Defense agency raises bar for reviewing contractor cost proposals

By Robert Brodsky

November 1, 2010

The Defense Contract Audit Agency has agreed to dramatically reduce its oversight of Pentagon procurements, according to an internal memorandum.

Effective immediately, DCAA will accept contracting officers' requests for audit assistance only for fixed-price proposals of more than $10 million and cost-type proposals worth more than $100 million, according to a memo the Project on Government Oversight, a federal watchdog group, obtained last week. Assistance entails a review of the contractor's cost proposals to the government. The order does not apply to requests by another DCAA office and includes a waiver for "exceptional circumstances."

"One of the priorities undertaken by DCAA this year was to better align workload requirements with available resources," wrote Kenneth J. Saccoccia, DCAA's assistant director of policy and plans, in the Oct. 18 memo. "Coordination within DoD resulted in agreement that DCAA should target its resources on high-risk proposals to best serve our stakeholders."

But, critics suggested the plan is short-sighted and could expose the government to massive overcharges by prime contractors.

"POGO has long feared contractors and their government allies would block DCAA from exposing contractor rip-offs," said Nick Schwellenbach, POGO's director of investigations. "Why are billions of dollars being put at risk when [Defense] Secretary [Robert] Gates is demanding cost savings?"

In a statement, a Defense Department spokeswoman said the change will allow DCAA to focus on the highest-risk areas, and "actually increase savings to the department and warfighter."

In the past, there was no dollar threshold for reviews on fixed-price contract proposals, but requests for audit assistance generally were limited to proposals in excess of $700,000, according to POGO. The previous threshold for DCAA to review a cost-type proposal was $10 million, although the agency made exceptions if the prime contractor had systemic problems estimating costs.

POGO reviewed federal contracting data and found $92 billion in Defense contracts fell between the previous thresholds and the new ones.

Audits below the new threshold will now be referred to the Defense Contract Management Agency for field pricing assistance, Saccoccia wrote.

Schwellenbach argued DCMA does not specialize in reviewing and verifying cost and pricing data. The congressionally chartered Commission on Wartime Contracting has criticized DCMA for a lack of thoroughness.

The redistribution of audit assistance work came as no surprise to observers who have tracked DCAA's response to a stinging 2008 Government Accountability Office report. The watchdog found DCAA auditors often failed to comply with generally accepted government auditing standards, documented their audit opinions improperly and submitted sloppy working papers.

But, some auditors suggested DCAA managers overreacted to the report, and they now have embraced the time-consuming GAGAS process for all audits and reviews of cost data in contractor proposals. The result has been that reports take longer and require a field office manager's approval. Often contracts are issued before the DCAA reviews are complete.

In fiscal 2008, the average time to complete a contractor pricing review was 28 days, compared with 72 days in fiscal 2010, agency officials said. The number of DCAA reports produced annually also has plunged from about 30,000 in fiscal 2008 to 21,000 in fiscal 2009.

"Some of our audits take longer because we are doing a more comprehensive job," DCAA Director Patrick Fitzgerald told Government Executive in July. "If there are other factors that are causing us to take longer, we need to do a deep dive on those and try to figure out how mitigate or to alleviate them."

The agency has hired 500 new auditors since the GAO report and will add 1,000 more by fiscal 2015, a 37 percent staffing increase. DCAA also is planning to shed several low-priority services and place more emphasis on high-risk contracts.

By Robert Brodsky

November 1, 2010