DCAA passes up chance to save $249.1M annually, says DoD OIG

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A September 2010 Defense Department policy change that established thresholds under which the Defense Contract Audit Agency doesn't ordinarily audit contractor proposals was meant to net the audit agency a higher return on investment. In fact, the policy change potentially cost taxpayers $249.1 million, says the Defense Department office of inspector general, in a Nov. 13 report (.pdf).

The policy change in question modified the Defense Federal Acquisition Regulation Supplement by establishing a $10 million threshold for routine DCAA audits of fixed-price contract proposals and a $100 million threshold for cost-type contract proposals (both thresholds include subcontracts that individually fall under the threshold but which are part of an over-the-threshold proposal).

During fiscal 2009 DCAA estimates that it spent $129 on each audit hour. By leaving it up to the Defense Contract Management Agency to conduct cost-analysis of under-threshold proposals, DCAA officials figured they would gain a higher return per audit hour.

Auditors actually agree with that logic; DCAA auditors do find higher value questionable costs when they work on high-dollar proposals.

But the under-threshold audits still provided a considerable return on investment, given a $129 per hour cost, the inspector general says. The office calculates that DCAA auditors during fiscal 2009 uncovered $1,885 worth of questionable costs per hour during the course of under-threshold audits that year.

And along with under-threshold audits, DCAA also conducts other audits, such as for defective pricing, compliance with cost accounting standards and incurred costs for "special audits." The return on investment for all of those other audits is less than the $1,885 recovered by under-threshold audits, the inspector general says – in some cases considerably less. Cost accounting standards compliance audits have a return on investment of $375 per hour while incurred cost audits have a return of $196 per hour.

Were the DCAA to perform under-threshold audits using the same number of audit hours as it expended on them during fiscal 2009, the DCAA would likely make a return of nearly $249.1 million, the inspector general says.

DCAA officials told inspector general officials that their conclusions ignored areas of risk. Some of the lower-return audits are nonetheless needed, said DCAA Deputy Director Anita Bales in an official response to the audit. For example, operational areas abroad are "an example where simply applying a return on investment measure might not result in the correct audit decision," she said. Many downrange area audits do have a low return, she acknowledged, but  "these reviews become critical to ensure the contractor is operating efficiently," she added.

Bales also said the potential return on re-instituting under-threshold audits would be $122.4 million rather than the inspector general's higher figure of $249.1 million – to which auditors respond that underlying premise that DCAA should factor in matter such as return on investment into resource allocation decisions remains valid.

For more:
- download the report, DODIG-2013-015 (.pdf)

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