Key Takeaways from the Defense Contract Audit Agency's Report to Congress for Fiscal Year 2021

The Defense Contract Audit Agency (DCAA) recently released its Report to Congress on Fiscal Year (FY) 2021 Activities. For companies regularly interacting with DCAA, this Advisory details key statistics and trends as well as DCAA's audit priorities and timelines. For other companies, like "low risk" small and mid-sized contractors or those participating in Other Transaction Authority agreements, this Advisory also discusses DCAA's industry outreach efforts and ways in which it may expand its audit activity.

Statistics and Trends

DCAA's report sets out several statistics that showcase its activities in FY 2021, including that DCAA has examined $259.7 billion in contract costs, identified more than $5.3 billion in audit exceptions and reported a net savings to the government of $3.7 billion.¹ These figures reflect a notable decrease (of $105.6 billion) in costs examined and a corresponding decrease (of $3.3 billion) in exceptions identified, when compared with audit reports completed by DCAA in FY 2020.²

The composition of examined costs further illuminates this delta. DCAA reports its audit activity across four categories: Forward Pricing; Incurred Cost; Claims and Terminations; and Systems, Cost Accounting Standards (CAS) & Truth in Negotiations (TIN). DCAA reported the most significant reduction of examined costs in the Forward Pricing category—from $185.3 billion in FY 2020 to $63 billion in FY 2021.³ Curiously, the number of audit reports across which DCAA examined these costs did not correspondingly drop off to the same degree. By contrast, DCAA examined more Incurred Costs in FY 2021—with $164.9 billion in costs examined (up from $145.8 billion) and $1.3 billion in exceptions identified (up from $917 million).⁴ Nevertheless, these figures remain significantly lower than the $239.7 billion in Incurred Costs examined in FY 2019.⁵

Despite the fact that DCAA examined fewer contract costs in FY 2021, DCAA reported higher net savings than it did in FY 2020 ($3.7 billion in FY 2021 as compared with $3.5 billion in FY 2020).⁶ For several consecutive years now, DCAA has announced a net savings in excess of $3 billion and a return on investment at or above $5 for each dollar invested. DCAA's sustention rate across all four categories of audit activity—i.e., the rate at which contracting officers adopted, or sustained, DCAA's findings—has also remained rather consistent,⁷ though DCAA's reports reveal variability within each audit category.

Audit Priorities and Timelines

DCAA also reported on both how it prioritizes audits as well as its timelines for completion, an area that has been the subject of significant scrutiny over the years.

As to Incurred Costs, DCAA continues to deploy its risk-based approach to establish priorities—focusing on audits involving "significant costs, significant audit findings in the past, or circumstances that reduce the incentive to control costs."⁸ In addition to the $164.9 billion examined as part of the formal audit report process, DCAA also reported examining $38 million in Incurred Costs and issuing 2,745 memorandums for "low risk" submissions.⁹ These memorandums are issued in lieu of a formal audit and can establish rates for contract close out.

DCAA acknowledged that timely Incurred Cost audits improve its ability to retrieve the records it requires, identify issues that may impact future audits and ease contractor burden. With the above process, DCAA touted "essentially completing" its audits of Incurred Cost submissions within the one-year requirement, citing an average of seven months from receipt of an adequate submission.¹⁰ There are a few notable exceptions to that statistic, including submissions received prior to the National Defense Authorization Act for FY 2018.¹¹ DCAA also excluded from its reported timelines those audits approved for waivers from the one-year requirement during FY 2021.¹²

DCAA also reported completion timelines for its other audit functions. For instance, recognizing that its "highest rate of return" is on Forward Pricing audits, and the role these audits play in time-sensitive contract negotiations, DCAA reported completing 90% on time.¹³

Notably, and like the rest of the workforce, DCAA reported a significant reduction in auditors, which led DCAA to curtail functions like Interim Voucher Advisory Services and Post Payment Voucher audits. DCAA noted that its ability to retain its workforce and thereby execute its audit mission, will be impeded without additional funding from Congress.¹⁴ It remains to be seen if and how auditor drop off will impact DCAA's ability to maintain progress against the aforementioned timelines.

Outreach and Other Activities

DCAA's report also discusses its industry outreach efforts and growing areas of audit activity.

First, DCAA outlined its proactive engagement with industry on various subjects, including establishing a dedicated email mailbox for addressing inquiries about the CARES Act and the Paycheck Protection Program as well as deploying the Contractor Submission Portal.¹⁵ DCAA also discussed its targeted outreach to small businesses, including through training seminars as well as its efforts to redesign a small business public website with tailored resources. DCAA further reported on its new Contractor Information Survey, which it plans to use to gather information about small to medium-sized contractors.¹⁶ This tool is intended to function like an interview whereby DCAA can validate a company's "low risk" status or identify risk factors that necessitate audits. Cast as a way to help these contractors maintain compliant systems and processes, the results of the Contractor Information Survey have the potential for subjecting currently "low risk" contractors to additional scrutiny.

DCAA also reported upon its expanding role supporting Other Transaction Authority (OTA) agreements. Because these agreements are not subject to the Federal Acquisition Regulation, DCAA has tagged them as having "more risk factors."¹⁷ Thus, DCAA has extensively promoted its services to buying commands to, among other things, identify risk factors regarding agreement terms and even recommend agreement terms for use that will "promote the Government team's ability to monitor the agreement," "permit oversight processes to occur as intended through administration and closeout of the agreement" and to "support the assessment that fair and reasonable prices are paid."¹⁸ DCAA reports supporting more than 250 requests for pre-award assistance in connection with OTAs, noting how its services in one example resulted in $50 million of potential initial savings and up to $600 million in future savings.¹⁹

In light of DCAA's increasing involvement in the OTA space—as a "key member of the other transaction agreement government team"²⁰—companies seeking to negotiate and perform under OTA agreements may encounter terms targeted at facilitating audit activity. While some measure of protection for the government is sensible, it remains to be seen whether DCAA's efforts in this area will impede the parties' ability to craft customized agreements unburdened by the onerous provisions that often dissuade commercial companies from entering the government contracting market.

Conclusion

DCAA's Report to Congress on FY 2021 Activities confirms that DCAA continues to credit itself for significant savings to the government. Indeed, despite examining fewer costs as compared with FY 2020, DCAA reported more savings in FY 2021 and a steady return on investment. DCAA's report further reveals a potential increase in audit activity in connection with previously "low risk" contractors as well as OTA agreements, possibly increasing the scope of its reach to more industry partners in the coming years.

Whether your company is accustomed to engaging with DCAA or your company will be subject to increased inquiry or audit activity for some of the reasons noted above, we welcome the opportunity to help you navigate the process and drive to a favorable resolution.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.