Federal Contracting:

Additional Management Attention and Action Needed to Close Contracts and Reduce Audit Backlog

GAO-17-738: Published: Sep 28, 2017. Publicly Released: Sep 28, 2017.

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Closing contracts ensures the government receives goods or services at the agreed price. We found that contracts were not closed on time at DOD, Health and Human Services, Homeland Security, Justice and State.

A challenge to closing certain contracts is the Defense Contract Audit Agency's backlog of incurred cost audits, which identify whether costs are allowable—information needed to close these contracts. While DCAA reduced this backlog, its timeliness in starting audits could improve: it took an average of 747 days to begin an audit in FY2016.

We recommended that these agencies and DCAA improve efforts to reduce their respective backlogs.

Average Number of Days for the Defense Contract Audit Agency to Complete Incurred Cost Audits

Graph showing a trend, 2011-2016: proposals spend more time awaiting audit, but audits are completed more quickly.

Graph showing a trend, 2011-2016: proposals spend more time awaiting audit, but audits are completed more quickly.

Additional Materials:

Contact:

Timothy J. DiNapoli
(202) 512-4841
dinapolit@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

What GAO Found

The effectiveness of management efforts to reduce the number of contracts overdue for closeout varied across five agencies GAO reviewed—the Departments of Defense, Health and Human Services, Homeland Security (DHS), Justice, and State. None of the agencies had critical elements agency-wide that would help track and oversee contract closeout processes—the number and type of contracts to be closed, where the contracts were in the process, and goals and performance measures. Having such information could help management address the causes as to why contracts remain open and reduce the contract closeout backlog.

Since 2011 the Defense Contract Audit Agency (DCAA) has reduced its inventory of contractors' incurred cost proposals awaiting audit by about half to 14,208, and DCAA has significantly reduced its backlog of older proposals—those for 2013 and prior—as of September 2016. To do so, DCAA used a risk-based approach to reduce the number of audits and began conducting multi-year audits, in which two or more incurred cost proposals are closed under a single audit. Nevertheless, DCAA did not meet its initial goal of eliminating its backlog by fiscal year 2016, and DCAA officials stated that they are unlikely to meet its revised goal by the end of fiscal year 2018. Further, GAO found that in fiscal year 2016, DCAA averaged 885 days from when a contractor submitted an adequate incurred cost proposal to when the audit was completed. The lag was due to limited availability of DCAA staff to begin audit work, as it took DCAA an average of 138 days to complete the actual audit work (see figure).

Average Number of Days for the Defense Contract Audit Agency to Complete Incurred Cost Audits

Average Number of Days for the Defense Contract Audit Agency to Complete Incurred Cost Audits

DCAA may be missing opportunities to help identify additional ways to reduce its inventory. For example, DCAA has not assessed options to reduce time to initiate audit work or comprehensively assessed how the use of multi-year audits could be improved and has not established related performance measures for both.

Why GAO Did This Study

Closing contracts is a key step in the contracting process. GAO and others have previously reported that large numbers of contracts were not closed within time frames set by federal regulations, which can expose the government to financial risk. DCAA's backlog of audits of contractors' incurred cost proposals contribute to the delays in closing out flexibly-priced contracts.

GAO was asked to review the extent of the contract closeout backlog at federal agencies. In addition, a House Armed Services Committee report included a provision for GAO to assess DCAA's incurred cost audit backlog. This report addresses the extent to which (1) selected federal agencies effectively manage contract closeout, and (2) DCAA effectively manages its incurred cost audit backlog.

GAO selected five agencies based on the number of contracts awarded and dollars obligated in fiscal year 2015. GAO analyzed documents and interviewed acquisition officials to assess how contract closeout is managed. GAO also analyzed data on DCAA's incurred cost audit backlog.

What GAO Recommends

GAO is making seven recommendations, including to each of the five agencies to develop means to track critical elements on contract closeout efforts and to DCAA to assess its efforts to reduce its backlog and establish related performance measures. Four agencies concurred, and DHS identified planned actions that could address the intent of the recommendation.

For more information, contact Timothy J. DiNapoli at (202) 512-4841 or dinapolit@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: DOD agreed with the recommendation and is taking various actions to track contracts pending closeout, including developing a tool with the capability of generating reports of contracts awarded and closed by fiscal year. DOD is also developing reports to identify contracts that should have a final invoice but do not, as well as identify the contracts that require additional administrative actions in order to close the contracts. DOD's estimated completion date is July 2019.

    Recommendation: To enhance management attention to closing out contracts, the Secretary of Defense should develop a means for department-wide oversight into components' progress in meeting their goals on closing contracts and the status of contracts eligible for closeout. (Recommendation 1)

    Agency Affected: Department of Defense

  2. Status: Open

    Comments: The Department of Health and Human Services agreed with the recommendation and is developing a reporting mechanism in the contract writing system, estimating that it will be ready in Fiscal Year 2019. The Department plans to have the divisions manually pull contract closeout data as of the end of Fiscal Year 2016, to be completed by end of Fiscal Year 2018, but has not yet developed performance measures.

    Recommendation: To enhance management attention to closing out contracts, the Secretary of Health and Human Services should develop a means for department-wide oversight into components' progress in meeting their goals on closing contracts and the status of contracts eligible for closeout. (Recommendation 2)

    Agency Affected: Department of Health and Human Services

  3. Status: Open

    Comments: The Department of Homeland Security disagreed with the recommendation, but has established a Contract Closeout Working Group in December 2017, which meets monthly to develop a comprehensive plan to address the overage contract backlog and monitor progress on meeting Fiscal Year 2018 goals. The working group plans is considering a comprehensive plan for the overall contract closeout effort, which the DHS estimates will be completed in November 2018.

    Recommendation: To enhance management attention to closing out contracts, the Secretary of Homeland Security should develop a means, either at the agency or the component level, to track where the contracts are in the closeout process, and establish goals and performance measures for closing contracts. (Recommendation 3)

    Agency Affected: Department of Homeland Security

  4. Status: Open

    Comments: The Department of Justice agreed with the recommendation and has completed enhancements to its financial management system to allow the Bureaus to assess whether a contract needs to be closed out. The Department plans to issue a policy providing direction to the Bureaus on closing contracts, and establishing Bureau-level goals and performance measures. The Department estimates it will have a policy in place by the end of Fiscal Year 2018.

    Recommendation: To enhance management attention to closing out contracts, the Attorney General should direct the Senior Procurement Executive to ensure the development of a means to track data on the number and type of contracts eligible for closeout and where the contracts are in the closeout process, as well as a means to assess--at the agency or component level--progress by establishing goals and performance measures for closing contracts. (Recommendation 4)

    Agency Affected: Department of Justice

  5. Status: Open

    Comments: The Department of State agreed with the recommendation and is utilizing contracting system to manually identify and close inactive contracts. Also, the Department updated its procurement writing system to include a contract closeout field that will assist in identifying contracts requiring closeout. The new field can be queried and is manually completed upon closeout of contract to label the record as completed. In addition, the Department also plans to expand the system in the future to include tracking of contract administration and closeout milestones, and estimates to implement the tracking functionality by December 2019.

    Recommendation: To enhance management attention to closing out contracts, the Secretary of State should develop a means at the agency level to track data on the entirety of the number and type of contracts eligible for closeout, where the contracts are in the closeout process, and establish goals and performance measures for closing contracts. (Recommendation 5)

    Agency Affected: Department of State

  6. Status: Open

    Comments: DCAA agreed with the recommendation. Subsequently, the Fiscal Year 2018 National Defense Authorization Act established a requirement to notify the contractor within 60 days of receipt of the submission whether it is an adequate incurred cost submission and that audit findings shall be issued no later than one year after the date of receipt of all adequate incurred cost submissions. DCAA has taken several efforts to implement these requirements but performance measures will not take effect until Fiscal Year 2019.

    Recommendation: To manage its incurred cost inventory, the Director, DCAA should assess and implement options for reducing the length of time to begin incurred cost audit work and establish related performance measures. (Recommendation 6)

    Agency Affected: Department of Defense: Defense Contract Audit Agency

  7. Status: Closed - Not Implemented

    Comments: DCAA agreed with the recommendation. Subsequently, the Fiscal Year 2018 National Defense Authorization Act limited the future use of multi-year audits, unless requested by the contractor. As a result, we believe the recommendation is no longer applicable and have closed the recommendation as unimplemented.

    Recommendation: To manage its incurred cost inventory, the Director, DCAA should comprehensively assess the use and effect of multi-year audits on both DCAA and contractors and establish related performance measures. (Recommendation 7)

    Agency Affected: Department of Defense: Defense Contract Audit Agency

 

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