NCMA Upper Chesapeake Chapter John Shire Deputy Assistant Director Policy and Plans Defense Contract Audit Agency The views expressed in this presentation are DCAA's views and not necessarily the views of other DoD organizations

2 DCAA Organization Director Patrick Fitzgerald Deputy Director Anita Bales Central Region Tim Carr Vacant Eastern Region Paul Phillips Gary Spjut Northeastern Region Ron Meldonian William Adie Mid-Atlantic Region Vacant Steve Hernandez Western Region Donald Mullinax David Johnson General Counsel Defense Legal Service Susan Chadick Assistant Director, Resources Philip Anderson Assistant Director, Policy & Plans Ken Saccoccia Assistant Director Operations Tom Peters Internal Review Karen Cash Field Detachment Karen Cash Terry Schneider Regions Headquarters Assistant Director, Integrity & Quality Assurance Don McKenzie Executive Officer Joe Garcia Executive Officer Joe Garcia

3 Deliver High Quality Services and Products Agency will use new Strategic Plan to work audit quality and workforce issues Established proposal walk-through and early identification of issues/inadequacies All Raytheon audits under cognizance of one region Issued extensive changes to audit guidance, procedures and processes Authorized additional management/supervisory positions to allow more time on audits Holding Agency-wide Field Audit Office (FAO) Managers Conference annually

4 Requirements/Workload and Resources Working with Stakeholders to defer or divest low risk workload - will allow DCAA to focus on higher risk work with larger payback to Warfighter/Taxpayer. Added 500 new employees over the last 2 years DPAP Memorandum (1/4/2011), “Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense Spending: ‘Align DCMA and DCAA Processes to Ensure Work is Complementary”  Increased Thresholds for Price Proposal Audits  Forward Pricing Rate Agreements/Forward Pricing Rate Recommendations  Financial Capability Reviews  Purchasing System Reviews  Contractor Business Systems Rule

5 Making a concerted effort to engage with stakeholders: Issued “Rules of Engagement” Initiated regular high level meetings with contracting community Executives participated at speaking engagements with DoD Procurement and Contractor Associations Issued Joint DCAA/DCMA Directors Memorandums  Established MOU on EVMS Improve Communications and Working Relationships with Stakeholders

6 DCAA Rules of Engagement MRD 10-PAS -023 and 024 dated Sept 9, 2010 Issued guidance on establishing open and effective communications with all stakeholders  Rules cover communications during each phase of the audit  Establishing the engagement  Entrance conference  During the audit  Exit conference  Post report issuance  Negotiations

7 Highlights of Rules of Engagement Hold discussions with the requestor before beginning the audit to identify specific areas of concern All parties participate in the contractor walk-through of the proposal During the audit  Keep stakeholders informed of major audit issues  Timely notification of required extensions  Status of audit communicated clearly Provide draft results after manager review Include the contracting officer in the exit conference Auditor attendance at negotiations

8 Unique Value of the Audit FAR (c)(2) provides that when a contracting officer performs “cost analysis” it includes verifying:  The offeror’s cost data or pricing data and  That the offeror’s cost submissions are in accordance with the contract cost principles and procedures in FAR part 31 and, when applicable, the requirements and procedures in 48 CFR Chapter 99, Cost Accounting Standards. The Price Analyst, adhering to the Contract Pricing Reference Guide (Volume 3- Cost Analysis), may perform many of the procedures discussed. However, the Auditor, with access to the contractor’s books and financial records, can evaluate the validity of historical data and other supporting records. Typically, contractors use historical costs to justify proposed costs. If we do not verify that historical costs are compliant, then historical non-compliant costs could go undetected, and the Government risks negotiating a proposal value that includes similar non-compliant costs.

9 Forward Pricing Proposal Adequacy Adequate Contractor Proposals – Facilitate Effective Audit  Proposed amounts supported by detailed basis of estimate and supporting documentation  Supporting justification/explanation provided for significant variances between prior buy actual cost data and proposed amounts  Consolidated Bill of Material  Detailed support for additive factors applied to various cost elements Indirect Rates supported by contractor budgetary or trend data Adequate Support for Subcontractor Proposals  Adequate prime contactor cost or price analysis  Adequate subcontract proposal Proposal reflects anticipated accounting changes

10 Top Reasons for Inadequate Contractor Proposals Significant variances between proposed amounts and basis of estimate/supporting documentation (proposed amounts not supported) Significant variances between prior buy actual cost data and proposed amounts without supporting justification/explanation Lack of consolidated Bill of Material Unsupported additive factors applied to various elements of costs often leading to duplicate costs proposed Rates not based on contractor budgetary or trend data Inadequate Support for Subcontract Proposals  Inadequate prime contractor cost or price analysis  Inadequate subcontract proposal Proposal does not reflect anticipated cost accounting changes

11 Proposal Walk-Through Includes PCO, ACO & DCAA  Gain full understanding of contractor’s proposal/assertion  Identify obvious data omissions  Facilitate early identification of proposal inadequacies  Process allows for expediting appropriate action if proposal is inadequate or other problems requiring contracting officer assistance  Establishment of suspense dates for contractor corrective actions

12 Importance of Proposal Adequacy Reduces time and resources needed for review of proposal- more efficient use of audit resources Ensures timely service to the requestor Facilitates contract negotiations Facilitates accomplishing the contracting officer’s requirement for ensuring proposal complies with FAR and CAS

13 Notification of Inadequate Proposal DCAA policy is to always notify the contracting officer as well as the contractor of proposal inadequacies and the necessary actions to make the proposal adequate – this is now earlier and more interactive due to the walk- throughs Contracting officer has the option to have DCAA go forward on proposal review based on the available information Going forward may result in additional time, an adverse or disclaimer of opinion and excessive audit resources The key is to ensure the audit will still provide value to the acquisition process

14 Contractor Support to Facilitate a More Timely Audit Process Effective contractor proposal walk-throughs Adequate contractor submissions and assertions Adequate supporting data in a timely manner and timely access to key contractor personnel responsible for contractor support Real-time DCAA access to contractor systems

15 Acquisition Example 1 Firm Fixed Priced $176M Proposal for services Audit questioned $43M $28M related to equipment lease costs  Due to additional audit procedures on this follow-on effort it was determined the contractor was leasing the equipment from a related party  FAR (b)(3) limits the allowable lease costs to the normal costs of ownership  The contractor removed the excess lease costs from its next proposal for two more option years

16 Acquisition Example 2 Firm Fixed Priced $78M Proposal for force protection equipment for troops  DCAA identified several inadequacies in the contractor’s original proposal  Revised Proposal submitted for $55M Audit Questioned $20M due to the contractor’s failure to consider actual cost already incurred The Army was able to use $15M of the saving to acquire additional equipment

17 Contractor Business Systems The interim Business System Rule was issued on May 18, 2011 Defines contractor business systems as the contractor’s  Accounting System  Estimating System  Material Management and Accounting System (MMAS)  Purchasing System  Property Management  Earned Value Management System (EVMS) Includes a contract clause that requires the contracting officer to apply a percentage of withhold when a contractor’s business system contains a significant deficiency

18 Contractor Business Systems DCAA will report on compliance with the criteria in DFARS DCAA Reports will identify significant deficiencies – defined by the interim Business System Rule as  Shortcomings in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes

19 Incurred Cost Initiative Developed a risk-based approach to working down backlog in a effective manner: Increase staffing Dedicated audit teams (FAO Manager, Supervisors, and auditors) Revising guidance to perform audits covering multiple contractor years in a single assignment at certain contractors Developed revised incurred cost audit program Delivering an incurred cost auditing refresher training course Continue working with DoD on strategies to better align the limited DCAA resources to the higher risk contracting areas

20 Continuous Improvement Ad-hoc studying the forward pricing rate evaluation process with a focus on timely delivery of audited rates High Risk Proposal Team assembled to provide a one – agency support network focused on quality and timeliness Full participation of proposal walk-throughs to assess proposal adequacy and understand the basis of estimate Emphasizing annual program plan meetings with contracting officer and contractor to discuss priorities Implementing a project management approach to include detailed milestone plans to facilitate timely completion of audits Enhancing the role of the prime contract auditor in coordinating major subcontract proposal audits under major procurements The use of audit reports on parts of a proposal to help get audit results to the contracting officer more timely

21 Additional information on DCAA and Points of Contact available at Defense Contract Audit Agency