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Last year, after reviewing DCAA’s audit metrics, we concluded that DCAA was not going to be able to reach its key questioned costs and return on investment metrics because of having to do a lot more incurred cost audits (incurred cost audits have a low rate of questioned cost). We were wrong.
The first thing we see when examining DCAA’s audit metrics (other than that neither DCAA nor the DoDIG provide enough data to isolate the incurred cost dollars audited) is that the questioned cost rate for “Incurred Costs and Other Audits” has dramatically increased. This dramatic increase is noteworthy because these audits, unlike forward pricing audits, represent money that was actually spent.
Audit Metrics
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Type of Audit
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Reports Issued
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Dollars Audited (millions)
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Dollars Questioned (millions)
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% Questioned
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FY 2012
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Forward Pricing
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1,811
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$ 113,000
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$ 9,860
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8.7%
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Special Audits
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1,937
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831
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Incurred Costs and Other Audits
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2,968
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41,000
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1,711
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4.2%
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Total
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6,716
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$154,000
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$12,402
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8.1%
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FY 2011
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Forward Pricing
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2,599
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$103,000
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$9,609
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9.3%
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Special Audits
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2,555
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1,691
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Incurred Costs and Other Audits
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2,236
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25,000
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629
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2.5%
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Total
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7,390
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$128,000
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$11,929
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9.3%
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What happened to the incurred and other audits? We should note that in 2011 DCAA performed Has DCAA been lax about doing incurred cost audits? Without better information on the amount of incurred cost work DCAA performed, it is difficult to generalize, but we can look at some of the DCAA audits featured in the DoDIG report to congress.
Of the $1.7 billion questioned in Incurred Costs and Other Audits, $1.5 billion were questioned in 41 audit reports included in the DODIG’s GFY 2012 reports to congress. This amount included $800 million of questioned costs relating to 21 incurred cost audits. What portion of these questioned costs is DCAA likely to sustain?
The questioned costs fall into six categories:
1. Costs from audits of contractor fiscal years 2006 and prior ($525 million). These questioned costs are potentially subject to the Contract Disputes Act Statute of Limitations. The sustention rate for these questioned costs should be 0%.
2. Costs not in accordance with the terms of the contract ($128 million) including:
Costs of Linguists Not In Accordance With Contract Terms ($106 million). Our experiences with DCAA’s interpretation of contract statements of work make us doubt that the requirements were interpreted correctly. The sustention rate for these questioned costs should be 0%.
Unapproved Direct Travel Costs ($22 million). Assuming that the only basis for questioning these costs was that they were not approved, the contracting officer should approve them. The sustention rate for these questioned costs should be 0%.
3. Questioned Subcontractor Costs ($30 million). The reasons for questioning the subcontractor costs include cost overruns, so some portion appears to be properly sustainable.
4. Unsupported Costs ($22 million). Contractors generally are able to find additional support, or show that the level of support requested by DCAA is unreasonable. Some significant portion of unsupported costs will not be sustained.
5. Healthcare Costs Lacking Adequate Documentation and Controls Supporting Eligibility of Dependents ($20 million). This issue is receiving and inordinate amount of attention from the Director of Defense Pricing, DCMA and DCAA (see MRD dated 3/28/13). Ignoring the Affordable Care Act, requirements of certain divorce settlements, and the likelihood that the vast majority of “ineligible dependents” are healthy young adults (the cost of self- insurance for whom has to be negligible and the difference in insurance premiums is $0), there is no cost principle that makes any cost unallowable due to “lack of controls”. The sustention rate for these questioned costs should be 0%.
6. Other ($75 million). We did not analyze these questioned costs.
So, what portion of the questioned incurred costs should be sustained? Probably $150 million of the $800 million questioned or about 20% (DCAA’s historically sustention rate is about 30%).
What should DCAA do about the backlog of incurred cost audits? Considering its questioned costs of between 2.5% and 4.2% and its questioned costs sustention rate of less than 30%, DCAA should quit wasting money on submissions subject to the statute of limitations and audit submissions that have significant risk.
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