March 29, 2019 —
We determined whether the actions taken by Defense Contract Management Agency (DCMA) contracting officers on DoD contractor executive compensation questioned by Defense Contract Audit Agency (DCAA) complied with the Federal Acquisition Regulation (FAR), DoD Instructions, and agency policy. To accomplish the objective, we evaluated DCMA contracting officer actions on 35 DCAA audit reports that questioned $58.1 million in claimed DoD contractor executive compensation.
An executive typically plays a role in developing company strategy and policy and who directs, controls, and coordinates part or all of the company’s activities.
The FAR is the primary regulation that all Federal Executive agencies must follow when they acquire supplies and services. FAR 31.205‑6, Compensation for Personal Services, limits the amount of allowable compensation that contractors can claim on Government contracts. For example, the FAR imposes a compensation cap on the amount of compensation a contractor can claim for any individual employee. Also, the FAR requires that compensation paid to employees be reasonable for the personal services or jobs they perform. In determining whether employee compensation is reasonable, the FAR states that relevant factors may include whether the compensation conforms to the practices of similar companies.
DCAA audits DoD contractor compensation and other costs claimed on Government contracts to determine if the costs comply with the FAR and any other applicable criteria. To determine if the compensation that DoD contractors claim for its executives is reasonable, DCAA compares the DoD contractor’s claimed compensation to the average for comparable jobs published in private compensation surveys. If the claimed compensation exceeds the compensation survey average plus a 10 percent range of reasonableness (RoR) factor, DCAA typically questions the difference as unreasonable unless the DoD contractor can support above average compensation. DCAA issues an audit report on its findings and recommendations to a contracting officer for action.
If the contracting officer does not sustain DCAA’s recommendations, the FAR and DoD Instruction 7640.02, “Policy or Follow-up of Contract Audit Reports,” April 15, 2015, require the contracting officer to document rationale in the negotiation memorandum that adequately explains why DCAA’s recommendations were not followed.
For 18 of 35 audit reports we selected for evaluation, DCMA contracting officers failed to comply with the FAR and DoD Instruction requirements to document adequate rationale when they do not sustain DCAA’s recommendations. As a result of not sustaining the DCAA recommendations, the contracting officers reimbursed DoD contractors $22.5 million in executive compensation that DCAA reported as unreasonable in the 18 audit reports. The 18 DCMA contracting officers documented one or more of the following three reasons for not sustaining the DCAA recommendations.
- DCAA’s findings were not credible because two Armed Services Board of Contract Appeals cases had rejected DCAA’s use of a 10 percent RoR factor.
- The addition of locality pay to DCAA’s calculated survey average effectively eliminated the executive compensation that DCAA identified as unreasonable.
- Grouping of the contractor’s executives into one job class offset the executive compensation that DCAA identified as unreasonable.
However, none of these reasons adequately explain why the contracting officers did not sustain DCAA’s recommendations. First, the two Armed Services Board of Contract Appeals did not reject DCAA’s use of a 10 percent RoR factor in all instances. Second, the contracting officers did not justify the need to add locality pay to the DCAA calculated survey average. Third, the contracting officers did not explain how the grouping of executives in one job class was appropriate or met the definition of a job class in the FAR. As a result, the contracting officers may have inappropriately reimbursed the contractors up to $22.5 million in unreasonable executive compensation.
We identified three factors that contributed to contracting officers not documenting adequate rationale when they did not sustain DCAA’s recommendations.
- Contracting officers did not obtain a required legal review.
- DCMA management has not provided any guidelines, training, or specialist assistance to contracting officers that would help them appropriately and consistently address DCAA questioned executive compensation.
- Contracting officers did not obtain DCAA’s opinion on additional information received from the contractor after issuance of the audit report.
Also, for 17 of the 35 audit reports, contracting officers did not maintain evidence that the negotiation memorandum and indirect cost rate agreement were distributed to the contracting officials affected by the negotiation, as the FAR requires. Additionally, for 9 of the 35 audits, the contracting officers could not demonstrate that they had provided a copy of the negotiation memorandum to DCAA. Appropriately distributing the negotiation memorandum and indirect cost rate agreement to affected contracting officials and DCAA is essential for ensuring that the negotiation results are incorporated in all affected Government contracts.
We recommend that the DCMA Director implement either:
- a program whereby contracting officers may seek advice and assistance from qualified personnel with extensive knowledge on executive compensation, or
- guidelines and training to contracting officers on executive compensation concepts and approaches for taking action on executive compensation audit findings in a consistent and appropriate manner.
- In addition, we recommend that the DCMA Director provide refresher training to contracting officers on the requirements to:
- Consult with legal counsel when their disagreement with an audit finding is based on an interpretation of a law or regulation.
- Obtain a Defense Contract Audit Agency opinion on additional information received from contractors after audit report issuance.
Management Comments and Our Response
The DCMA Director agreed with the recommendations. The Director’s comments and the planned actions are responsive and the recommendations are considered resolved. DCMA plans to provide training that emphasizes evaluating executive compensation using appropriate techniques, obtaining the required legal review, and requesting DCAA’s opinion on additional information received from contractors. We will close the recommendations once we have verified the completion of DCMA’s planned actions.
We request DCMA management furnish the DoD Office of Inspector General with documentation supporting the corrective actions taken once completed.
This report is a result of Project No. D2017-DAPOCF-0195.000.