Welcome back to the Cost Corner, providing practical insightinto the complex cost and pricing requirements that apply togovernment contractors. This column recently reviewed the TruthfulCost or Pricing Data Statute, commonly known as the Truth inNegotiations Act (TINA).1We will return to TINA in a fewmonths to address the Defense Contract Audit Agency's (DCAA)playbook for defective pricing audits.
But first, this column embarks on a two-part seriesregarding DCAA audits generally. Part 1 (this column) provides anoverview of DCAA's mission, organization, audit guidance, andaudit rights. It also addresses the types of audits DCAA conductsand recent DCAA audit statistics. Part 2 (next month'scolumn) will focus on DCAA's audit guidance, audit procedures,and best practices for contractors dealing with DCAAaudits.
DCAA'S MISSION
Prior to 1965, each military department conducted its owncontract audits.2 Contractor and government personnelrecognized the need for consistency. In May 1962, Secretary ofDefense Robert S. McNamara instituted "Project 60" toexamine the feasibility of centrally managing contractadministration and audit functions.3 This study resultedin a decision to create a single contract audit capability withinthe Department of Defense (DoD).4 Secretary McNamarathen established DCAA as a separate DoD agency on June 8,1965.5 DCAA's mission is to conduct contract auditsand to provide accounting and financial advisory services to allDoD components responsible for procurement and contractadministration.6 DCAA providesthese services for the negotiation, administration, and settlementof DoD contracts and subcontracts to "ensure that taxpayerdollars are spent on fair and reasonable contractprices."7 DCAA also provides contract auditservices for other Federal agencies through inter-agencyagreements.8
DCAA interprets its contract audit function broadly. The DCAAContract Audit Manual, DCAA's primary source of guidance forauditors, describes contract audits as extending to all aspects ofa contractor's organization, including not only financial data,but also operations, policies and procedures, internal controls,management decisions, and any other activities that have thepotential to impact contract costs:
The purpose of contract auditing is to assist in achievingprudent contracting by providing those responsible for Governmentprocurement with financial information and advice relating tocontractual matters and the effectiveness, efficiency, andeconomy of contractors' operations. Contract auditactivities include providing professional advice on accounting andfinancial matters to assist in the negotiation, award,administration, repricing and settlement of contracts. Auditinterest encompasses the totality of the contractor'soperations. Audits are performed to assure the existence ofadequate controls which will prevent or avoid wasteful,careless, and inefficient practices by contractors. Theseaudits include the evaluation of a contractor's policies,procedures, controls and actual performance, identifying andevaluating all activities which contribute to, or have an impacton, proposed or incurred costs of Government contracts. Areasof concern to the auditor include the adequacy ofcontractor's policies, procedures, practices, and internalcontrols relating to accounting, estimating, and procurement;the evaluation of contractors' management policies anddecisions affecting costs; the accuracy and reasonableness ofcontractors' cost representations; the adequacy and reliabilityof contractors' records for Governmentowned property; thefinancial capabilities of the contractor; and the appropriatenessof contractual provisions having accounting or financialsignificance. Contract auditors perform evaluations ofcontractors' statements of costs to be incurred (costestimates) or statements of cost actually incurred to the extentdeemed appropriate by the auditors in the light of their experiencewith the contractors and relying upon their appraisals of theeffectiveness of the contractors' policies, procedures,controls, and practices. Such evaluations may consist of testchecks of a limited number of transactions or in-depth examinationsat the discretion of the auditor.9
DCAA frequently takes aggressive audit positions. Fortunatelyfor contractors, DCAA's role in the procurement process isadvisory.10 DCAA is responsible for advising thecontracting officer regarding the acceptability of incurred andestimated costs, reviewing the financial and accounting aspects ofthe contractor's internal controls, and performing otheranalyses and reviews that require access to the contractor'sfinancial and accounting records.11 DCAA does not havethe authority to make final determinations regarding theallowability of costs, the contractor's compliance withregulatory or contractual requirements, or the acceptability of thecontractor's business systems. The contracting officer has theexclusive authority to make those determinations.
Notably, contracting officers do not always adopt DCAA'saudit findings.12 DCAA's fiscal year (FY) 2022Report to Congress indicates that contracting officers sustainedless than half the dollar value of DCAA's auditexceptions.13 This demonstrates the importance ofresponding thoroughly to adverse DCAA audit findings in order topresent the contractor's best defenses to the contractingofficer. Audit responses can be particularly effective when theyinclude a detailed contractual and legal analysis of DCAA'saudit position (including citations to applicable contractprovisions, regulations, regulatory history, case law, and DCAAaudit guidance).
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Footnotes
1. 10 U.S.C. §§ 3701–3708; 41 U.S.C.§§ 3501–3508.
2. Government Accountability Office (GAO), DCAAAudits—Widespread Problems with Audit Quality RequireSignificant Reform at 7 (GAO-09-468) (Sept. 2009), available athttps://www.gao.gov/products/gao-09-468 (hereafter DCAAAudits—Widespread Problems); Janet A. McDonnell, A History ofDefense Contract Administration (March 5, 2020), available at https://www.dcma.mil/News/Article-View/Article/2100501/a-history-of-defense-contractadministration/.
3. DCAA Audits—Widespread Problems at7–8.
4. DCAA Audits—Widespread Problems at8.
5. DCAA Audits—Widespread Problems at 8; DoDDirective (DoDD) 5105.36, Defense Contract Audit Agency (DoDD5105.36) ¶ 1.3 (December 1, 2021). Project 60 also resulted inconsolidation of the military departments' contract managementactivities under the Defense Contract Management Agency (DCMA),formerly the Defense Contract Management Command(DCMC).
6. DoD Directive (DoDD) 5105.36, ¶ 1.2; DCAAContract Audit Manual (DCAM) ¶ 1-102 (Apr. 2023). The DCAM isavailable at http://www.dcaa.mil/Guidance/CAM-Contract-AuditManual/(last visited June 26, 2023).
7. DoDD 5105.36 ¶ 1.2; see also DCAM ¶ 1-102.a(Apr. 2023).
8. DoDD 5105.36 ¶ 1.2; DCAM ¶ 1-102 (Apr.2023).
9. DCAM ¶ 1-104.2.a (Apr. 2023) (emphasisadded).
10. DCAM ¶ 1-102.b (Apr. 2023).
11. Defense Federal Acquisition Regulation Supplement(DFARS) 42.102(a).
12. DoD, Report to Congress on FY 2022 Activities DefenseContract Audit Agency at 7 (Mar. 31, 2023) available at:https://www.dcaa.mil/Portals/88/Documents/About%20DCAA/Report%20to%20Congress/DCAA_FY22_Report_to_Congress.pdf?ver=Hx7wl7AE_OE1CaR8Aepj0g%3d%3d (hereinafter DCAA FY 2022 Report toCongress).
13. See DCAA FY 2022 Report to Congress at 7.
Originally published by LexisNexis.
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