BRG GovCon Research Report: October – December 2012

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Berkeley Research Group’s Government Contracts Advisory Services (GCAS) practice keeps its clients up to date on the latest regulatory developments affecting the government contracts industry. This edition of the GovCon Research Report summarizes the critical regulatory and compliance issues contractors faced in the fourth calendar quarter of 2012. The issues are summarized by the following key subject-matter areas:

  • Key Federal Acquisition Regulation (FAR) Updates
  • Key Defense Acquisition Regulation (DFAR) Updates
  • GSA and VA Schedule Matters
  • Pertinent Government Accountability Office (GAO) Audit Reports
  • Other Relevant News

Key Federal Acquisition Regulation (FAR) Updates

Nondisplacement of Qualified Workers Under Service Contracts - Final Rule (FAR Case 2011–028)

This final rule, published on December 21, 2012, adds FAR subpart 22.12, ‘‘Nondisplacement of Qualified Workers Under Service Contracts,’’ and a related contract clause.

The regulations require that workers on a federal service contract who would otherwise lose their jobs as a result of contract completion or expiration be given the right of first refusal for employment with the successor contractor. The regulations apply to all service contracts (prime and subcontractor) above the simplified acquisition threshold (currently $150,000) and their solicitations, except those excluded, that succeed contracts for the same or similar services at the same location. The regulations exclude certain types of contracts and employees from its requirements, and allows the head of a contracting department or agency to exempt any contracts from the regulations if it finds the requirements would not serve the purposes of the Executive Order Equal Employment Opportunity or would impair the Federal Government’s ability to procure services economically or efficiently.

The new regulations include provisions for investigating and resolving complaints of non-compliance. The regulations also provide for remedies and sanctions for violations—including payment of back wages, withholding of funds for unpaid wages, and exclusion from federal contracting.

Accelerated Payments to Small Business Subcontractors – Proposed Rule (FAR Case 2012-031)

On December 19, 2012, the FAR Council issued a proposed rule to implement the temporary policy provided by OMB Policy Memorandum M-12-16 and establish a new FAR clause at 52.232-XX, “Providing Accelerated Payments to Small Business Subcontractors.” This proposed rule would require the prime contractor, upon receipt of accelerated payments from the Government, to make accelerated payments to small business subcontractors, to the maximum extent practicable, after receipt of a proper invoice and all proper documentation from small business subcontractors.

This proposed rule would not provide any new rights under the Prompt Payment Act or affect application of the Prompt Payment Act late payment interest provisions. The clause would be inserted into all new solicitations issued after the effective date of the final rule, including solicitations and contracts for the acquisition of commercial items.

Key DFARS Updates

Definition of Cost or Pricing Data – Final Rule (DFARS Case 2011–D040)

This final rule updates the text in DFARS to clarify the distinction between “certified cost or pricing data” and “data other than certified cost or pricing data.” The rule ensures consistency with the FAR, which had been amended in August 2010 to clarify the distinction between those terms, as well as the requirements for the submission of cost or pricing data. (See Federal Acquisition Circular 2005-45 FAR Case 2005-0360).

The rule, published on December 31, 2012, merely aligns the DFARS with the FAR by updating the text addressing the definition of cost or pricing data to include the word “certified” in front of “cost or pricing data.” The rule does not expand or diminish the existing rights of the contracting officer to obtain cost data or pricing data. Instead, this rule will benefit all entities, both large and small, by clarifying the requirements for the submission of “certified cost or pricing data” and “data other than certified cost or pricing data”—with certified cost or pricing data being subject to the requirements of the Truth in Negotiations Act and the potential for adjustments resulting from defective pricing.

General Services Administration and Department of Veterans Affairs Schedule Matters

The Latest GSA Schedule False Claims Act Settlement – Grainger – The Settlements Continue

On December 26, 2012, the Department of Justice (DoJ) announced its latest False Claims Act (FCA) settlement related to a General Services Administration (GSA) Schedule contractor. W.W. Grainger, Inc. agreed to pay the Government $70 million to resolve allegations that it submitted false claims under its schedule contract with GSA for hardware products and supplies, as well as under two other U.S. Postal Service (USPS) contracts.

Like most other GSA Schedule FCA matters, the alleged issues were identified during a GSA Office of Inspector General (GSA OIG) post-award audit of Grainger’s schedule contract. During the audit, the GSA OIG identified alleged failures to disclose current, accurate, and complete commercial sales pricing and discounting information to GSA. As a result, the GSA OIG and DoJ allege that the government customers paid higher prices than they should have under Grainger’s GSA schedule contract.

The settlement also included allegations that Grainger failed to meet its contractual obligations to provide “most-favored customer” pricing under two USPS contracts for sanitation and maintenance supplies. Ironically, the Government often presumes—incorrectly—that it is entitled to most-favored customer pricing under GSA Schedule contracts as well.

Per the DoJ announcement, the USPS contracts required Grainger to treat USPS as Grainger’s most-favored customer by ensuring that USPS received the best overall discount that Grainger offered to commercial customers.

The Grainger settlement is just the latest in a laundry list of settlements related to GSA and Department of Veterans Affairs (VA) schedule contract pricing issues—the largest being Oracle’s $199.5 million settlement in October 2011.

The Evergreen provisions within the schedule contract program provide schedule holders base contracts lasting as long as five years, with up to three subsequent five-year renewal periods. Inevitably, when a schedule contract with significant sales is up for renewal, GSA OIG will perform a “pre-award” audit of the contractors renewal offer. The audit provides insight into the contractor’s commercial sales practices for a snapshot of the preceding period—usually the most recent 12 months.

Using this snapshot, GSA OIG will then identify whether potential violations of the Price Reductions clause requirements exist in the preceding contract period. If GSA OIG believes there are potential undisclosed price reductions, the pre-award audit of the renewal is often put on hold and post-award audit of the preceding period will commence.

Often, despite industry opposition to the Government’s right to perform post-award audits of pre-award data, the post-award audit will typically include a review of the contractor’s initial Commercial Sales Practices (CSP-1) disclosure. Using this approach, GSA OIG effectively expands the scope of the audit to day one of the preceding contract period.

As indicated by the results of GSA OIG’s most recent semiannual audit report to Congress, this audit approach has been effective in maximizing findings associated with GSA Schedule audits of contract pricing—resulting in an average finding of $16.28 million per audit report issued, with an average of $47.25 million in findings for the audits involving the four contractors with the most sales volume as audited during the period. (See summary of GSA OIG semiannual report to Congress below).

As pricing issues surface during a GSA Schedule audit, to the extent they are considered significant or otherwise indicative of an intentional or careless disregard of the pricing requirements of the contract, GSA OIG will often refer the matter to the DoJ, which will investigate as alleged FCA violations. Unlike a routine pricing or billing matter, as an FCA matter, pricing issues are subject to penalties as high as treble damages.

The Grainger settlement is yet another example of why schedule contractors need to be cognizant of their pricing requirements, as they relate to pre-award commercial sales practices disclosures and post-award price reductions monitoring and reporting.

General Services Administration Office of Inspector General Audit Reports

GSA OIG Semiannual Report to the Congress (April 1, 2012 to September 30, 2012)

In its semiannual report, GSA OIG highlights its continued focus on GSA Schedule contracts. Specifically, GSA OIG notes that it performed over 34 pre-award audits covering $4.3 billion in contract costs. It issued 25 audit reports with recommendations of $407 million in potential savings (i.e., refunds or overpayments), for an average of $16.28 million in findings per audit. Per GSA OIG, the agency concurred with 99.9 percent of the recommended amounts.

GSA OIG points out that four of its significant audits were of GSA Schedule contracts with combined sales of more the $1.8 billion; the audits of these contracts resulted in recommendations of $189 million in findings, or roughly 11 percent of contract sales, with average findings of $47.25 million per contractor.

The issues with the four contracts involved compliance with the Price Reductions clause. Interestingly, in addition to the traditional findings associated with lack of compliance with monitoring requirements of the clause, GSA OIG points out that some findings were a result of the clause being ineffective, because the contractor had little in the way of commercial sales.

In three of the four audits performed, the GSA OIG determined that the CSP information submitted by the contractor was not current, accurate, or complete—with one of the audits finding that the contractor’s commercial customers received greater discounts than what was offered to GSA—despite the CSP stating that the contractor offered no discounts to its commercial customers.

The semiannual report gives insight into GSA OIG’s request for, and contractors’ willingness to provide, cost data in support of GSA Schedule pricing. In three of the four GSA audits, the contractor submitted cost data in support of its offer. In all the three cases in which cost build-up data was provided, GSA OIG’s audit of the data resulted in some form of audit adjustments. These adjustments resulted from the contractor including indirect employees in the base hourly rates for direct employees, the incorrect application of indirect rate burdens, or both.

Three of the audits indicated problems with GSA sales reporting, resulting in both over and under-payment of the Industrial Funding Fee (IFF). Finally, two of the audits determined the contractors overbilled GSA buyers by invoicing a higher contractor rate site when work was performed at a Government site or because of unreported price reductions.

Department of Veterans Affairs Inspector General Audit Reports

VA OIG Semiannual Report to the Congress (April 1, 2012, to September 30, 2012)

The Veterans Affairs Office of Inspector General (VA OIG) Semiannual Report to Congress includes several key reviews that occurred from April 1 to September 30, 2012. These reviews were performed by the VA Office of Contract Review, which provides pre-award, post-award, and other requested reviews of vendors’ proposals and contracts. The results are as follows:

  • VA OIG issued 31 pre-award audit reports that identified potential costs savings to VA of $123.8 million. These results were provided to assist VA contracting officers during the reporting period. Over $102 million (83 percent) of the dollar savings from the audits were associated with pre-award audits of VA Schedule contracts.
  • Post-award reviews were performed for 14 contracts, including 5 voluntary disclosures. VA recovered 100 percent of the recommended recoveries ($11.76 million) for the contract reviews performed. Over $11.69 million (99 percent) of the dollars recovered were on VA Schedule contracts.

The report included other audit efforts unrelated to VA Schedules. An item of note includes the cancellation of five contracts with Enterprise Technology Solutions, LLC (ETS) due to non-compliance with the contract provisions limiting subcontracting. The five contracts were awarded as set-asides for VA’s Service-Disabled Veteran-Owned Small Business (SDVOSB) program, and ETS subcontracted all five contracts to Health Net, a large business.

In addition, VA OIG identified four individuals and one company that violated VA’s SDVOSB program requirements and were debarred.  VA OIG submitted an additional five referrals to the Suspension and Debarment Committee for action.

General Services Administration Regulation (GSAR) – Proposed Rules

Rewrite of GSAR Part 538, Federal Supply Schedule Contracting – Proposed Rule Withdrawal (GSAR Case 2006-G507)

On December 28, 2012, GSA withdrew a proposed rule that would have overhauled Part 538 of the GSAR, regarding Federal Supply Schedule Contracting. The original proposed rule, issued on January 29, 2009, attempted to address Federal Supply Schedule (FSS) contract issues ranging from contract administration to CSP disclosures. In feedback to the proposed rule and the numerous comments to the associated Advanced Notice of Proposed Rulemaking, industry lamented the proposed rule’s failure to address the contentious issues of the Price Reductions Clause and GSA’s pre- and post-award audits of FSS contracts.

Citing the variety of issues addressed in the GSAR rewrite and strong stakeholder interests, GSA has decided to withdraw the proposed rule to review the implementation plan of the GSAR case. GSA will open a new series of cases to modernize the FSS program. Per GSA’s notice, the new cases will focus on areas that require immediate modernization to maintain currency in the FSS program and to strategically position the program to meet existing and future needs of its buyers.

Industrial Funding Fee and Sales Reporting – Proposed Rule (GSAR Case 2012-G503)

Also on December 28, 2012, GSA issued a proposed rule to revise GSAR Clause 552.238-74, “Industrial Funding Fee and Sales Reporting,” to reflect the current use of the IFF by GSA to include the ability to offset losses in other Federal Acquisition Services (FAS) programs. GSAR 552.238-74(b)(2) currently states that the IFF reimburses the Federal Supply Service to cover the costs of operating the FSS program and to recoup operating costs from ordering agencies.

The proposed rule, which is part of the GSAR Part 538 rewrite initiatives, addresses findings from a February 3, 2012, GSA OIG audit report, “Audit of the Multiple Award Schedule Program Industrial Funding Fee” (Report Number A090256/Q/A/P12003). The OIG report recommended that GSA improve transparency in the Multiple Award Schedule (MAS) program by informing MAS customers that the IFF may be used to fund other programs or offset losses in other FAS programs, citing the GSA Modernization Act of 2006 as the authoritative statute allowing for the use of net operating revenue from IFF funds for purposes other than the recoupment of funds from the MAS program. The proposed rule would revise GSAR 552.238-74(b)(2) as summarized below:

Proposed GSAR Changes to GSAR Clause 552.238.-74

                Per December 28, 2012 Proposed Rule (GSAR Case 2012-G503)

(b) * * *

(2) The IFF represents a percentage of the total quarterly sales reported. This percentage is set at the discretion of GSA’s FSS. GSA’s FSS has the unilateral right to change the percentage at any time, but not more than once per year. FSS will provide reasonable notice prior to the effective date of the change. The IFF reimburses FSS for the costs of operating the Federal Supply Schedules Program and recoups its operating costs from ordering activities. Offerors must include the IFF in their prices. The fee is included in the award price(s) and reflected in the total amount charged to ordering activities. FSS will post notice of the current IFF at http://72a.fss.gsa.gov/ or successor website as appropriate.

 

(b) * * *

(2) The IFF represents a percentage of the total quarterly sales reported. This percentage is set at the discretion of GSA’s FAS. GSA’s FAS has the unilateral right to change the percentage at any time, but not more than once per year. FAS will provide reasonable notice prior to the effective date of the change. The IFF reimburses FAS for the costs of operating the Federal Supply Schedules Program. FAS recoups its operating costs from ordering activities as set forth in 40 U.S.C. 321: Acquisition Services Fund. Net operating results generated by the IFF are also applied to offset losses or fund initiatives benefitting other FAS programs, in accordance with 40 U.S.C. 321. Offerors must include the IFF in their prices. The fee is included in the award price(s) and reflected in the total amount charged to ordering activities. FAS will post notice of the current IFF at https://72a.gsa.gov/or successor Web site as appropriate.

 

In issuing the proposed rule, GSA notes that the action is separate from GSA’s recent announcement that it will review and develop recommendations on the overall fee structure for the MAS program in an effort to create savings for GSA customers.

Comments to this proposed rule are due by February 26, 2013.

Pertinent Government Accountability Office (GAO) Audit Reports

GAO Audit Report

Defense Contracting - DoD Initiative to Address Audit Backlog Shows Promise, but Additional Management Attention Needed to Close Aging Contracts (GAO Audit Report GAO13-131)

The Senate Armed Services Committee report accompanying the National Defense Authorization Act for Fiscal Year 2012 directed GAO to review the criteria and procedures for conducting incurred cost audits. This audit stems from the large volume of contracts that DoD has not closed out on a timely basis. Closing contracts within a required time frame can limit the government’s exposure to certain financial risk. One reason why contracts are not being closed on a timely basis involves the large backlog of incurred cost audits that must be completed by the Defense Contract Audit Agency (DCAA). GAO assessed DCAA’s efforts to reduce the backlog of incurred cost audits and the challenges DoD faces in addressing the contract closeout backlog.

DCAA implemented an initiative that revised its focus on performing high dollar-value or high-risk incurred cost audits. The thresholds were raised from $15 million to $250 million for an automatic audit of incurred costs; the DCAA revised its high-risk criteria and reduced the number of low-risk audits that would be randomly sampled.

GAO found this initiative to be promising, but indicated that DCAA has not fully developed the measures by which it will assess whether this initiative is reducing the backlog in a way that protects taxpayers’ interests. GAO recommended that DCAA develop a plan with time frames and measures to assess its progress toward achieving these objectives.

GAO found other obstacles in its audit, including limited data on the extent and nature of the contract closeout backlog and a lack of information in the hands of the Defense Contract Management Agency (DCMA) that would allow it to identify contracts it could act on for closeout. Further, GAO found that DoD lacks performance metrics to measure the progress in closing out contracts. GAO also found that DCMA made little to no use of quick closeout procedures.

GAO recommended that DCMA work to ensure the data in its contract information system is complete for acting on closeouts. Further, GAO recommended that military departments develop baseline data and performance measures for closing out contracts, including appropriate consideration for the use of quick closeout procedures.

Suspension and Debarment - DOD Has Active Referral Processes, but Action Need to Promote Transparencey (GAO Audit Report GAO-12-932)

On September 19, 2012, GAO issued a report regarding the suspension and debarment process at DoD. In the review, which was performed at the request of the Senate Armed Services Committee, GAO found DoD’s referral process to be active in identifying and referring contractors for either suspension or debarment. However, the GAO noted that improvements were needed to promote transparency within the process. Specifically, GAO noted that DoD’s processes resulted in awards being made to suspended or debarred contractors without proper justification and notification.

Per the 1982 National Defense Authorization Act, DoD must provide written justification and notification to GSA when contracts are awarded to suspended or debarred contractors based on compelling reason determinations. The notification to GSA is intended to ensure that the action of awarding the contract to an otherwise ineligible contractor is publicized.

In its review, GAO identified that between 2009 and 2011, the services comprising DoD made 14 awards to suspended or debarred contractors based on compelling reason determinations, without providing the proper notification to GSA. In its report, GAO recommends that DoD ensure that its components are aware of the requirements to notify GSA when awarding contracts to suspended or debarred contractors.

Strategic Sourcing - Improved and Expanded Use Could Save Billions in Annual Procurement Costs (GAO Audit Report GAO-12-919)

On September 20, 2012, GAO issued a report on the Government’s use of established Strategic Sourcing initiatives. The report addressed the results of GAO’s follow-up review on a 2005 Office of Management and Budget (OMB) directive to increase the use of strategic sourcing. The review was initiated upon request of the Committee on Homeland Security and Governmental Affairs.

Per the report, GAO evaluated four agencies— DoD, Department of Homeland Security, VA, and Department of Energy—to assess the agencies’ respective utilization of strategic sourcing. GAO found marginal use of strategic sourcing—either at the agency levels or through the Federal Strategic Sourcing Initiative (FSSI), which was established as a result of the 2005 OMB memo. GAO also found that agencies were not using strategic sourcing for their high-spend areas.

Per GAO’s findings, only 5 percent of agency buys were going through strategic sourcing initiatives, resulting in cost savings estimated at 0.5 percent. By way of comparison, GAO noted that commercial organizations use strategic sourcing for over 90 percent of their buys, with associated cost savings of 10 to 20 percent. GAO noted that a similar savings rate applied to the federal procurement budget would equal more than $50 billion.

In its report, the GAO cited several reasons why strategic sourcing was not utilized more frequently, including:

  • Lack of agency leadership support
  • Lack of dedicated resources to strategic sourcing
  • Failure to establish goals or metrics to monitor strategic sourcing
  • Agencies felt as if they could buy at lower prices outside of FSSI
  • Inability to define standardize requirements that would allow for strategic sourcing

Further, some agencies expressed doubts as to whether a majority of the acquisitions were suited for strategic sourcing—particularly acquisitions for emergency needs or in contingency operations. Finally, some agencies expressed concerns about the reduction in spend budgets in subsequent years if they actually had savings resulting from strategic sourcing or if strategic sourcing buys were sent outside of the agency.

In its report, GAO recommended that agencies increase resources dedicated to managing strategic sourcing and establish goals for spending managed through strategic sourcing initiatives. In addition, GAO recommended that agencies establish procedures to identify and track departmental wide strategic sourcing initiatives and work with FSSI to identify ways to utilize strategic sourcing for high spend items.

The GAO also recommended that OMB direct the Office of Federal Procurement Policy to issue a follow-up memo to the 2005 OMB guidance on how agencies can manage, use, calculate savings, and measure progress toward meeting strategic sourcing goals; and direct FSSI to report on assessment of whether government-wide top-spend product and service items are suitable for strategic sourcing initiatives.

Other News

More on Strategic Sourcing

On December 5, 2012, OMB issued a memorandum to the heads of all Executive Departments and Agencies entitled, “Improving Acquisition through Strategic Sourcing.” Citing examples of cost savings in strategic sourcing, the memorandum establishes broad strategic sourcing initiatives for agencies to manage acquisitions effectively and, when possible, collectively. As a result of the memo, five new initiatives are under way related to the government’s ongoing efforts to increase the use of strategic sourcing:

  1. Designation of Strategic Sourcing Accountable Officials (SSAOs) by Chief Financial Officers (CFO) Act Agencies. The 24 agencies and departments subject to the CFO Act (see table below) are responsible for identifying an SSAO, which will have the authority to coordinate the respective agency’s internal strategic sourcing activities.

                        CFO Act Agencies

Department of Agriculture

Department of Commerce

Department of Defense

Department of Education

Department of Energy

Department of Health and Human Services

Department of Housing and Urban Development

Department of the Interior

Department of Justice

Department of Labor

Department of State

Department of Transportation

Department of the Treasury

Department of Veterans Affairs

Agency for International Development

Environmental Protection Agency

Federal Emergency Management Agency

General Services Administration

National Aeronautics and Space Administration

National Science Foundation

Nuclear Regulatory Commission

Office of Personnel Management

Small Business Administration

Social Security Administration

  1. Establishing an Interagency Strategic Sourcing Leadership Council (SSLC). SSLC, which is to be chaired by the Administrator of the Office of Federal Procurement Policy, will consist of representatives from the departments of Defense, Energy, Health and Human Services, Homeland Security, VA, GSA, NASA, and other administrator-designated agencies. To accommodate small business concerns, SSLC will also include a representative from the Small Business Administration. SSLC’s goal is to work with existing councils (e.g., the councils of Chief Acquisition Officers, Chief Financial Officers, and Chief Information Officers) to lead the Government’s efforts for use of government-wide management and sourcing. SSLC is responsible for providing recommendations to OMB by the end of March 2013 on management strategies for the acquisition of specific goods and services.
  2. Expanded Responsibilities for GSA. The Administrator of GSA will work with SSLC to implement at least five new government-wide strategic sourcing solutions in both FY 2013 and FY 2014; provide transparency to prices paid for goods and services by agency officials in market research and negotiations; and promulgate requirements and guidance for the acquisition, use, and disposition of commodities used through strategic sourcing initiatives.
  3. Stipulate Characteristics of Strategic Sourcing Acquisition Vehicles. Characteristics stipulated by OMB for government-wide vehicles include: reflection of input from large number of agency users; use of tiered-pricing or similar strategies based sales volume; requirements for vendors to provide sufficient pricing, usage and performance data; and agency contract administration plans to perform commodity management and to monitor vendor performance and pricing throughout the life of the contract.
  4. Increasing Small Business Opportunities. OMB requires that all strategic sourcing agreements baseline small business use under existing strategies and establish goals to meet or exceed baselines in new strategic sourcing vehicles.

The OMB memo was issued only a couple of months after GAO issued its report citing the relative lack of use of strategic sourcing by several Executive Aencies. (see GAO Report 12-919 above).

While the OMB memo serves to continue the Government’s efforts to achieve cost savings through strategic buys, it includes some requirements of particular concern to industry partners. Specifically, OMB requires the newly formed interagency SSLC to propose strategies related to vendor management to reduce the variability in the prices paid for similar goods and services in situations where new government-wide vehicles may not be feasible.

Coupled with the potential requirements for additional reporting on pricing, usage and performance under strategic sourcing acquisition vehicles; this has raised concerns within industry that Government cost-savings objectives may not result in associated cost savings on the part of industry, but instead increase costs and administrative burdens.

On January 31, 2013, in a public meeting hosted jointly by several industry associations, Joseph Jordan, administrator for the Office of Federal Procurement Policy, addressed his office’s top priorities to facilitate expanded use of strategic sourcing, including:

  1. The need for better data analytics to identify prices paid across the government
  2. Building the right partnerships within the government, including agency inspector general offices and Suspension and Debarment officials to detect fraud waste and abuse; and outside the government, including industry suppliers
  3. Developing the acquisition workforce

In addition, Mr. Jordan also indicated that strategic sourcing vehicles may become mandatory-use vehicles, which could result in elimination of other contracts.

The Government’s strategic sourcing initiative, though not new, has gained momentum. With the Government’s continued focus on cost savings, it is clear the initiative will garner continued support within the Government. While industry appears to agree to the overall intent of strategic sourcing, real concerns exist about the consequences of such initiatives, the practicality of use—particularly as it relates to complex services and solutions— and expectations regarding vendor pricing and reporting.

Industry partners should keep abreast of the Government’s ongoing focus on strategic sourcing and give thought to how their own pricing practices may need to be analyzed and presented to ensure that they can take maximum advantage of strategic sourcing opportunities while not settling on the default option of providing their goods and services to all agencies at the lowest price offered.

Office of Inspector General Reports

Department of Defense Inspector General (DOD OIG) Audit Reports

DOD OIG Semiannual Report to the Congress (April 1, 2012, to September 30, 2012)

As summarized in its semiannual report, DOD OIG issued 79 reports identifying $2.8 billion in potential monetary benefits. The Defense Criminal Investigative Service conducted investigations that resulted in 72 arrests, 167 criminal convictions, 37 suspensions, and 136 debarments, for a return of $3.3 billion to the government. The report points to areas of critical concern: contract oversight and training and equipping the Afghan National Security Forces, which are the critical means of establishing security and stability in Afghanistan.

Appendix D of the Semiannual Report contains updated information regarding DCAA audit reports issued during the six months ending on September 30, 2012. The following chart provides this information:

Type of Audit

Reports Issued

Dollars
Examined
($ in millions)

Questioned Costs

Funds Put to Better Use

Incurred Costs, Ops Audits, Special Audits

2,586

$24,354.6

$1,715.0

$10.1

Forward Pricing Proposals

875

$53,682.5

$4,704.9

Cost Accounting Standards

337

$126.6

$94.2

Defective Pricing

22

Note

$36.5

Totals

3,820

$78,163.7

$1,845.7

$4,715.0

 

Note:  Defective pricing dollars examined are not reported by the DOD IG because the original value was included in the audits associated with the original forward pricing proposals

DOD OIG Audit Policy and Oversight Report – Actions to Align Defense Contract Management Agency and Defense Contract Audit Agency Functions, November 13, 2012 (DODIG-2013-15)

DOD OIG evaluated actions taken by DoD to align DCMA and DCAA functions by increasing the dollar thresholds that trigger DCMA to request a DCAA proposal audit. In 2010, the Office of Defense Procurement and Acquisition Policy (DPAP) raised these thresholds to $10 million for fixed price proposals and $100 million for cost-type proposals. DOD OIG found that DPAP did not perform an adequate business case analysis supporting this decision. Further, DOD OIG found that DCMA was not prepared to perform contract cost analysis in place of DCAA audits as a result of the increased thresholds.

DOD OIG recommended that DCAA implement a risk-based audit planning process that would enable it to redirect resources from low-risk audits to higher-risk areas, as previously recommended by the Defense Business Board. DOD OIG further recommended that DPAP return to its previous lower thresholds for recommending DCAA audit assistance with proposals. Additional recommendations were included regarding the strengthening of DCMA documentation relating to proposal audits, and enhancing electronic tools available for proposal audits.

DOD OIG Audit Report – Improvement Needed with DoD Single-Bid Program to Increase Effective Competition for Contracts, October 4, 2012 (DODIG-2013-002)

DOD OIG evaluated single-bid awards issued by DoD between November 2010 and September 2011. It found that in the case of 31 single bid contracts and 39 modifications to contracts that were awarded based on single bids, the services did not follow DPAP guidance to promote competition and negotiate fair and reasonable pricing on single-bid awards.

Per DPAP guidance memos in November 2010 and April 2011, services were to take steps to promote competitiveness (either by extending solicitation times or ensuring adequate lead times for proposals submissions) and take extra steps to ensure prices are fair and reasonable. In addition, to the extent that awards were made based on single bids, modifications of the awards are to be limited to only three years, at which time the awards should be recompeted.

DOD OIG found instances where the services did not follow DPAP’s guidance. DOD OIG cited DoD and DPAP’s failure to codify the guidance memos into the DFARS as a fundamental reason for the services not following the guidance. This has since been addressed with the June 29, 2012, DFARS changes on “Only One Offer” (F.R. 39126).

DOD OIG recommended that DPAP create new “effective competition” reports to monitor and track single bid awards and document actions to increase competition. In addition, it recommended DoD services to develop procedures to adequately monitor the command’s implementation of the single-bid guidance and to increase competition. Finally, DOD OIG recommended that the services create plans regarding modification of single-bid awards to be consistent with the time restrictions in DPAP guidance memos.