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What to Expect from DCAA in the Coming YearBill WalterDavid Eck

November 11, 2015

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Speaker Information

Bill Walter, PartnerDixon Hughes Goodman, LLP(703) 970.0509bill.walter@dhgllp.com

@DHG_GovCon

David Eck, DirectorDixon Hughes Goodman, LLP(703) 970.0480david.eck@dhgllp.com

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Agenda

• A Moment• Driving Trends• Recent Reports• DCAA Audit Plan Overview• DCAA Priorities• Cost Issues

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Driving Trends

• Budget Uncertainty – The New “Normal”• Procurement Trends

– Better Buying Power– Commercial Items– LPTA’s and Fallout

• Executive Orders – The New Front• DCAA vs. DCMA – The Great Divide

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Recent Reports

• DCAA Report to Congress on FY 2014 Activities – March 25, 2015– Made major progress in reducing incurred cost backlog– Issued 5,600 audit reports– Examined $182 billion– $10.7 billion questioned costs– $4.5 billion net savings

• House Report 114-102, National Defense Authorization Act for FY 2016 – May 5, 2015– More needs to be done to improve DCAA efficiency– DODIG continues to find GAGAS deficiencies in majority of DCAA

audits– Concerns with slow DCAA audit process and extensive backlog– Substandard DCAA performance impairs defense acquisition process

by incurring avoidable delays and raising costs to government and industry

– Directs Secretary to provide briefing by March 1, 2016 on steps taken to address DCAA deficiencies

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Recent Reports

• H.R. 1735, National Defense Authorization Act for FY 2016 –October 9, 2015 (vetoed by President on October 22, 2015)– DCAA may not provide audit services for non Defense Agencies

unless Secretary of Defense certifies that backlog for incurred cost audits is less than 18 months of incurred cost inventory

• Report No. DODIG-2016-001 – Evaluation of DCMA Actions on Reported DoD Contractor Business System Deficiencies, October 1, 2015– In all 21 DCAA business system reports reviewed, DCMA

contracting officers did not comply with one or more DFARS requirements

– DCMA contracting officers did not:• Issue timely initial and final determinations• Obtain or adequately evaluate contractor responses• Withhold a percentage of contractor payments

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DCAA FY 2016 Audit Plan Overview

• DCAA FY 2016 Staff Allocation and Future Plan Guidance, August 13, 2015 (15-OWD-025(R)

• FY 2016 work years – 4,969 (FY 2015 work years –4,916)

• Focus on agreed-to due dates and reducing incurred cost backlog

• Complete disclosure statements and termination audits in a timely manner

• Perform selected business system audits• Perform real time MAARS (labor and material)• Assignments for reimbursable customers will continue

to receive attention

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DCAA Priorities

• Annual Plan– The top priorities for FY 2016 are: (1) Demand work including proposal audits, forward pricing rates, terminations, claims, and other time-sensitive requests (2) Incurred costs audits to reduce the backlog (3) Business Systems (MMAS and Estimating Systems) (4) Disclosure statement audits (5) High-risk, time-sensitive labor and material reviews (6) Contractor billings: provisional billing rates, pre- and post-payment reviews (7) Postaward Audits of compliance with the Truth in Negotiations Act (8) Other high-risk areas

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Demand Work – Proposals, Forward Pricing Rates, and Terminations

• Avoid DCAA making inadequate determinations on your proposals• Maintain adequate estimating systems in compliance with the

DFARS estimating system criteria• Assess the adequacy of your proposals using the Forward Pricing

Proposal and Forward Pricing Rate Checklists prior to submission to the government

• DCAA says it will support having Forward Pricing Rate Agreements (FPRAs) or Forward Pricing Rate Recommendations (FPRRs) at most contractors

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Incurred Cost Audits

• DCAA FY 2016 incurred cost audit plan will focus on completing CFYs 2010 and earlier , audits, and a portion of CFYs 2011 and 2012, except for:– Corporate, group, home office, and service centers (CFYs 2011 and earlier)– Overseas Contingency Contracts – real time audits of direct cost on a six

month testing cycle• DCAA will continue to attempt to use multi-year audit and sampling techniques

to reduce the backlog• Avoid DCAA making inadequate determinations on your submissions – use the

Incurred Cost Adequacy Checklist• Maintain adequate accounting systems in compliance with the DFARS

accounting system criteria

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Business Systems (MMAS and Estimating)

• Other than MMAS and estimating system audits, DCAA says it does not have the resources to perform other business system audits (e.g., accounting)

• DCAA will perform 12 estimating system audits and 5 MMAS audits at contractors listed in the audit plan guidance– 5,000 hours each for estimating system audits– 4,000 hours each for MMAS audits

• Contractors listed in the audit plan guidance should assess the adequacy of their estimating and MMAS business systems using the DFARS criteria for these business systems

• DCAA will perform requested audits of other business systems if supported by risk

• DCAA will issue recommended disapprovals of business systems if deficiencies are found in other audits (e.g., real time testing of incurred cost during voucher reviews)

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Disclosure Statement Audits

• DCAA audit plan will include sufficient hours to perform disclosure statement audits– Including both initial and revised disclosure statements

• DCAA will not perform individual CAS compliance audits during FY 2016– Testing for CAS compliance will be performed as part of other

audits (e.g., incurred cost and forward pricing)• Perform self assessments to verify that your disclosure

statements are adequate

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High Risk, Time-Sensitive Labor and Material Audits

• DCAA will perform real time audits of labor and material at all major contractors and high risk non major contractors MAARs 6 and 13)

• At contractors with large amounts of labor and material costs, DCAA will perform testing to support an opinion on these costs for the entire year

• Perform self assessment to verify adequacy of your timekeeping and material accounting system (not MMAS)

• Any deficiency found during these audits most likely will result in DCAA recommending disapproval of your accounting system

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Contractor Billings

• DCAA will perform incurred cost testing during post payment voucher reviews– One third of non majors for each fiscal year– One voucher each quarter for major contractors

• DCAA will also review provisional billing rates to verify the rates are updated on billings at least annually

• Final contract costs will remain a priority • Perform self assessments of your billings to verify that direct costs

reconcile to the accounting records and provisional billing rates are updated at least annually

• Also perform a self assessment of your billing system to verify it complies with relevant DFARS accounting system criteria

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Post Award Audits

• DCAA will perform 29 post award audits at 16 contractors listed in the audit plan guidance (1,250 hours per audit)– Does not do a good job assessing risk (over/under testing)– Does not build upon the proposal audit– Does not know when the audit is over – audits continue forever– Spends more time on the post award audit then the proposal audit

• Contractors listed in the audit plan guidance should identify the targeted contract for post award audit and perform self assessment

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Other High Risk Areas

• Other high risk DCAA audit areas include:– Financial Capability audits– Preaward and non major accounting systems– NASA Property audits– Progress Payment audits– Operations audits

• DCAA will perform these audits based on risk assessments• DCAA will not perform any EVM Compliance or Surveillance

audits

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Cost Issues

• Executive Compensation• “Expressly” Unallowable Costs

– Courts vs. Guidance

• Facility Costs• Time and Material contracts• Commercial Items• Subcontract Costs• Metron – Document, Document, Document

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What Does This Mean

• Civilian Agencies• Proposal Scrutiny

– Adequacy Checklist

• Incurred Costs– Historic Document

• Business Systems– Self Evaluate

• Disclosure Statements– Organization

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Questions?

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Fundamentals of Govt. Contracting at a GlanceBeginning Thursday November 19th @ 11am• Challenges of Contracting with the Federal Government• Contract Types and Associated Risks• Year-End Closing• An Introduction to the Incurred Cost Submission

– Part I: Who, What, Where, When, Why, and How?– Part II: Preparation and Adequacy Review

• Accounting Systems and Setups• Accounting System Adequacy 101• The Composition of Total Cost• Making Way for 2017 – Budgeting and Provisional Rates• Procurement Systems: DFARS Business Systems Rule and Criteria• Exploring the Gray Area of Unallowable Costs• Policy and Procedures Manual: What’s In It and Why Do You Need

One?

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Join Us Next Month

Wrapping Up the YearWednesday, December 16th, 11:00 am

@DHG_GovCon