857)
September 2009 (GAO-09-468)
December 2011 (GAO-12-88)
GAO Testimony October 2009 (GAO-10-163T)
Commission on Wartime Contracting in Iraq and Afghanistan
Final Report Dated August 2011
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Current DCAA Initiatives
Aftermath of the Events
Prior DCAA Metrics Abolished
Independent Reference Reviews added
Audit Sample Sizes are Much Larger
Audits Take a Lot Longer to Complete
Fewer Audits Complete
Backlog Grows
More Auditors are Needed/On the Way
Reduction in Business Systems Monitored (10 to 6)
Previous Audit Work Moves to DCMA
Fin Cap (MRD 11-PPD-007(R))
Pricing Below $10M FFP/$100M Cost
(MRD 10-PSP-030(R))
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Current DCAA Initiatives
National Defense Authorization Act of 2011
Section 893.
Required the Secretary of Defense to develop a program to
provide for the approval/disapproval of contractor business
systems within 270 days of the act. It allowed for up to a
10% withhold on payments if one or more systems is
disapproved.
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Current DCAA Initiatives
DFARS Business Systems
Rule Now Final
DoD issued an interim rule effective May 18, 2011 which
mandated withholding a percentage of payments when a
contractor's business system has one or more significant
deficiencies. Rule now final with minimal change effective
February 24, 2012.
A "significant deficiency" is defined as "a shortcoming in the
system that materially affects the ability of officials of the
Department of Defense to rely upon information produced
by the system that is needed for management purposes."
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Current DCAA Initiatives
DFARS Business Systems
Six business systems are covered by this rule:
► Accounting System
► Earned Value Management System (EVMS)
► Estimating System
► Material Management and Accounting System (MMAS)
► Property Management System
► Purchasing System
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Current DCAA Initiatives
DFARS Business Systems
Allows the Government to impose withholds for business
system(s) with significant deficiencies
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Five percent (5%) for significant deficiencies in a single contractor
business system
Total payment withholds are not to exceed 10%
Payments could be withheld on-►
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Interim payments under-Cost-reimbursement contracts;
Incentive type contracts;
Time-and-materials contracts;
Labor-hour contracts;
Progress payments; and
Performance-based payments.
Current DCAA Initiatives
DFARS Business Systems
Withholdings only apply to contracts with the clause.
Complicates billing – two sets of rates/rules
FFP contracts are liquidated upon delivery of product
and no longer subject to withhold after delivery
(clarified in the final rule).
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Current DCAA Initiatives
Cost Accounting Standards (CAS)
Threshold change for applicability
Cost Accounting Standards applicability
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Increased from $650,000 to $700,000
Removes the fixed threshold amount whereby future threshold
changes are tied to TINA thresholds
In line with corresponding increase in the cost or pricing threshold
from October 2010 (applicable in the Truth in Negotiations Act –
TINA)
Changes effective August 11, 2011
Current DCAA Initiatives
NDAA 2012 Section 803
803 - Extension of Applicability of the Senior Executive
Benchmark Compensation Amount for Purposes of
Allowable Cost Limitations under Defense Contracts
The prior statute limited reimbursement of top five
executives to a cap established annually by Office of Federal
Procurement Policy or OFPP (DCAA does the actual
computation for OFPP). New law extends the
reimbursement cap to all employees.
DFARs Case 2012-D028
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Current DCAA Initiatives
Executive Compensation
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FAR 31.205-6(p)(i) “Compensation” means the total amount of wages, salary,
bonuses, deferred compensation (see paragraph (k) of this subsection), and
employer contributions to defined contribution pension plans (see
paragraphs (j)(4) and (q) of this subsection), for the fiscal year, whether paid,
earned, or otherwise accruing, as recorded in the contractor’s cost accounting
records for the fiscal year."
But before you get to apply this definition, you have to exclude otherwise
unallowable cost - some deferred compensation is unallowable in its own
right (e.g. deferred comp based on stock value increases). So, the
government won't pay for the unallowable cost but not because of the
compensation cap.
So as to the question whether the cap applies to all compensation, the
answer is no it doesn't; it only applies to otherwise allowable compensation
included in FAR 31.205-6(p) definition. Noticeably excluded from that
definition is contributions to a defined benefit plan - so contributions to a
defined benefit plan are recoverable over and above the cap.
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Current DCAA Initiatives
Executive Compensation
ASBCA Cases 56105, 56322
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Did not Support Most (in Dollars) of DCAA’s Findings that Executive Compensation
was Unreasonable.
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Upheld use of Surveys and After-the-fact Challenge that Some Cost was Unreasonable
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Contractor Produced Statistical Expert
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Government Produced Compensation Expert (other than DCAA)
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Court Discounted Government Expert
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Court Used Statistical Analysis at 90% Confidence (per Contractor Expert) and Still
Found Unreasonable Executive Compensation
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DCAA Approach of Mid-Point Plus 10% Clearly Not Accepted
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Current DCAA Initiatives
Federal Acquisition Regulation (FAR)
Contract Closeout Final Rule
A Federal Acquisition Regulation (FAR) final rule amends
procedures for closing out contracts effective June 30, 2011
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Revises procedures for clearing patent reports
Provides for mandatory withholds of fixed fees until all contract
close-out actions have been completed (including adequate
certified final indirect cost rate proposal)
Revises the quick close-out threshold to $1M
Describes an adequate final indirect cost rate proposal and
supporting data - the format follows the DCAA indirect cost rate
proposal prescriptions
Current DCAA Initiatives
Defense Contract Audit Agency (DCAA)
Update
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DCAA activity (inactivity) continues to reflect reactions to
earlier criticisms from Congress, the U.S. Government
Accountability Office (GAO) and the DoD Inspector
General
DCAA is issuing fewer audit reports – DCAA Director
Fitzpatrick reported average days to complete proposal
pricing audits increased from 28 days in FY 2008 to 72
days in FY 2010
With a growing backlog, DCAA Director Fitzpatrick
reported that DCAA has hired 500 new auditors and will
add 1,000 more by fiscal 2015, a 37 percent staffing
increase
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Current DCAA Initiatives
Defense Contract Audit Agency (DCAA)
Update
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NDAA Section 806 requires annual reporting to Congress
on reports issued and status of backlog.
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February 1, 2012 Senate Hearing (Ad Hoc Subcommittee
on Contracting Oversight of the Committee on Homeland
Security and governmental Affairs). Senator Brown
expressed concern for growing backlog of incurred cost
audits.
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Current DCAA Initiatives
Defense Contract Audit Agency (DCAA)
Update
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DCMA has assumed responsibility for audits previously
performed by DCAA
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Financial capability audits
Price proposal audits
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Fixed price $10M and below
Cost-type $100M and below
Business Systems
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DCMA will lead or co-lead the following business system reviews
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Purchasing system
Estimating system
Property system
DCMA makes the final decision on business system adequacy
Current DCAA Initiatives
Defense Contract Audit Agency (DCAA)
Update
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Director of Defense Procurement and Acquisition Policy
(Guidance dated December 4, 2009)
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DoD policy for addressing and resolving significant disagreement
with DCAA recommendations
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Significant disagreements = situations where the Contracting Officer
(CO) pre-negotiation objective position will sustain less than 75% on
proposal of $10M or more
Resolution process to involve applicable DoD agencies up to the
Undersecretaries of Defense, Acquisition, Logistics and Technology
and the DoD Controller, if necessary
Requires DoD component agencies to establish applicable processes
CO has the ultimate responsibility for resolution
Current DCAA Initiatives
DoD Initiatives/Challenges
Better Pricing – FPI Contracts
Subject to DCAA Incurred Cost Audit
Fewer Service Contracts
Budget
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Current DCAA Initiatives
CAS Board Harmonization Rule
Effective February 27, 2012
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Harmonization Required by Pension Protection Act
Rule issued December 27, 2011
Contracts prior to the effective date will require Equitable
Adjustment claim to be submitted, if impacted.
Forward Pricing Rates need to be adjusted for Contracts
issued after February 27, 2012 or risk loss of recovery
because Equitable Adjustment may no be appropriate.
Impact starts 1st fiscal year after receipt of CAS covered
contract after 6-30-12 which will mean 1-1-13 for most
calendar year contractors.
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Current DCAA Initiatives
CAS Board Harmonization Rule
Effective February 27, 2012
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Impact is phased in over four years
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25% in 2014
50% in 2015
75% in 2016
100% in 2017 and later
Harmonization shorten amortization period for
Gains/Losses from 15 years to 10 years
Results of PPA/Harmonization:
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More Cost on Programs
More complex auditing required
Current DCAA Initiatives
DCAA Open Audit Guidance
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2/23/12
Agreed-to Dates Measure
(MRD12-PPS-005)
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2/9/12
Non-Audit Services Concern
(MRD 12-PAS-004)
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1/25/12
Milestone Plans Required
(MRD 12-PPS-001)
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12/14/11 Testing CAS in other Assignments
(MRD 11-PAC-021)
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Current DCAA Initiatives
What Will Likely Influence DCAA Initiatives
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Compliance with GAGAS remains a significant factor
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Pressure to improve against backlog
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Staffing an issue
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Experience level in near term
Adequacy in terms of mission long term
Current DCAA Initiatives
What to Expect from DCAA Initiatives
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Longer audits are here to stay for foreseeable future
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Multi-year/multi-task audits
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Lack of flexibility on data requests/responses
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More requests for Internal Audits
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Dealing with Inexperienced Auditors in an increasing
complex environment where staff in risk adverse
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Current DCAA Initiatives
Questions
Thank You
Follow-up Information – Contact
Frank Summers
617.375.1285
frank.summersjr@ey.com
Steven J. Tremblay
617-375-2420
steven.tremblay@ey.com
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Assurance Services
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Current DCAA Initiatives