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Missile Defense Agency and Defense Microelectronics Activity Use of Cost-Reimbursement Contracts

DODIG-2014-011

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Objective

We are required to perform this audit in accordance with the FY 2009 National Defense Authorization Act, section 864, “Regulations on the Use of Cost Reimbursement Contracts.” Our objective was to determine whether the Missile Defense Agency (MDA) and the Defense Microelectronics Activity (DMEA) complied with interim Federal Acquisition Regulation revisions on the use of costreimbursement contracts by documenting:  

  • that approval for the cost-reimbursementcontract was at least one level above the contracting officer;
  • that cost-reimbursement contracts were justified;
  • how the requirements under the contract could transition to firm-fixed-price in the future;
  • that Government resources were available to monitor the cost-reimbursement contract; and
  • that contractors had an adequate accounting system in place at contract award.  

This is the third in a planned series of audit reports on DoD compliance with the interim rule for the use of cost-reimbursement contracts.  

Finding

Of the 88 contracts reviewed, valued at about $1.66 billion, MDA and DMEA contracting personnel did not consistently implement the interim rule for 72 contracts, valued at about $528 million. Contracting personnel issued contracts that did not follow the interim rule because of different interpretations of the interim rule requirements. As a result, MDA and DMEA contracting personnel continue to issue cost-reimbursement contracts that may inappropriately increase DoD’s contracting risks because cost reimbursement contracts provide less incentive for contractors to control costs.

Recommendations

We recommend that the Director of Contracting, MDA:

  • Emphasize the importance of the Federal Acquisition Regulation revisions to contracting personnel for the use of cost-reimbursement contracts.

We recommend that the Chief, Contracting Division, DMEA:

  • Develop procedures that ensure a senior official approves all cost-reimbursement contracts one level above the contracting officer.
  • Emphasize the importance of the Federal Acquisition Regulation revisions through guidance to contracting personnel for the use of cost-reimbursement contracts.
  • Provide guidance to contracting personnel that the nature of DMEA’s contracts and the inability to transition to a firmfixed- price contract needs to be documented in the contract file of cost-reimbursement contracts.  

Management Comments

The Director, Missile Defense Agency, agreed with our recommendation and will emphasize the importance of the revisions to contracting personnel. MDA contracting personnel have updated their checklists to reflect the revisions. The Chief, Contracting Division, Defense Microelectronics Activity, agreed and immediately established procedures to ensure that a senior official is always available to approve all cost-reimbursement contracts one level above the contracting officer. According to the Chief’s comments, DMEA has provided additional training to contracting personnel regarding the requirements of the interim rule. We consider these comments responsive.

This report is a result of Project No. D2013-D000CG-0170.000.