Report | Oct. 9, 2014

Policy Changes Needed at Defense Contract Management Agency to Ensure Forward Pricing RatesResult in Fair and Reasonable Contract Pricing

DODIG-2015-006

Objective

We reviewed Defense Contract Management Agency (DCMA) forward pricing rate policy and practice for indirect rates for compliance with the Federal Acquisition Regulation (FAR) and DoD policy. DCMA forward pricing rate policy covers the 353 contractor locations where DoD contracting officers use DCMA forward pricing rates to negotiate at least $70 billion in Government sales.

Findings

DCMA policy does not adequately address Federal Acquisition Regulation (FAR) requirements to (1) perform cost analysis to establish fair and reasonable forward pricing rates, (2) tailor the requests for audit services, and (3) document a contract case file. The case file documentation at the eight sites we visited was not sufficient to demonstrate that use of DCMA forward pricing indirect rates to negotiate an estimated $4.5 billion in contractor-proposed indirect costs resulted in fair and reasonable contract prices. The contract case files did not demonstrate that the administrative contracting officers (ACOs) had tailored the request for audit services to reflect only the minimum essential supplementary information needed by the ACO to conduct a cost analysis, an action that can help ensure that scarce DoD contract administration and contract audit services are used efficiently. Finally, DCMA policy does not require the ACO to establish a contract case file. Without sufficient case file documentation, DCMA cannot demonstrate that use of their forward pricing rates to negotiate at least $70 billion in Government sales results in fair and reasonable contract prices.

In response to our findings, DCMA revised its policy on July 21, 2014, to require the ACO perform a cost analysis and identify and address any cost analysis techniques and procedures that can be used to ensure fair and reasonable rates.

Recommendations

We recommend that DCMA revise its forward pricing rate policy to require the ACO (1) tailor any requests for audit services in accordance with the FAR, (2) establish, maintain, and dispose of Government contract case files, and (3) provide training on the use of the revised DCMA forward pricing rate policy.

Management Comments and Our Response

The Director, DCMA concurred with our recommendation to establish policy on contract case files and training. Regarding the FAR requirement to tailor a request for audit services, DCMA concurred in principle. Although DCMA identified potential obstacles to promptly implementing corrective actions, these obstacles should not prevent DCMA from appropriately tailoring audit requests in accordance with the FAR. The management comments were responsive and no additional comments are required.