DEFENSE 

CONTRACTING

DOD Initiative to 

Address Audit 

Backlog Shows 

Promise, but 

Additional 

Management Attention 

Needed to Close Aging 

Contracts

Report to the Committee on Armed 

Services, U.S. Senate

December 2012

GAO-13-131

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-131, a report to the 

Committee on Armed Services, U.S. Senate

December 2012

DEFENSE CONTRACTING 

DOD Initiative to Address Audit Backlog Shows 

Promise, but Additional Management Attention 

Needed to Close Aging Contracts 

Why GAO Did This Study

DOD has a large volume of contracts 

that have not been closed on time. 

Closing a contract includes tasks such 

as verifying that the goods and 

services were provided and making 

final payment to the contractor. Closing 

contracts within required time frames 

can limit the government’s exposure to 

certain financial risks. One reason why 

some contracts are not being closed is 

the large backlog of incurred cost 

audits that must first be completed. 

These audits, conducted by DCAA, 

ensure that the costs contractors have 

incurred are permissible under 

government regulations. 

The Senate Armed Services 

Committee report accompanying the 

National Defense Authorization Act for

Fiscal Year 2012 directed GAO to 

review the criteria and procedures for 

conducting incurred cost audits, among 

other things. In response, GAO 

assessed (1) efforts to reduce the 

backlog of incurred cost audits and (2) 

the challenges DOD faces in 

addressing the contract closeout 

backlog. GAO reviewed DCAA’s 

policies and procedures for incurred 

cost audits; analyzed data on the audit 

and contract closeout backlogs; and 

interviewed officials in the military 

departments and agencies. 

What GAO Recommends

GAO is recommending that DCAA

develop a plan to assess its incurred 

cost audit initiative; that DCMA 

improve data on over-age contracts; 

and that the military departments

develop contract closeout data and 

establish performance measures. DOD 

concurred with the recommendations

and identified ongoing and planned 

actions to address them. 

What GAO Found

To reduce the backlog of incurred cost audits, the Defense Contract Audit 

Agency (DCAA) implemented an initiative to focus its resources on auditing 

contractors’ incurred costs that involve high dollar values or are otherwise 

determined to be high risk. Incurred cost audits are conducted on a contractor’s 

annual proposal that includes all costs incurred on certain types of contracts in 

that fiscal year. Under the initiative, DCAA raised the dollar threshold that triggers 

an automatic audit on a contractor’s incurred cost proposal from $15 million to 

$250 million, revised the criteria used to determine a proposal’s risk level, and 

significantly reduced the number of low risk audits that will be randomly sampled. 

This initiative appears promising, and DCAA plans to track certain 

characteristics, such as the number of risk determinations made and audits 

completed. But DCAA has not fully developed the measures by which it will 

assess whether the initiative reduces the backlog in a manner that protects the

taxpayers’ interests. Specifically, DCAA does not have a plan for how it will

determine whether key features of the initiative, such as the revised risk criteria 

and the revised sampling percentages, should be adjusted in the future. By 2016,

DCAA estimates it will reduce the backlog and reach a steady state of audits, 

which it defines as two fiscal years of proposals awaiting review. DCAA’s ability 

to achieve this goal will depend on a number of factors, including the number of 

proposals determined to be high risk, which as of September 2012 was about 

two-and-a-half times more than anticipated. 

Reducing the backlog of incurred cost audits will ease one obstacle to closing 

over-age contracts, but other obstacles, such as limited data and performance 

metrics, must still be overcome. The military departments have limited data on

the extent and nature of their contract closeout backlog, and the Defense 

Contract Management Agency (DCMA)—which performs contract administration 

services for the Department of Defense (DOD)—is missing information that 

would allow it to identify contracts that it could act on. Such data can cue 

agencies on how to identify or tailor approaches to address the backlog. Further, 

the military departments generally do not have performance metrics to measure 

progress in closing out contracts. The Army recently announced a goal of closing 

over 475,000 contracts by September 2014; however, it does not yet have the 

information necessary to know if it can reach this goal and does not have an 

implementation plan. The Navy and the Air Force had not established any 

department-wide performance metrics for contract closeout. In contrast, DCMA 

has established two agency-wide performance metrics related to contract 

closeout that are regularly monitored. While many officials said contract closeout 

was not a priority, GAO found some local contracting activities taking action to 

bring attention to contract closeout. 

View GAO-13-131. For more information, 

contact Timothy J. DiNapoli, (202) 512-4841

or dinapolit@gao.gov. 
Page i GAO-13-131 Contract Closeout

Letter 1 

Background 4

DCAA Implemented Initiative to Focus on High Risk Incurred Cost 

Proposals, but Has Not Yet Fully Developed Measures to 

Evaluate the Initiative’s Results 12

DOD’s Efforts to Reduce Its Contract Closeout Backlog Is 

Hindered by Limited Data and Performance Metrics 18

Conclusions 24

Recommendations for Executive Action 25

Agency Comments and Our Evaluation 25

Appendix I Objectives, Scope, and Methodology 28

Appendix II Comments from the Department of Defense 32

Appendix III GAO Contact and Staff Acknowledgments 35

Tables

Table 1: Incurred Cost Audit Backlog as of the End of Fiscal Year 

2011 13

Table 2: Key Changes to DCAA’s Incurred Cost Audit Low Risk 

Criteria 14

Table 3: Percentage of Proposals Sampled under Previous and New 

Procedures 15

Table 4: Military Department, Command, and Contracting Offices 

GAO Reviewed 30

Figures

Figure 1: DOD Contract Closeout Process 6

Figure 2: Incurred Cost Audit Process 8

Figure 3: DCAA’s Revised Incurred Cost Audit Procedures 16

Contents 
Page ii GAO-13-131 Contract Closeout

Abbreviations

ADV Auditable Dollar Value

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency

DFARS Defense Federal Acquisition Regulation Supplement

DFAS Defense Finance and Accounting Services

DPAP Defense Procurement and Acquisition Policy

DOD Department of Defense

FAR Federal Acquisition Regulation

MOCAS Mechanization of Contract Administration Services

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Page 1 GAO-13-131 Contract Closeout

United States Government Accountability Office

Washington, DC 20548

December 18, 2012

The Honorable Carl Levin 

Chairman 

The Honorable John McCain 

Ranking Member 

Committee on Armed Services 

United States Senate 

The Department of Defense (DOD) obligated more than $3 trillion over 

the last 10 years on contracts to acquire goods and services needed to 

support its mission. Once performance on these contracts has been 

completed, they must be closed as the final step in the acquisition 

process. DOD currently has a large backlog of both flexibly priced and 

firm-fixed-price contracts1

—reportedly numbering in the hundreds of 

thousands—that have not been closed within the time frames required by 

federal regulations.2 Closing contracts within required time frames can 

help to limit the government’s exposure to certain financial risks by 

identifying and recovering improper payments and avoiding paying 

interest fees when the government does not pay contractors on time. 

Timely closeout also ensures that DOD deobligates and uses unspent 

funds from completed contracts before the funds are canceled and 

returned to the U.S. Department of the Treasury.

3

 

1

A firm-fixed-price contract provides for a contract price that is generally not subject to any 

adjustment on the basis of the costs a contractor incurs while performing the contract. In 

contrast, flexibly priced contracts include contract types where the price may be adjusted 

based on actual costs incurred. The DCAA Contract Audit Manual defines flexibly priced

contracts to include all cost-type, fixed-price-incentive, and fixed-price-redeterminable 

contracts; orders issued under indefinite delivery contracts where final payment is based 

on actual costs incurred; and portions of time-and-material and labor hour contracts. 

In addition, closing a 

contract years after the performance is complete can present challenges

because key documentation and contracting personnel with firsthand 

knowledge of the contract may no longer be available.

2

Federal Acquisition Regulation (FAR) § 4.804-1(a)(2) and (3). 

3

An agency can use funds for up to 5 years after they expire to pay for authorized 

increases to existing obligations made from the same appropriation. Any funds remaining 

after the 5-year period are considered canceled and must be returned to U.S. Department 

of the Treasury. If closeout does not take place until after they are canceled, and the 

agency identifies a need for the government to pay the contractor for an unanticipated 

cost, the government must use other funds that are currently available.

 
 

Page 2 GAO-13-131 Contract Closeout

One of the key factors affecting DOD’s ability to close out flexibly priced

contracts is the Defense Contract Audit Agency (DCAA) backlog of 

approximately 25,000 incurred cost audits as of the end of fiscal year 

2011, some dating as far back as 1996. This backlog represents 

hundreds of billions of dollars in unsettled costs, and according to DCAA 

has quadrupled over 10 years. DCAA conducts incurred cost audits to 

identify whether all costs incurred on flexibly priced contracts are 

allowable, allocable, and reasonable—information that contracting officers 

need to close flexibly priced contracts. Contracting officers also use 

information from incurred cost audits to help determine final indirect cost 

rates for a contractor. Indirect cost rates are a mechanism for establishing 

the proportion of indirect costs—or costs that are not directly attributable 

to a specific project or function such as a contractor’s general and 

administrative expenses and health benefits—that can be charged to a 

contract. Because of the need to settle indirect cost rates, flexibly priced

contracts can be more difficult and time-consuming to close than firmfixed-price contracts. One tool for expediting the closeout of flexibly priced

contracts is a process known as the quick closeout procedure. The quick 

closeout procedure can only be applied to certain contracts where the 

unsettled contract costs are considered relatively insignificant and can 

allow for closing these contracts without an incurred cost audit.

The Senate Armed Services Committee report accompanying the 

National Defense Authorization Act for Fiscal Year 2012 directed GAO to 

review DCAA’s criteria and procedures for conducting incurred cost audits 

and recommend steps DCAA could take to reduce the backlog and to 

consider the feasibility and advisability of three options aimed at reducing 

the contract closeout backlog.4

 

4

S. Rep. 112-26, at 153 (2011).

The three options we were asked to 

consider were (1) restoring the authority of the head of an agency to close 

out a contract that is administratively complete, was entered into 10 or 

more years ago, and has an unreconciled balance of less than $100,000; 

(2) authorizing the contracting officer, in consultation with DCAA, to waive 

the requirement for an incurred cost audit in the case of a low risk, lowcost contract; and (3) authorizing the contracting officer to waive final 

payment in a case where the contractor has gone out of business and 

cannot be reached. It also asked us to assess the efficacy of a May 2011 

change to the Federal Acquisition Regulation (FAR) that was intended, in 

part, to increase the use of quick closeout procedures. In response, this 
 

Page 3 GAO-13-131 Contract Closeout

report addresses (1) DCAA’s efforts to reduce the backlog of incurred 

cost audits, and (2) the challenges DOD faces in addressing the contract 

closeout backlog. Included within the scope of the second objective was a 

consideration of the three options outlined in the Committee report as well 

as the use of quick closeout procedures. 

To assess DCAA’s efforts to reduce the backlog of incurred cost audits, 

we reviewed applicable federal regulations and DCAA’s Contract Audit 

Manual to identify its criteria and procedures for conducting incurred cost 

audits and obtained and reviewed data on DCAA’s incurred cost audit 

backlog. We also collected and reviewed documentation on DCAA’s 

processes and criteria for conducting incurred cost audits, such as 

agency memorandums, guidance, and forms for documenting risk 

determinations. We interviewed senior DCAA officials and DCAA auditors 

from three field offices that performed a high volume of risk 

determinations to obtain a better understanding of the process and 

considerations by which they determine the risk associated with a 

contractor’s incurred cost proposals.5

To identify the challenges DOD faces in addressing the contract closeout 

backlog and to assess the efficacy of the May 2011 change to the FAR

pertaining to quick closeout procedures, we reviewed federal regulations 

as well as agency guidance and policies on contract closeout and quick 

closeout procedures, and GAO’s standards for internal controls in the 

federal government.

We also interviewed officials at 

Defense Procurement and Acquisition Policy (DPAP) and the Defense 

Contract Management Agency (DCMA) to get their perspective on 

DCAA’s efforts to reduce the backlog of incurred cost audits. 

6

 

5

The FAR refers to these proposals as “final indirect cost rate proposals.” FAR 42.705-

1(b)(1). 

We collected and analyzed available data and 

documentation on over-age contracts—or contracts that have not been 

closed in the time frames prescribed by federal regulations—from DCMA 

headquarters, the two DCMA contract management offices with the 

largest volume of over-age contracts, military department headquarters 

(Army, Navy, and Air Force), five commands, and nine contracting offices 

within those commands. The commands and contracting offices were 

selected based on factors such as the total reported volume of over-age 

6

GAO, Internal Control: Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (Washington, D.C.: November, 1999). 
 

Page 4 GAO-13-131 Contract Closeout

contracts. We also interviewed officials at DPAP, DCAA, DCMA, the 

Defense Finance and Accounting Services (DFAS); Army, Navy, and Air 

Force officials at headquarters and the commands, as well as individual 

contracting offices. We interviewed one contractor and two contractor 

industry associations to obtain their views on the incurred cost audit and 

contract closeout backlogs. To address the options outlined in the 

Committee report, we reviewed applicable laws, related agency policies 

and guidance, and solicited input about the availability and potential 

usefulness of the options in our interviews with representatives from 

DCAA; DCMA; military department headquarters, commands, and 

contracting offices; the military departments’ general counsel; DFAS; and 

contractor representatives. Appendix I provides additional details on our 

scope and methodology.

We conducted this performance audit from February 2012 to December 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

Closing out contracts involves a number of tasks, such as verifying that 

goods or services were provided, making final payment to the contractor, 

and deobligating excess funds. A contract is generally eligible to be 

closed once all option provisions have expired, the contractor has 

completed performance, and the government has accepted the final 

delivery of goods or services, or when the government has provided the 

contractor a notice of complete contract termination. From this point, 

contracts are considered physically complete, and should be closed 

within time frames set by the FAR—6 months for firm-fixed-price

contracts and 36 months for flexibly priced contracts. The FAR prohibits 

the closing of contract files if the contract is in litigation, under appeal, or 

where the contract is being terminated and all termination actions have 

not been completed.

7

 

7

FAR § 4.804-1(c)(1) and (2). 

Contract documents can be stored and retained 

after the contracting officer signs and files the contract completion 

statement. 

Background 
 

Page 5 GAO-13-131 Contract Closeout

Additional time is allowed for the closeout of flexibly priced contracts

because there are additional steps necessary to close out these types of 

contracts (see figure 1). Specifically, closing these contracts generally 

requires an audit and settlement of the contractor’s final indirect cost 

rates. Contracting officers and DCAA need to ensure all costs incurred by 

the contractor and charged to the government are allowable, allocable, 

and reasonable. Contracting officers also need to establish final indirect 

cost rates based on the contractor’s incurred costs, which determine, in

part, the contractor’s final payment on flexibly priced contracts.8

 

 

8

Indirect cost rates can also be auditor determined. FAR § 42.705-2.
Page 6 GAO-13-131 Contract Closeout

Figure 1: DOD Contract Closeout Process

Source: GAO analysis of federal and DOD regulations and guidance.

Contracting

officer

 performs

pre-closeout

administrative

tasksa

Indirect

cost rates for

all relevant

years applied

to contract

Final invoice

submitted

and reviewed

Contract is

physically

complete/

 goods and

services

received

Final

payment

made

Contract

closed when

contracting

officer signs

contract

completion

statement

Payment

differences

reconciled

and excess

funds

deobligated

Interactive Graphic To highlight firm-fixed-price closeout process, roll mouse over legend. Click on blue box to go to figure 2, DCAA’s incurred cost audit process.

Indirect cost

rates settled

with DCAA

recommendations

Firm-fixed-price

Flexibly priced

a

Certain low-dollar, fixed-price contracts are closed using a more simplified process.
 

Page 7 GAO-13-131 Contract Closeout

Contractors are required by the FAR to submit proposals that include 

information on all of their flexibly priced contracts in a fiscal year.9

 

9

FAR § 16.307 directs the contracting officer to insert FAR Clause 52.216-7 in a contract 

when a cost-reimbursement contract or a time-and-material contract is contemplated. The 

clause addresses the requirement for a contractor to submit an adequate final indirect cost 

rate proposal.

Once 

submitted, DCAA audits the proposal to determine if the costs incurred 

are reasonable, allowable and allocable to government contracts (see 

figure 2 for incurred cost audit process). There is not a one-to-one 

relationship between an incurred cost audit and an individual contract. In 

a single fiscal year, a contractor may incur costs on multiple flexibly 

priced contracts, and all of these contracts would be included in the 

proposal. The total value of the proposal, called the auditable dollar value 

(ADV), is the sum of all the costs on flexibly priced contracts for that 

contractor during the fiscal year. Additionally, since the period of 

performance on an individual contract may span several fiscal years, 

several audits may need to be conducted to provide the information 

necessary to close one flexibly priced contract. Further, DCAA may 

assess a contractor’s incurred cost proposal as inadequate for a variety of 

reasons, for example if the proposal is not certified or contains math 

errors, and request that the contractor review, revise, and resubmit its 

incurred cost proposal. 
Page 8 GAO-13-131 Contract Closeout

Figure 2: Incurred Cost Audit Process

Incurred cost audit process is

repeated for all fiscal years

DCAA

conducts audit,

identifies

questioned

costs and

recommends

ratea

Contracting

officer

 or auditor

settles indirect

cost rates

with contractor

for fiscal year

adequate

proposal

inadequate

proposal

Contractor

submits

incurred cost

proposal

including all

flexibly priced

contracts for

a fiscal year

DCAA

evaluates

incurred cost

proposal for

adequacy

Interactive Graphic To return to figure 1, click the arrow.

Source: GAO analysis of federal and DOD regulations and guidance.

a

Not all proposals are selected for audit. See figure 3 for additional 

details on selection process.
 

Page 9 GAO-13-131 Contract Closeout

The responsibility for closing out a contract resides with the DOD 

contracting officer within the military department or other defense agency 

that awarded the contract. The contracting officer may, however, delegate 

certain administrative responsibilities, including contract closeout, to 

DCMA, which provides contract administration services to DOD.10 DFAS 

also plays a role in activities related to contract closeout, such as paying 

final vouchers, and, when needed, resolving unreconciled balances on a 

contract.11 

To facilitate contract closeout of flexibly priced contracts, federal 

regulations authorize the use of quick closeout procedures, by which a 

contracting officer can negotiate the settlement of direct and indirect costs 

on a specific contract, task order, or delivery order without waiting for the 

determination of final indirect cost rates for the contractor’s fiscal year.12

To use the quick closeout procedure, several conditions must be met. For 

example, the amount of unsettled direct and indirect costs to be allocated 

to the contract, task order, or delivery order must be relatively 

insignificant—which is defined as costs that do not exceed the lesser of 

$1,000,000 or 10 percent of the total contract, task order, or delivery 

order amount. The contracting officer also must perform a risk 

assessment and determine that the use of the quick closeout procedure is 

appropriate and consider such factors as the contractor’s accounting, 

estimating, and purchasing systems, and any concerns of cognizant 

DCAA auditors. When the quick closeout procedure is used for a contract, 

determinations of final indirect costs are considered binding for the 

specific contract covered, but the rates used during this process are not 

considered binding when establishing the final indirect cost rates for other 

contracts.

 

DCMA has issued a memorandum authorizing its contracting officers to 

close specific contracts prior to the establishment of indirect cost rates 

regardless of the dollar value of the contract or the percent of unsettled 

 

10FAR § 42.202(a). 

11The term “unreconciled balances” can refer to situations in which the payments recorded 

for a contractor’s invoices do not agree with the obligations recorded on its contracts and 

the different amounts must be reconciled. 

12FAR § 42.708. 

Quick Closeout 

Procedures 
 

Page 10 GAO-13-131 Contract Closeout

direct and indirect costs allocable to the contract. This memorandum—

known as a class deviation from the FAR because it allows for actions 

that are inconsistent with the regulation—was signed by the agency 

director in October 2011 and extends through September 2013. 

According to DCMA officials, DCMA has had similar deviations in place 

since 1999. The policy allows a DCMA contracting officer to waive the 

requirement for an incurred cost audit, in consultation with DCAA, when a 

compelling reason exists. DCMA guidance indicates that compelling 

reasons may include contracts with funds at risk of canceling, contracts 

that have been over-age for 6 or more years, and contracts where a 

contractor’s historical final indirect cost rates have been fairly consistent 

with proposed certified final indirect cost rates.

Our prior work has highlighted challenges at DCAA as well as some of 

DOD’s challenges in closing out contracts, particularly those awarded to 

support operations in Iraq and Afghanistan. In 2009, we found problems 

with DCAA’s audit quality nationwide, including insufficient testing of 

contractors’ support for claimed costs.

13 We recommended that DCAA 

develop a risk-based contract audit approach across the agency that 

included identification of resource requirements. DCAA officials reported 

that as a result of our findings, it now requires more testing and stricter 

compliance with government auditing standards, which adds to the 

amount of staff time required to complete each audit. In September 2011, 

we reported that DOD’s ability to close the contracts it awarded to support 

efforts in Iraq was hindered by several factors, including the failure to plan 

for or emphasize the need to close these contracts until reconstruction 

efforts were well under way.14

 

13See GAO, DCAA Audits: Widespread Problems with Audit Quality Require Significant 

Reform, 

We also found that DOD commands 

prioritized contract awards over other activities and DOD does not have 

visibility into the number of Iraq contracts eligible for closeout. We also 

reported that DOD’s efforts to close its large, cost-type contracts was 

hindered by staffing shortages at DCAA and unresolved issues with 

contractors’ cost accounting practices. We made recommendations to 

ensure DOD has sufficient resources to close its Iraq and Afghanistan 

GAO-09-468 (Washington, D.C.: Sept. 23, 2009). 

14GAO, Contingency Contracting: Improved Planning and Management Oversight Needed 

to Address Challenges with Closing Contracts, GAO-11-891 (Washington, D.C.: Sept. 27, 

2011).

Prior Work
 

Page 11 GAO-13-131 Contract Closeout

contracts and to better plan for and improve visibility of closeout efforts in 

future contingencies. In May 2012, DOD amended the Defense Federal 

Acquisition Regulation Supplement to require heads of contracting 

activities to monitor and assess on a regular basis the progress of 

contingency contract closeout activities and take appropriate steps if a 

backlog occurs. 

Our prior work has also identified some challenges at DCMA in relation to 

establishing indirect cost rates and workload. In November 2011, we 

reported that DCMA has been increasing its workforce and rebuilding key 

skills sets that had atrophied in recent years, such as cost and pricing 

capabilities.15

The challenges faced by DOD in closing out contracts are not recent 

phenomena. For example, in 2001, the DOD Inspector General issued a 

report that found weaknesses in the closeout process, including 

inadequate monitoring of contracts that could be closed, inattention to 

closure requirements, erroneous data about contracts available for 

closure, lack of coordination, lack of sufficient funding, a shortage of 

personnel, and untimely contractor input.

 According to DCMA, loss of this skill set meant that many of 

the agency’s pricing-related contract administration responsibilities, such 

as establishing final indirect cost rates, were no longer performed to the 

same level of discipline and consistency as in prior years. As a result, 

DCMA stated that DOD’s acquisitions were subjected to unacceptable 

levels of cost risks. Both DCMA and DCAA have been increasing their 

workforce in recent years to address some of the challenges faced by the 

agencies. 

16 The Inspector General 

reported that DOD made progress by closing about 30,000 contracts from 

February 2000 to March 2001, though over 26,000 became over-age 

during that same period. 

 

15GAO, Defense Contract Management Agency: Amid Ongoing Efforts to Rebuild 

Capacity, Several Factors Present Challenges in Meeting Its Missions, GAO-12-83

(Washington, D.C.: Nov. 3, 2011).

16DOD Office of the Inspector General, Closing Overage Contracts Prior to Fielding a New 

DOD Contractor Payment System, D-2002-027 (Arlington, Va.: Dec. 19, 2001).
 

Page 12 GAO-13-131 Contract Closeout

To address the backlog of incurred cost audits, DCAA implemented a 

new, risk-based initiative in 2012 which focuses DCAA’s resources on 

incurred cost proposals that have high dollar values or are determined by 

auditors to be high risk. In doing so, DCAA will significantly reduce the 

number of audits performed on incurred cost proposals that are 

determined to be low risk. Under its risk-based initiative, DCAA raised the 

threshold by which an incurred cost audit is automatically performed on a 

contractor’s incurred cost proposal, revised the criteria used to determine 

a proposal low risk, and decreased the percentages of low risk proposals 

that will be randomly selected for audit. DCAA plans to track certain data 

to help assess progress in eliminating the backlog, but DCAA has not fully 

developed measures to determine whether key features of the initiative, 

such as revised criteria for determining a proposal is low risk and revised 

sampling percentages, should be adjusted in the future. Further, DCAA 

estimates it will reach a steady state of audits, which DCAA defines as 

two fiscal years of proposals awaiting review, by 2016, but whether DCAA 

will achieve its goals will depend on a number of factors, including the 

number of proposals determined to be high risk and the completion of 

subsequent audits. 

In 2012, DCAA began implementing a new, risk-based approach that is 

expected to shift DCAA’s resources to focus on incurred cost audits 

involving high-dollar value and high risk proposals. DCAA officials told us 

that in 2011, DCAA recognized that the number of audits that needed to 

be conducted exceeded the capacity of DCAA’s staff to do so. 

Accordingly, DCAA reported that incurred cost audits were not prioritized 

in fiscal year 2011 since they did not provide as many financial benefits 

as other audits, such as forward pricing audits, which are used to 

determine fair and reasonable rates for the award or modification of a 

contract. 

In developing the initiative, DCAA performed an analysis of which audits 

provided financial benefits by comparing how much money was saved or 

recovered by various types of audits (such as incurred cost and forward 

pricing audits) to how much money was invested in performing those 

audits. As a part of this analysis, DCAA officials found that the agency 

spent more in terms of staff resources to conduct incurred cost audits on 

proposals valued at less than $1 million than the financial benefits derived 

from the audits. DCAA’s analysis also determined that proposals valued 

over $1 million have provided more benefits than the cost to conduct 

them, with the benefits generally increasing as the value of the proposal 

increased. 

DCAA Implemented 

Initiative to Focus on 

High Risk Incurred 

Cost Proposals, but 

Has Not Yet Fully 

Developed Measures 

to Evaluate the 

Initiative’s Results

DCAA’s Initiative 

Prioritizes High Risk 

Incurred Cost Proposals 

for Audit 
 

Page 13 GAO-13-131 Contract Closeout

DCAA’s risk-based initiative includes key changes to its criteria and 

procedures that will decrease the number of audits conducted. These 

changes include (1) raising the threshold by which proposals 

automatically qualify for audit, (2) revising the criteria used to determine a 

proposal low risk, (3) lowering the percentage of low risk proposals to be 

randomly selected for audit, and (4) eliminating further review of 

proposals not selected for audit, and revising its adequacy review 

procedures to be more comprehensive. In addition to the changes to 

criteria and procedures, DCAA officials noted they plan to increase their 

staffing levels from 4,900 employees in 2011 to 5,600 by 2016. DCAA 

provided refresher training to its staff, and created 17 dedicated teams to 

incurred cost audit work.

DCAA raised the threshold above which an audit is required based on 

ADV from $15 million to $250 million, thereby decreasing the number of 

proposals automatically qualifying for audit from 5,194 to 659, based on 

the backlog as of the end of fiscal year 2011 (see table 1). Proposals 

under the $250 million threshold will not be audited unless they are 

determined to be high risk or randomly selected for audit. 

Table 1: Incurred Cost Audit Backlog as of the End of Fiscal Year 2011

Auditable dollar value

Number of 

proposalsa Total auditable dollar value (in billions)

$1 million or less 9,040 $4.0

>$1 million to $15 million 10,488 $48.8

>$15 million to $50 million 2,884 $71.0

>$50 million to $100 million 945 $56.4

>$100 million to $250 million 706 $79.8

More than $250 million 659 $313.4

Total 24,722 $573.3

Source: DCAA. 

a

Includes 2,431 non-DOD proposals. DCAA conducts audits on a reimbursable basis for non-DOD 

agencies, and is working with these agencies to determine their level of participation in the initiative.

According to DCAA, the backlog includes all proposals that are due to be audited, whether they have 

been submitted to DCAA by the contractor or not, and whether they have been determined adequate 

or not. 

In conjunction with raising the threshold by which incurred cost proposals 

were automatically selected for audit, DCAA revised two of the three 

criteria that a contractor’s incurred cost proposal under the $250 million 

threshold must meet to be determined low risk (see table 2). For example, 

under DCAA’s prior criteria, DCAA must have performed an incurred cost 

Raised Threshold by Which 

Proposals Automatically 

Qualify for Audit

Revised Criteria Used to 

Determine a Proposal to Be 

Low Risk 
 

Page 14 GAO-13-131 Contract Closeout

audit within the past three years; under the new initiative, for proposals 

$100 million or under, the time frame for conducting the last incurred audit 

was eliminated—the requirement is now that the contractor has had at 

least one incurred cost audit. These changes will increase the potential 

number of contractor proposals that are eligible for low risk

determinations. The other criterion—audit leads or other significant 

risks—did not change.17

Table 2: Key Changes to DCAA’s Incurred Cost Audit Low Risk Criteria 

 However, DCAA did provide several examples of 

the types of risks that should be considered under this criterion, such as 

known business system deficiencies or risks identified by the contracting 

officer. 

Risk factor

Previous criteria (applied to 

proposals under $15 

million ADV)

Revised criteria (applied to 

proposals under $250 

million ADV)

History of incurred cost 

audits

At least one incurred cost 

audit every 3 years

At least one incurred cost 

audita

Previous questioned 

costs

Below $10,000 Below thresholds ranging from 

$15,000 to $100,000 based on 

ADV

Audit leads or other 

significant risks

No relevant risk factors No changes

Source: GAO analysis of DCAA guidance and documentation.

a

Proposals with an ADV of greater than $100 million to $250 million must have an incurred cost audit

at least once every three years. For all other proposals, auditors will rely on their professional 

judgment to determine if a contractor’s prior incurred cost audit history is sufficient. 

Once risk has been determined, those proposals that are determined to 

be low risk will be randomly sampled at DCAA’s five regional offices

based on the proposal’s ADV, but now at a lower percentage than before. 

Currently, between 1 and 20 percent of low risk proposals are sampled 

depending on ADV, whereas under the previous procedure 33 percent of 

low risk proposals were sampled (see table 3). 

 

17DCAA auditors document audit leads in their files when an issue arises that an auditor 

feels needs to be addressed, but is not an area within the scope of the current audit. As a 

part of their risk assessment of the incurred cost proposal, DCAA auditors are responsible 

for reviewing the files for any audit leads related to the contractor.

Reduced the Percentage of Low 

Risk Proposals Sampled for 

Audit
 

Page 15 GAO-13-131 Contract Closeout

Table 3: Percentage of Proposals Sampled under Previous and New Procedures

Auditable dollar value Sampling percentages for low 

risk proposals under 

previous criteria

Sampling percentages for

low risk proposals under 

new criteria

$1 million or less 33%a 1%

>$1 million to $15 

million 

33%a 5%b

>$15 million to $50 

million 

All proposals were audited 5%b

>$50 million to $100 

million

All proposals were audited 10%

>$100 million to $250 

million

All proposals were audited 20%

More than $250 million All proposals were audited All proposals will be audited 

Source: GAO analysis of DCAA procedures. 

a

Under the previous criteria, sampling percentages were 33 percent for all proposals $15 million or 

less, not separately for the two categories ($1 million or less; >$1 million to $15 million). b

Under the new criteria, sampling percentages are 5 percent for all proposals from greater than $1

million to $50 million, not separately for the two categories (>$1 million to $15 million; >$15 million to 

$50 million).

Under DCAA’s risk-based initiative, low risk proposals that are not 

selected for audit are not subject to any further review, whereas 

previously all proposals not selected for audit were subject to desk 

reviews. Desk reviews included an evaluation of the proposal for unusual 

items and changes from prior year proposals, among other actions. Now, 

when a low risk proposal is not selected for audit, DCAA auditors issue 

memorandums to the contracting officers recommending that the 

contracting officer use his or her authority to determine the contractor’s 

final indirect cost rates, which allows the contracting officer to proceed 

with closing the contract. However, in November 2011, DCAA issued 

revised guidance to determine whether a contractor’s proposal is 

adequate, and DCAA officials explained that the revised adequacy review 

provides a more comprehensive determination that includes many areas

previously covered in the desk review process. 

A summary of DCAA’s revised incurred cost audit procedures are outlined 

in figure 3. 

Eliminated Desk Reviews and 

Revised Adequacy Review 

Procedures 
 

Page 16 GAO-13-131 Contract Closeout

Figure 3: DCAA’s Revised Incurred Cost Audit Procedures

a

Proposals with an ADV of greater than $100 million to $250 million must have an incurred cost audit

at least once every three years.

By revising its policies and procedures and dedicating resources to 

incurred cost audits, DCAA estimates it will reduce its backlog and reach 

a steady state by 2016, which it defines as having two fiscal years of 

incurred cost proposals awaiting review. By randomly sampling low risk

proposals, DCAA officials note that the possibility of an audit is still 

present, which is a deterrent for contractors to report inaccurate 

information. However, DCAA has not yet fully developed measures to 

evaluate the initiative’s results and assess whether the changes will 

require further adjustments. For example, DCAA is planning to track the 

number of risk determinations completed, the numbers of proposals 

deemed high and low risk, and the number of audits completed. Further,

DCAA regional offices will be responsible for monitoring risk 

DCAA Has Not Yet Fully 

Developed Measures to 

Evaluate the Initiative’s 

Results 
 

Page 17 GAO-13-131 Contract Closeout

determinations on an ongoing basis to ensure that they are completed in 

a timely manner and to identify any field audit offices that have a 

significantly higher or lower percentage of high risk determinations than 

other field audit offices. However, DCAA has not determined how to 

assess whether the revised criteria for determining a proposal’s risk level 

or the revised sampling percentages are appropriate or should be 

adjusted in the future. DCAA stated that they plan to reassess the 

initiative in about a year, but did not provide details on what would be 

assessed at that time. Internal control standards require the 

establishment of clear, consistent objectives and the identification and 

analysis of what measures will be used to determine if an agency is 

achieving those objectives.

18

Additionally, it is too early to tell whether DCAA will achieve its goal of 

eliminating the backlog by 2016, in part because DCAA does not yet 

know how many proposals under $250 million ADV will be determined low 

or high risk and its initial estimates have proven inaccurate. DCAA reports 

that its auditors have completed risk assessments on 13,522 contractor 

proposals that had an ADV of less than $15 million—out of a universe of 

approximately 20,000 proposals—as of September 2012. Of 13,522 risk 

assessments completed, DCAA determined that 7,815 proposals were 

high risk, or about two-and-a-half times more than anticipated. DCAA 

determined that the number of high risk proposals is higher than expected 

because over 3,500 of those proposals belong to contractors with no 

incurred cost audit history. DCAA’s backlog includes multiple proposals 

covering several fiscal years for some contractors. DCAA officials stated 

the agency plans to audit older proposals first, thus contractors’ proposals 

for later years may become eligible for low risk status once an audit has 

been conducted for a single fiscal year and an audit history is established.

DCAA’s ability to reach a steady state by 2016 will also depend on 

whether DCAA completes its audits within anticipated time frames. 

However, DCAA was not able to complete the number of audits it planned 

to in 2012. Specifically, DCAA planned to address 4,065 incurred cost 

proposals in fiscal year 2012 by, for example, completing an audit or desk 

review, but the agency reported that it addressed 2,930 as of the end of 

September 2012. 

 

 

18GAO/AIMD-00-21.3.1. 
 

Page 18 GAO-13-131 Contract Closeout

DCAA’s efforts to reduce its incurred cost backlog will remove one factor 

hindering efforts to close out flexibly priced contracts; however, DOD is 

also hindered by limited data and performance metrics on contract 

closeout efforts. The military departments generally do not have data on 

the extent or nature of their contract closeout backlog, while DCMA is 

missing key information that would allow it to identify contracts on which it 

could take action. Additionally, the military departments generally lack 

performance metrics on contract closeout. For example, in November 

2012, the Army announced its intent to close 475,000 over-age contracts 

by September 2014, but was still in the process of having its commands 

identify interim goals and did not yet have a final detailed implementation 

plan, while the Navy and Air Force have no department-wide metrics. In 

contrast, DCMA has established two agency-wide performance metrics 

related to contract closeout with regular reporting to the head of the 

agency on progress in meeting goals. Our work identified some efforts at 

local contracting offices to focus on contract closeout, but DOD has made 

limited use of quick closeout procedures— a tool that can be used to 

expedite the closeout of flexibly priced contracts. 

Data on the extent and nature of the contract closeout backlog can help 

organizations identify or tailor approaches to address the backlog. 

However, we found that the military departments had difficulty providing 

reliable data on the size of their backlogs and did not have information on 

where the contracts were in the closeout process. For example, we 

requested data from each of the military departments on the number of 

contracts in the backlog, type of contract, and what contracting office was 

administering the contract. The military departments took the following 

steps to provide the data: 

• The Army pulled data from its centralized data repository, but there 

were large discrepancies between the data provided by headquarters 

and data reported at the commands and local contracting offices. For 

example, according to the data provided by headquarters, one 

contracting office had about 30,000 over-age contracts, yet officials at 

the office reported about 3,700 over-age contracts. 

• The Air Force also pulled data from its centralized data repository for 

one command, but the command had to verify the data with its local 

contracting offices and acknowledged it needed to make adjustments 

based on the input from those offices before providing the data to us. 

Air Force officials told us that providing the data for the remaining 

commands would require significant effort because they would need 

to go through a similar verification process. 

DOD’s Efforts to 

Reduce Its Contract 

Closeout Backlog Is 

Hindered by Limited 

Data and 

Performance Metrics 

DOD Has Limited Data on 

Its Contract Closeout 

Backlog 
 

Page 19 GAO-13-131 Contract Closeout

• Navy officials told us they did not have a centralized data repository, 

so the Navy requested data from its local contracting offices. 

At the local level, seven out of the nine contracting offices we spoke with 

collected some information about their over-age contracts, such as the 

total number of contracts in the backlog and the type of contracts, but the 

offices generally were unable to provide us with detailed information as to 

where the contracts were in the closeout process, such as the number 

awaiting a DCAA incurred cost audit.

DCMA collects data through its Mechanization of Contract Administration 

Services (MOCAS) system on where its over-age contracts are in the 

contract closeout process, but it is missing key information that would 

allow it to identify contracts that it could take action on. For example, 

DCMA’s data showed that as of July 2012 the agency had approximately 

36,000 contracts awaiting closeout, including 28,000 that were awaiting 

establishment of final indirect cost rates. However, of these 28,000 

contracts, DCMA did not know how many were awaiting a contractor’s 

submission of an adequate incurred cost proposal, a DCAA incurred cost 

audit, or final negotiation of rates. This information is important because it 

identifies who is responsible for moving the contract forward in the 

closeout process—for example, DCMA contracting officers may be able 

to advance the closeout of contracts awaiting final negotiation of rates. 

DCMA officials we spoke with thought that the majority of these contracts 

were awaiting DCAA’s audit, and thus would be addressed by DCAA’s 

initiative. In addition, DCMA’s MOCAS system was missing data on the 

reasons why contracts are over-age for about 1,700 contracts.19

The limited visibility into the characteristics of the contract closeout 

backlog, particularly at the military departments, made it challenging for 

officials to fully assess the extent to which specific efforts to reduce the 

backlog would impact their over-age contracts. For example, we asked 

DOD officials their views on restoring the authority of the head of an 

DCMA 

officials told us the agency recently enhanced its efforts to identify and 

close contracts within the agency’s control due to an increase in the 

number of over-age contracts in fiscal year 2012. DCMA officials reported 

that specific categories of contracts are being targeted for closure, such 

as firm-fixed-price contracts with no outstanding obligations. 

 

19The remaining 6,300 contracts were held up in other steps in the closeout process. For 

example, 1,200 contracts were waiting for the contractor to submit a final voucher. 
 

Page 20 GAO-13-131 Contract Closeout

agency to close out a contract that is administratively complete, was 

entered into 10 or more years ago, and has an unreconciled balance 

under $100,000. Many DOD officials we spoke with at various levels 

within the military departments and within DCMA stated they did not 

believe the option would affect the backlog, as they did not believe their 

contracting offices would have many contracts to which this option would 

apply. For example, based on DCMA’s over-age contract data, DCMA 

officials estimated that as of July 2012, only 85 of the approximately 

36,000 contracts in their backlog would meet the criteria of the option. 

However, officials at the military departments, commands and local 

contracting offices that we asked generally could not provide specific 

numbers as to how many contracts this option would impact. Further, 

several officials noted that a similar temporary authority was granted in 

the mid-2000s that they believed was ineffective, in part because DOD 

established a process and administrative requirements that they termed 

burdensome.

20

Similarly, when we asked how useful it would be if legislation authorized a 

contracting officer to waive final payment in a case where a contractor 

has gone out of business and cannot be reached, DOD officials reported 

that this situation occurs infrequently. Yet DOD officials at several 

locations we reviewed said that they did not have data readily available 

on how often they had encountered this situation. Further, some officials 

noted that a contracting officer can use the authority in the FAR to

unilaterally close a contract for this purpose.

For example, DFAS officials reported that the authority 

was only used to close out 14 contracts.

21 Additionally, DCMA’s 

guidebook outlines procedures that contracting officers use to close a 

contract where the contractor has gone out of business. 

Performance measures, which compare actual performance against 

planned results, can be an important tool in demonstrating leadership 

commitment and maintaining adequate internal controls. We found that 

the Army recently communicated a goal to its commands for closing overage contracts, but the Navy and Air Force did not have established 

performance metrics for closing out contracts within their organization. In 

 

20The authority was granted in the National Defense Authorization Acts of 2004, 2005 and 

2007. 

21FAR § 42.705(c)(1). 

Military Departments 

Generally Did Not Have 

Performance Metrics to 

Measure Progress in 

Closing Out Contracts 
 

Page 21 GAO-13-131 Contract Closeout

November 2012, the Office of the Deputy Assistant Secretary of the Army 

(Procurement) sent an e-mail to its commands identifying a goal of 

closing over 475,000 over-age contracts by September 2014. The office 

requested that each command provide information on their over-age

contracts by the end of November 2012, including identifying contracts 

that may be suitable to be grouped together and closed at the command 

level, such as low dollar contracts, and identifying contracts that fit into 

other priority categories, such as certain contracts with expiring funds. 

Further, the office directed the commands to establish monthly closeout 

goals and describe challenges that may impact the command’s ability to 

meet the Army’s September 2014 goal. According to an Army official, 

they have drafted an implementation plan for this effort, but the plan has

not yet been approved. Although the Navy did not have department-wide 

performance metrics related to contract closeout, one Navy command 

established a goal of decreasing the contract closeout backlog from 

approximately 23,000 contracts to 13,000 contracts over fiscal year 2012, 

and reported it had exceeded that goal before the end of the year. Within 

the Air Force, headquarters officials told us in November 2012 that they 

plan to begin regular collection of data on contract closeout statistics 

starting in January 2013. 

In contrast, DCMA had established two agency-wide performance 

measures related to contract closeout for contracts where they have been 

delegated contract administration responsibilities. For example, one of 

DCMA’s closeout measures looks at the total number of over-age

contracts in the agency, with a target of reducing the total number of overage contracts by 10 percent during a fiscal year. The measures are 

reviewed at a number of levels within DCMA, including a briefing to the 

DCMA Director approximately twice a year, and monthly reviews at each 

of the contract management offices. When the targets for each measure 

are not met, DCMA officials conduct a root cause analysis to identify the 

reasons why, as well as to identify potential methods for addressing the 

issues. 

While many DOD officials acknowledged that contract closeout is not a 

priority compared to other mission critical activities, we found some 

contracting offices were taking actions locally to address their contract 

closeout backlogs. For example, one Army contracting office made its 

contract closeout process more centralized, added two new staff, and 

tracked the number of contracts they closed. Officials at this office 

reported that they closed over 14,000 of a reported 20,000 low dollar firmfixed-price contracts in its backlog over the past year. Further, we found 

four contracting offices established a contract closeout team whose work 
 

Page 22 GAO-13-131 Contract Closeout

is focused on contract closeout activities. Officials from three of these 

offices noted that their office prioritizes closing out contracts when funds 

are close to canceling to preserve funds for other uses.

Further, DOD has established a contract with the AbilityOne program for

contract closeout support services to help address some of the contract 

closeout backlog. According to DOD officials, this contract is limited to 

closing firm-fixed-price contracts across the department, whether overage or not.22 AbilityOne representatives reported that the contractor has 

already provided contract closeout support services for over 50,000 

contracts across DOD. DOD stated that using AbilityOne allows 

contracting officers to focus on other duties and mission-critical work such 

as awarding contracts; however, some DOD officials noted limitations, 

including the administrative burden on the contracting officer to locate all 

appropriate documentation to forward to the AbilityOne contractor, and 

ensuring AbilityOne staff have the proper clearance and access for the 

contractors. While AbilityOne’s efforts are currently limited to firm-fixedprice contracts, senior DOD officials told us they are looking into the 

feasibility of contracting with AbilityOne for contract closeout services on 

flexibly priced contracts.

Our work found that DCMA and the contracting offices we reviewed made 

only limited use of quick closeout procedures. For example, even though 

DCMA has a policy, based on a FAR deviation, that allows for broader 

use of quick closeout procedures than what is allowed under the FAR, 

and DCMA’s guidance recommends that contracting officers use quick 

closeout where applicable, the two DCMA contract management offices 

we reviewed made little or no use of quick closeout procedures.23

 

22The AbilityOne program provides career opportunities for people who are blind or have 

severe disabilities, including service-disabled veterans. The program also trains and 

employs wounded veterans to conduct contract closeout activities.

Officials 

at DCMA headquarters and one contract management office said they 

were unsure why quick closeout is not used more often. Officials at the 

other DCMA contract management office we spoke with told us one 

reason they had not made more use of DCMA’s policy related to quick 

23DCMA’s guidance states that when it becomes apparent that there will be a delay in the 

settlement of rates, it is recommended that contracting officers use quick closeout 

procedures. The guidance goes on to say that quick closeout procedures should be the 

first area looked at when deciding how to close a contract. 

DOD Organizations Made 

Limited Use of Quick 

Closeout Procedures
 

Page 23 GAO-13-131 Contract Closeout

closeout procedures is that DCMA did not define what can be considered 

a compelling reason to waive an audit until December 2011. Further, 

once they started to assess eligibility, this office encountered challenges 

in identifying contractors that they considered to be eligible for the quick 

closeout procedure. Specifically, the office initially identified 1,489 

contracts with 32 contractors that may be eligible for quick closeout 

procedures. However, after further analysis, officials reported that 463

contracts with 7 contractors were deemed potentially eligible. Contractors 

were excluded from eligibility due to issues such as contractor billing 

problems, DCAA concerns about the contractor, or contractor delays in 

submitting an incurred cost proposal. 

Similarly, none of the nine military department contracting offices reported 

using quick closeout procedures currently, although three reported 

minimal use in the past. For example, one contracting office estimated 

using quick closeout procedures for about 40 to 50 contracts in fiscal 

years 2010 and 2011. Officials at two other contracting offices reporting 

use of quick closeout on a handful of contracts in the past, but are not 

making use of it now. With regard to the efficacy of the May 2011 change 

to the FAR that was intended, in part, to increase the use of quick 

closeout, officials at the two contracting offices that previously used quick 

closeout procedures reported that the May 2011 change reduced the 

number of eligible contracts by including direct costs in the eligibility 

criteria. Officials from one of these contracting offices explained that the 

previous language allowed the contracting officer to waive the dollar 

threshold based on a risk determination. Since the current language 

removed the waiver, officials explained that the contracting officer is no 

longer able to make a business decision for contracts above the dollar 

threshold to determine an acceptable level of risk. 

DCMA and contracting officials we interviewed also noted that other 

challenges to the use of quick closeout procedures included a lack of 

audit history by which to determine what a contractor’s rates should be. 

DOD officials told us there was sometimes a reluctance to use quick 

closeout procedures because they are uncertain of the risk they are 

taking on and concerned that their decisions may be questioned later by 

others. 

During our interviews with DOD officials, we asked about the advisability 

and feasibility of authorizing a contracting officer, in consultation with 

DCAA, to waive the requirement for an audit in the case of a low risk, low 

cost contract to assist in closing out contracts—one of the options we 

were asked to consider in our review. Officials throughout DOD—at 
 

Page 24 GAO-13-131 Contract Closeout

DCMA, military commands, military department contracting offices, and 

others—told us they believed this option was similar to quick closeout 

procedures, a tool already available to them. 

DOD has fallen far behind in closing out its contracts, in part due to the 

large backlog of incurred cost audits that must be performed by DCAA. 

DCAA has recognized that completing the volume of these audits, as well 

as other high-priority audits, using its traditional approach exceeds the 

capacity of its resources. In response, DCAA launched a risk-based 

approach to focus its resources on audits that are considered to be high 

risk or high dollar value. Such an approach appears prudent and shows 

promise, but its success will depend upon reducing the audit backlog in a 

way that protects the taxpayers’ interests. DCAA, however, has not 

developed a plan with measures to assess progress toward achieving 

these goals. DCAA must ensure that the key changes to its criteria and 

procedures—such as increasing thresholds for audit, revising its risk

determination criteria, and decreasing sampling percentages for low risk 

proposals—adequately direct resources to audits that will provide the 

greatest benefit to the taxpayer. Without a plan that includes appropriate 

measures, DCAA will not be well-positioned to assess whether the 

initiative is achieving its goals.

Reducing the incurred cost audit backlog should enable more flexibly 

priced contracts to be closed out, but the extent to which it will do so is 

uncertain. As there is not a one-to-one relationship between an incurred

cost audit and a specific contract, and there are additional steps that need 

to be taken to close a contract, there is likely to be a lag in closing out 

contracts even if DCAA is successful in its efforts. Within the military 

departments, limited data on the extent of the backlog or the reasons why 

contracts are in the backlog hinders their ability to develop targeted 

approaches, with goals and performance metrics, to address over-age 

contracts. The Army is just starting to collect the information necessary to 

determine if it can realistically meet its goal of closing over-age contracts 

and has not issued an implementation plan. The Navy and the Air Force, 

while facing similar data issues, have no department-wide performance 

metrics. Even DCMA, which does have performance measures in place

as well as some information on where the contract is in the closeout 

process, has incomplete information on who has responsibility for moving 

the contract forward in the closeout process. One technique—the use of 

quick closeout procedures—has been available for a number of years, but 

we found little evidence that any organization has made significant effort 

to use it, either before or after the May 2011 change in federal 

Conclusions 
 

Page 25 GAO-13-131 Contract Closeout

regulations. Until DOD prioritizes closing contracts in a timely fashion and 

underscores the need to do so by improving the availability of accurate 

data and establishing performance measures, it will not see a significant 

reduction in its contract closeout backlog.

To improve DCAA’s ability to assess whether its incurred cost backlog 

initiative is achieving the objectives of reducing the incurred cost audit 

backlog while continuing to protect the taxpayer’s interests, we 

recommend that the Director, DCAA, develop a plan that includes time

frames and measures to assess progress towards achieving its 

objectives, and as appropriate, to identify how it will assess whether the 

changes in DCAA’s procedures and criteria are appropriate or require 

further revisions.

To increase visibility and enhance management attention on closing out 

contracts within their departments, we recommend that the Secretaries of 

the Navy and Air Force, respectively, develop baseline data and 

performance measures for closing out contracts, including consideration 

of the use of quick closeout procedures, as appropriate.

To facilitate the closeout of contracts within the Army, we recommend the 

Secretary of the Army ensure that the Army’s contract closeout 

implementation plan includes baseline data and performance measures, 

and includes consideration of the use of quick closeout procedures, as 

appropriate.

To enable DCMA to better identify contracts that may be closed out, we 

recommend that the Director, DCMA, take steps to ensure the data in 

DCMA’s contract information system on who has responsibility for moving 

the contract forward in the closeout process is complete. 

DOD provided written comments on a draft of this report. DOD concurred 

with the four recommendations and identified a number of ongoing and 

planned actions to address them. For example, DCAA stated that by 

March 2013 it will develop a more detailed plan to monitor and assess its

progress towards achieving the objectives of its initiative. DCAA stated 

that this plan will include time frames and measures to determine whether 

its current criteria and procedures will require future modification. Further, 

DCAA identified several factors that this plan will include, such as an 

analysis of high risk determinations and audit results to determine if some 

criteria are better indicators of risk than others and an analysis of DCAA’s 

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 26 GAO-13-131 Contract Closeout

return on investment to determine if revisions to the sampling variables 

are needed. 

Each of the military departments identified actions that they would take to 

increase visibility and management attention on closing out contracts 

within their departments. For example, the Navy plans to collect data and 

internal policies and procedures on closing out contracts, including the 

use of quick closeout procedures, from its contracting activities as an 

initial step developing Navy-wide baseline data and performance 

measures for closing out contracts. The Air Force stated that it plans to 

place additional emphasis on aging contracts at a joint forum focused on 

high priority issues between DCMA, DCAA, and the departments. The 

Army concurred with our recommendation and reiterated its goal of 

eliminating approximately 475,000 over-age contracts by the end of fiscal 

year 2014, but did not provide additional details on how baseline data, 

performance measures, or consideration of the use of quick closeout 

procedures would be integrated into its detailed implementation plan. We 

believe that doing so would facilitate the Army’s efforts and enable it to 

assess progress.

In response to our recommendation to better identify contracts that may 

be closed out, DCMA plans to begin requiring the use of a code within its 

MOCAS system that will clearly identify who is responsible for the next 

step in the closeout process, and to ensure the code is properly entered 

into the system. DOD’s comments are reprinted in appendix II.

We are sending copies of this report to the Secretary of Defense; the 

Secretaries of the Army, Navy, and Air Force; the Director, Defense 

Contract Audit Agency; the Director, Defense Contract Management 

Agency; appropriate congressional committees; and other interested 

parties. This report will also be available at no charge on GAO’s website 

at http://www.gao.gov. 
 

Page 27 GAO-13-131 Contract Closeout

If you or your staff have any questions concerning this report, please 

contact me at (202) 512-4841 or by e-mail at dinapolit@gao.gov. Contact 

points for our Offices of Congressional Relations and Public Affairs may 

be found on the last page of this report. Key contributors to this report are 

listed in appendix III.

Timothy J. DiNapoli

Acting Director

Acquisition and Sourcing Management
Appendix I: Objectives, Scope, and 

Methodology

Page 28 GAO-13-131 Contract Closeout

The Senate Armed Services Committee report accompanying the 

National Defense Authorization Act for Fiscal Year 2012 directed us to 

review the Defense Contract Audit Agency’s (DCAA) criteria and 

procedures for conducting incurred cost audits and recommend steps 

DCAA could take to reduce the backlog, and to consider the feasibility 

and advisability of three options aimed at reducing the contract closeout 

backlog.1

To conduct our work for each objective, we reviewed relevant sections of 

the FAR, including FAR Subpart 4.804, Closeout of Contract Files and 

FAR Subpart 42.1, Contract Audit Services, and the Defense Federal 

Acquisition Regulation Supplement (DFARS), including DFARS Subpart 

242, Contract Administration and Audit Services. We also reviewed DOD 

policies, such as the Office of the Under Secretary of Defense for 

Acquisition, Technology, and Logistics memorandum on Increasing 

Contracting Opportunities with the AbilityOne Program. We also reviewed 

prior GAO and DOD Inspector General reports pertaining to challenges at 

DCAA and the Defense Contract Management Agency (DCMA), and 

contract closeout at DOD, including contract closeout in a contingency 

environment. And finally, we reviewed GAO’s Standards for Internal 

Controls in the Federal Government.

The three options we were asked to consider were (1) restoring 

the authority of the head of an agency to close out a contract that is 

administratively complete, was entered into 10 or more years ago, and 

has an unreconciled balance of less than $100,000; (2) authorizing the 

contracting officer, in consultation with DCAA, to waive the requirement 

for an incurred cost audit in the case of a low risk, low-cost contract; and 

(3) authorizing the contracting officer to waive final payment in a case 

where the contractor has gone out of business and cannot be reached. It 

also asked us to assess the efficacy of a May 2011 change to the Federal 

Acquisition Regulation (FAR) that was intended, in part, to increase the 

use of quick closeout procedures. In response, this report addresses (1) 

DCAA’s efforts to reduce the backlog of incurred cost audits, and (2) the 

challenges the Department of Defense (DOD) faces in addressing the 

contract closeout backlog. Included within the scope of the second

objective was a consideration of the three options outlined in the 

Committee report as well as the use of quick closeout procedures. 

2

 

1

S. Rep. 112-26, at 153 (2011).

2

GAO, Internal Control: Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (Washington, D.C.: November, 1999). 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 29 GAO-13-131 Contract Closeout

To assess DCAA’s efforts to reduce the backlog of incurred cost audits, 

we reviewed applicable sections of federal regulations and DCAA’s 

Contract Audit Manual to identify criteria and procedures for selecting and 

conducting incurred cost audits. We obtained and reviewed data from 

DCAA’s management information system on the agency’s incurred cost 

audit backlog. To assess the reliability of DCAA’s data on its incurred cost 

audit backlog, we reviewed related documentation, interviewed 

knowledgeable agency officials, looked for obvious inconsistencies in the 

data, and verified the accuracy of the data when necessary. From these 

efforts, we believe the information obtained is sufficiently reliable for this 

report. We also reviewed documentation on DCAA’s incurred cost audit 

initiative, such as DCAA guidance on its revised criteria and procedures 

for risk assessment, agency memorandums related to the timing and 

implementation of the new sampling procedures, new forms for 

documenting risk determinations, and data on which proposals were 

selected for audit. We reviewed analyses and projections DCAA used to 

establish its goal of becoming current on incurred cost audits by 2016. 

We interviewed senior DCAA officials responsible for the incurred cost 

audit initiative, and DCAA auditors from three field offices to obtain a 

better understanding of the process and considerations for determining 

risk for the contractor’s incurred cost proposals. We selected the three 

DCAA field offices that had completed the largest number of risk 

assessments under the new incurred cost audit initiative as of September 

2012. We also interviewed officials at Defense Procurement and 

Acquisition Policy (DPAP) and DCMA to get their perspective on DCAA’s 

incurred cost audit initiative. 

To identify the challenges DOD faces in addressing the contract closeout 

backlog and to assess the efficacy of the May 2011 change to the FAR 

pertaining to quick closeout procedures, we reviewed applicable sections 

of the FAR, including FAR Subpart 42.3, Contract Administration Office 

Functions and FAR Section 42.708, Quick Closeout Procedures, and

DFARS Subpart 242.3, Contract Administration Office Functions. We also 

reviewed Air Force, Navy, Army, and DCMA guidance, as well as DCMA 

policy on contract closeout and quick closeout procedures, such as the 

agency’s March 2012 closeout instructions and DCMA’s deviation to the 

quick closeout procedures. We obtained available data from the Army, 

Navy, and Air Force, five commands and nine contracting offices within 

the military departments. We selected the commands and contracting 

offices based on factors such as the total reported volume of over-age

contracts and interviews with senior DOD officials (see table 4). We 

determined that the data reported by the military departments was 

sufficient for our purposes of selecting which commands and contracting 
Appendix I: Objectives, Scope, and 

Methodology

Page 30 GAO-13-131 Contract Closeout

offices to review, but did not take steps to assess the reliability of the data 

collected from the local contracting offices. 

Table 4: Military Department, Command, and Contracting Offices GAO Reviewed

Military 

department Command Contracting office 

Army Army Medical Command U.S. Army Medical Research Acquisition 

Activity, Fort Detrick, Maryland

Army Materiel Command/Army 

Contracting CommandAberdeen Proving Ground

Army Depot, Tobyhanna, Pennsylvania

Army Research Office, Durham, North 

Carolina

Navy Naval Sea Systems Command Southwest Regional Maintenance 

Center, San Diego, California

Supervisory Shipbuilding, Groton, 

Connecticut

Naval Facilities Engineering 

Command 

Atlantic and Mid-Atlantic, Norfolk, 

Virginia

Specialty Acquisitions Center, Port 

Hueneme, California

Air Force Air Force Materiel Command Electronic Systems Center- Hanscom Air 

Force Base, Massachusetts

Warner Robins- Air Logistics Center, 

Robins Air Force Base, Georgia

Source: GAO. 

We collected and analyzed available data and documentation on overage contracts from DCMA headquarters and the two DCMA contract 

management offices with the largest volume of over-age contracts—

located in Manassas, Virginia and Baltimore, Maryland. To assess the 

reliability of DCMA’s data, we reviewed related documentation, 

interviewed knowledgeable agency officials, looked for obvious 

inconsistencies in the data, and verified the accuracy of the data when 

necessary. We also compared the data received from DCMA 

headquarters to the data that we received from Manassas and Baltimore. 

From these efforts, we believe the information we obtained is sufficiently 

reliable for this report. We also interviewed officials from DCMA 

headquarters and the two contract management offices. Further, we 

interviewed and collected documentation from officials at DPAP, DCAA, 

and the Defense Finance and Accounting Services; and from Army, Navy, 

and Air Force officials at the headquarters and command level, as well as 

individual contracting offices. We interviewed two contractor industry 

associations as well as a DOD contractor to obtain their views on the 

incurred cost audit and contract closeout backlogs. 
Appendix I: Objectives, Scope, and 

Methodology

Page 31 GAO-13-131 Contract Closeout

To address the options outlined in the Committee report, we reviewed 

applicable laws, such as the National Defense Authorization Acts of 

Fiscal Years 2004, 2005, and 2007, which had authorities similar to one 

we were asked to review, and related agency policies and guidance, such 

as DCMA’s contract closeout guidebook. We also solicited input about the 

availability and potential usefulness of the options in our interviews with 

DCAA, DCMA, military departments’ headquarters, commands, and local 

contracting offices, military departments’ general counsel, DFAS, and 

contractor representatives. 

We conducted this performance audit from February 2012 to December 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Comments from the Department 

of Defense

Page 32 GAO-13-131 Contract Closeout

Appendix II: Comments from the Department 

of Defense
Appendix II: Comments from the Department 

of Defense

Page 33 GAO-13-131 Contract Closeout
Appendix II: Comments from the Department 

of Defense

Page 34 GAO-13-131 Contract Closeout
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 35 GAO-13-131 Contract Closeout

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

In addition to the contact named above Tatiana Winger, Assistant 

Director; Arkelga Braxton, Virginia Chanley, Nicole Dery, John Krump, 

Janet McKelvey, Anh Nguyen, Robert Swierczek, and Omar Torres made 

key contributions to this report.

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(121036)
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