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Evaluation of DoD Hotline Complaint Regarding Defense Contract Management Agency Baltimore’s Actions on Audit Findings Reported by Defense Contract Audit Agency DODIG-2018-134

DODIG-2018-134

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Objective:

We evaluated a Defense Hotline complaint alleging that a Defense Contract Management Agency (DCMA) contracting officer at the Baltimore Field office did not take appropriate action on a Defense Contract Audit Agency (DCAA) Audit Report which identified $1.1 million in indirect costs that did not comply with the Federal Acquisition Regulation (FAR).

Background:

On September 30, 2013, DCAA issued Audit Report No. 6431-2008B101000026 that addressed a DoD contractor’s incurred cost proposals for 2005 through 2008. DCAA reported that $1.1 million in costs did not comply with FAR.

A contracting officer at the DCMA Baltimore office was responsible for taking action on the DCAA audit report. According to her negotiation memorandum, the contracting officer decided not to uphold the DCAA audit findings in part because DCAA had not provided an overall audit opinion on the DoD contractor’s proposals. In addition, the negotiation memorandum states that the DoD contractor was not willing to negotiate with the Government on the results of the DCAA audit. The contracting officer also told us she was concerned that the 6-year statute of limitations on recouping the costs had expired.

During our evaluation, we determined that DCAA also identified approximately $9 million in direct costs included in the DoD contractor’s proposals that did not comply with the FAR. Even though DCAA issued its audit report more than 4 years ago, the contracting officer has not yet taken any action on the $9 million in direct costs.

Findings:

We determined that the DCMA Baltimore contracting officer did not take appropriate action on the $1.1 million in indirect costs reported by DCAA. Therefore, we substantiated the allegation. The contracting officer may have reimbursed up to $1.1 million in proposed indirect costs to the DoD contractor that did not comply with the FAR.

The contracting officer failed to document an adequate rationale for not upholding the DCAA findings, as FAR 42.705-1(b)(5)(iii), “Contracting Officer Determination Procedure,” requires. According to FAR 42.705-1(b)(5) (iii), regardless of whether DCAA is able to provide an overall audit opinion, the contracting officer is obligated to address any significant matters reported by the auditor. In addition, if the DoD contractor was not willing to negotiate, the contracting officer had the option of issuing a final unilateral decision to uphold the DCAA audit findings if the contracting officer agreed with them.

In addition, the contracting officer failed to seek legal advice on the applicability of the 6-year statute of limitations as DCMA policy requires. The contracting officer incorrectly assumed the statute of limitations would prevent her from disallowing the contractor’s proposed costs.

We determined that insufficient training, DCMA procedures, and management oversight contributed to the contracting officer’s failure to take appropriate action on the $1.1 million in indirect costs reported by DCAA. For example, we found that DCMA does not have any procedures addressing the actions that contracting officers should take on audit findings when DCAA is unable to provide an overall audit opinion.

Finally, we found that the contracting officer’s failure to take any action for more than 4 years on the $9 million in direct costs did not comply with DoD Instruction 7640.02, “Policy for Follow-up on Contract Audit Reports,” which requires contracting officers to complete their actions on audit findings within 1 year.

The contracting officer should determine the actions needed to address the direct cost audit findings and recoup any costs that are unallowable.

Recommendations:

We recommend that the DCMA Director develop procedures and training addressing the actions that contracting officials should take on DCAA reports that do not contain opinions on contractor proposals.

We recommend that the DCMA Director, through the DCMA Baltimore Commander, require the contracting officer to:

  • Reassess the actions taken on Audit Report No.6431-2008B10100026, to determine whether the $1.1 million in indirect costs comply with the FAR.
  • Take reasonable steps to recoup the $1.1 million in indirect costs, if the results of the reassessment indicate that the costs do not comply with the FAR.
  • Take appropriate action on the DCAA reported direct cost of $9 million.

Also, we recommend that the DCMA Director direct the DCMA Baltimore Commander to assess and improve the adequacy and timeliness of management oversight associated with contracting officer actions taken on DCAA audit findings at DCMA Baltimore. Finally, we recommend that the DCMA Director improve Agency internal controls to help ensure that contracting officers complete all required actions on direct cost audit findings within 1 year and do not close the audit report in the Contract Audit Follow-Up System until they address the direct cost audit findings.

Management Comments and Our Response:

The DCMA Director agreed with the recommendations, and the comments and planned corrective actions adequately addressed the specifics of the recommendations. Specifically, the Director stated that DCMA plans to provide training to DCMA contracting officials, determine if any unallowable costs reported by DCAA can be recouped, and take other appropriate corrective actions. Therefore, the recommendations are resolved, but will remain open. We will close the recommendations once we verify that the planned corrective actions have been implemented.

This report is a result of Project No. D2017-DAPOCF-0142.000.