Publicly Released: January 14, 2020
The objective of this evaluation was to determine whether Defense Contract Management Agency (DCMA) contracting officer actions complied with the Federal Acquisition Regulation (FAR), DoD Instructions, and agency policy when the Defense Contract Audit Agency (DCAA) recommended penalties against DoD contractors for claiming unallowable indirect costs.
We evaluated DCMA contracting officer actions on 28 DCAA audit reports that recommended the assessment of penalties on $154 million in indirect costs claimed by DoD contractors.
Indirect costs benefit two or more of a DoD contractor’s contracts. Examples of indirect costs include administrative employee salaries, leases, legal costs, and marketing costs. The FAR requires DoD contractors to submit an annual indirect cost rate proposal to the Government within 6 months following the close of each fiscal year. The contractor submits the proposal to claim actual indirect costs incurred on flexibly priced Government contracts and to reconcile the costs to amounts previously billed.1 DoD contractors must exclude unallowable costs from the proposal and certify to the Government that all costs in the proposal are allowable.
The FAR identifies the costs that are unallowable (also referred to as “expressly unallowable”) on Government contracts. For example, the FAR states that costs of influencing legislation are unallowable on Government contracts.
The FAR requires DoD agencies to assess penalties and interest against DoD contractors that include expressly unallowable costs in DoD contractor indirect cost proposals. In most instances, the penalties are equal to the amount of expressly unallowable costs allocated to Government flexibly priced contracts over $750,000. The FAR also states that the agencies may waive the penalties and interest if certain conditions are met, such as when the unallowable costs subject to penalty equal $10,000 or less.
DCAA audits DoD contractor indirect cost proposals to determine if the claimed costs are allowable and comply with the FAR, the Defense Federal Acquisition Regulation Supplement, and contract terms. If the DCAA audit discloses any expressly unallowable costs, DCAA recommends that the contracting officer assess penalties and interest against the DoD contractor.
DCMA contracting officers are responsible for taking action on DCAA audit recommendations, including the assessment of penalties and interest. Contracting officers must document adequate rationale in the negotiation memorandum when they do not sustain the DCAA recommendations.2 After considering the DCAA recommendations, the contracting officer negotiates an indirect cost rate agreement with the DoD contractor, which includes the indirect rates that the DoD contractor must use to close DoD contracts.
For 18 of 28 DCAA audit reports we selected, DCMA contracting officers did not adequately explain why they disagreed with DCAA’s recommendations to assess penalties on $43 million in unallowable indirect costs. The contracting officers documented adequate rationale for the actions they took on the remaining $111 million ($154 million less $43 million) in costs that DCAA reported as unallowable and subject to penalties.
The DCMA contracting officers for the 18 audit reports documented one or more of the following reasons for not assessing penalties on the $43 million in expressly unallowable costs reported by DCAA:
• For $32 million, the contracting officers determined that the costs were not subject to penalties. However, the DCMA contracting officers did not document adequate rationale for disagreeing with DCAA that the costs were unallowable and subject to penalties.
• For $11 million, the contracting officers determined that the costs met the FAR criteria for waiving penalties. However, the DCMA contracting officers did not document adequate rationale to show that the DoD contractor met the FAR criteria for waiving penalties.
Therefore, in the case of the 18 reports, the contracting officers did not comply with the FAR requirement that contracting officers document adequate rationale when they disagree with DCAA recommendations.
We concluded that this noncompliance occurred for the following reasons:
• insufficient training in assessing and waiving penalties and interest,
• failure to obtain a required legal review,
• failure to obtain DCAA’s opinion on additional information received after audit report issuance, and
• ineffective supervisor reviews of the contracting officers’ actions.
As a result, the contracting officers did not collect penalties on $43 million in costs that may have been unallowable and subject to penalties. Furthermore, when contracting officers do not assess penalties, they diminish the incentive for DoD contractors to exclude expressly unallowable costs from indirect cost proposals submitted to the Government.
In addition, for seven contracting officers who upheld DCAA’s recommendation to assess penalties, the contracting officers did not assess the correct amount of penalties. Finally, eight contracting officers did not assess the correct amount of interest due to the Government. We concluded that these deficiencies occurred because DCMA contracting officers were not consistently trained on correctly calculating penalties or interest.
We recommend that DCMA provide training to contracting officers and supervisors covering the requirements for identifying expressly unallowable costs and for assessing and waiving penalties in the Federal Acquisition Regulation 42.709. In addition, we recommend that DCMA reevaluate the contracting officers’ decisions not to assess penalties on the $43 million, take steps to recoup any expressly unallowable costs not previously disallowed, and obtain payment from the contractor for any penalties due to the Government.
Management Comments and Our Response
The Defense Contract Management Agency Director agreed with three recommendations and partially agreed with two recommendations. Specifically, the Director agreed to assess the adequacy of the current training provided to contracting officers and supervisors related to the assessment of penalties and interest and to make any necessary improvements to the training.
In addition, DCMA will review the 18 DCAA audit reports in which contracting officers did not document adequate rationale and attempt to recoup any unallowable costs and assess penalties and interest. Finally, the DCMA Director stated that DCMA will evaluate the eight instances in which DCMA contracting officers incorrectly calculated penalties and interest and, if necessary, attempt to recoup any additional penalties and interest due to the Government.
The DCMA Director’s comments addressed the specifics of all five recommendations; therefore, the recommendations are resolved but will remain open. We will close the recommendations once we verify that the DCMA has implemented its planned corrective actions.
This report is the product of Proj. No. 2018-DAPOCF-0160.000