MORE INCURRED-COST AUDITS OF DOT 

PROCUREMENT CONTRACTS SHOULD 

BE OBTAINED 

Office of the Secretary 

Report Number: FI-2007-064 

Date Issued: August 29, 2007 
U.S. Department of 

Memorandum

Transportation 

Office of the Secretary 

of Transportation 

Office of Inspector General 

Subject: ACTION: More Incurred-Cost Audits of DOT 

Procurement Contracts Should Be Obtained 

Date: August 29, 2007 

Report Number FI-2007-064 

From: Mark H. Zabarsky 

Deputy Assistant Inspector General for 

Financial Management Audits 

Reply to 

Attn. of: JA-20 

To: Assistant Secretary for Administration 

This report presents the results of our audit concerning the use of incurred-cost 

audit services on Department of Transportation (DOT) procurement contracts. It 

does not include the Federal Aviation Administration’s (FAA) use of contract 

audit services. A report on FAA’s use of audit services was issued in May 2002.1

 

Annually, DOT spends about $6 billion in procuring goods and services to support 

departmental operations—about $2 billion if FAA is excluded. An efficient and 

effective contract management and administration program considers the use of 

contract audits to ensure that claimed contractor costs are accurate and allowable. 

Contract audits are necessary throughout a contract’s life cycle. For example, 

incurred-cost audits determine whether costs charged to Government contracts are 

allowable, allocable, and reasonable, in accordance with contract terms and 

applicable Government acquisition regulations. 

Like most Federal agencies, DOT primarily uses the Defense Contract Audit 

Agency (DCAA) to perform incurred-cost audits of contractors. DCAA’s work 

has shown many instances in which Federal Government agencies were overbilled 

or the amounts paid, claimed, or both were questionable. In fiscal year (FY) 2006, 

DCAA reported about $2.3 billion in net savings to the Federal Government as a 

result of all contract audits. 

The objectives of the audit were to determine whether DOT and its Operating 

Administrations were (1) obtaining contract audit services in accordance with 

 

1

 “Report on Oversight of Cost Reimbursable Contracts,” May 8, 2002, OIG Report Number FI-2002-092. Most OIG 

reports can be accessed on our website: www.oig.dot.gov. 
2

policies, procedures, and acquisition regulations and (2) effectively using audit 

results to recover overpayments to contractors. This audit was performed in 

accordance with Generally Accepted Government Auditing Standards as 

prescribed by the Comptroller General of the United States. Our scope and 

methodology are described further in Exhibit A. 

BACKGROUND 

To strengthen oversight of agency acquisition activities, Congress enacted the 

Services Acquisition Reform Act of 2003, which established Chief Acquisition 

Officers at Federal agencies. The Chief Acquisition Officer is responsible, in part, 

for monitoring the performance of acquisition activities and programs of the 

Department and evaluating the performance of those programs. The Senior 

Procurement Executive is responsible for direction of the procurement system of 

the Department, including implementation of unique procurement policies, 

regulations, and standards. In DOT, the Deputy Secretary is the designated Chief 

Acquisition Officer, who has delegated the day-to-day operations to the Senior 

Procurement Executive in the Office of the Secretary. The Senior Procurement 

Executive reports directly to the Assistant Secretary for Administration. 

RESULTS IN BRIEF 

Since 2005, departmental officials have emphasized incurred-cost audits and have 

achieved success with them, recovering a high percentage of contractor 

overpayments. Specifically, the Assistant Secretary for Administration issued a 

memorandum in November 2005 to increase awareness and address the 

importance of incurred-cost audits; the Senior Procurement Executive has begun 

implementing a new approach for obtaining these audits; and the Department has 

achieved considerable cost savings through incurred-cost audits, recovering over 

$4 for every audit dollar DOT spent for these audits. 

More, however, needs to be done. Use of cost-reimbursable contracts increases 

the Government’s risk because contractors generally have little incentive to 

control costs. In reviewing 30 cost-reimbursable contracts to assess the extent to 

which audits were obtained and used to administer these contracts, we found that 

Operating Administration contracting offices: 

• Obtained incurred-cost audits on 12 of the 30 contracts, having a total value 

of more than $640 million. For the remaining 18 contracts, audits were not 

obtained and the required justification for not obtaining them was not 

provided for 17 of the 18. These 18 contracts represented a value of more 

than $600 million. 
3

• Resolved questioned costs of about $600,000 that DCAA identified for 3 of 

the 12 audited contracts. However, for 6 of the 12, contracting officers 

took no action to resolve questioned costs of $1 million. No action was 

required for the remaining three contracts. 

Exhibit B details the results of the 30 contracts we reviewed. 

In addition to the 30 contracts we audited, we obtained historical data from DCAA 

about audit reports (excluding FAA) issued between FYs 2001 through 2005. 

During that time, DCAA identified $48 million in questioned costs, of which the 

Department resolved about $36 million. While resolving three-quarters of the 

questioned costs, the Department missed opportunities to identify and recover 

almost $12 million in questioned contract costs. These conditions occurred 

because contracting officers did not consistently follow departmental and Federal 

Acquisition Regulation (FAR) guidance for obtaining incurred-cost audits, nor did 

they consistently take adequate action to resolve audit findings for the audits 

DCAA conducted. 

The Office of the Senior Procurement Executive took a significant step to improve 

the process for obtaining contract audits after we briefed the office on our 

preliminary audit findings. In conjunction with our office, the Office of the Senior 

Procurement Executive met with DCAA to discuss best practices for obtaining 

audit support services. According to DCAA, agencies with large procurement 

activities, such as the Department of Defense, Department of Energy (DOE), and 

National Aeronautics and Space Administration (NASA), do not rely solely on 

individual contracting offices to select contracts for audit. Instead, these agencies 

work with DCAA to identify audit opportunities using a structured approach that 

takes into consideration the agency’s entire contracting portfolio, contractor risk 

assessment, and the status of individual contracts. We realize that a change in 

approach of this magnitude is likely to take some time to effectively implement at 

DOT, but actions taken by the Senior Procurement Executive are good first steps. 

The Office of the Senior Procurement Executive provided DCAA with a list of all 

DOT (excluding FAA) cost-reimbursable contracts having a value of more than 

$1 million. DCAA was asked to identify contracts for audit and estimate the 

number of hours needed to perform incurred-cost audits. The Operating 

Administrations were provided with DCAA’s recommendations in August 2006 to 

facilitate the development of their FY 2007 audit plans. However, Operating 

Administrations have made little progress in obtaining these audits. As of 

March 31, 2007, Operating Administrations had implemented less than 3 percent 

of the number of hours that DCAA recommended for DOT’s high-risk contracts 

(356 audit hours implemented versus 13,934 hours recommended). 
4

The Senior Procurement Executive’s initiative to use a structured approach for 

obtaining contract audit services has the potential of significant cost savings for 

the Department. If fully implemented, this new process should reduce the 

Department’s risk of fraud, waste, and abuse on cost-reimbursable contracts. 

However, DOT Operating Administrations need to obtain incurred-cost audits to 

fulfill this new structured approach and contracting officers need to resolve audit 

findings in a timely manner. 

We provided a draft of this report to OST for comment on June 20, 2007, and on 

August 7 we received OST’s response. OST generally concurred with our 

recommendations, stating that during the last 5 years, several alternatives were 

considered to obtain more incurred-cost audits. OST said that, unfortunately, 

these alternatives had not moved forward, due largely to resource constraints. A 

complete list of recommendations can be found starting on page 8 of this report. 

OST’s response can be found in its entirety in the appendix. 

FINDING 

DOT’s Operating Administrations Are Recovering Contractor 

Overpayments, but More Audits Are Needed 

While the rate of recovery of contractor overpayments resulting from incurred-cost 

audits has been positive, contracting officers at seven of the eight Operating 

Administrations audited were not consistently obtaining such audits. As a result, 

the Department may have lost opportunities to recover additional questioned 

contract costs. This occurred because contracting officers did not follow the FAR 

and departmental guidance for obtaining audits. 

We judgmentally selected for review 30 contracts valued at about $1.2 billion. 

Contracting officers did not ask for incurred-cost audits on 18 of these contracts, 

valued at about $600 million. The FAR requires contractors’ indirect cost rates to 

be established annually, using contract audits, unless limited exceptions apply. 

The Department’s Transportation Acquisition Manual (TAM) states, “Under most 

circumstances, DOT recognizes that . . . incurred-cost audits . . . are the preferred 

mechanism to assist the contracting officer in ensuring the validity of direct and 

indirect costs billed under cost-reimbursement contracts.” 

The TAM also requires contracting officers to justify and document in the contract 

files the reasons for not obtaining independent audits. Maintaining documentation 

is extremely important because it allows others who might assume responsibility 

for the contract to know what prior events and decisions have transpired. We 

found no such documentation for 17 of the 18 contracts. For the remaining one 

contract, the contracting officer provided adequate justification. 
5

New Approach for Obtaining Audits Emphasizes Risk Assessment 

In response to our preliminary conclusions that Operating Administrations would 

benefit from obtaining more audits, the Assistant Secretary for Administration 

issued a memorandum on November 22, 2005, emphasizing the importance of 

these audits under existing procedures and guidance. Further, in March 2006, the 

Office of the Senior Procurement Executive began working with DCAA and the 

Operating Administrations on a new approach to identify a best practice for 

obtaining audit support services. 

According to DCAA, agencies with large procurement activities work with DCAA 

in a more structured approach to identify contracts for audit. Such an approach 

considers the agency’s entire contracting portfolio, risk assessment on the 

contractors, and the status of individual contracts. After the analysis, procurement 

officials decide what audits to obtain. 

For FY 2007, the Office of the Senior Procurement Executive began implementing 

such a structured approach for audit support services. DOT provided DCAA with 

a list of all cost-reimbursable contracts (excluding those of FAA) awarded 

between FYs 2003 and 2006 that had obligated funds greater than $1 million each, 

with a total obligated value of about $700 million. The Office of the Senior 

Procurement Executive requested that DCAA analyze the list and estimate the 

number of hours needed to perform incurred-cost audits. 

DCAA estimated that about 23,000 hours, at an estimated cost of $2.4 million, 

would be needed. According to DCAA, about 14,000 of these hours were needed 

to conduct audits of contracts it deemed high risk, based on experience with the 

contractors. These audits had an estimated cost of $1.4 million. The Office of the 

Senior Procurement Executive provided the list to the Operating Administrations 

to use as a tool in estimating the number of hours of audit support required in 

FY 2007. 

Operating Administrations Planned Only Two-Thirds of High-Risk Audits 

Recommended by DCAA, and Did Not Implement Their Own Plan to 

Obtain Audits 

Despite DCAA’s estimate, the Operating Administrations planned to obtain only 

about 8,700 hours, 63 percent of what DCAA identified as high risk. The Office 

of the Senior Procurement Executive did not require Operating Administrations to 

provide documentation justifying their deviations from DCAA’s 

recommendations. However, as of March 31, 2007, Operating Administrations 

had requested only 356 contract audit hours, less than 3 percent of the 

13,934 hours recommended for high-risk contracts (see table 1). While few audits 

have been requested, five of the eight Operating Administrations indicated their 

intention to obtain, in FY 2007, the planned number of audit hours. Operating 
6

Administrations must ensure that needed incurred-cost audits are obtained and the 

Head of the Contracting Activity for each Operating Administration must be 

aware of these responsibilities. 

Table 1. FY 2007 Contract Audits Recommended Versus 

Planned, as of March 2007 

Operating 

Administration(OA)* 

Total Audit 

Hours 

Recommended 

by DCAA** 

Audit Hours 

Recommended 

for High-Risk 

Contracts by 

DCAA 

Audit 

Hours 

Planned 

by OA 

Audit 

Hours 

Requested 

by OA 

FHWA 1,860 1,000 1,034 196

FRA 1,280 1,280 0 0

FTA 1,300 0 900 39

MARAD 1,520 1,360 3,556 0

NHTSA 0 0 40 0

OST 3,580 2,080 0 0

PHMSA 280 0 94 21

RITA/VOLPE 13,374 8,214 3,130 100

Total 23,194 13,934 8,754 356

 * See Exhibit A for definitions of acronyms. 

** Although DCAA indicated a potential for combining work, the number of hours shown assumes that each audit is 

accomplished independently and is not combined with other ongoing work at DCAA. 

Contracting Officers Are Effectively Recovering Questioned Costs, but 

Opportunities for Improvement Exist 

Contracting officers are taking effective actions to recover overpayments made to 

contractors and are achieving significant savings, but opportunities for 

improvement exist. DCAA identified $48 million in questioned costs on all DOT 

contracts (excluding FAA) for FYs 2001 through 2005 (see table 2). DOT 

contracting officers addressed $36.3 million of those questioned costs. Of that 

amount, they recovered about $29.5 million—a sustention rate2

 of 81 percent. 

The DOT sustention rate is considerably higher when compared with the Federal 

Governments rate of 63 percent.3

 However, contracting officers have not taken 

consistent actions in a timely manner to resolve the remaining $11.7 million. By 

applying the sustention rates of 63 percent and 81 percent to the $11.7 million, 

DOT has the potential to recover from $7.4 million to $9.5 million more in 

contractor overcharges. 

 

2

 The sustention rate is calculated by dividing the questioned costs sustained by the questioned costs. Questioned costs 

sustained is that portion of costs questioned by the auditor upheld as a result of actions taken by either the contractor 

or the contracting officer during negotiations. 3

 Based on DCAA data for FYs 2001 through 2005. 
7

Table 2. Questioned Costs on All DOT Contracts by Operating 

Administration, FY 2001 through FY 2005 

Operating 

Administration* 

Questioned Costs 

($ in millions) 

FHWA $41.8 

FRA $ 1.4 

FTA $ .1 

MARAD $ 4.1 

NHTSA $ 0 

OST $ .2 

PHMSA $ 0 

RITA/VOLPE $ .4 

Total $48.0 

* See Exhibit A for definitions of acronyms. 

Of the 30 contracts we sampled during this audit, incurred-cost audits were 

performed on only 12. Contracting officers took actions to resolve questioned 

costs of about $600,000 that DCAA identified for 3 of the 12 audited contracts. 

However, contracting officers took no action to recover about $1 million of 

questioned costs on 6 contracts. By applying the sustention rates of 63 percent 

and 81 percent to the $1 million, DOT has the potential to recover from $630,000 

to $810,000 more in contractor overcharges. No action was required for the 

remaining three contracts. 

Contracting officers stated that they wait until contract closeout to resolve DCAA 

audit reports, contrary to Federal regulations. However, the longer a contracting 

officer delays action to recover savings, the more difficult it may become to 

resolve discrepancies and other problems. Further, accurate records and 

knowledgeable personnel involved with the contract may become difficult to find. 

For example, in a contract for railroad services for a Government-owned, Federal 

Railroad Administration contractor-operated facility, valued at about $42 million, 

DCAA questioned $485,000. Although the audit was completed in 1999, the 

contracting officer would not act to recover the costs until the contract had been 

closed out. As of November 2006—7 years later—the contract still had not been 

closed because the contracting officer was waiting for a supplementary report 

from DCAA. The contracting officer asked DCAA to address an issue unrelated 

to the questioned costs of $485,000 identified in the 1999 report. Although this is 

an example of a worst case scenario, DOT and its Operating Administrations need 

to be more vigilant in recovering savings from audits. 

Office of Management and Budget Circular A-50 requires agencies to assign a 

high priority to the resolution of audit recommendations and to the implementation 
8

of corrective actions. Its guidance states, “Resolution shall be made within a 

maximum of six months after issuance of a final report or, in the case of audits 

performed by non-Federal auditors, six months after receipt of the report by the 

Federal Government. Corrective action should proceed as rapidly as possible.” 

We recognize that external circumstances beyond the control of the Operating 

Administrations, such as a contractor’s appeal of a contracting officer’s decision, 

may require resolution of audit findings to take more than 6 months. However, the 

Department should emphasize to Operating Administration contracting officers the 

importance of resolving audit findings in a timely manner. 

Given the potential benefits of incurred-cost audits—such as savings of 

$29.5 million for FYs 2001 through 2005—DOT must consider giving priority to 

those expenditures that yield such a good return on investment. The lack of audits 

also increases the vulnerability of DOT’s contracting dollars to fraud, waste, and 

abuse. 

RECOMMENDATIONS 

We recommend that the Assistant Secretary for Administration direct the Senior 

Procurement Executive to: 

1. Require Operating Administrations to: 

a. Review the FY 2007 contract audit plan submitted to the Office of the 

Senior Procurement Executive and document justifications for any revision; 

b. Submit the revised FY 2007 contract audit plan to the Office of the Senior 

Procurement Executive for approval; 

c. Resolve the $12.7 million ($11.7 million and $1 million) in questioned 

costs that Operating Administrations have not addressed and report any 

resulting costs recovered to our office, the Senior Procurement Executive, 

and Administrators of each Operating Administration; and 

d. Update the list of DCAA-reported unresolved questioned costs that are 

more than 6 months old as of October 2006; resolve those costs; and report 

any costs recovered to our office, the Senior Procurement Executive, and 

Administrators of each Operating Administration. 

2. Ensure that Operating Administrations obtain incurred-cost audits and that 

audit report recommendations are resolved within 6 months of issuance of the 

final report. 
9

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

A draft of this report was provided to the Office of the Secretary of Transportation 

(OST) for comment on June 20, 2007, and on August 7 we received OST’s 

response, which can be found in its entirety in the appendix. OST generally 

concurred with our recommendations and stated that during the last 5 years, 

several alternatives were considered to further the actions taken to obtain more 

incurred-cost audits. According to OST, unfortunately, aside from some limited 

application of the enhanced planning option, these alternatives have not moved 

forward, due largely to resource constraints. OST also said that dedicated 

contracting resources, both in the Operating Administrations and in the Office of 

the Senior Procurement Executive, must be increased in order for the Department 

to have sufficient capability to better ensure that contract audits are effectively 

planned, implemented, and acted upon. 

OST further stated that without a detailed examination of each contract, the 

questioned costs, and the reason that the questioned costs have not been acted 

upon, it is impossible to determine the accuracy of potential recoveries. However, 

OST agreed that our estimated savings from $8.0 million to $10.3 million related 

to resolution of outstanding incurred-cost audits for FY 2001 through FY 2005 is 

reasonable for tracking purposes. 

The corrective actions that OST plans to take adequately address the intent of our 

recommendations. Management responses to our recommendations are 

summarized below: 

Recommendation 1.a.: OST concurred, stating that the Office of the Senior 

Procurement Executive will issue a memorandum to the Operating Administration 

Chiefs of the Contracting Offices within 30 days after the issuance of our final 

report. The memorandum will request Operating Administrations to review the 

FY 2007 contract audit plan and document justifications for revisions. 

Recommendation 1.b.: OST concurred in part, stating that since it is well into 

the 4th quarter of the fiscal year, it would be most constructive for the Operating 

Administrations to identify planned contract audits that were not implemented in 

FY 2007 and include them in their FY 2008 audit plan. OST also stated that the 

memorandum described in response to recommendation 1.a. will include direction 

for Operating Administrations to provide a copy of the FY 2008 plan to the Office 

of the Senior Procurement Executive for review before the start of the fiscal year. 

Recommendation 1.c.: OST concurred, stating that the memorandum described 

in response to recommendation 1.a. will encourage Operating Administrations to 

expeditiously complete action on any pending audit findings with questioned costs 
10

and report the costs to the Head of the Contracting Activity (HCA) and the final 

disposition to the Office of the Senior Procurement Executive. 

Recommendation 1.d.: OST concurred, stating that the memorandum described 

in response to recommendation 1.a. will direct the Operating Administrations to 

update the list of DCAA-reported unresolved questioned costs that are more than 6 

months old as of October 2006, resolve those costs, and report results to the HCA 

and the Office of the Senior Procurement Executive. 

Recommendation 2.: OST concurred in part, stating that the Office of the Senior 

Procurement Executive does not believe it is in a position to “ensure” our 

recommended actions. Instead, the Office of the Senior Procurement Executive 

will use the aforementioned memorandum to reiterate the Department’s policy to 

the Operating Administrations regarding the use of incurred-cost audits and the 

forum provided by the Procurement Management Council to ensure complete 

understanding of the policy. OST further stated that although it is not always 

possible to resolve audit report recommendations within 6 months of the issuance 

of the final report, in FY 2008, the Operating Administrations will begin 

submitting quarterly status reports against their audit plans. The status reports will 

address audit hours used, resolved and unresolved questioned costs, and whether 

justifications have been placed in the contract file where audits were not 

requested. 

ACTION REQUIRED 

OST’s planned actions satisfy the intent of our recommendations, subject to 

follow-up provisions in DOT Order 8000.1C. We appreciate the courtesies and 

cooperation of Department of Transportation representatives during this audit. If 

you have any questions, please call me at (202) 366-1496. 

# 

cc: Deputy Secretary 

 Assistant Secretary for Programs and Budget/Chief Financial Officer 

 Martin Gertel, M-1
11

EXHIBIT A. SCOPE AND METHODOLOGY 

We performed this audit at eight procurement offices of the following Operating 

Administrations: 

• Federal Highway Administration (FHWA) 

 

• Federal Railroad Administration (FRA) 

• Federal Transit Administration (FTA) 

• Maritime Administration (MARAD) 

• National Highway Traffic Safety Administration (NHTSA) 

• Office of the Secretary of Transportation (OST) 

• Pipeline and Hazardous Materials Safety Administration (PHMSA) 

• Research and Innovative Technology Administration (RITA) (Volpe 

National Transportation Systems Center) 

We used the DOT Contract Information System to identify a universe and sample 

of cost-reimbursable contracts for audit. We initially selected a sample of 

9 contracts, valued at about $925 million, consisting of high-dollar-value contracts 

issued by the procurement offices of the Operating Administrations audited. We 

judgmentally selected the contracts reviewed from a universe of 570 costreimbursable and time-and-materials contracts with a value of about $2.4 billion. 

Subsequently, at the request of the Office of the Senior Procurement Executive, 

we expanded the scope of contracts reviewed from 9 to 30. We judgmentally 

selected the additional 21 contracts with a value of about $320 million from a 

universe of 395 cost-reimbursable and time-and-materials contracts with a value of 

about $2.2 billion. We validated that the information in the DOT Contract 

Information System was reliable. We audited at least one contract from each of 

the eight procurement offices. 

We reviewed documents maintained by procurement offices, such as price 

negotiation memorandums, DCAA audit reports, contractor invoices, and contract 

modifications. We chose for review contracts on which we believed sufficient 

time should have elapsed for incurred-cost audit activity to have occurred. We 

performed a detailed review of each contract, to include the contract files and 

Exhibit A. Scope and Methodology 
12

sources, such as DCAA information, to determine the extent of contract audit 

activity involving each contract. 

To determine the costs identified by DCAA as questioned, we obtained data from 

DCAA’s management information system on all DCAA DOT-related audit reports 

with questioned costs issued between October 2000 and September 2005. To 

develop an understanding and assess the reliability of the information included in 

the database, we held discussions with and obtained documentation from DCAA 

officials. 

To determine the actions taken by DOT in response to DCAA audit findings, we 

selected the 12 contracts for which an incurred-cost audit had been performed. 

We obtained the DCAA audit reports for the 12 contracts and interviewed 

contracting officers to determine the actions taken to address the DCAA audit 

findings and looked for key documentation, such as price negotiation 

memorandums. We also used the data obtained from the DCAA management 

information system to identify the amount of questioned costs not addressed by 

contracting officers. 

Additionally, we reviewed pertinent Federal and departmental acquisition 

regulations and guidance. We conducted this audit from February 2003 through 

March 2007 in accordance with Generally Accepted Government Auditing 

Standards prescribed by the Comptroller General of the United States and included 

such tests as we considered necessary to detect fraud, abuse, or waste. 

Exhibit A. Scope and Methodology 
13

 

EXHIBIT B. DETAILED RESULTS OF 30 CONTRACTS REVIEWED 

Operating 

Administration Contract Number 

Audit 

Obtained? 

DTFH6102Z00001 Yes 

DTFH6103C00135 No* 

DTFH6197C00010 No 

DTFH6102C00007 No 

FHWA 

DTFH6196Z00046 No 

DTFR5300C00012 Yes 

DTFR5301D00030 No 

DTFR5394A00060 No 

FRA 

DTFR5393C00001 Yes 

DTFT6098D41005 No 

FTA 

DTFT6099D41008 Yes 

DTMA9195C00024 Yes 

MARAD ** DTMA8C00002 Yes 

DTMA9190A10015 Yes 

DTNH2201C07000 No 

DTNH2201C17000 No 

DTNH2201D01103 No 

NHTSA 

DTNH2295D08168 No 

DTTS5999C00410 Yes 

DTOS5996D00415 Yes 

DTOS5996D00412 No 

DTOS5996D00428 No 

OST 

DTOS5996D00425 No 

DTRS5696C0004 No 

PHMSA 

DTRS5600C0001 No 

DTRS5797C00107 Yes 

DTRS5700D30004 No 

DTRS5701D30003 Yes 

DTRS5700C10045 No 

RITA/VOLPE 

DTRS5792C00077 Yes 

Total Yes = 12 

No =18 *

 Contracting officer adequately justified not obtaining an audit. 

** MARAD consistently obtained audits (3 contracts/3 audits).

Exhibit B. Detailed Results of 30 Contracts Reviewed 
14

 

EXHIBIT C. MAJOR CONTRIBUTORS TO THIS REPORT 

Name Title 

Mark H. Zabarsky Deputy Assistant Inspector 

 General for Financial 

 Management Audits 

Kenneth Prather Program Director 

Dana Short Project Manager 

Michael P. Fruitman Communications Adviser 

Lawrence Heller Senior Auditor 

Adam Schentzel Senior Auditor 

Thomas Wiener Senior Analyst 

Allison Horkan Auditor 

Exhibit C. Major Contributors to This Report 
15

 

APPENDIX. MANAGEMENT COMMENTS 

 MEMORANDUM 

U.S. Department of 

Transportation

Office of the Secretary 

of Transportation

Subject: 

ACTION: Response to Office of Inspector General (OIG) 

Draft Report, “More Incurred-Cost Audits of DOT 

Procurement Contracts Should Be Obtained”

Date: August 7, 2007 

From: Linda J. Washington 

Assistant Secretary for Administration

Reply to 

Attn. of:

To: David A. Dobbs 

Principal Assistant Inspector General 

for Auditing and Evaluation 

We agree that audits, including incurred-cost audits for cost type contracts, are a critically 

important tool for ensuring that the Department’s contracts are executed efficiently, 

effectively and at the lowest possible cost. The Office of the Senior Procurement 

Executive (OSPE) has consistently worked to provide the necessary guidance and 

direction for the Department’s operating administrations (OA) to apply the appropriate 

use of audits for cost type contracts and to effect prompt action to determine whether 

questioned costs should be disallowed and recovered. 

During the last 5 years, several alternatives were considered to further the actions taken 

in this area. For example, OSPE sought the capability to centrally manage audit funding 

to better manage the allocation and application of audit activity. Alternatively, if audit 

funding continues to be managed independently in each OA, OSPE requested a dedicated 

resource to oversee the use of audits and ensure they are properly resolved. As noted in 

discussions with OIG during the course of this review, this dedicated resource could 

leverage the Department’s limited audit dollars, by enabling pooling where two or more 

OAs have cost contracts with the same contractor. Most recently OSPE developed a 

methodology whereby DCAA and the OAs work together to identify cost type contracts 

most suitable for audits and to better estimate the necessary audit hours. Discussions 

with the OA Chiefs of the Contracting Offices (COCOs) revealed that not all cost 

contracts identified by DCAA were of sufficient complexity to warrant auditor assistance. 

Therefore, rather than using the DCAA-provided list, in many cases, the COCOs opted to 

identify for themselves the contracts to be included in their fiscal year (FY) 08 audit plan. 

Appendix. Management Comments 
16

 

Unfortunately, aside from some limited application of the enhanced planning option, 

these alternatives have not moved forward, due largely to resource constraints. 

Whichever alternative or methodology is employed to better manage the use and 

disposition of incurred-cost audits in the Department, greater resources will be necessary. 

Recent resource trends have not been encouraging. Staffing of the GS-1102 

(procurement) career series in DOT has decreased over the past 5 years by ten percent. 

In OSPE, staffing has decreased by nearly half over the same period, while 

responsibilities have increased. Dedicated contracting resources, both in the OAs and in 

OSPE must be increased in order for the Department to have sufficient capability to 

better ensure that contract audits are effectively planned, implemented and acted upon. 

Recommendations and Responses 

Recommendation 1a: Require OAs to review the FY 2007 contract audit plan submitted 

to the Office of the Senior Procurement Executive and document justifications for any 

revision. 

Response: Concur. Within 30 days after the issuance of the OIG final report OSPE will 

issue a memorandum to the OA COCOs calling upon them to review the FY 2007 

contract audit plan and document justifications for revisions. 

Recommendation 1b: Require OAs to submit the revised FY 2007 contract audit plan to 

the Office of the Senior Procurement Executive for approval. 

Response: Concur in part. Since it is now well into the 4th quarter of the fiscal year, it 

would be most constructive for the OAs to identify planned contract audits not 

implemented during FY 07 and include them in their FY 08 audit plan. Further, 

justification and approval of audit plans are a responsibility of each COCO and their 

Administrator. However, to encourage timely and effective completion of each OAs 

contract audit plan, the memorandum described above will include direction to provide 

OSPE with a copy of the FY 08 plan for review prior to the start of the fiscal year. 

Recommendation 1c: Require Operating Administrations to resolve the $12.7 million 

($11.7 million and $1 million) in questioned costs that OAs have not addressed and 

report any resulting costs recovered to our office, the Senior Procurement Executive, and 

Administrators of each OA.

Response: Concur. The aforementioned memorandum will encourage OAs to 

expeditiously complete action on any pending audit findings with questioned costs. 

These costs should be reported to the Head of the Contracting Activity (HCA) and OSPE 

will also request a copy of the information describing final disposition. 

Recommendation 1d: Require Operating Administrations to update the list of DCAAreported unresolved questioned costs that are more than 6 months old as of October 2006; 

resolve those costs; and report any costs recovered to our office, the Senior Procurement 

Executive, and Administrators of each Operating Administration. 

Appendix. Management Comments 
17

 

Response: Concur. The aforementioned memorandum will include direction to the OAs 

to complete the recommended actions and report results to the HCA and to OSPE. 

Recommendation 2: Ensure that Operating Administrations obtain incurred-cost audits 

and that audit report recommendations are resolved within 6 months of issuance of the 

final report. 

Response: Concur in part. OSPE will use the aforementioned memorandum to reiterate 

the Department’s policy to the OAs regarding the use of incurred-cost audits. In addition, 

it will use the forum provided by the Procurement Management Council to ensure that 

there is complete understanding of the policy. However, lacking direct management 

control of each OA’s contract administration offices, or a centralized capability to direct 

and fund audits, OSPE is not in a position to ensure the recommended actions. Further, it 

is not always possible to resolve audit report recommendations within 6 months of the 

issuance of the final report because some contracts are more complex and resolution may 

require additional actions by DCAA or the contractor. As an alternative, in FY 08 the 

OAs will begin submitting quarterly status reports against their audit plans. The status 

reports will address audit hours used, resolved and unresolved questioned costs, and 

whether justifications have been placed in the contract file where audits were not 

requested. 

Other Action Requested: The draft report requested management comment on its $8.0 to 

$10.3 million savings estimate related to additional incurred-cost audits for FY 2001 

through FY 2005. Management understands, through discussions with the OIG that this 

range represents an extrapolation of historic sustainment rates of questioned costs applied 

to the pending $12.7 million of questioned costs outstanding from previous audits. While 

we understand the basis of the estimate, it is not possible without a detailed examination 

of each contract, the costs questioned, and the reason that they have not been acted upon, 

to determine whether a straight line extrapolation offers an accurate estimate of potential 

recoveries. Nonetheless, lacking more precise estimates, it is not an unreasonable 

estimate to be used for tracking purposes. 

Appendix. Management Comments