For DoD acquisitions, the Conference Report for FY 2018 NDAA includes provisions that would streamline the DCAA Incurred Cost Audit process by involving private auditors and increase the TINA threshold.
- Conference Report requires the government to retain private auditors for a “sufficient” number of Incurred Cost Audits to eliminate backlog by October 1, 2020.
- Conference Report requires faster responses from DCAA, including completion of Incurred Cost Audits within one year from reception of contractor’s “Qualified’ Incurred Cost proposal.
- Conference Report significantly raises TINA threshold to $2 Million and thereby reduces the number of contractors subject to TINA
On November 8, 2017, the U.S. Senate and House Armed Services Committees announced that they had reached agreement to reconcile the different versions of the NDAA for Fiscal Year 2018 passed by the Senate and House earlier in the year. The Senate unanimously approved the compromise legislation on November 16, sending it to President Trump to sign into law. The 2018 National Defense and Authorization Act Conference Report sent to the President leaves little question that Congress remains unhappy with the Defense Contract Audit Agency’s (DCAA) audit backlog and, therefore, mandates that DCAA personnel function more like commercial auditors in regard to audit timeliness and risk. Interestingly, however, the Conference Report also rejects a controversial 2017 NDAA provision that would have allowed contractors to use private auditors of their own selection to perform ICP audits. We set forth below the provisions that reflect these and other important changes contractors should anticipate.
- DCAA Incurred Cost Proposal (ICP) Audits. Conference Report Section 803 adds 10 U.S.C. §2313b which, among other requirements, includes language that:
- Directs DCAA to comply with commercially accepted standards of risk and materiality in performing each incurred cost audit for DOD contractors.
- Requires that DOD use “qualified private auditors” to perform a sufficient number of incurred cost audits so that backlog is eliminated by October 1, 2020.
- Requires that incurred cost audits must be completed in one year from the date the Government receives a “qualified incurred cost submission.” After October 1, 2020 any audit findings not issued within one year shall be considered “complete” and further audit work will be barred-subject to waivers that must be submitted for approval by the Director of DCAA to the Comptroller of DOD.
- Directs DOD not to differentiate between private auditors and DCAA when considering audit results.
- Requires peer review by a commercial auditor of DCAA’s unqualified audit findings.
- Requires that DOD notify a contractor within 60 days after receipt whether its ICP is “qualified.”
- Contractor Use of Commercial Auditors Rejected. Conference Report Section 804 strikes subsection (f) of NDAA 2017 Section 820(b) which was to add Section 1909 to Title 10 of US Code. Subsection (f) would have allowed contractors to use a commercial auditor and would have required the DOD to accept their findings without performing additional audits.
- Simplified Acquisition Threshold (SAT) Increase. Section 805 increases the SAT from $100,000 to $250,000.
- Truth in Negotiations Act (TINA) Changes. 2018 NDAA Section 811 increases the TINA threshold significantly from $750,000 to $2 million for all contracts entered into after July 1, 2018. Section 811 also revises language in 10 USC §2306a(d) from affirmatively requiring the contracting officer (CO) to request other than cost or pricing data to the extent necessary to requiring the contractor to provide other than cost or pricing data only “if requested by the contracting officer.”
Where Do We Go From Here?
These provisions are fairly drastic—very possibly leading to a sea change in how DCAA will operate in the future. It is clear that Congress has tired of waiting on DCAA to police itself and eliminate the audit backlog which has been a millstone around government agencies and contractors alike. Contractors should welcome these changes—they portend less TINA application and quicker turnaround on resolution of ICPs so that contractors can resolve any issues before they include potentially disputed costs in several additional ICPs. However, there are certainly key unknowns. For example, what standard will emerge for defining a “qualified” ICP triggering the one year audit time limit—the current language appears prone to Government subjectivity and possible abuse in order to prevent the running of the one year clock. Similarly, what will be the real impact of terminating unfinished audits? It seems likely that this will force DCAA to focus on the most significant costs first and, at a minimum, complete audits of those costs. In any event, contractors should pay close attention as these changes play out and be facile enough to adjust to the unknowns.