On May 4, 2018, the Department of Defense (“DoD”) issued a final rule amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) to state that, in the interest of promoting voluntary disclosures of defective pricing identified by contractors after contract award, DoD contracting officers have more discretion to determine the scope of the involvement of the Defense Contract Audit Agency (“DCAA”) in assessing such a disclosure. 83 Fed. Reg. 19645. This is a change from DoD’s November 2015 proposed rule, which required contracting officers to request at least a limited-scope audit when a contractor voluntarily discloses defective pricing. While arguably a step in the right direction, the permissive language of the final rule continues to provide only limited information to defense contractors about what to expect following a voluntary defective pricing disclosure. Nonetheless, by listing the types of information that the contracting officer must consider when deciding whether to request an audit, the rule arms contractors with potentially impactful information.
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DCAA
ASBCA Shoots Down DCAA Overreach on Responsibility to Manage Subcontractors
A prime contractor is responsible for managing its subcontractors, but what exactly does that require? In a recent decision, the answer of the Armed Services Board of Contract Appeals was: not nearly as much as DCAA claimed.
In Lockheed Martin Integrated Sys., Inc., ASBCA Nos. 59508, 59509, the Board ruled on a Government claim seeking more than $100 million from LMIS for allegedly breaching an obligation to manage subcontracts. In DCAA’s reading, this obligation was extensive and required a number of concrete actions by the prime contractor.
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DoD Proposes DFARS Changes in Attempt to Promote Voluntary Disclosure of Defective Pricing
Pursuant to the Truth in Negotiations Act (TINA), contractors are required to submit current, accurate, and complete cost or pricing data when negotiating certain contracts with the Government. On November 20, the Department of Defense (DoD) published a proposed rule to amend the Defense Federal Acquisition Regulation Supplement (DFARS). The change would require DoD contracting officers to request a limited-scope audit if a contractor voluntarily discloses defective pricing,[1] unless a full-scope audit is “appropriate for the circumstances.” In theory, if the rule is implemented, contracting officer would have the flexibility to focus an audit on the defective portions disclosed by the contractor and not reexamine all previously provided pricing data. Though the proposed rule appears to be DoD’s attempt to provide limited relief to defense contractors facing significant regulatory burdens under TINA, it is not clear the rule as written will provide any such relief.
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Defense IG’s Criticism of DCMA Is Cold Comfort for Government Contractors
The Inspector General (“IG”) of the Department of Defense issued a report on October 1, 2015, sharply criticizing the performance of Defense Contract Management Agency (“DCMA”) contracting officers. In a sample of 21 business system deficiency reports (collected from the 164 reports filed between July 2012 and June 2013) the IG investigation found none that fully complied with DCMA’s obligations under the Defense Federal Acquisition Regulation Supplement. The overwhelming majority of the reports were deficient in multiple respects, and many of them were severely untimely.
Should government contractors celebrate this public admonishment from the IG? Probably not.
Although the investigation alleges serious lapses in the timeliness and sufficiency of DCMA’s reports, it rests on the presumption that DCMA needs to be more aggressive in identifying and correcting deficiencies. The report does not suggest, for example, that the DCMA’s delays result from overzealous investigations or excessive focus on insignificant concerns. Instead, the report calls for reforms that would increase the incentives for DCMA contracting officers and Defense Contract Audit Agency (“DCAA”) auditors to take swift, aggressive action.
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Updated DoD IG Guidance Signals New Enforcement Emphasis for DCAA Auditors
The Department of Defense Office of Inspector General (“DoD IG”) appears poised to place new emphasis on the pursuit of fraud cases in certain key enforcement areas, at least according to updated agency guidance recently published online. Earlier this month, the DoD IG quietly revised its “Auditor Fraud Resources” page, intended to serve as guidance for DCAA auditors, by adding new materials addressing fraud scenarios in the context of defective pricing and forward pricing proposal audits. Although the appearance of this new guidance was the cause of little fanfare, the prospect of increased enforcement activity in these areas could significantly impact the defense contracting community.
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DCAA’s 4th Annual Report to Congress Will Look Familiar to Many…
The Defense Contract Audit Agency (DCAA) recently issued its Fourth Annual Report to Congress dated March 25, 2015. Once again, the report shows DCAA is making modest improvements in the timeliness of its audits, and continues to seek regulatory changes that would provide DCAA greater access to contractors’ data, internal audits, and personnel.
Congress began requiring annual reports from DCAA in 2011 following well-documented and widely reported criticisms of DCAA that ranged from allegations about failure to comply with professional standards, questions about the timeliness of audit reports, and the well-publicized increased backlog of incurred cost proposals requiring audit. Section 805 of the 2012 National Defense Authorization Act requires DCAA to submit an annual report by March 30th of each year. Each report must provide statistics on DCAA’s audit performance during the previous fiscal year and address “Significant Deficiencies and Recommended Actions to Improve the Audit Process.”Continue Reading DCAA’s 4th Annual Report to Congress Will Look Familiar to Many…
An Acceptable Proposal: Set Appropriately High, Clear Standards for DoD’s Auditors and LPTA Competitions
On April 30, 2015, the House Armed Services Committee passed H.R. 1735, the National Defense Authorization Act for Fiscal Year (“FY”) 2016, with an amendment (Log #325rl) that could shape how the Department of Defense (“DoD”) acquires audit and audit readiness services for its Financial Improvement and Audit Readiness (“FIAR”) Plan. Under the FIAR Plan, DoD must validate the audit readiness of its financial statements by September 30, 2017, and it must submit to Congress an audit of its FY 2018 financial books by March 31, 2019. The amendment states that, for DoD to meet these deadlines, “it is imperative that [DoD] not sacrifice contracts with firms who have the proper credentials and expertise” to provide DoD with audit and audit readiness services. Hence, the amendment bars the use of a lowest-price, technically-acceptable (“LPTA”) evaluation method to procure such services unless DoD (1) establishes “the values and metrics for the services being procured, including domain expertise and experience, size and scope of [an] offeror’s team, personnel qualifications and certifications, technology, and tools”; and (2) considers offerors’ past performance history.
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Inside the Proposed DFARS Business Systems Rule
On July 15, 2014, the U.S. Department of Defense (“DOD”) issued a proposed rule that imposes new requirements for third-party audits of three contractor business systems, as well as a requirement for contractors to self-report deficiencies uncovered in these audits or in internal reviews of these business systems. The three…
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