Federal Contracting: Additional Management Attention and Action Needed to Close Contracts and Reduce Audit Backlog
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.
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
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.
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.
Recommendations for Executive Action
|Department of Defense||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)||
DOD agreed with the recommendation and took action to track contracts pending closeout, including creating an ability to centrally track the number of contracts eligible to be closed and contracts that are overdue for closeout. In addition, DOD developed guidance and procedures on closing contracts, which included performance measures. These performance measures included the percentage of contracts that are closed within time frames, the number of contracts awaiting final payments, and the percentage of contracts overdue for closeout. For example, in March 2020, DOD reported that across its components, about 87 percent of selected contracts were overdue for closeout.
|Department of Health and Human Services||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)||
The Department of Health and Human Services agreed with the recommendation and developed a template for reporting of contract closeout activities from its divisions on a monthly basis to assess progress. The department began its the monthly reporting in June 2021 on contracts that were closed and those eligible for closeout by contract type and fiscal year.
|Department of Homeland Security||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)||
The Department of Homeland Security disagreed with the recommendation, but has taken action to address the recommendation. The department has developed performance goals that are reviewed annually and monitored on a monthly basis. DHS reported that its contracting activities achieved 72 percent of its fiscal year 2018 contract closeout goal and as of April 2019, the contracting activities has achieved about 46 percent of the department's fiscal year 2019 goal.
|Department of Justice||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)||
The Department of Justice agreed with the recommendation and in November 2020 issued guidance on contract closeout procedures and reporting requirements. The components included in the review, the Federal Bureau of Investigation and the Bureau of Alcohol, Tobacco, Firearms, and Explosives, developed their own specific guidance on contract closeout procedures in addition to the department-wide guidance. These components implemented the reporting requirements and issued their closeout reports for the first quarter of fiscal year 2021. The Bureau of Prisons is also developing its own policy document on contract closeout and due to delays in implementing the contract data system, will begin its quarterly reporting in fiscal year 2022.
|Department of State||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)||
The Department of State agreed with the recommendation and is working to identify all contract actions ready for closeout. The Department plans to categorize these contracts by contract type, identify unexpended funding balances, and review audit requirements for flexibly priced contracts. When the contracts eligible for closeout are identified, the Department plans to establish performance goals and metrics to assess its progress. The Department anticipates completing these actions by February 2023.
|Defense Contract Audit Agency||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)||
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 implemented these requirements and revised their policies. Further, DCAA is monitoring the timeliness for contractor notification and audit completion dates in their monthly performance reviews.
|Defense Contract Audit Agency||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)||
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.