John Shire
Deputy Assistant Director
Policy and Plans
Defense Contract Audit Agency
The views expressed in this presentation are DCAA's views and not necessarily the views of other DoD organizations

Internal Review
Karen Cash
Director
Patrick Fitzgerald
Deputy Director
Anita Bales
Executive Officer
Joe Garcia
General Counsel
Defense Legal Service
Susan Chadick
Assistant Director
Operations
Tom Peters
Headquarters
Regions
Central
Region
Tim Carr
Vacant
Eastern
Region
Paul Phillips
Gary Spjut
Assistant Director,
Policy & Plans
Ken Saccoccia
Assistant Director,
Resources
Philip Anderson
Assistant Director,
Integrity &
Quality Assurance
Don McKenzie
Northeastern
Region
Ron Meldonian
William Adie
Mid-Atlantic
Region
Vacant
Steve Hernandez
Western
Region
Donald Mullinax
David Johnson
Field
Detachment
Karen Cash
Terry Schneider
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Deliver High Quality Services and Products

Agency will use new Strategic Plan to work audit quality and workforce issues

Established proposal walk-through and early identification of issues/inadequacies

All Raytheon audits under cognizance of one region
 Issued extensive changes to audit guidance, procedures and processes
 Authorized additional management/supervisory positions to allow more time on audits

Holding Agency-wide Field Audit Office (FAO) Managers
Conference annually
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Requirements/Workload and Resources

Working with Stakeholders to defer or divest low risk workload will allow DCAA to focus on higher risk work with larger payback to Warfighter/Taxpayer.

Added 500 new employees over the last 2 years
 DPAP Memorandum (1/4/2011), “Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense
Spending: ‘Align DCMA and DCAA Processes to Ensure Work is
Complementary”
 Increased Thresholds for Price Proposal Audits


Forward Pricing Rate Agreements/Forward Pricing Rate
Recommendations
Financial Capability Reviews


Purchasing System Reviews
Contractor Business Systems Rule
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Improve Communications and Working
Relationships with Stakeholders
Making a concerted effort to engage with stakeholders:
 Issued “Rules of Engagement”

Initiated regular high level meetings with contracting community

Executives participated at speaking engagements with
DoD Procurement and Contractor Associations

Issued Joint DCAA/DCMA Directors Memorandums
 Established MOU on EVMS
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DCAA Rules of Engagement
MRD 10-PAS -023 and 024 dated Sept 9, 2010

Issued guidance on establishing open and effective communications with all stakeholders
 Rules cover communications during each phase of the audit
 Establishing the engagement
 Entrance conference
 During the audit
 Exit conference
 Post report issuance
 Negotiations
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
Hold discussions with the requestor before beginning the audit to identify specific areas of concern

All parties participate in the contractor walk-through of the proposal

During the audit
 Keep stakeholders informed of major audit issues
 Timely notification of required extensions
 Status of audit communicated clearly

Provide draft results after manager review

Include the contracting officer in the exit conference

Auditor attendance at negotiations
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Unique Value of the Audit

FAR 15.404-1(c)(2) provides that when a contracting officer performs “cost analysis” it includes verifying:
 The offeror’s cost data or pricing data and
 That the offeror’s cost submissions are in accordance with the contract cost principles and procedures in FAR part 31 and, when applicable, the requirements and procedures in 48 CFR Chapter 99, Cost Accounting
Standards.
 The Price Analyst, adhering to the Contract Pricing Reference Guide (Volume
3- Cost Analysis), may perform many of the procedures discussed.
However, the Auditor, with access to the contractor’s books and financial records, can evaluate the validity of historical data and other supporting records.
 Typically, contractors use historical costs to justify proposed costs. If we do not verify that historical costs are compliant, then historical non-compliant costs could go undetected, and the Government risks negotiating a proposal value that includes similar non-compliant costs.
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Forward Pricing Proposal Adequacy

Adequate Contractor Proposals – Facilitate Effective Audit
 Proposed amounts supported by detailed basis of estimate and supporting documentation
 Supporting justification/explanation provided for significant variances between prior buy actual cost data and proposed amounts
 Consolidated Bill of Material
 Detailed support for additive factors applied to various cost elements

Indirect Rates supported by contractor budgetary or trend data

Adequate Support for Subcontractor Proposals
 Adequate prime contactor cost or price analysis
 Adequate subcontract proposal

Proposal reflects anticipated accounting changes
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Top Reasons for Inadequate
Contractor Proposals

Significant variances between proposed amounts and basis of estimate/supporting documentation (proposed amounts not supported)

Significant variances between prior buy actual cost data and proposed amounts without supporting justification/explanation
 Lack of consolidated Bill of Material

Unsupported additive factors applied to various elements of costs often leading to duplicate costs proposed

Rates not based on contractor budgetary or trend data
 Inadequate Support for Subcontract Proposals
 Inadequate prime contractor cost or price analysis
 Inadequate subcontract proposal

Proposal does not reflect anticipated cost accounting changes
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
Includes PCO, ACO & DCAA

Gain full understanding of contractor’s proposal/assertion
 Identify obvious data omissions
 Facilitate early identification of proposal inadequacies
 Process allows for expediting appropriate action if proposal is inadequate or other problems requiring contracting officer assistance
 Establishment of suspense dates for contractor corrective actions
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
Reduces time and resources needed for review of proposal- more efficient use of audit resources

Ensures timely service to the requestor

Facilitates contract negotiations

Facilitates accomplishing the contracting officer’s requirement for ensuring proposal complies with FAR and CAS
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Notification of Inadequate Proposal

DCAA policy is to always notify the contracting officer as well as the contractor of proposal inadequacies and the necessary actions to make the proposal adequate – this is now earlier and more interactive due to the walkthroughs

Contracting officer has the option to have DCAA go forward on proposal review based on the available information
 Going forward may result in additional time, an adverse or disclaimer of opinion and excessive audit resources
 The key is to ensure the audit will still provide value to the acquisition process
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Contractor Support to Facilitate a More Timely Audit Process
 Effective contractor proposal walk-throughs

Adequate contractor submissions and assertions

Adequate supporting data in a timely manner and timely access to key contractor personnel responsible for contractor support
 Real-time DCAA access to contractor systems
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Acquisition Example 1

Firm Fixed Priced $176M Proposal for services

Audit questioned $43M

$28M related to equipment lease costs
 Due to additional audit procedures on this follow-on effort it was determined the contractor was leasing the equipment from a related party


FAR 31.205-36(b)(3) limits the allowable lease costs to the normal costs of ownership
The contractor removed the excess lease costs from its next proposal for two more option years
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Acquisition Example 2

Firm Fixed Priced $78M Proposal for force protection equipment for troops
 DCAA identified several inadequacies in the contractor’s original proposal
 Revised Proposal submitted for $55M

Audit Questioned $20M due to the contractor’s failure to consider actual cost already incurred

The Army was able to use $15M of the saving to acquire additional equipment
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
The interim Business System Rule was issued on May 18, 2011
 Defines contractor business systems as the contractor’s
 Accounting System
 Estimating System
 Material Management and Accounting System (MMAS)
 Purchasing System
 Property Management
 Earned Value Management System (EVMS)

Includes a contract clause that requires the contracting officer to apply a percentage of withhold when a contractor’s business system contains a significant deficiency
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
DCAA will report on compliance with the criteria in DFARS

DCAA Reports will identify significant deficiencies – defined by the interim Business
System Rule as
 Shortcomings in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes
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Developed a risk-based approach to working down backlog in a effective manner:

Increase staffing

Dedicated audit teams (FAO Manager, Supervisors, and auditors)

Revising guidance to perform audits covering multiple contractor years in a single assignment at certain contractors

Developed revised incurred cost audit program

Delivering an incurred cost auditing refresher training course

Continue working with DoD on strategies to better align the limited DCAA resources to the higher risk contracting areas
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
Ad-hoc studying the forward pricing rate evaluation process with a focus on timely delivery of audited rates

High Risk Proposal Team assembled to provide a one – agency support network focused on quality and timeliness

Full participation of proposal walk-throughs to assess proposal adequacy and understand the basis of estimate

Emphasizing annual program plan meetings with contracting officer and contractor to discuss priorities

Implementing a project management approach to include detailed milestone plans to facilitate timely completion of audits

Enhancing the role of the prime contract auditor in coordinating major subcontract proposal audits under major procurements

The use of audit reports on parts of a proposal to help get audit results to the contracting officer more timely
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Defense Contract Audit Agency
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