Improved Auditing of Contracts

2016 National Defense Authorization Act

2016 NDAA. On November 25, 2015, President Obama signed the National Defense Authorization Act (NDAA) for FY 2016. The Act authorizes $515 billion in spending for national defense and an additional $89.2 billion for Overseas Contingency Operations, for a total of $604.2 billion for FY 2016. The NDAA also has 77 (about twice the typical) provisions relating to government procurement, including Section 893.

Section 893, Improved Auditing of Contracts. Section 893 has an interesting title since it really has nothing to do with improving audits. It simply reduces the amount of work that the DCAA is authorized to perform. The Section prohibits DCAA from providing audit support for non-Defense Agencies (e.g. NASA, Department of Energy) unless the Secretary of Defense certifies that DCAA’s backlog for incurred cost audits is less than 18 months of incurred cost inventory. DCAA does not currently keep data called incurred cost inventory, but the average audit takes over three years, and many audits are six or more years old.

Section 893 Practical Application

When Does the DCAA Audit Prohibition Apply? Section 893 states the prohibition is “effective on the date of the enactment of this Act.” The President signed the Act on November 25, 2015, so the prohibition is effective after that date. That means the DCAA may not provide any “audit support” to non-DOD agencies after that date. There is no exclusion for audits already begun, so the DCAA is required to stop any non-DOD audits already underway as of that date as well as not start any new non-DOD audits.

Impact on Indirect Costs. Contractors should note that support provided to DCAA auditors for non-DOD audits after that date may support illegal audit activities. Any costs incurred to support illegal audits will be unallowable and must be backed out of indirect rates. Contractors should immediately cease all support of DCAA audits for non-DOD contracts or risk facing unallowable cost determinations for those activities.

What is “Audit Support”? DCAA may not provide “audit support” to non-Defense Agencies until SecDef certifies there is less than 18 months of incurred cost audit inventory. The statute does not define “audit support” but it appears the provision will likely apply to all audits, including cost proposal audits for contract awards or modifications, forward pricing audits, incurred cost audits or other audit activities.

How Will DCAA Determine the Backlog? This is not clear, and Section 983 does not contain any directions. Based upon public statements by DCAA, it appears likely that DCAA will use a simple count and not consider the value of contracts or complexity of the audit. Using this approach, DCAA may do simple audits and defer high-dollar or complex audits in order to make their backlog look lower.

What if a non-DOD Agency Pays DCAA to Perform an Audit? Congress thought of this one—Section 983 provides the DCAA budget funding will be reduced by an amount equivalent to any reimbursements received by DCAA from non-DOD Agencies for audit support provided.

How Will Non-DOD Agencies Perform Audits? No one knows for sure, but the most likely approach is that in the short-term non-DOD agencies will engage more outside auditors to perform the audits, and will also attempt to bring more audit activities in-house to the agency. That will likely have an impact on non-DOD agency budgets, and may impact agency operations.

What Does this Mean to Contractors? Again, no one knows for sure, but it definitely adds a layer of uncertainty to an already uncertain business. The change may result in longer wait times before contracts can be awarded while audits are being completed. It may take longer to get final rates, and there may be more disputed cost issues with auditors who may not have DCAA experience.

If you have DCAA disallowed cost, or other cost or audit issues, contact the professionals at Williamson Law Group at 301 788-8198, or e-mail Scott Williamson, at srw@williamsonlawgroup.com. This information is intended to keep readers current on developments in federal government contract matters and is not intended to be legal advice. Please contact Williamson Law Group for legal advice for your particular case.