In his State of the Union address, President Obama talked of the need to overhaul the way that the government does business in order to make it more efficient. He said,
“We live and do business in the information age, but the last major reorganization of the government happened in the age of black and white TV. In the coming months, my administration will develop a proposal to merge, consolidate, and reorganize the federal government in a way that best serves the goal of a more competitive America.”

The body which is responsible for overseeing the $530 billion in yearly government contracts is Defense Contract Audit Agency. Despite its name, DCAA is also responsible for civilian contracts as well as those for the Department of Defense.

DCAA has been the main authority in auditing government contracts for 46 years. Since it was introduced, the role of DCAA has expanded greatly. However, the staff of DCAA auditors has significantly decreased from the one-time high of 7,000 during the 1990s to the 4,114 auditors it has today. This is the current number after about 500 new auditors were added in the past two years.

After the President’s State of the Union address, the Senate Homeland Security and Governmental Affairs Committee held a hearing on February 1st to discuss the future of how government contracts are overseen.

Government watchdog groups promoted the need for the DCAA’s role to be increased. Some lobbyists even argued for the creation of a solitary, independent audit agency which would function outside of the pentagon and report directly to congress.

Nick Schwellenbach, the director of investigations for Project on Government Oversight, said in his argument, “Unlike most agencies, a new Federal Contract Audit Agency could save more money each year by uncovering waste and fraud than it would cost to run it. The FCAA would provide a needed check on contractors, ensuring that the government is not overcharged for goods and services.”

Despite the implications of Schewellenbach’s statement, DCAA still considers itself to be a good investment. In 2010, DCAA had a return of $5.10 for every dollar spent running the agency. The savings came to a total of $2.7 billion.

While this rate of return does show that DCAA is profitable, it is much less than the past high ROR of $50. Of course, supporters of DCAA could argue that there are fewer instances of fraud and overspending today because of DCAA audits, thus reducing the ROR compared to the past.

One the other side of the hearing argument were lobbyists from industry groups and the private sector. They argued that the role of DCAA shouldn’t be increased. Instead, there was a dire need to increase communication between contractors and auditors as well as increase the level of trust.

The President and CEO of Professional Services Council Stan Soloway said that DCAA auditors were too isolated.

“As most would agree, the quality of an audit and, more importantly, the effectiveness of any response to an audit are tied to the degree of communication that occurs among the parties before and after the audit itself.”

Soloway went on to criticize the current system of pass/fail which DCAA uses in audits. The system treats all deficiencies equally, regardless of severity. After issues are corrected, it can take months or even years before communication is received from DCAA auditors.

After the February 1st HSGAC Contracting Oversight Subcommittee hearing, the DCAA director, Patrick Fitzgerald has been on a media campaign to tout all the new changes he has implemented and how they have improved the quality of DCAA audits.

According to Fitzgerald, DCAA has saved about $3 billion with a “tightened net” which focuses on singling out defense contracts which are considered high-risk. About these “real savings,” Fitzgerald said,

“I mean there’s a lot of numbers thrown around sometimes, but these are savings determined by the contracting officer saying that they paid less for goods and services as a result of basing their negotiations on our audit reports.”
However, while DCAA may be saving money by forcing contractors to find cheaper alternatives to goods and services, the contractors are paying dearly while they stand by waiting for contracts to be approved.

The subcommittees ranking member Senator Scott Brown, R-Mass, addressed the how the slow audit process was affecting contractors.

“It is costing them real money, real dollars. So, in addition to the healthcare bill, the taxes they are paying, and the regulations they are dealing with, now they are facing audits.”

A year ago, DCAA was criticized because its auditors were purportedly too friendly with contractors. Now, while remedying this criticism and focusing more on high-risk contracts, DCAA has now lost communication with contractors.

When auditors cite deficiencies in a contract, they are no longer making the recommendations about corrective actions. This means contractors must rely upon their own analysts to search out remedies. By the time that deficiencies are corrected, it takes DCAA a long time to approve contractors.

With this pass/fail approach to DCAA audits, contractors are left idling because of minor problems. This idling is costing contractors real dollars in healthcare, managerial costs, taxes, and other costs. Additionally, the amount of lost income is enormous as the contractors often cannot bid on new DCAA contracts until they have been approved by their auditor.

The subcommittee hearing shed light on the need to improve the partnership between contractors and auditors. However, it missed an opportunity to discuss the critical changes needed to improve communication between DCAA contractors and auditors.

For what it is worth, DCAA director Fitzgerald has done a thorough job of addressing the identity criticisms of DCAA during his short tenure. Under his direction, DCAA has hired about 500 new auditors in two years. Instead of just using these auditors to nitpick details of contracts, the auditors are focusing on giving quality audits.

Fitzgerald emphasized that the job of the auditors was to focus on quality, not just quantity.

“To be a really good auditor, you have to be curious. You have to ask that follow-on question. You have to kind of look at things and see if you can connect the dots. Does it all make sense?”

This statement doesn’t include anything about an auditor’s job to communicate with DCAA contractors. While DCAA is on a good start internally, hopefully they will soon address the problems with the auditing process from an industry perspective.

To get the New Year off to a frustrating start for government contractors, Shay Assad, Director of the Defense Procurement and Acquisition Policy (DPAP), released a memorandum called:

“Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense Spending; ‘Align Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) Processes to Ensure Work is Complementary”

Just reading the name of this memorandum was painful enough but then it went on to discuss actions, which have been implemented for a better working overlap between the DCMA and DCAA. These were to be in compliance with an earlier memorandum from September 2010.

Amongst other matters, the memorandum discusses that DCAA field audits will only be carried out for cost-type proposals of $100million+ and fixed-price proposals of $10million+. Additionally, DCAA will withdraw from financial capability reviews with the exception of reviews that are in the processes of Preaward Audit Surveys.
While this is generally good news for government contractors, the memorandum did mention one troubling aspect in regards to the corporate administrative contracting officers (CACO) and Forward Pricing Rate Recommendations (FPRR) and Forward Pricing Rate Agreements (FPRA).

The troubling part of the memorandum is that it states that, after DCAA does an audit of a government contractor’s rates, those rates will be adopted by DCMA. The rates will then become the recommended rates for FPRR. However, this clearly goes against the judicial decision that the final forward pricing rates are to be determined by the contracting officer.

FAR states that role of DCAA is just one of advising and the contracting officer will be in charge of deciding to what extent the DCAA recommendations will be carried out. Further, the contracting officer is the only and final authority for administering the contracts and to “make related determinations and findings.”

Clearly, the memorandum goes against FAR. Even though the purpose of the memorandum was to define the relationship of DCAA and DCMA, it instead worked to give DCAA more power while stripping the contracting officer of the right to, “wide latitude to exercise business judgment” as stated under FAR.

Now, the final contracting rates set by DCAA will simply be issued from the contracting officer. The contractor will not be able to contradict these rates set by DCAA and show why they are not relevant or reasonable unless the contractor objects to the rates by a Contract Disputes Act claim.

That means that government contractors are going to lose the ability to get back the money spent from fixed price DCAA contracts because the rates will be all predetermined.

While the memorandum may have seemed like good news to us at first, government contractors should prepare for a tough year, which could get even worse in the next several years. DCAA is gaining increasing influence and, as it does, the authority of DCMA and contracting officers is diminishing. It will probably take a court appeal before this trend of DCAA power increasing ends.

Do you remember back in 2008 when the Government Accountability Office gave a very critical review of the DCAA audit practices? DCAA was told to be more independent.

Now, several years after DCAA criticism, government contractors are finally going to start feeling the effects. Instead of DCAA acting as a friendly business partner with contractors, DCAA is taking the remote, big-brother approach.

In the past, DCAA would point out all the various deficiencies in systems, internal controls and processes that government contractors are subject to. Then, the DCAA would also give recommendations and guidance through fixing these problems. If you thought that DCAA was tough before, just wait until your next audit!

The new face of DCAA will still point out all the deficiencies but contractors will be on their own to find remedies for fixing them. All of the findings from a DCAA audit will have to be investigated independently. Once adequate solutions have been found for the problems, then the contractor must also defend the solutions to the new, unfriendly DCAA.

To make matters worse, DCAA is becoming a much larger entity. Instead of having just 4,000 employees as it did back in 2008 when the critical report was released, DCAA now has 4,700 employees. Since a whopping 85% of DCAA employees are auditors, that means there will be more audits. In 2011, DCAA intends on upping hires for even more auditors. As many of us have probably experienced, larger entities of oversight generally mean less-friendly business practices.

In 2011, government contractors can also expect many more requirements just for proposal requests. For example, now the contractor must have a certified business system already in place in order to be applicable as a bidder.

Contractors are going to have a much harder time renewing contracts and bidding on new ones. If anything, we can expect even harsher standards in the future from DCAA. Many government contractors are preparing for the harsher regulations already and seeking out third party help to make assessments. Of course, this means investing money for an independent evaluation on a contract, which the company is not even guaranteed to win.

Another main issue with DCAA is that the pre-award audits are not being carried out in a consistent manner. Each DCAA auditor spends a different amount of time going over the procedures. Then, even if the bid is won, there can still be additional audits before the bid is officially awarded.

Even though recent DCAA news has shown that audits are going to be limited to larger contract jobs, the intensity of the audits is going to drastically increase. We can expect that the DCAA audits are going to delve into all aspects of transactions, documentation, timekeeping, and so forth. There is a lot of room for DCAA to delve into. If you go to the DCAA’s website, you will find 98 types of audits that a government contractor can be subjected to.

Talk about government reform is sure to make you groan, especially when in regards to DCAA regulations.  It is hard enough to grasp these DCAA regulations without the added challenge of continual changes in policies and procedures.  As contractors, what we need to remember is that the DCAA is not just a scrutinizer, but is also under constant scrutiny.  Groups such as The Project on Government Oversight (POGO) are urging the Senate Armed Services as well as Homeland Security & Governmental Affairs Committees to step up their supervision of DCAA.

There are many problems within DCAA, which were addressed by congress in early 2010.  However, the DCAA reforms which resulted after considerable criticism of DCAA have failed to change any of the problems.  This means that we can expect more DCAA reforms in the future, which will undoubtedly cause more complications for contractors.

Some of the biggest criticisms with DCAA are with managers of auditors.  Many auditors allege that DCAA is a hostile workplace.  There have been allegations of DCAA managers changing audits because of friendly relationships with the contractors.  Since there was no way to hold these DCAA managers accountable for their actions, the agency decided to create a hotline where auditors could report abuses.  However, this hotline reports all findings back to the region or manager.  Obviously, an abusive manager is not going to hold him or herself accountable for irresponsible actions.

There have also been theories that DCAA promotes employees based on loyalty to managers, not because of dedicated work that reduces unnecessary spending.  Even though there has been a call for grassroots organizations to investigate the internal workings of DCAA hiring and promotions, the DCAA headquarters has been resistant.

These sorts of problems with DCAA are not new and complaints about corruption go back decades.  Real DCAA reform may not be possible so long as the agency is within the Department of Defense.  There has been a call for an independent auditing agency for federal contracts.

So, how do DCAA problems and reforms affect you as a federal contractor?  The suggestion that managers are playing favorites with contractors is a big concern to smaller firms looking to win government contracts.  It will be even more difficult to compete against larger companies if those companies are giving managers bribes.  While you tire away trying to fill out your DCAA timesheets correctly, an auditor for a large company is looking the other way while sharing drinks with the contractor.

Now that DCAA management is obsessed with documenting the auditor’s steps, there is less focus on the actual contractor costs.  Instead of DCAA being about accountability and stopping overspending, the audit process becomes more a systematic procedure of steps which aren’t applicable for GAGAS.  It seems like the senate house will continue applying pressure on DCAA to make reforms.  Hopefully, this means that contractors can expect to be awarded bids on the strength of the proposal rather than just friendly relationships with DCAA managers.

It’s good to know that QuickBooks can now be compliant to the Defense Contract Auditing Agency. Within a phone call or two, you can have the QuickBooks system up and running. You will need to contact a third-party to align your QuickBooks to be DCAA Compliant, but it is well worth it – anything that eases the pressures of DCAA compliance helps.

Once you determine your contract type, fixed-priced, “costs,” or initial contract, you will be able to let your QuickBooks consultant know what you need done. If you don’t know exactly what needs to be done to become QuickBooks DCAA Compliant, don’t worry, these individuals know what needs to be done according to contract type.

The DCAA has implemented a requirement for daily compounded interest on adjustments of CAS noncompliance after a dispute over a contractor not paying interest on monies owed.

This is a costly change, as compounded interest is significantly more than simple interest. Treasury rates can make this cost hurt even more if they inch towards the higher side as it has in the past two decades.

Click Here to read further about how this new requirement may affect you.

The past couple years have been a struggle for the DCAA with reports of frustrated employees and corrupt supervisors. The GAO found flawed audit reviews, some suppressing negative findings. Many auditors reported inappropriate behavior from their supervisors.

With new authority in place, changes have been improving the DCAA. More attention is going towards the hiring and training process, and disagreements between employees is being closely evaluated.

Although there is still skepticism from some auditors, a better workforce is on the horizon.

For more information about the changes coming to the DCAA, click here

With the Federal Government being the largest purchaser of goods and services, it is extremely beneficial for small businesses to submit federal contracts.  The Federal Government actually allocates a portion of their budget towards small firms.

The upcoming 2010 Midwest Small Business Government Contracting Symposium is offering help to small businesses interested in contracting with the Federal Government and becoming DCAA compliant.

To find out more about the speakers and topics at this symposium, click here.

Could your company’s valuation be negatively impacted by your lack of compliance with the DCAA? For many firms that rely on DoD business, it’s important to realize how closely your valuation could be tied to your compliance with the DCAA.  The following article helps explore some key elements to consider and highlights this frequently overlooked link.

For more information on how DCAA compliance can impact company valuation, >>click here.