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Project on Government Oversight

Pentagon Radically Reducing Oversight of Contracts Worth Tens of Billions

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October 29, 2010

The Pentagon has radically decreased the Defense Contract Audit Agency’s (DCAA) review of contracts, according to an October 18 DCAA memo obtained by POGO. DCAA’s job is to protect taxpayers from contractor overbilling.

“POGO has long feared contractors and their government allies would block DCAA from exposing contractor ripoffs,” said Nick Schwellenbach, POGO’s director of investigations.  “Why are billions of dollars being put at risk when Secretary Gates is demanding cost savings?”

According to the memo, contracting guidance “now limits contracting officer requests for audit services to Fixed-price proposals over $10 million and Cost-Type proposals over $100 million, unless there are exceptional circumstances.” 

These audit services are reviews of cost data (referred to as “reviews”) and they entail an examination of a contractor’s cost proposal to the government.  In these proposals, contractors estimate how much it will cost them to accomplish work on a contract.

Previously, there was no dollar threshold for reviews on fixed-price contract proposals, but contracting officers would limit requests for DCAA reviews of proposals over a threshold tied to the submission of cost or pricing data, which is currently $700,000. The old threshold for reviews of cost-type proposals was $10 million, but could be lower if the contractor has systemic problems estimating costs. 

In FY 2009, a total of at least $92 billion in Defense Department contracts fell between the old thresholds and the new ones, according to USAspending.gov.  The $92 billion figure is a conservative estimate – it reflects awarded and funded contracts, rather than contract proposals, which are often higher than the funded contract award amounts.

The guidance states that cost proposals below the new dollar thresholds for review may be sent instead to the Defense Contract Management Agency (DCMA). DCMA is typically less thorough than DCAA, according to a 2009 Wartime Contracting Commission report.  The DCMA also does not specialize in examining and verifying cost and pricing data.

The reason for this new restriction is DCAA’s attempt to perfectly comply with Generally Accepted Government Auditing Standards (GAGAS). With this standard, which requires meticulous documentation of findings, DCAA is unable to cover as much ground as they used to, thus the need to restrict “audits” as defined by GAGAS.  The number of DCAA reports produced annually has plunged: 33,801 in FY 2007 to 30,352 in FY 2008 to 21,276 reports in FY 2009.

Rather than subjecting reviews of cost or pricing data to GAGAS, DCAA should consider these reviews as financial advisory services, which are not subject to all GAGAS requirements.  This would better protect taxpayers and warfighters by allowing DCAA to review cost data and deliver advice to contracting officers in a timely fashion.

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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