Defense Contracting: DOD Initiative to Address Audit Backlog Shows Promise, but Additional Management Attention Needed to Close Aging Contracts
Highlights
What GAO Found
To reduce the backlog of incurred cost audits, the Defense Contract Audit Agency (DCAA) implemented an initiative to focus its resources on auditing contractors' incurred costs that involve high dollar values or are otherwise determined to be high risk. Incurred cost audits are conducted on a contractor's annual proposal that includes all costs incurred on certain types of contracts in that fiscal year. Under the initiative, DCAA raised the dollar threshold that triggers an automatic audit on a contractor's incurred cost proposal from $15 million to $250 million, revised the criteria used to determine a proposal's risk level, and significantly reduced the number of low risk audits that will be randomly sampled. This initiative appears promising, and DCAA plans to track certain characteristics, such as the number of risk determinations made and audits completed. But DCAA has not fully developed the measures by which it will assess whether the initiative reduces the backlog in a manner that protects the taxpayers' interests. Specifically, DCAA does not have a plan for how it will determine whether key features of the initiative, such as the revised risk criteria and the revised sampling percentages, should be adjusted in the future. By 2016, DCAA estimates it will reduce the backlog and reach a steady state of audits, which it defines as two fiscal years of proposals awaiting review. DCAA's ability to achieve this goal will depend on a number of factors, including the number of proposals determined to be high risk, which as of September 2012 was about two-and-a-half times more than anticipated.
Reducing the backlog of incurred cost audits will ease one obstacle to closing over-age contracts, but other obstacles, such as limited data and performance metrics, must still be overcome. The military departments have limited data on the extent and nature of their contract closeout backlog, and the Defense Contract Management Agency (DCMA)--which performs contract administration services for the Department of Defense (DOD)--is missing information that would allow it to identify contracts that it could act on. Such data can cue agencies on how to identify or tailor approaches to address the backlog. Further, the military departments generally do not have performance metrics to measure progress in closing out contracts. The Army recently announced a goal of closing over 475,000 contracts by September 2014; however, it does not yet have the information necessary to know if it can reach this goal and does not have an implementation plan. The Navy and the Air Force had not established any department-wide performance metrics for contract closeout. In contrast, DCMA has established two agency-wide performance metrics related to contract closeout that are regularly monitored. While many officials said contract closeout was not a priority, GAO found some local contracting activities taking action to bring attention to contract closeout.
Why GAO Did This Study
DOD has a large volume of contracts that have not been closed on time. Closing a contract includes tasks such as verifying that the goods and services were provided and making final payment to the contractor. Closing contracts within required time frames can limit the government’s exposure to certain financial risks. One reason why some contracts are not being closed is the large backlog of incurred cost audits that must first be completed. These audits, conducted by DCAA, ensure that the costs contractors have incurred are permissible under government regulations.
The Senate Armed Services Committee report accompanying the National Defense Authorization Act for Fiscal Year 2012 directed GAO to review the criteria and procedures for conducting incurred cost audits, among other things. In response, GAO assessed (1) efforts to reduce the backlog of incurred cost audits and (2) the challenges DOD faces in addressing the contract closeout backlog. GAO reviewed DCAA’s policies and procedures for incurred cost audits; analyzed data on the audit and contract closeout backlogs; and interviewed officials in the military departments and agencies.
Recommendations
GAO is recommending that DCAA develop a plan to assess its incurred cost audit initiative; that DCMA improve data on over-age contracts; and that the military departments develop contract closeout data and establish performance measures. DOD concurred with the recommendations and identified ongoing and planned actions to address them.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Defense Contract Management Agency | To improve DCAA's ability to assess whether its incurred cost backlog initiative is achieving the objectives of reducing the incurred cost audit backlog while continuing to protect the taxpayer's interests, the Director, DCAA, should develop a plan that includes time frames and measures to assess progress towards achieving its objectives, and as appropriate, to identify how it will assess whether the changes in DCAA's procedures and criteria are appropriate or require further revisions. |
DCAA has implemented this recommendation. DCAA developed a monitoring plan that includes measures to assess its progress in achieving its objectives, as well as to identify whether changes are needed to its procedures or criteria for addressing the backlog. For example, one measure involves DCAA analyzing audit results for contractor proposals deemed high risk to determine whether some of the risk criteria, such as the questioned costs from prior audits, are better indicators of risk than others. DCAA is regularly monitoring this measure and others to see if adjustments to its plan for reducing the incurred cost audit backlog are needed.
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| Department of the Air Force | To increase visibility and enhance management attention on closing out contracts within their departments, the Secretaries of the Navy and Air Force should, respectively, develop baseline data and performance measures for closing out contracts, including consideration of the use of quick closeout procedures, as appropriate. |
The Department of the Air Force has addressed the recommendation. The Air Force is tracking the number of contracts eligible for closeout on a regular basis, with regular reports senior Air Force contracting officials. In July 2015, the Air Force established percentage baselines for overage contracts based on contract type and put a plan in place to reduce the percentage of contracts ready to be closed that are overage with annual goals through fiscal year 2020. For example, in July 2015 the Air Force identified 51,475 firm-fixed price contracts due for closeout, 85 percent of which were overage. The Air Force established 85 percent as its baseline of the percentage of firm-fixed price contracts that were overage, and established the goal of reducing the percentage of overage firm-fixed price contracts to 77 percent by the end of fiscal year 2016. The Air Force made progress toward achieving this goal--reducing the percentage of firm-fixed price contracts that were overage to 78 percent as of March 2016.
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| Department of the Navy | To increase visibility and enhance management attention on closing out contracts within their departments, the Secretaries of the Navy and Air Force should, respectively, develop baseline data and performance measures for closing out contracts, including consideration of the use of quick closeout procedures, as appropriate. |
The Department of the Navy has addressed the recommendation. The Navy is tracking the number of contracts overdue for closeout on an annual basis, and is reporting to the Navy's Office of the Assistant Secretary of the Navy for Research, Development, and Acquisition's Naval Contracting Council on the Navy's progress toward closing these contracts. At the beginning of fiscal year 2016, the Navy identified a total of 85,090 over-age contracts. In January 2016, the Navy established performance goals for their Naval Commands to reduce their overage contracts by 5 percent by the end of the year, as well as a 10 percent cumulative reduction goal by the end of 2017. In May 2017, the Navy reported on their 2016 numbers and made some progress toward achieving its goal, with 6 of their 10 commands meeting the 5 percent reduction of over-age contracts goal.
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| Department of the Army | To facilitate the closeout of contracts within the Army, the Secretary of the Army should ensure that the Army's contract closeout implementation plan includes baseline data and performance measures, and includes consideration of the use of quick closeout procedures, as appropriate. |
The Department of the Army has addressed the recommendation. The Army is tracking the number of contracts eligible for closeout as well as those overdue for closeout on a quarterly basis. The Army conducts quarterly reviews on a variety of contracting topics, including contract closeout, which are reported to the Office of the Deputy Assistant Secretary of the Army (Procurement). The reporting to senior executives includes performance goals on over-age contracts by Army commands. Army officials stated that the performance metric is to reduce the overage contracts by 10 percent each year.
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| Defense Contract Management Agency | To enable DCMA to better identify contracts that may be closed out, the Director, DCMA, should take steps to ensure the data in DCMA's contract information system on who has responsibility for moving the contract forward in the closeout process is complete. |
DCMA has addressed this recommendation. DCMA has developed a mechanism for querying its database to identify who has responsibility for moving the contract forward in the closeout process. DCMA generates reports using this query, and these reports link the information of who is responsible for moving the contract forward to the stage in the closeout process where the contract is currently held up. DCMA has also taken steps to ensure these reports include complete data on who has responsibility for contract closeout. According to DMCA officials, they monitor the data on a monthly basis and report the data on a quarterly basis.
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