Report | Jan. 21, 2021

Evaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs (DODIG-2021-047)

Evaluation

Publicly Released: January 25, 2021

 

Objective

The objective of this evaluation was to determine whether the actions taken by DoD contracting officers on questioned direct costs reported by the Defense Contract Audit Agency (DCAA) complied with the Federal Acquisition Regulation (FAR), DoD Instructions, and agency policy.

Additionally, we followed up on the actions taken by DoD contracting officers in response to prior recommendations in DoD OIG Report No. DODIG-2017-055. The prior DoD OIG report identified eight DCAA audit reports where the contracting officers took no action on $304.8 million in questioned direct costs.

 

Background

The DCAA performs incurred cost audits to examine a DoD contractor’s claimed indirect and direct costs incurred on Government contracts to determine whether the claimed costs are allowable in accordance with contract terms and the FAR. When a DCAA auditor finds any indirect and direct claimed costs that do not comply with the contract terms and the FAR, the DCAA reports the costs as questioned because the costs are considered unallowable on Government contracts. The DCAA issues the report to a DoD contracting officer who is responsible for making a final determination on whether the DoD contractor’s claimed indirect and direct costs are allowable in accordance with contract terms and the FAR. January 21, 2021 DoD Instruction 7640.02 and DCMA policy require DCMA divisional administrative contracting officers (DACOs), who are usually the primary recipients of DCAA incurred cost audit reports, to settle (make a final determination on the allowability of the claimed costs) any questioned indirect costs identified in DCAA audit reports and prepare a final indirect cost rate agreement.

However, according to DCMA Manual 2201-03, DCMA administrative contracting officers (ACOs) must settle DCAA questioned direct costs. The DCMA DACO must coordinate with DCMA ACOs, other DoD Component contracting officers, or other Government agency contracting officers who have the responsibility for settling any questioned direct costs identified in DCAA incurred cost audit reports.

DoD Instruction 7640.02 and DCMA policy also require the DCMA contracting officer to keep the DCAA audit report open in the Contract Audit Follow-Up (CAFU) system until all questioned costs (including questioned direct costs) are settled. The DoD Components use the CAFU system to track and record actions taken to settle DCAA audit reports. For 25 of the 26 DCAA reports we selected, DCMA DACOs were responsible for coordinating with the DCMA ACOs or other contracting officers to obtain a settlement on the questioned direct costs. The DCMA DACOs were then responsible for closing the associated CAFU system record after they completed all required actions, including the completion of a negotiation memorandum, which in part explains the basis for settling DCAA questioned costs.

 

Findings

For 12 of 26 DCAA audit reports, DCMA contracting officers did not comply with DoD Instruction 7640.02 and DCMA policy because they did not settle, or coordinate the settlement of, $231.5 million in questioned direct costs. DCMA contracting officers did not comply with DoD Instruction 7640.02 and DCMA policy because:

• The DCMA lacks adequate guidance for identifying and coordinating with other contracting
   officers who are responsible for settling questioned direct costs;

• DCMA supervisors and the DCMA OIG did not provide effective oversight of the DCMA DACOs’
   actions for settling questioned direct costs; and

• DCMA Manual 2201-03 states that DCMA ACOs must settle questioned direct costs.

As a result of not settling the DCAA questioned direct costs, DCMA contracting officers may have reimbursed DoD contractors up to $231.5 million in costs that may be unallowable on Government contracts in accordance with the FAR.

Additionally, three recommendations from DoD OIG Report No. DODIG-2017-055 remain open because the DCMA contracting officers assigned to three of the eight audit reports have not yet settled $98.1 million of the $304.8 million in questioned direct costs reported by the DCAA. The DCMA contracting officers stated that they did not settle, or coordinate the settlement of, the questioned direct costs because they experienced difficulties in determining the other contracting officers responsible for settling the questioned direct costs. As a result, DCMA contracting officers may have reimbursed DoD contractors up to $98.1 million in unallowable costs.

 

Recommendations

Among the six recommendations for DCMA, we recommend that the Defense Contract Management Agency Director:

• Require the DCMA DACOs to coordinate the settlement of the $231.5 million in questioned
   costs that have not been settled.

• Determine whether to revise DCMA policy to allow DCMA DACOs to settle questioned direct
   costs.

In addition, we recommend that the Defense Pricing and Contracting (DPC) Principal Director issue guidance to the DoD Components to clarify who has the authority and responsibility for settling questioned direct costs.

 

Management Comments and Our Response

The DCMA Director disagreed with one element of our findings, but agreed with the six recommendations for the DCMA. In addition, the DPC Principal Director partially agreed with the one recommendation for the DPC.

The DCMA Director did not agree with our finding that the FAR grants DCMA contracting officers the authority to settle or negotiate DCAA questioned direct costs. The DCMA Director stated that DCMA ACOs and DACOs are limited to establishing final indirect cost and billing rates. We disagree with the DCMA Director that the FAR limits DCMA ACOs and DACOs to establishing final indirect cost and billing rates. As stated by the DPC, which establishes DoD acquisition policy, DCMA contracting officers (including DACOs) have the authority to settle questioned direct costs as part of their administrative responsibilities in establishing indirect rates in accordance with the FAR.

The DCMA Director agreed with the six recommendations for the DCMA. Specifically, the Director agreed to have the DCMA DACOs reopen the CAFU records and coordinate the settlement of the $231.5 million in questioned costs that have not been settled. The DCMA Director also agreed to provide the DCMA contracting officers and supervisors who were responsible for settling the questioned costs with additional training. The DCMA Director further agreed to update DCMA policy to clarify the roles of the various types of DoD contracting officers in settling questioned direct costs, consistent with guidance provided by the DPC.

The DPC Principal Director stated that he partially agreed with the one recommendation to issue guidance to the DoD Components, which clarifies who has the authority to settle direct questioned costs. The DPC Principal Director agreed to consider issuing clarifying guidance if he determines that it will be useful to do so. In addition, the DPC Principal Director will consider a revision to the Defense Federal Acquisition Regulation Supplement to clarify DoD contracting officer roles and their authority in settling questioned direct costs.

We determined that the comments from the DCMA Director and the DPC Principal Director addressed the specifics of all seven recommendations. Therefore, the seven recommendations are resolved but will remain open until we verify that the agreed-upon actions to implement the recommendations are completed.

 

This report is the product of Proj. No. D2019-DAPOCF-0130.000.