Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

Volume 3 of 3 | January 2019

Budget Volume 3

Recommendation 58: Address the issue of over-age contracts through

(a) establishing an end-to-end, integrated, streamlined process, (b) codifying

DCMA’s Quick Close Out class deviation in the DFARS, and (c) extending DCMA’s

Low Risk Quick Close Out initiative by 2 years. 

Problem

If Recommendation 57 is adopted, and the 5-year cancellation deadline is lengthened to 8 years, it may,

in the short term, result in reduced pressure on the contract administration organizations that deal with 

contract closeouts. DCMA currently has a large backlog of approximately 65,000 over-aged contracts 

and this issue needs to be resolved to allow agencies to reach a workload steady state of closing out 

contracts. Resource constraints and processes that limit the ability to close out contracts appear to cause 

this backlog. The current DCMA backlog represents only a portion of the contracts administered by

DoD and the entire scope of over-aged contracts needs to be identified. A cross-organization mitigation 

strategy with streamlined process improvements would preclude this situation from reoccurring and 

placing current funds at risk of use for cancelled bills.

Background

The primary focus of the acquisition system is the selection and administration of contracts. Work on a 

contract can go on long after the delivery of the last product or the performance of the last service with 

contract closeout the final step in the contract lifecycle.

Contract closeout is a complex set of processes and subprocesses that includes the contractor and 

government working together to confirm all deliveries or performance services have been properly 

completed, settling up the final contract indirect costs rates, reconciling the various type and year of 

funds used on the contract, dispositioning residual inventory or government property, disposing of 

any classified information, addressing any patents filed by the contractor related to work performed 

under the contract, addressing any open warranty matters, settling any partial terminations of the work 

to be performed, resolution of any contract disputes or other legal matters, and more. 

Closeout can be a relatively simple process in firm-fixed-price contracts but can be enormously 

complex for flexibly priced (fixed-price-incentive and cost-reimbursement) contracts. Among the most 

time-consuming of these closeout tasks is the settling of the contractor’s final indirect costs and the 

settlement of the indirect costs are found to be the root cause of the overaged contract backlog.

A major component of any flexibly priced contract is the cost associated with general and 

administrative expenses, labor rates, receiving and inspection costs and other essential, but indirect 

costs. At the time a contract is priced, negotiated estimates of indirect rates are used to establish billing 

rates. At the end of each contractor fiscal year in which the contract was performed the contractor must 

prepare a final indirect cost overhead rate proposal, including any final indirect costs applicable to any 

corporate headquarters. The final indirect-costs-rate proposal for each year is submitted to DCAA for 

audit and DCMA for final negotiation of all allowable and allocable indirect costs.

The process described above for the prime contractor’s direct and indirect costs is repeated for each 

flexibly priced subcontract the prime may have awarded in support of the prime contract. The prime 
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contractor cannot submit its final indirect-cost proposal to the government for audit and negotiation 

until all its flexibly priced subcontracts have been settled and the final costs incorporated into the 

prime’s final cost proposals for submission to the government.

This lengthy contract closeout process starts when the contractor prepares a final indirect-cost proposal 

including all direct costs (including final subcontract costs) and the negotiated final overhead rates for 

each year of performance. The final indirect-cost proposal is submitted to DCAA for audit. DCAA 

provides audit and financial advisory services to DoD and other federal entities responsible for 

acquisition and contract administration. When DCAA completes the audit, then DCMA conducts final 

negotiations. Once complete, any excess funds are deobligated or any shortage of funds is addressed by 

working through DFAS. DCMA works directly with defense suppliers to help ensure DoD, federal, and 

allied government supplies and services are delivered on time, at projected cost, and with all 

performance requirements met. 

“DCMA professionals serve as ‘information brokers’ and in-plant representatives for military, Federal, 

and allied government buying agencies — both during the initial stages of the acquisition cycle and 

throughout the life of the resulting contracts. Before contract award, DCMA provides advice and 

information to help construct effective solicitations, identify potential risks, select the most capable 

contractors, and write contracts that meet the needs of customers in DoD, federal, and allied 

government agencies. After contract award, DCMA monitors contractors’ performance and 

management systems to ensure that cost, product performance, and delivery schedules are in 

compliance with the terms and conditions of the contracts.”1 DCMA serves as the ACO with 

responsibility for more than 20,000 contractors and more than $223 billion in unliquidated obligations.

In 2011, Congress expressed concern about the backlog of incurred cost audits at DCAA and directed 

GAO to review reasons for the backlog, as well as DCAA’s plan to address it.2 At that time, DCAA had 

a backlog of more than 21,000 incurred cost audits.3 Since 2011, DCAA has reduced its inventory of 

contractors’ incurred cost proposals awaiting audit by about half to 14,208, and DCAA has 

substantially reduced its backlog of older proposals.4

 

1 “About the Agency,” Defense Contract Management Agency, accessed November 1, 2018, http://www.dcma.mil/About-Us/. 2 GAO, Defense Contracting: DOD Initiative to Address Audit Backlog Shows Promise, but Additional Management Attention Needed to 

Close Aging Contracts, GAO-13-131, December 2012, accessed September 15, 2017, http://www.gao.gov/assets/660/650970.pdf. 3 DCAA, Report to Congress on FY 2016 Activities: Defense Contract Audit Agency, March 31, 2017, 9, accessed November 1, 2018, 

https://www.dcaa.mil/Content/Documents/DCAA_FY2016_Report_to_Congress.pdf. 4 GAO, Federal Contracting: Additional Management Attention and Action Needed to Close Contracts and Reduce Audit Backlog, 

GAO-17-738, September 2017, 1, accessed June 11, 2018, https://www.gao.gov/assets/690/687497.pdf. 
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Figure 4-20. DCMA Historical Over-aged Contract Backlog5

DCAA’s focus on completing incurred-cost audits has caused the DCMA contract-closeout backlog to 

increase. It is not a one-for-one relationship. Each incurred cost audit may have many contracts 

associated with it. Currently, DCMA has a backlog of approximately 65,000 over-aged contracts and 

can complete an average of 18,000 contracts a year. Figure 4-20 above reflects the impact of the DCAA 

focus to reduce the incurred cost audit backlog starting in 2011. At the same time, DCMA has been 

prioritizing upcoming cancelling-year invoices versus actually closing out the contract. This is 

necessary in order to prevent using current appropriations to pay final invoices as shown in the 

Figure 4-21. DCMA’s objective is to reduce this projection prior to those funds actually being cancelled.

 

5 DCMA graph, email to Section 809 Panel, August 9, 2018. 
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Figure 4-21. DCMA Projected Cancelling Year Funds at Risk ($B)6

Discussion

In addition to addressing the DCMA over-aged contract backlog, streamlining initiatives need to be 

implemented to prevent future incurred- cost audits and over-aged contract backlogs. Research shows 

that initiatives are being developed and implemented as a result of three things: (1) the Section 809 

Panel Volume 1 Report, (2) GAO reports, and (3) emphasis by DCMA senior leadership.7

Section 809 Panel

The Section 809 Panel recommendations in Volume 1, Section 2: Contract Compliance and Audit, 

proposed initiatives to prevent backlogs of incurred cost audits such as (a) providing flexibility to 

contracting officers and auditors to use audit and advisory services when appropriate, (b) reviewing 

the roles of DCAA and DCMA to ensure appropriate alignment and eliminate redundancies, 

(c) establishing statutory time limits for defense oversight activities, and (d) clarifying and streamlining 

the definition of and requirements for an adequate incurred cost proposal to refocus the purpose of 

DoD’s oversight. 

GAO and Commission on Wartime Contracting

GAO reports that the Defense Procurement and Acquisition Policy Group was required to establish the 

Contract Closeout Working Group in September 2014 to improve and streamline the contract closeout 

process, including policy revisions and technology updates to its systems, with no projected 

completion date.8 The Commission on Wartime Contracting noted the rapidly growing incurred-cost 

backlog at DCAA in its final report in 2011. The commission found that Congress did not provide 

 

6 Data points gathered from DCMA response to the RMD700A2 from the PBR19-23 cycle, email to Section 809 Panel, July 2, 2018. 7 DCMA response to the RMD700A2 from the PBR19-23 cycle, email to Section 809 Panel, July 2, 2018. 8 GAO, Federal Contracting: Additional Management Attention and Action Needed to Close Contracts and Reduce Audit Backlog, 

GAO-17-738, September 2017, 1, accessed June 11, 2018, https://www.gao.gov/assets/690/687497.pdf.
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DCAA and DCMA adequate resources and staffing to accomplish their respective missions. The 

commission also recognized the difficulty placed on defense contractors when delays in incurred cost 

audits leave the contractors facing cash management problems. 

DCMA Initiatives

DCMA recognized the need to institute streamlining initiatives to address the over-aged contract 

closeouts by issuing a DCMA Quick-Closeout Procedure Class Deviation. This deviation was issued on 

August 15, 2017, but has a sunset date of September 30, 2020. It streamlines the quick-closeout process 

only for DCMA’s ACOs by removing requirements to obtain an audit report or Low-Risk Adequacy 

Memorandum from DCAA prior to settling quick-closeout rates. It also authorizes ACOs to settle final 

overhead rates and close any and all physically complete contracts regardless of dollar value or the 

percent of unsettled direct and indirect costs allocable to the contracts.9

DCMA recently released new guidance for ACOs to perform the Low Risk Quick Closeout Process

(LRQCO). This initiative was released April 13, 2018, and has a sunset date of September 30, 2020.

It allows ACOs to close out low-risk contracts with less than $750,000 of remaining funds by accepting 

the contractor’s indirect rates through a bilateral agreement. Following this process means the ACO 

does not have to wait on final DCAA audits of the contractor’s rates or negotiate the rates with the 

contractor. This new streamlined initiative will help reduce the over-age contracts each year with 

approximately 40,000 contracts currently in this category. 10

Another initiative DCMA is pursuing is to no longer accept non-core services contracts, which are not 

included in DCMA’s core mission requirements. This could mean a reduction of approximately 

5,000 contracts per year that could potentially become over-aged and have cancelling funds within 

DCMA. Although this initiative could ultimately move the work load back to the services and increase 

their over-aged contract backlog. 

DCMA has partnered with DCAA to prioritize audits and emphasize audits with cancelling funds. This 

partnership allows them to actually perform the audit to close out the contract rather than focusing on 

interim billing for cancelling funds. DCAA now has the audit plan with DCMA priorities (cancelling 

funds) through FY 2020.

The streamlining initiatives reflect DCMA and external agencies’ recognition that the over-aged 

contract backlog needs to be addressed, but these initiatives will not fully remedy the existing backlog 

of approximately 65,000 over-aged contracts. The existing backlog can only be mitigated by crossorganization monitoring and discipline. As shown in Figure 4-22, DoD recognized that DCMA needed 

additional resources. DoD provided funding for 30 additional full-time equivalents (FTEs) starting in 

FY 2019. DCMA developed the Figure 4-22 burn-down plan based on those 30 additional FTEs and the 

implementation of initiatives described in the discussion above. The projection below also reflects that 

DCMA will still not be able to fully address the over-aged contract backlog by FY 2022. The light-blue 

dashed line depicts the point that even if the workforce were augmented again with an additional 30 

FTEs starting in FY 2020, DCMA would still not reach a steady state by FY 2022. To reach a steady state 

 

9 DCMA Memorandum to DCMA Component Heads, DCMA Quick-Closeout Procedure Class Deviation (DCMA 17-142), August 15, 2017. 10 DCMA Memorandum to DCMA Component Heads, DCMA Low Risk Quick Closeout Initiative, April 13, 2018.
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workload, DCMA would need process improvements and possibly additional resources to address 

approximately 15,000 over-aged contract audits annually for 3 years starting in FY 2020, and the 

additional resources would require approximately $3.5 million or more annually. Because DoD could 

spend up to $3.5 million of current-year funds to pay cancelled bills, one might suggest applying those 

dollars to remedy this issue. But these current-year funds were originally appropriated for other 

requirements and that would contradict the original intent of the appropriation by Congress. 

Figure 4-22. DCMA Over-aged Contract Burn-down Projection

Conclusions

To eliminate the backlog, DCMA must reach a workload steady state, and then apply process 

improvements to prevent reoccurrence. As shown in Figure 4-23 below, the majority of over-aged 

contracts could potentially be closed with application of the DCMA QCO streamlined initiatives 

described above. As depicted in Figure 4-22 above, DCMA will not reach a workload steady state by 

2020 and the Secretary of Defense should require the DCMA class deviation initiative dated August 15, 

2017 be made a permanent change versus a temporary deviation that sunsets in 2020. DCMA, through 

the class deviation, has been operating in this manner for years without any negative consequences. In 

addition, the LRQCO sunset date should be extended at least another 2 years.

The application of these recommendations could eliminate the over-aged contract backlog within 2 to 

3 years and allow DCMA to reach a workload steady state, but for DCMA to maintain that level, the 

DCMA Quick-Closeout Procedure Class Deviation should be a permanent change to the DFARS.
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Figure 4-23. DCMA Over-aged Contracts (Total Contract Value)

To prevent reoccurrence of this backlog, the Secretary of Defense should direct the DoD Chief 

Management Officer (CMO) to work with USD(C) and USD(Acquisition and Sustainment), to perform 

further analysis that describes the entire scope of the problem to develop an end-to-end integrated 

streamlined process. The metrics reflected in Figure 4-23 are only for DCMA-administered contracts 

and not the entire scope of DoD. CMO should present the results in a report to Congress and propose a 

mitigation strategy that addresses the entire over-aged contract issue for DoD. The report should 

contain the following:

§ Recommendation assigning responsibility to a single process owner with authority to set 

priorities and approve closeout policies affecting all involved agencies (recognizing that the 

current problem started when DCAA made a unilateral policy change on what a low risk

closeout is, without regard to the downstream effects on other agencies, particularly DCMA).

§ Recommendation of process improvements such that closeout happens in a timely manner. 

Timely in this regard should mean that expiring funds are identified, and prioritized for closeout 

in sufficient time so the Services/Agencies don’t have to use current funds to satisfy past 

obligations.

§ Recommendation of appropriate metrics and levels of review to ensure appropriate leadership 

attention so this cycle of contract backlogs doesn’t recur. 

- Reporting tools and emphasis should be put in place to preclude the utilization of current 

year funds to address cancelled funding bills

- Automation where appropriate to align and integrate business systems

Congress has already set precedence in Sections 925–927 of the FY 2019 NDAA that the DCMO review 

the roles and responsibilities of DCAA, DCMA, and DFAS, but does not require an integrated end-toend look across the three organizations. DCMO should expand the FY 2019 NDAA direction to include 
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an integrated look to determine much needed process improvements and prevent the over-aged 

contract backlog from reoccurring in the future. It is imperative that this issue be addressed now and in 

the future to eliminate the application of current-year funds to pay cancelled bills, which results in 

harming existing programs and DoD strategic interests, as well as undermining the original intent of 

the appropriators. 

Implementation

Legislative Branch

§ Direct the Secretary of Defense to submit a report that reflects an end-to-end, integrated, 

streamlined process-improvement strategy for preventing the reoccurrence of over-aged 

contract backlog by March 1, 2021.

Executive Branch

Note: DoD, in implementing these recommendations, should engage with industry in accordance with the 

recommendations in Section 8.

§ Codify DCMA’s Quick Close Out class deviation in the DFARS by: 

- Removing requirements to obtain an audit report or low-risk adequacy memorandum from 

the DCAA prior to settling quick-closeout rates.

- Authorizing ACOs to settle final overhead rates when it is in the best interest of the 

government and close any and all physically complete contracts regardless of dollar value 

or the percent of unsettled direct and indirect costs allocable to the contracts. 

- Applying the streamlined QCO process to flexibly priced contracts.

§ Develop a report to Secretary of Defense providing the entire scope of the DoD over-aged 

contract backlog with current funds at risk for cancelling and an integrated mitigation strategy 

to resolve and prevent reoccurrence.

§ Develop a QCO burn-down plan addressing the entire DoD over-aged contract backlog with 

quarterly status reports to the Secretary of Defense.

§ Extend the current sunset date of the DCMA LRQCO initiative that was issued April 13, 2018 by 

2 years.

Implications for Other Agencies

§ There are no cross-agency implications for this recommendation.