Insights Into DCAA’s Report to Congress for Fiscal Year 2022

ERIC POPPY: Hello and welcome to Cherry Bekaert’s GovCon podcast, where we discuss current Government Contracting trends, compliance matters, and best practices to guide federal contractors forward.

My name is Eric Poppy. I am a Managing Director with Cherry Bekaert’s Government Contracting Advisory Services Group.

With me today are Jeff and Jacqueline from our GovCon team. Jeff is a Senior Manager on the team, and Jacqueline is a Manager.

Today we are discussing DCAA’s annual report to Congress for FY22, which was recently published.

Before we jump into the weeds of what DCAA communicated to Congress, Jeff and Jacqueline, do you want to give a quick intro regarding your experience as former employees of the agency? Jeff, I will go to you first.

JEFF: Thanks, Eric. As Eric said, I have been a Senior Manager here at Cherry Bekaert for just over a month.

Prior to that, I was with the Defense Contract Audit Agency for approximately 14 years. I served in various roles, such as Senior Auditor, Supervisory Auditor, Quality Manager, and most recently, Senior Financial Liaison Advisor.

I spent a lot of time leading, reviewing, and managing all the audits that DCAA offers. With that, I will pass it to Jacqueline.

JACQUELINE: Hi, my name is Jacqueline, and I am a Manager with Cherry Bekaert. I have been with the firm for about a year and a half.

I was with DCAA for a little over eight years and performed a wide range of audits, including Forward Pricing and Incurred Cost. After that, I was with DCMA for about two years.

ERIC POPPY: Thank you both. I am very interested to get your insights from the report to Congress that DCAA put out.

Today we are going to walk through some of those highlights. This is a follow-up to the webinar we conducted back in the spring. Since this report came out in early summer, we wanted to make sure we discussed it.

Jacqueline, to start, can you give us an overview of how many audits were conducted by DCAA and the questioned costs noted?

JACQUELINE: For FY22, DCAA examined nearly $262.50 billion in contract costs and identified more than $5.7 billion of audit exceptions across 2,560 audit reports.

They reported $3 billion in net savings and produced a return on investment of approximately 4.6 to 1.

Regarding the breakdown, there were 486 Forward Pricing audits, 522 Incurred Cost audits, 902 Claims and Terminations audits, and 650 reports for Systems, CAS, and TINA audits.

The audit exceptions by type included $4,166,551,000 in Forward Pricing, which is where the bulk of the exceptions lie. Incurred Cost exceptions were $1.1 billion, Claims and Terminations were $261 million, and Systems, CAS, and TINA audit exceptions were $25.5 million.

ERIC POPPY: Jeff, turning it over to you, what does this mean for a contractor? What is the overall return on investment on these types of audits?

JEFF: DCAA computes the return on investment using their annual funding dollars based on the exceptions that were sustained.

Questioned costs do not necessarily mean that a Contracting Officer is negotiating that full amount. Forward Pricing had a $22 return on investment, meaning for every dollar DCAA spent, they returned $22.

For Incurred Cost, the return on investment was $2.45. You can see a significant difference between Forward Pricing and Incurred Cost.

The return on investment for Claims and Terminations was approximately $2.26 for every dollar spent. For Systems, CAS, and Truth in Negotiations audits, the return on investment was approximately $0.45.

DCAA’s value to Congress is mostly focused on Forward Pricing. You are going to see more exceptions in Forward Pricing, though they are not always negotiated at a 100% sustention rate.

The primary focus for questioned costs and sustention remains Forward Pricing, Incurred Cost, and Claims and Terminations.

ERIC POPPY: If you are a contractor submitting Forward Pricing rates, those are going to be looked at under a microscope. Every stone will be overturned to reach that $22 return on investment.

JEFF: Exactly.

ERIC POPPY: Jacqueline, was there any discussion in the report regarding investigative cases?

JACQUELINE: Yes, for FY22, DCAA auditors worked on 372 investigative cases. Their efforts contributed to monetary recoveries of $328 million for this past year.

ERIC POPPY: Jeff, regarding those sustention rates, how important are they to DCAA? How does this impact our clients?

JEFF: Sustention is very important to DCAA as it is the main metric they submit to Congress.

They track how much in questioned costs they are saving the taxpayer to justify their mission of supporting the warfighter.

Audit exceptions for Forward Pricing were almost $5.5 billion, but they only sustained a little over $3 billion, resulting in a 56.2% sustention rate.

This indicates that significant questioned costs in Forward Pricing audits are not always sustained. There is often wiggle room in estimating methodologies that might not be supported during negotiation.

For Incurred Cost audits, there were about $2 billion in audit exceptions, but only $531 million was sustained, resulting in a 26.2% sustention rate.

For Claims and Terminations, there was about $380 million in audit exceptions with a $172 million sustention, resulting in a 45.4% sustention rate.

For Systems, CAS, and TINA audits, there were about $448 million in audit exceptions with about $127 million sustained, resulting in a 28.3% sustention rate.

The biggest area for questioned costs and sustention is Forward Pricing, followed by Claims and Terminations, Systems, CAS, and TINA audits, and then Incurred Cost.

ERIC POPPY: Was there any guidance in the reports regarding how long these audits are taking? Historically, we have heard stories of DCAA taking years to complete audits.

JACQUELINE: DCAA has implemented a day count for the average length of time to complete an audit.

Forward Pricing averaged about 88 days, and Incurred Cost took about 204 days. Claims and Terminations ran around 148 days, and Systems, CAS, and TINA audits averaged 280 days.

ERIC POPPY: A few years ago, it was big news when they began contracting out Incurred Cost audits to Independent Public Accounting (IPA) firms. Was there any guidance there?

JACQUELINE: Per the FY18 National Defense Authorization Act, DCAA started awarding task orders for Incurred Cost audits. There were 117 Incurred Cost audits performed by IPAs in 2022.

ERIC POPPY: We are seeing many other agencies also using IPAs for Incurred Cost audits. While DCAA and the DoD are going that route, other agencies are following suit.

JEFF: Regarding the length of time DCAA takes to perform an audit, we saw an increase in duration across the board from FY21 to FY22.

ERIC POPPY: Can you think of any reason for that?

JEFF: Part of it is likely a shift in experienced staff across DoD agencies. DCAA has recently lost people and is working on staffing back up.

There has been significant movement within the agency at senior-level positions, which opens up paths for promotions.

This results in many new supervisors and staff working through things, which adds additional on-the-job training time to the process.

ERIC POPPY: For the companies we assist, the big takeaway is that contractors and consultants must know the regulations and use publicly available audit programs.

We need to understand the questions completely and answer as effectively as possible. This is especially important when auditors are newer and still learning.

JEFF: It is always good to make sure everyone is staying in their lane and not over-asking for information.

ERIC POPPY: OTAs, or Other Transaction Authorities, were a hot topic a couple of years ago. Jeff, can you talk about how DCAA assists with OTAs and the current trends?

JEFF: DCAA is trying to get involved with OTAs as much as they can. We have seen a recent push and an increase in contracting using OTAs.

DCAA supports Agreements Officers by providing advisory services or negotiation support for Forward Pricing situations.

Even though they do not follow the FAR, they might perform quick reasonableness testing to get a contract in place quickly.

They also advise on specific elements of an agreement and help scope the language. DCAA can include OTAs as part of Incurred Cost audits if the agreements contain an audit clause and the Agreements Officer requests it.

In FY22, DCAA examined $375 million worth of OTAs and questioned about $981,000.

ERIC POPPY: Regarding Incurred Cost audits, can you explain the difference between high and low risk? When is a low-risk memo issued versus a full audit?

JEFF: DCAA has specific criteria to determine whether an Incurred Cost audit is performed or if a low-risk memo is issued.

Audits are requested if the contractor’s Auditable Dollar Value (ADV) is $1 billion or greater, or if they do not meet low-risk memo criteria.

Other factors include risks related to specific direct costs or concerns raised by an ACO. For low-risk memos, the office determines the ADV and completes a sampling eligibility determination form.

If eligible, the proposal is placed into a sampling universe for random selection. In FY22, DCAA issued 522 Incurred Cost audit reports covering $186 billion.

They also issued 2,900 low-risk memos covering about $48 billion in costs. Most of these were completed within the 12-month requirement.

ERIC POPPY: Was there any guidance given by DCAA regarding post-pandemic activities?

JEFF: DCAA staff returned to offices in May 2022 for approximately two workdays per period. Prior to that, everything was handled remotely.

The Defense Contract Audit Institute continues to offer both virtual and live courses for training. DCAA’s current goal is to reduce costs and consider consolidating smaller offices.

In FY22, DCAA established the Operations, Business Enterprise, and Data Intelligence Division (OBD) to develop innovative solutions for complex data challenges.

They are currently procuring a replacement management information system and plan to use technology to enhance the audit process.

Additionally, DCAA passed its external peer review in July 2022 with a rating of "Pass."

ERIC POPPY: That is good to know, especially since DCAA was previously noted for not meeting professional standards.

The big takeaway from the report is the focus on Forward Pricing rate audits. We know companies are interested in submitting these rates for estimating purposes.

Agencies are emphasizing these submissions, so there is a significant audit focus there.

If anyone has questions about navigating a DCAA audit, Incurred Cost submissions, or government responses, please reach out.

Thank you for tuning into the Cherry Bekaert GovCon podcast. Reach out if you have any questions.