Evaluation of Defense Contract Management Agency Contracting Officer Actions on Defense Contract Audit Agency Incurred Cost Audit Reports DODIG-2017-055

We evaluated the appropriateness of Defense Contract Management Agency (DCMA) actions on Defense Contract Audit Agency (DCAA) findings reported in 22 incurred cost audit reports. Specifically, we determined whether the DCMA contracting officer’s actions on the 22 reports complied with applicable sections of the Federal Acquisition Regulation (FAR), DoD Instruction 7640.02, “Policy for Follow-up of Contract Audit Reports,” and DCMA policy.

For the 22 incurred cost reports we selected, we found several instances when DCMA contracting officer actions did not comply with FAR, DoD Instruction 7640.02, or DCMA instructions. We found:

•             eight instances when contracting officers did not address direct costs questioned by DCAA worth $305 million;  

•             seven instances when DCMA did not assess or waive penalties on $1.4 million in expressly unallowable costs, as FAR 42.709-3, “Assessing the Penalty,” and FAR 42.709-5, “Waiver of the Penalty,” requires; 

•             two instances when contracting officers failed to document adequate reasons for not upholding $5.6 million in audit recommendations, as FAR 42.705-1(b)(5)(iii) requires; 

•             three instances when questioned costs upheld by the contracting officer totaling $4.3 million were not incorporated in the incurred cost agreement with the DoD contractor; and

•             five instances when contracting officers did not complete their actions within the resolution and disposition timeframes established in DoD Instruction 7640.02. 

As a result, contracting officers may have inappropriately reimbursed DoD contractors for millions of dollars in unallowable costs, the Government did not collect penalties when they should have been assessed, or reported incurred cost findings were not addressed in a timely manner.

Finally, in 15 of 22 reports, contracting officers did not enter accurate status information in the DoD Contract Audit Follow-up (CAFU) system, which DoD Components use to track the status of actions contracting officers take on DCAA audit reports. The errors diminished the reliability of the system as a tool for monitoring contracting officer actions on incurred cost audit reports. 

We recommend that the Director, DCMA:

•             address the outstanding questioned direct costs;

•             assess or waive penalties as appropriate;

•             consider educational or corrective opportunities for each of the contracting officers in relation to the requirement to provide adequate reasons for not following the audit recommendations in accordance with the FAR and DoD Instruction 7640.02; and

•             correct the CAFU inaccuracies.