Government Contracts Monitor

DCAA Audit Backlog - You Can\'t Always Get Your Contract Closed Out

January 2, 2013

By: Lindsay Simmons

As you probably know, the Defense Contract Audit Agency (DCAA) has an incredible backlog of incurred cost audits.  While they’ve been tackling this backlog through a 2012 initiative that focuses on high dollar value incurred costs (or incurred costs that, for some other reason, are considered “high risk”), Congress doesn’t think the process is working – or at least not fast enough.

Incurred cost audits cover a contractor's cost proposal, on certain types of contracts, for a single fiscal year.  DCAA has increased the dollar threshold triggering an automatic audit from $15 million to $250 million, changed the criteria for assessing a proposal's risk, and significantly reduced the number of audits to be randomly sampled.

But are these measures reducing the backlog and allowing DOD to close out its contracts?

The Senate Armed Services Committee report which accompanied the National Defense Authorization Act for Fiscal Year 2012 directed GAO to take a look at this issue.  Accordingly, GAO examined and reported on (i) current efforts to reduce the audit backlog and (ii) other challenges faced in addressing the backlog of contract closeouts.

GAO just finished its review. Not surprisingly, it found that DOD has a large volume of contracts that have not been closed on time – in large part because, before a contract can be closed out, the Government must complete an incurred cost audit. These audits, conducted by DCAA, ensure that the costs contractors have incurred are permissible under applicable government regulations.

DCAA hoped to eliminate its backlog by 2016.  By DCAA’s definition, this means that by 2016 it will have only two fiscal years of proposals awaiting review.  But DCAA’s ability to achieve this goal has been severely hampered by the fact that it significantly underestimated the number of “high risk” proposals requiring audit. As a result, during the first year of its new initiative – 2012 – DCAA completed less than 75% of the planned audits.  This is not a good sign.

GAO’s Recommendation: DCAA needs to improve its ability to assess whether its incurred cost backlog initiative is actually working – i.e., whether it is reducing the incurred cost audit backlog.  In order to do so, DCAA must establish time frames and measures to assess progress and, as appropriate, modify its audit criteria and procedures to make certain this backlog is addressed, and on schedule.

What does this mean for contractors?  While delays in audits and contract closeouts are far from new, the ever-increasing attention on this problem is likely to force changes in FY13.  For example, in November 2012 the Army established a goal of closing over 475,000 over-age contracts by September 2014 and directed its commands to establish plans for achieving this goal.  The Air Force and Navy are expected to follow suit.  In order to achieve these goals, expect to see more use of quick closeout procedures.  Using traditional approaches exceeds the capacity of DCAA’s resources.  DCAA also may modify its definition of “high risk” in order to limit the number of incurred cost proposals requiring audit.

 

Lindsay Simmons is the attorney responsible for the content of this article.