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New Guidance–Limited Role for DCAA Audit of Non-DoD Contracts

The 2016 National Defense Authorization Act (NDAA, S.1356) (“the Act”) includes a number of sections related to Acquisition Policy or Acquisition Management. In particular, the Act discusses the subject of the Defense Contract Audit Agency (“DCAA”) contract audits and the requirements for improved auditing on the incurred cost backlog (“Indirect Cost Rate Proposals”; “ICPs”) are explicitly mentioned. Section 893 prohibits DCAA from performing any audits for non-defense agencies (e.g., National Aeronautics and Space Administration (“NASA”)), unless the Department of Defense (“DoD”) certifies that DCAA is current on the ICP backlog or less. This restriction could cause some disruption for contractors when DoD contracts are not a majority of the contractor’s government work and when audit support has been provided by DCAA in the past. “Current” is defined as 18 months of incurred cost inventory. Based upon 2015 public comments made by DCAA’s Deputy Director, the annual inventory is approximately 7,500 ICPs which would implicate an approximate annual value of $339 billion.

DCAA issued additional guidance to its auditors that appear to limit the prohibition on “audit support” to incurred cost audits, leaving DCAA auditors free to provide other accounting services to non-DoD agencies. One Memorandum for Regional Directors (MRD) in particular seems to permit DCAA to perform incurred cost audits that include both DoD and non-DoD contracts when auditors determine that inclusion of the non-DoD contracts involves “de minimis” incremental effort by DCAA, and offering guidance about how to handle both DoD and non-DoD contract (mixed) audits when the non-DoD contracts will create more than “de minimis” incremental effort. There is no language in the MRD that discusses cognizance.

Although we don’t know if DCAA met the 18-month inventory as required by Section 893 (that could change this month when/if the annual report to Congress is released), we do know that DCAA has immediately ceased some audit support for non-Defense Agencies. For example, DCAA is not reviewing/approving public vouchers for NASA contracts.

Cherry Bekaert will continue to follow the implications of these developments. Feel free to contact your Cherry Bekaert GovCon or Audit professional to discuss how these changes will impact you.

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