Publicly Released: March 2, 2021
Objective
The objective of this evaluation was to determine whether the actions taken by Defense Contract Management Agency (DCMA) contracting officers on Defense Contract Audit Agency (DCAA) audit report findings complied with applicable Federal Acquisition Regulation (FAR), DoD Instruction 7640.02, and DCMA policy. Our evaluation focused on DCMA contracting officer actions on DCAA audit reports related to two of the largest DoD contractors. The contractor names are not disclosed because this evaluation addresses contracting officer actions on the DCAA audit report findings and recommendations that are pre-decisional in nature and subject to negotiation and settlement. Therefore, this report refers to the two DoD contractors as Contractor A and Contractor B.
Background
According to FAR 42.302, the contract administration office is responsible for several administrative functions, including determining:
- allowability of incurred costs;
- compliance with the 19 Cost Accounting Standards (CAS) on applicable contracts; and
- compliance with business system requirements.
In most instances, the DCMA is designated as the contract administration office for DoD contracts. DoD Instruction 7640.02 requires that contracting officers take timely and appropriate actions in response to findings and recommendations in DCAA audit reports. Contracting officers are required to complete their actions on a DCAA audit report (“settle” a DCAA audit report) within 12 months. As part of settling a DCAA audit report, the FAR and DCMA policy require that contracting officers prepare a negotiation memorandum that includes sound rationale for not upholding any of the DCAA findings and recommendations.
Finding
For 14 of the 30 DCAA audit reports we evaluated, we determined that DCMA contracting officers did not comply with the FAR when they settled DCAA audit reports associated with two of the largest DoD contractors. Specifically, DCMA contracting officers did not:
- adequately document or explain why they disagreed with $97 million in questioned costs from eight DCAA incurred cost audit reports; or
- issue a notice of potential noncompliance within 15 days on DCAA reported CAS noncompliances, make a determination of CAS compliance or noncompliance, or determine the cost impact to the Government from six DCAA CAS audit reports.
As a result, DCMA contracting officer actions on the eight audit reports may have resulted in improperly reimbursing DoD contractors up to $97 million in unallowable costs on Government contracts. In addition, because DCMA contracting officers did not take timely action on six audit reports, they delayed the correction of CAS noncompliances and the recovery of any increased costs due to the Government.
Recommendations
Among our five recommendations, we recommend that the Defense Contract Management Agency Director:
- Review the contracting officers’ decision to not uphold the $97 million of questioned costs in the eight DCAA incurred cost audit reports, determine whether the costs are unallowable in accordance with the FAR, and take steps to settle all findings, as necessary.
- Remind all DCMA contracting officers in writing of the requirement to issue a notice of potential CAS noncompliance within 15 days of receipt of a reported CAS noncompliance, in accordance with the FAR.
- Require the supervisors of the contracting officers for the 14 audit reports to receive training on the level of review necessary to ensure that contracting officers complete actions appropriately when they address DCAA audit reports.
Management Comments and Our Response
The Defense Contract Management Agency Director agreed with all five recommendations. The Director’s planned actions include:
- reviewing contracting officer decisions to not uphold the $97 million of questioned costs in the eight DCAA incurred cost audit reports,
- reminding all DCMA contracting officers of the requirement to issue a notice of potential CAS noncompliance within 15 days, and
- providing training to the DCMA supervisors assigned to the 14 audit reports.
We determined that the Director’s comments and planned actions addressed the specifics of all five recommendations. Therefore, the five recommendations are resolved, but will remain open until we verify that the DCMA has completed the planned actions.
This report is the result of Proj. No. D2019-DEV0SO-174.000.