Pentagon Told to Improve Management of Cost-Plus Contracts

Pentagon contracting officers failed to follow a key interim Federal Acquisition Regulation rule on managing cost-reimbursement contracts, risking overspending on 411 contracts worth $31.7 billion, an audit found.

The Defense Department inspector general’s office visited dozens of sights to review 604 contracts valued at about $82.7 billion collectively, and determined that an interim rule designed to beef up contract oversight was inconsistently followed on 193 of the contracts. “As a result, contracting personnel continued to issue cost-reimbursement [agreements] that may increase DoD’s contracting risks because cost-reimbursement contracts provide less incentive to control costs,” auditors wrote.

Auditors investigated whether contracting officers implemented the rule -- finalized in September 2012 -- by documenting that approval for the cost reimbursement contract was at least one level above the contracting officer; that the use of cost reimbursement contracts was justified; that requirements under the contract could transition to firm-fixed price in the future; that government resources were available to monitor the cost-reimbursement contract; and that contractors had an adequate accounting system in place.

The report acknowledged that the rule “does not identify what steps contracting officers should take to assess a contractor’s accounting system.” Hence some officers issued contracts without this assessment stating that the Defense Contract Audit Agency could not assess the system in a timely manner, while others did their own assessment without outside help.

Some contracting officers said they were not aware of the interim rule, thought its requirements were not clear, thought it didn’t apply to their contract, or failed to document steps taken to comply.

The inspector general recommended that contracting officers:

• Reinforce current guidance or clarify when cost-reimbursement contracts should be approved one level above the contracting officer;
• Reinforce current regulations regarding the requirement to consider how a cost-reimbursement contract could transition to a firm-fixed-price contract in the future;
• Identify best practices to assess a contractor’s accounting system and codify the efforts that should be taken by contracting personnel to assess the adequacy of the contractor’s accounting system;
• Clarify whether FAR revisions are applicable to task and delivery orders issued on previously issued basic contracts;
• Discuss whether broader contracting policies are sufficient support to meet the increased criteria before issuing a cost-reimbursement contract, and
• Clarify the extent to which initial decisions for a basic contract can be relied on for analysis on the subsequent orders and options pertaining to the contract.

Pentagon acquisition officials have not yet responded to the recommendations.