Federal Contracting: Additional Management Attention and Action Needed to Close Contracts and Reduce Audit Backlog
Published: 2017-09-28T00:00:00

Fast Facts:
Closing contracts ensures the government receives goods or services at the agreed price. We found that contracts were not closed on time at DOD, Health and Human Services, Homeland Security, Justice and State.
A challenge to closing certain contracts is the Defense Contract Audit Agency's backlog of incurred cost audits, which identify whether costs are allowable—information needed to close these contracts. While DCAA reduced this backlog, its timeliness in starting audits could improve: it took an average of 747 days to begin an audit in FY2016.
We recommended that these agencies and DCAA improve efforts to reduce their respective backlogs.

Highlights:
section_title: Why GAO Did This Study
paragraphs: Closing contracts is a key step in the contracting process. GAO and others have previously reported that large numbers of contracts were not closed within time frames set by federal regulations, which can expose the government to financial risk. DCAA's backlog of audits of contractors' incurred cost proposals contribute to the delays in closing out flexibly-priced contracts.
GAO was asked to review the extent of the contract closeout backlog at federal agencies. In addition, a House Armed Services Committee report included a provision for GAO to assess DCAA's incurred cost audit backlog. This report addresses the extent to which (1) selected federal agencies effectively manage contract closeout, and (2) DCAA effectively manages its incurred cost audit backlog.
GAO selected five agencies based on the number of contracts awarded and dollars obligated in fiscal year 2015. GAO analyzed documents and interviewed acquisition officials to assess how contract closeout is managed. GAO also analyzed data on DCAA's incurred cost audit backlog.
section_title: What GAO Found
paragraphs: The effectiveness of management efforts to reduce the number of contracts overdue for closeout varied across five agencies GAO reviewed—the Departments of Defense, Health and Human Services, Homeland Security (DHS), Justice, and State. None of the agencies had critical elements agency-wide that would help track and oversee contract closeout processes—the number and type of contracts to be closed, where the contracts were in the process, and goals and performance measures. Having such information could help management address the causes as to why contracts remain open and reduce the contract closeout backlog.
Since 2011 the Defense Contract Audit Agency (DCAA) has reduced its inventory of contractors' incurred cost proposals awaiting audit by about half to 14,208, and DCAA has significantly reduced its backlog of older proposals—those for 2013 and prior—as of September 2016. To do so, DCAA used a risk-based approach to reduce the number of audits and began conducting multi-year audits, in which two or more incurred cost proposals are closed under a single audit. Nevertheless, DCAA did not meet its initial goal of eliminating its backlog by fiscal year 2016, and DCAA officials stated that they are unlikely to meet its revised goal by the end of fiscal year 2018. Further, GAO found that in fiscal year 2016, DCAA averaged 885 days from when a contractor submitted an adequate incurred cost proposal to when the audit was completed. The lag was due to limited availability of DCAA staff to begin audit work, as it took DCAA an average of 138 days to complete the actual audit work (see figure).
DCAA may be missing opportunities to help identify additional ways to reduce its inventory. For example, DCAA has not assessed options to reduce time to initiate audit work or comprehensively assessed how the use of multi-year audits could be improved and has not established related performance measures for both.
section_title: What GAO Recommends
paragraphs: GAO is making seven recommendations, including to each of the five agencies to develop means to track critical elements on contract closeout efforts and to DCAA to assess its efforts to reduce its backlog and establish related performance measures. Four agencies concurred, and DHS identified planned actions that could address the intent of the recommendation.

section_title: Letter
paragraphs: Closing out completed contracts is a key step in the contracting process  through which the government obligates billions of dollars annually for  goods and services. Closing contracts within expected time frames can  help limit the government’s exposure to certain financial risks by  identifying and recovering improper payments. Timely closeout also  allows agencies to deobligate and make available funds from completed  contracts before the funds are canceled and returned to the U.S.  Department of the Treasury. Further, closing a contract years after the  period of performance is complete can present challenges since key  documentation and personnel with firsthand knowledge of the contract  may no longer be available and tracking down information on these  contracts becomes more burdensome and time consuming.
The Department of Defense (DOD), as well as other agencies, recently  reported a large number of contracts—including firm-fixed-priced  contracts and flexibly-priced contracts—that have not been closed within  the time frames typically expected under federal regulations—6 months  for firm-fixed-priced contracts and up to 36 months for flexibly-priced  contracts. Contract closeout includes a number of administrative actions,  which are performed by the contracting activities within the agencies or  contracting activities that have been delegated authority to perform these  actions, such as the Defense Contract Management Agency (DCMA)  within DOD.
One of the factors cited by agency officials in closing out flexibly-priced  contracts is the delay in receiving audits of contractors’ incurred cost  proposals that are conducted by the Defense Contract Audit Agency  (DCAA). DCAA conducts incurred cost audits to identify whether costs  incurred on flexibly-priced contracts are allowable, allocable, and  reasonable—information that contracting officers need to close the  contracts. DCAA, however, reported an inventory of approximately 14,000  incurred cost proposals that were awaiting audit as of September 2016.  The backlog of older proposals—those that were submitted prior to  2014—also affects defense contractors’ ability to close their books and,  according to industry representatives, is resource- and labor-intensive to  support. In 2015, Congress enacted legislation that prohibited DCAA,  starting in fiscal year 2016, from conducting incurred costs audits for non- defense agencies until DCAA met certain criteria pertaining to reducing its  backlog.
We were asked to review the extent of the contract closeout backlog at  large federal agencies. In addition, the House Armed Services Committee  report on H.R. 4909 contained a provision for us to assess DCAA’s  incurred cost audit backlog. This report addresses (1) the extent to which  selected federal agencies effectively manage contract closeout, and (2)  the extent to which DCAA effectively manages its incurred cost audit  backlog.
To assess the extent to which selected federal agencies are effectively  managing contract closeout for both firm-fixed-priced and flexibly-priced  contracts, we collected data from the Federal Procurement Data System- Next Generation (FPDS-NG) on the number of contracts awarded and  dollars obligated on contracts for fiscal year 2015, which was the most  recent year for which data were available when we began this review. We  selected five agencies based on the number of contracts awarded and  dollars obligated—(1) DOD, (2) Department of Health and Human  Services (HHS), (3) Department of Homeland Security (DHS), (4)  Department of Justice (DOJ), and (5) Department of State (State). We  interviewed officials at the selected agencies and collected agency-wide  data at the selected agencies to the extent available. For agencies where  contract closeout was not tracked at the agency-level (DOD, HHS, and  DOJ), we also selected several components from the five agencies for  further review to examine management of contract closeout at the  component-level. Specifically,
For DOD we selected the Army, Navy, Air Force, DCMA, and Defense  Logistics Agency (DLA) based on the FPDS-NG data on the number  of contracts awarded and dollars obligated on contracts for fiscal year  2015. We also used data from the Electronic Document Access  system to determine the number of contracts that the DOD  components administered in fiscal year 2015, and compared that to  the FPDS-NG data. We determined that the data reported were  sufficient for our purpose of selecting components for further review.
For HHS, we determined that contract closeout data were available at  various components within the agency. As a result, we selected a  larger component based on contract dollars obligated in fiscal year  2015 for additional information—the Centers for Medicare and  Medicaid Services (CMS).
For DOJ, we determined that agency components had data available  on the extent of contracts due and overdue for closeout. We selected  the two largest components within DOJ, the Bureau of Prisons (BOP)  and the Federal Bureau of Investigation (FBI), based on the number  of contracts awarded and dollars obligated. We also selected the  Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) since it  indicated that contract closeout data was available.
We reviewed relevant sections of the Federal Acquisition Regulation  (FAR), including FAR Subpart 4.804, Closeout of Contract Files and FAR  Subpart 42.1, Contract Audit Services. In addition, we reviewed agencies’  guidance, policies, and memorandums on contract closeout. We also  reviewed standards for internal control in the federal government, prior  GAO reports, and other agencies’ Inspector General reports regarding  contract closeout. Based on our review of the standards for internal  control, we identified several critical elements to address management  challenges—such as having and using information on the scope and  characteristics of the backlog and setting goals and performance  measures to assess progress of reducing the backlog. We interviewed  senior acquisition officials at each agency and component we reviewed  on contract closeout management, and the challenges and any actions  the agencies have taken or are planning to take to address those  challenges. We collected and analyzed relevant documentation, such as  quarterly reviews and briefings to determine how agencies are managing  contract closeout.
To assess management of contract closeout and agencies’ insight into  the characteristics of the contracts due for closeout, we collected  available data on the number of contracts that could be over-age (i.e., for  firm-fixed-priced contracts those that were not closed within 6 months  after completion, and for flexibly-priced contracts those that were not  closed within 36 months) and, when possible, a breakdown of the over- age contracts by contract type. We interviewed agency and component- level officials regarding the collection and verification process of their  contract closeout data. We determined that the data reported by the  selected agencies and components were sufficiently reliable for our  purposes of determining the level of available detail on their contract  closeout data. We also reviewed annual financial reports and discussed  with agency officials the extent to which they are managing unliquidated  obligations. Unliquidated obligations are those that have not yet been  paid or are no longer needed to pay for goods and services. For example,  unliquidated obligations can result from having excess funds on the  contract or from delays in a contractor submitting an invoice for the cost  of goods and services provided to the government.
For agencies for which DCAA had been responsible for conducting  incurred cost audits on their behalf, we interviewed senior acquisition  officials at each agency we reviewed and collected and analyzed  documentation on any actions these agencies took to address the fiscal  year 2016 prohibition of DCAA conducting incurred cost audits, such as  contracts awarded to private auditing firms. We also interviewed  members of a civilian agency working group that was formed to identify  options for private firms to provide contract audit support services across  the government. We also interviewed representatives from an industry  association of federal government contractors to obtain their perspectives  on the effect that delays in completing incurred cost audits had on their  organizations, and DCAA’s efforts to reduce its incurred cost audit  backlog.
To assess the extent to which DCAA was effectively managing its  incurred cost audit backlog, we reviewed applicable federal regulations,  federal standards for internal control, and DCAA’s Contract Audit Manual,  as well as other DCAA guidance and policies to identify its procedures for  prioritizing and conducting incurred cost audits. We obtained and  analyzed data on DCAA’s incurred cost proposal inventory, including its  backlog, as of September 2016. We interviewed senior DCAA policy  officials to better understand the process and considerations by which  they determine adequacy and the risk associated with contractors’  incurred cost proposals.
We conducted this performance audit from June 2016 to September 2017  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.
subsections: section_title: Background
paragraphs: Contracts are generally considered to be physically complete once all  option provisions have expired, the contractor has completed  performance, and the government has accepted the final delivery of  supplies or services. Physically completed contracts should then be  closed within time frames set by the FAR—6 months for firm-fixed-priced  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 termination actions have not  been completed. Flexibly-priced contracts take longer to close because  additional steps must be taken during the closeout process; for example,  audits on costs incurred and settlement of the contractor’s final indirect  cost rates. Contracting officers and DCAA need to ensure that costs  incurred by the contractor and charged to the government are allowable,  allocable, and reasonable. On flexibly-priced contracts, contracting  officers need to establish final indirect cost rates based on the  contractor’s incurred costs. Indirect cost rates are a mechanism for  establishing the proportion of indirect costs—such as a contractor’s  general and administrative expenses—that can be charged to a contract.  See figure 1 for the contract closeout process.
Federal acquisition regulations require contractors to submit proposals  that include information on all of their flexibly-priced contracts in a fiscal  year. DCAA uses a checklist to determine whether a proposal is  adequate, which, among other items, includes various cost schedules,  subcontract information, and information on contracts that would be ready  for closeout. DCAA may determine that a contractor’s incurred cost  proposal is inadequate for a variety of reasons, such as incomplete or  inaccurate information, and request that the contractor revise and  resubmit the incurred cost proposal. This process may take several  iterations before the proposal is deemed adequate. DCAA categorizes the  proposals based on the total value of the proposal, called the auditable  dollar value (ADV), which is the sum of all of the costs on flexibly-priced  contracts for that contractor during the fiscal year. Figure 2 depicts key  steps in the 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 contractor’s proposal. Further, since the period of  performance on an individual contract may span several years, an audit  of each of the contractor’s incurred cost proposals for those years needs  to be conducted to provide the information necessary to close one  flexibly-priced contract.
subsections: section_title: Prior Work by GAO and the Inspectors General
paragraphs: Our prior work has highlighted some challenges at DOD in closing out  contracts, as well as challenges at DCAA regarding incurred cost audits.  For example,  In September 2009, we reported on problems with DCAA’s audit  quality and recommended DCAA improve audit quality guidance and  develop a risk-based audit approach. DOD and DCAA generally  agreed with the recommendations. As a result, DCAA required more  testing and stricter compliance with government auditing standards  that added staff time to complete audits. Additionally, as DCAA’s  workload increased and resources remained relatively constant,  auditors prioritized time-sensitive activities, such as audits to support  new awards, and incurred cost audits were not completed, creating a  backlog.
In September 2011, we found that DOD’s ability to close the contracts  it awarded to support efforts in Iraq and Afghanistan was hindered by  several factors, including limited visibility into over-age contracts and  DCAA workforce shortfalls. DOD concurred with our  recommendations and revised its guidance on contract closeout in a  contingency environment to require regular monitoring and  assessment of the progress of closeout activities.
In November 2011, we found that DCMA faced workforce challenges  that caused delays in conducting timely quality assurance, audits of  contractor processes, and contract closeout activities. Additionally,  we found that DCAA had workforce challenges that affected its ability  to conduct business system audits. We recommended that DCMA and  DCAA identify and execute options to assist with audits and improve  transparency of the current status of contractor business systems.  DOD generally concurred with the recommendations and has initiated  some actions to address them.
In December 2012, we found that DOD components—including the  Army, Navy, and Air Force—did not prioritize contract closeout and  had limited data on the extent of their contract closeout backlog. We  also reported that DOD’s efforts to close its large, flexibly-priced  contracts were hindered by the backlog of DCAA’s incurred cost  proposals. We recommended that DOD components establish  baseline data and performance measures related to contract closeout.  DOD concurred with our recommendations and the components have  since established performance measures on contract closeout.
The challenges faced by DOD in closing out contracts are not recent. 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 closeout requirements, and erroneous data  about contracts available for closeout.
Further, challenges in closing contracts are not exclusive to DOD. In  recent years, the Inspectors General at several federal agencies,  including the National Aeronautics and Space Administration (NASA),  State, and the Department of Transportation, among others—have  reported on the issues and challenges related to contract closeout. For  example,  In February 2014, the NASA Inspector General found that delays in  closing contracts were due to the workload at DCAA, that some funds  were not being deobligated in a timely manner, and that the closeout  process was not uniform across the agency. For example, the  Inspector General reported that contract personnel at the various  NASA offices used different guidance when closing out contracts,  which impaired their ability to share information and work across the  agency;  In November 2014, the Inspector General at State found that the  agency did not have systems in place for tracking contingency  contracts in Afghanistan nearing completion or which had funds that  were expired or were available for deobligation. The Inspector  General further found that State had not established comprehensive  procedural guidance for contract closeout or ensured existing  guidance was accurate for these contingency contracts in  Afghanistan. According to State acquisition officials, State revised its  policies and guidance regarding contract closeout. For example, the  Foreign Affairs Handbook was updated to include procedures on how  to address common difficulties in closing contracts; and  In July 2015, the Inspector General at the Department of  Transportation found that the agency had not implemented oversight  procedures or performance measures on contract closeout to assess  whether the components were complying with closeout  requirements.
section_title: Effective Management of Contract Closeout Varied Across the Selected Agencies
subsections: section_title: Selected Agencies and Components Had Varying Levels of Contract Closeout Data and Some Established Related Goals and Performance Measures
paragraphs: The five agencies and selected components we reviewed varied widely in  ensuring that contracts were closed within the time frames prescribed by  federal acquisition regulations. None of the five agencies we reviewed  had all of the following: (1) centralized data on the number of contracts  needed to be closed out; (2) information on where the contracts were in  the closeout process; (3) established agency-wide contract closeout- related goals; and (4) established performance measures to assess  progress toward achieving these goals. Most agencies delegated  responsibility for contract administration, including closing out contracts,  to their components. We found that some components within these  agencies had at least three of these elements. For example, DCMA,  which manages contract closeout for contracts that have been delegated  to it, had each of these elements in place, while the Air Force, Navy, and  Army each had contract closeout data and had established goals and  performance measures, but lacked data on where contracts were in the  closeout process. DHS also had information on the number of contracts  eligible or overdue for closeout and had initiatives underway to reduce the number of low-risk, firm-fixed-priced contracts but did not have initiatives  for higher risk contracts, including those involving flexibly-priced  contracts.
According to the federal standards for internal control, management  should use quality information to make informed decisions and evaluate  the entity’s performance in achieving key objectives and addressing risks.  To help meet the FAR expected time frames for closing out contracts,  using data on the number of firm-fixed-priced and flexibly-priced contracts  that are eligible or overdue for closeout and where contracts are in the  closeout process can help agencies identify where additional  management attention is needed in order to close the contracts. Further,  establishing goals and performance measures to assess progress toward  achieving these goals can be an important tool in demonstrating  leadership commitment. Having information on the scope of the issue and  identifying the challenges to closing contracts could help agency-level  management tailor approaches to specifically address causes as to why  contracts remain open, notably if they are similar across the various  components within the agency. In addition, establishing goals and  performance measures ensure that sufficient management attention is  paid to contract closeout. As shown in table 1, agencies varied in having  each of these elements.
A recurring issue highlighted in our prior work, as well as in this review, is  that contract closeout was not a priority for either agency management or  contracting officers. Agency officials and contracting officers noted the  focus for contracting officers is to award contracts for the goods and  services needed to support agency operations and missions, and that  closing out contracts is largely viewed as an administrative task that staff  get to when time is available. Further, agency acquisitions officials we  spoke with on this review noted that their ability to focus attention on  contract closeout was affected by resource constraints, including  workforce challenges and sequestration.
At the agency level, DOD has focused management attention on contract  closeout, but does not have agency-wide data in place and does not have  insight into the components’ goals and performance measures. In  September 2014, Defense Procurement and Acquisition Policy  established the Contract Closeout Working Group to improve and  streamline the contract closeout process, including policy revisions and  technology updates to its systems. DOD officials noted that while the  department has limited insight as to the total number and value of  contracts needing to be closed, it is the responsibility of the components  and contracting offices to manage contract administration, including  closeout. According to the federal standards for internal control,  management should use quality information to make informed decisions  and evaluate the entity’s performance in achieving key objectives and  addressing risks—such as identifying improper payments and utilizing  unspent funds elsewhere. DOD does not have the ability to track contract  closeout centrally, and the components use a number of different contract  management systems. The lack of insight into contracts that need to be  closed, including where they are in the closeout process, hinders DOD’s  oversight and ability to develop targeted approaches to address the  causes as to why contracts remain open—especially if there are similar  issues across the agency and could make it difficult to identify areas that  may need improvement. Further, without DOD oversight and monitoring  of the performance measures set at the component level, DOD will not be  able to assess agency-wide progress in managing contract closeout.
At the component level, we found that each of the DOD components we  reviewed had data on the number of contracts to be closed and had goals  and performance measures in place. However, with the exception of  DCMA, the components were unable to track—and therefore address— challenges as to where contracts were in the closeout process, such as  how many contracts were awaiting DCAA audits or needed action to be  taken by their contracting staff. For example,
Starting in 2013, the Army established a contract closeout task force  in an effort to reduce over-age contracts. In fiscal year 2015, the Army  set an overall goal of getting its over-age contracts down to 70  percent or below of the total contracts due for closeout. Further, the  Army has established specific percentage goals for its contracting  activities. According to the Army’s Contracting Enterprise Review for  the third quarter of fiscal year 2017, only one out of the Army’s five  contracting activities was on track to meet its fiscal year 2017 goal.  Overall, the Army reported that it had a total of 231,627 firm-fixed- priced and flexibly-priced over-age contracts, which constituted about  86 percent of the total contracts due for closeout. The Army does not  have the data broken out by contract-type.
In January 2016, the Navy established a goal for each of its  contracting activities of reducing the number of over-age contracts by  5 percent from the end of 2016 and 10 percent cumulatively for 2017.  In May 2017, the Navy conducted its first annual review on over-age  contracts with its senior leadership and reported that 6 of the 10  contracting activities met the 2016 goal. Overall, the Navy reported it  had a total of 74,453 firm-fixed-priced and 10,637 flexibly-priced over- age contracts as of December 2016 across its 10 contracting  activities, including the Marine Corps.
In 2015, the Air Force established a goal to eliminate its over-age  contracts by fiscal year 2020. To do so, the Air Force established a  goal for fiscal year 2016 of reducing the number of contracts needing  to be closed out by 10 percent; in fiscal year 2017, the goal rose to 20  percent. The Air Force reported that for fiscal year 2016, the 10  percent reduction goal was met for firm-fixed-price contracts. For  flexibly-priced contracts, however, the Air Force reports two  categories of contracts—“cost” and “other”—and reported that it had a  percentage increase of over-age “cost” contracts from 69 percent to  72 percent and an increase for “other” contracts from 82 percent to 85  percent. As of June 2017, the Air Force reported 33,844 firm-fixed- priced and a combined total of 21,036 flexibly-priced contracts due for  closeout across its 15 contracting activities.
For firm-fixed-priced contracts, DCMA established a goal of reducing  its over-age contracts by 50 percent in fiscal year 2016, which it met.  DCMA further established a goal that it would have no more than 869  over-age firm-fixed-priced contracts after fiscal year 2017 and no  more than 350 after fiscal year 2018. For flexibly-priced contracts,  DCMA established a goal from fiscal year 2016 through fiscal year  2020 to reduce its over-age flexibly-priced contracts by an additional  20 percent each year. As of March 2017, DCMA reported that it had  70,322 firm-fixed-priced and flexibly-priced over-age contracts and is  generally on track to meeting its goals for both firm-fixed-priced and  flexibly-priced contracts as of May 2017.
DLA runs monthly reports of contracts that are recommended for  closeout, and, in January 2017, DLA acquisition officials reported that  784 firm-fixed-priced contracts were recommended for closeout. Most  of DLA’s contracts are firm-fixed-priced contracts, with few flexibly- priced contracts. DLA has instituted a shorter goal for closing out a  firm-fixed-priced contract—within 120 days—as opposed to the FAR  time frames of 180 days of contract completion. DLA officials stated  that the agency consistently meets this goal, having approximately 99  percent of its contracts closed within the shorter time frame.  According to DLA acquisition officials, management attention over the  last 2 years resulted in a reduction of the number of contracts in the  backlog, with the intention of preventing another backlog from  reoccurring.
DOD officials noted that DOD has several department-wide initiatives to  help components address their contract closeout backlogs. For example,  in December 2013, DOD implemented a policy change, increasing the  obligation threshold from $150,000 to $500,000 for contracts that could  qualify for automatic closeout. To qualify, contracts must be under  $500,000, firm-fixed-priced, and not have certain contract clauses that  require contracting officers to take action, such as patents. For contracts  meeting these criteria, DOD systems automatically closed these  contracts. In August 2015, DOD added a contract closeout module in one  of its data systems to identify and automatically close contracts that were  not covered by other automated closeout processes. This initiative  leverages implementation of the Procurement Data Standard across the  various DOD contract writing systems to improve visibility and accuracy of  contract-related data needed to determine whether automated closeout  can occur. DOD reported that over 12,000 contracts were closed in fiscal  year 2016 across the department using the new module.
DOD is also working to ensure that contracts closed in its contract writing  systems, for example the Standard Procurement System, are reflected as  closed in other data systems, such as Electronic Document Access.  Further, DOD awarded a contract with the AbilityOne program in 2010 for  contract closeout support services. The 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 support contract closeout activities. In September  2015, DOD awarded a follow-on 5-year contract to AbilityOne to provide  continued contract closeout support services. The contract has a not-to- exceed value of $75 million. DOD officials stated that since it started,  more than 317,000 contracts—across the various DOD components— would be closed through the AbilityOne contract as of May 2017.
Department of Health and Human Services  HHS management does not have information on the extent the agency  has contracts due for closeout or where contracts are in the closeout  process. Having such information could help the agency in its oversight of  contract closeout by identifying and addressing the causes as to why  contracts remain open—such as determining if the issues affecting  contract closeout are similar across the components. According to HHS  acquisition officials, this information is managed at the component-level.  While there is value in components tracking and managing their own  progress, HHS will not be able to assess agency-wide progress in  managing contract closeout without oversight and monitoring of the  performance measures set at the component level. According to the  federal standards for internal control, management should use quality  information to make informed decisions and evaluate the entity’s  performance in achieving key objectives and addressing risks—such as  recovering improper payments or identifying unspent funds for use  elsewhere.
While various HHS components reported that they are taking various  actions to address contract closeout, such as establishing goals and  performance measures to track their progress in closing contracts, we  focused on CMS—which accounted for about 30 percent of contract  dollars in fiscal year 2015 for HHS. CMS tracks the number and type of  contracts that are overdue for closeout. According to senior CMS  acquisition officials, in October 2014 they established a closeout goal of  closing 2,250 contracts per year. In fiscal year 2016, CMS surpassed this  goal and closed 2,831. As of June 2017, CMS had already met this goal  for fiscal year 2017, closing 2,653 contracts and reported that it had 2,244  firm-fixed-priced and 2,867 flexibly-priced over-age contracts that still  needed to be closed. In addition, CMS also issues monthly reports on  contracts due for closeout that are shared among the various CMS  offices. CMS acquisition officials stated that having management-level  attention had a positive effect in identifying and addressing issues  affecting contract closeout.
Our review found that DHS management made a commitment to address  contract closeout challenges, gained insight into the extent of its contract  closeout backlog, and has initiatives underway to address at least a  portion of its contract closeout backlog. It has not, however, established  goals and performance measures to assess its progress in reducing its  contract closeout backlog.
To respond to a material weakness identified in the agency’s 2014 annual  Financial Report, senior DHS management initiated an effort in March  2016 to identify the extent of the department’s contract closeout backlog.  This effort, jointly led by the Chief Procurement Officer and the Chief  Financial Officer, used DHS’s contract reporting system to pull data from  FPDS-NG and identify contracts that had a period of performance end  date that had elapsed beyond 6 months for firm-fixed-priced contracts  and beyond 36 months for flexibly-priced contracts. According to a March  2016 memorandum, DHS estimated that it had approximately 382,000  over-age contracts—those that were beyond the FAR set time frames for  closeout. DHS determined that 352,000 (about 92 percent) of the over- age contracts were considered “low-risk” contracts—contracts awarded  using simplified acquisition procedures or firm-fixed price contracts with  the remaining 30,000 being flexibly-priced contracts.
DHS has ongoing efforts to address over a quarter of its low-risk, firm- fixed-priced contracts. From the list of 352,000 low-risk contracts, DHS  financial management officials identified 5,695 over-age firm-fixed-priced  contracts with unliquidated obligations of $50,000 or less. DHS officials  then verified the list of these contracts with their components’ acquisition  and financial management staff to verify the unliquidated obligation  amounts and confirm that the contracts were ready for closeout. DHS  published the list of verified contracts in a October 2016 Federal Register  notice, requested contractors to submit any outstanding invoices  associated with these contracts within 60 days of publication, and, if it did  not receive any outstanding invoices, indicated that it planned to close the  contracts. DHS acquisition officials estimated that by August 2017 about  100,000 (about 28 percent) low-risk, over-age contracts would be closed  through this effort. According to the DHS officials, the initiative was  focused on closing older contracts where the funds have already expired  and did not collect information on the amount of funds that were  deobligated off of these over-age contracts. Further, DHS acquisition  officials stated that they received feedback from DHS components that  the effort was helpful in reducing some of the administrative paperwork  that allowed them to close these low-risk contracts.
DHS officials also stated that in fiscal year 2015, they implemented a  separate initiative to address unliquidated obligations that targeted  contracts in each DHS component with the highest amount of  unliquidated obligations, which resulted in a deobligation of $164 million  from those contracts. According to the DHS officials, they also have  several efforts related to flexibly-priced contracts, including efforts to  coordinate with DCAA on the status of audits, developing a tool to track  the audits and providing additional guidance and training to close the  contracts. DHS has not, however, established goals and performance  measures to assess the department’s overall progress in reducing the  total number of firm-fixed-priced or flexibly-priced contracts that need to  be closed. Further, DHS does not have insight—either at the agency-level  or the component-level—as to where these contracts are in the closeout  process that would help identify where there are challenges in the  process. This hinders the agency’s ability to target its approaches to  address the causes as to why contracts remain open and could make it  difficult to identify areas that may need improvement. Additionally, without  goals and performance measures, DHS officials will not be able to track  progress agency-wide on closing contracts over time. According to the  federal standards for internal control, management should use quality  information to make informed decisions and evaluate the entity’s  performance in achieving key objectives and addressing risks—such as  recovering improper payments or identifying unspent funds for use  elsewhere.
DOJ management does not have agency-wide information on its  contracts that are eligible or overdue for closeout. Having such  information could help the agency in its oversight of contract closeout by  identifying and addressing the causes as to why contracts remain open.  The Deputy Assistant Attorney General for Policy, Management, and  Planning, who also serves as DOJ’s Senior Procurement Executive, is  responsible for implementing agency-wide procurement policy and other  management initiatives. DOJ acquisition officials told us, however, that  DOJ is decentralized, and it is up to each bureau to manage contract  closeout—including the implementation of policies, monitoring closeout  efforts, as well as establishing any goals and performance measures.  While there is value in components tracking and managing their own  progress, DOJ will not be able to track the department’s overall progress  across the agency on closing contracts or determine if the issues  affecting contract closeout are similar across the components and  address them at an agency-wide level without information on the number  and type of contracts that need to be closed, as well as goals and  performance measures. According to federal standards for internal  control, management should use quality information to make informed  decisions and evaluate the entity’s performance in achieving key  objectives and addressing risks—such as recovering improper payments  or identifying unspent funds for use elsewhere.
The three DOJ components that we reviewed had varying levels of  information on their contract closeout backlog. For example, senior FBI  acquisition officials told us that while the FBI has procedures in place for  contract closeout and for removing unliquidated obligations, the FBI does  not have management-level oversight on contracts that need to be  closed. According to the FBI acquisition officials, the FBI does not  centrally track contract closeout information and would have to go to  individual contracting offices for information. The FBI accounts for about  22 percent of DOJ’s contract dollars. BOP, which accounted for about 36  percent of DOJ’s contract dollars in fiscal year 2015, generally lacked  centralized information on the status of contracts needing to be closed  out. ATF, which accounted for about 3 percent of DOJ’s contract dollars  in fiscal year 2015, identified 58 firm-fixed-priced contracts that had a total  of approximately $4.3 million dollars in unliquidated obligations that  needed to be closed out. ATF was one of the first bureaus in DOJ to  implement DOJ’s Unified Financial Management System (UFMS).  According to ATF acquisition officials, they use UFMS to identify contracts  that need to be closed based on the elapsed period of performance date  and if the contracts have unliquidated obligations. In addition, ATF has  two staff dedicated to closing contracts and senior ATF acquisition  officials meet quarterly to discuss the progress of contracts due for  closeout. ATF does not have the ability, however, to use UFMS to identify  contracts that do not have unliquidated obligations. Further, FBI, BOP,  and ATF do not have specific goals and performance measures in place.  Having agency-wide information on contracts due for closeout could help  DOJ in its oversight of contract closeout by identifying and addressing  challenges that could be similar across its components.
State management does not have information on the extent of contracts  that are eligible or overdue for closeout across the agency or where the  contracts are in the closeout process. Having such information could help  the agency in its oversight of contract closeout and address challenges at  an agency-wide level. Further, State has not established goals and  performance measures to assess its progress in reducing its over-age  contracts. While State does not have information on the total number of  contracts due for closeout, in 2009 it established a contract closeout team  that tracks contracts for which it provides closeout support at the request  of contracting officers. As of November 2016, the contract closeout  team was working on 128 contracts due for closeout.
State acquisition officials stated that they are working to improve their  ability to track when newly awarded contracts become eligible for  closeout. In October 2016, State implemented a pilot to identify contracts  based on the period of performance end date to identify the number of  contracts ready for closeout on a quarterly basis. The pilot added new  data fields into its system for contracts awarded or modified since  October 2016. This is intended to help contracting officers monitor their  contracts and move forward in the closeout process. The pilot ended in  April 2017, and State acquisition officials expect full implementation within  18 months. While this initiative can have positive outcomes if  implemented as planned, it does not pertain to contracts awarded prior to  October 2016. For those older contracts, the new fields will not be  applicable, limiting State’s insight into those contracts. The lack of  information on the full scope of contracts that need to be closed and  where they are in the contract closeout process, coupled with the  absence of goals and performance measures, means that State will not  be able to track its progress across the agency on closing contracts over  time. Further, without this information, it could hinder the agency’s ability  to target its approaches to address the causes as to why contracts remain  open and make it difficult to identify areas that may need improvement.  According to the federal standards for internal control, management  should use quality information to make informed decisions and evaluate  the entity’s performance in achieving key objectives and addressing  risks—such as recovering improper payments or identifying unspent  funds for use elsewhere.
section_title: Selected Civilian Agencies’ Responses to Prohibition on DCAA Conducting Incurred Cost Audits for Non-Defense Agencies
paragraphs: While DOD is generally required to use DCAA for contract audit support  services, DCAA also provided these services to civilian agencies— including DHS, State, and HHS—on a reimbursable basis. As noted  previously, the NDAA for Fiscal Year 2016 included a provision  prohibiting DCAA from performing audit support services on behalf of  other federal agencies until DOD certified that DCAA had reduced its  incurred cost audit inventory to below 18 months. Starting in January  2016 DCAA notified the civilian agencies for which they had planned to  do reimbursable work in fiscal year 2016 that it would no longer be able to  perform audits for them until it met the statutory requirements. This  affected approximately 500 audits that DCAA had planned to perform.  DCAA had to coordinate with the agencies that it does work for to  determine if DOD had audit responsibility over certain contractors. For  contractors that did not fall under DOD cognizance, the other agencies  had to identify alternate means to meet their contract audit needs.
Several of the agencies we reviewed took actions to obtain audit services.  For example, DHS established blanket purchase agreements with private  auditing firms to conduct incurred cost audits for its contractors, while  State issued orders off of an existing one. DHS acquisition officials  stated that since the vast majority of DHS’ contractors are also DOD  contractors, the agency intends to continue to rely on DCAA for audits  where it is already performing efforts for DOD and can provide a timely  response. In instances where DCAA services are not available or if DCAA  cannot provide a timely response, DHS plans to use the private firms for  contractors for which they have cognizance. As of July 2017, DHS had  not awarded any orders off of its blanket purchase agreements. State  awarded four orders off of an existing blanket purchase agreement for  incurred cost audit support from a private accounting firm. State  acquisition officials stated that they received two incurred cost audit  reports and will begin the process of negotiating rates with the contractor.  They also stated that that they will continue to use DCAA because DOD  has cognizance over many of its contractors. HHS officials stated that  some of their components use DCAA for incurred cost audits, but others  are using alternate options such as conducting the audit work internally or  contracting out to private firms for audit support services.
Further, in April 2016, the Office of Management and Budget sent out a  survey to federal agencies to gauge the effect of the DCAA prohibition  and determine the agencies’ audit needs. The survey determined that  there was enough of a need for contract audit support services that, in  August 2016, the Federal Aviation Administration—in coordination with  the Office of Management and Budget—led a civilian agency working  group to address this gap. Since then, the working group conducted  market research to identify the extent to which civilian agencies relied on  DCAA or private sector providers to perform financial audits on their  behalf, the extent to which the private sector can address the need for  contract audit support services, and potential contract approaches to  meet the needs of civilian agencies. For example, the working group  determined that federal agencies spent about $100 million annually on  contract audit support services, either through reimbursable work  performed by DCAA or through contracts awarded to private accounting  firms. The working group is working with the Office of Management and  Budget and the General Services Administration on a contract solution  that maximizes existing contracts already available across multiple  agencies using the General Services Administration’s Federal Supply  Schedules program. Further, the working group is preparing an ordering  guide to assist agencies with placing contracts for contract audit related  services. The guide, expected to be completed by August 2017, will also  identify best practices to address concerns regarding the quality of audits.
section_title: DCAA Made Progress in Reducing Its Incurred Cost Audit Backlog, but Opportunities Exist for Improvement
paragraphs: DCAA made progress in reducing its inventory of incurred cost proposals  awaiting audit by about half since fiscal year 2011 and has closed more  than three-quarters of its oldest proposals—those submitted for years  prior to fiscal year 2014. This reduction was due to several initiatives that  DCAA implemented in recent years, such as risk-based sampling,  conducting multi-year audits, and dedicating more staff resources to  conduct incurred cost audits. DCAA did not, however, meet its goal of  having 2 years of incurred cost proposals in its inventory by fiscal year  2016 and may not be able to meet its revised goal to do so by the end of  fiscal year 2018. Further, our work identified two areas in which DCAA  may be missing opportunities or currently lacks information to help  identify additional ways to reduce its inventory. These areas include: (1)  assessing actions for reducing the amount of time it takes for DCAA to  begin an incurred cost audit and establishing related performance  measures to assess its progress and (2) evaluating the use of multi-year  auditing and establishing related performance measures.
subsections: section_title: DCAA Reduced Total Inventory, Including Its Backlog of Incurred Cost Proposals Awaiting Audit
paragraphs: DCAA has reduced its overall inventory of incurred cost proposals  awaiting audit from about 31,000 in fiscal year 2011 to about 14,000 as of  the end of fiscal year 2016. Over that same time period, DCAA reduced  what it characterizes as its backlog of old incurred cost proposals—those  proposals submitted for fiscal year 2013 and prior—from 21,000 to below  5,000. DCAA did not, however, meet its original goal of having a 2-year  inventory of audit proposals—eliminating its backlog of proposals older  than 2 years—by fiscal year 2016 and acknowledged that meeting its  revised goal to do so by the end fiscal year 2018 will be challenging.  DCAA policy officials stated that they were unable to meet the goal of  eliminating the backlog due to resource constraints, including workforce  challenges, such as hiring freezes. Overall, as of the end of fiscal year  2016, DCAA’s total inventory included 14,208 incurred cost proposals,  representing approximately $825 billion in auditable dollar value (ADV)  (see figure 3).
DCAA attributes its progress in reducing its total inventory as well as its  backlog of incurred cost proposals awaiting audits to various efforts, such  as management attention in prioritizing incurred cost audits, as well as  two specific initiatives—the implementation of a risk-based approach to  identify proposals for audit and multi-year audits, in which multiple  proposals are done under a single audit.
DCAA has reduced its inventory primarily through the use of a risk-based  approach to conducting audits. Under this approach, DCAA focused its  resources on conducting audits of proposals that it deemed high-risk or  exceeded $250 million in ADV. According to DCAA policy officials, DCAA  auditors are supposed to make the risk assessment concurrently when  determining that a proposal is adequate. Factors that DCAA considers  when conducting a risk assessment include whether a specific risk was  identified by an external source—such as a contracting officer—or the  audit team has identified a specific risk that has a material impact to the  proposal being assessed, business system deficiencies, and prior audit  experience with the contractor, among others. DCAA officials stated that  DCAA audits all proposals that are deemed high risk regardless of ADV.  As of the end of fiscal year 2016, DCAA’s data indicates contractors had  submitted 9,309 incurred cost proposals that were either deemed  adequate by DCAA or were awaiting an adequacy review. DCAA reported  it had made a risk assessment on 8,426, or about 91 percent, of those  proposals. DCAA policy officials stated that several factors contributed to  the gaps on the status of proposals, such as instances where audits on  proposals for earlier years for a contractor are ongoing and DCAA would  need to consider the results of those audits when assessing risk for  proposals for later years.
For incurred cost proposals that were deemed low-risk or were  $250 million or below in ADV, DCAA would audit a certain percentage of  those proposals, with the percentages varying by different strata. As a  result, DCAA conducts far fewer audits on low-risk, lower-dollar value  proposals than it did prior to initiating the risk-based approach in 2012.  For low-risk and lower-dollar value proposals that were not sampled,  DCAA issues a low-risk memorandum that recommends the contracting  officers use his or her authority to determine the contractor’s final indirect  cost rates and proceed with closing the contract. Unless they are  assessed to be high-risk, DCAA will close the majority of these proposals  with a low-risk memorandum. Since the risk-based initiative was  implemented in 2012, DCAA issued a total of 18,292 low-risk  memorandums to close out proposals, compared to a total of 9,641  incurred cost audit reports.
In developing the risk-based approach, DCAA assessed the costs  associated with performing audits at different ADV against the savings  associated with identifying unallowable or questioned costs. DCAA  determined that it had a higher return on investment for higher value ADV  proposals and that the return on investment was negative for audits  conducted on lower-dollar proposals. For example, DCAA reported that  even under its risk-based approach, it conducted 767 audits on incurred  cost proposals with ADVs of $1 million or less from fiscal years 2014  through 2016, but expended approximately $18 million more in staff  resources than the government received by identifying unallowable or  questioned costs. DCAA policy officials stated they regularly assess  results and, if appropriate, revise the sampling percentages.
DCAA policy officials also noted that the use of multi-year auditing— through which it combines audits of two or more incurred cost proposals  into a single audit—has helped reduce the inventory. According to  DCAA’s data, multi-year auditing reduced the average number of hours to  conduct an audit by 40 percent over conducting separate single-year  audits. DCAA, however, does not actively track at the agency level how  many proposals have been closed or are planned to be closed using this  process. DCAA policy officials stated that DCAA’s management  information system does not have a specific field to collect information on  open proposals that are planned to be closed using multi-year audits.  Instead, DCAA policy officials stated that they can determine the number  of proposals closed through multi-year auditing once the audit reports  have been issued. DCAA reported that it used multi-year audits to close  1,232 and 1,536 incurred cost proposals, in fiscal years 2015 and 2016,  respectively, which constituted about 13 percent and 19 percent,  respectively, of the total number of incurred cost proposals closed in  those years.
section_title: DCAA Has Not Developed Certain Performance Measures for Its Incurred Cost Proposals
paragraphs: While DCAA has made progress in reducing its inventory of incurred cost  proposals awaiting audit, our work identified two areas in which DCAA  may be missing opportunities or lacking information to help identify  additional ways to reduce its inventory. These areas include: (1)  assessing actions for reducing the amount of time it takes for DCAA to  begin audit work and establishing related performance measures to  monitor its progress and (2) evaluating the use of multi-year auditing and  establishing related performance measures. Federal standards for  internal control call for 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.
DCAA’s data for fiscal year 2016 indicate that once a contractor submits  an adequate incurred cost proposal, it took DCAA on average 885 days— or nearly 2 and a half years—before DCAA completed the incurred cost  proposal audit. Further, our analysis found that DCAA’s backlog of  contractor proposals submitted for 2013 and prior years includes 51  adequate proposals that have $1 billion or more in ADV submitted by at  least 15 of DOD’s largest contractors for which audits have not been  completed. The number of days from the date these 51 proposals were  determined adequate ranged from 78 to 2,206 days at the end of fiscal  year 2016, meaning that a contractor submitted an adequate cost  proposal more than 6 years ago but DCAA has not yet completed the  audit. According to DCAA policy officials, staff availability is the primary  factor for the delay before starting audit work. For example, proposals  closed in fiscal year 2016 waited in DCAA’s queue an average of 747  days before the start of audit work. From the time that DCAA initiated the  audit—which it defines as the date DCAA holds an entrance conference  with the contractors—it took DCAA about 138 days on average to  complete the audit in fiscal year 2016. For the average days that DCAA  took to complete incurred cost audits from fiscal years 2011 through  2016, see figure 4.
DCAA policy officials attributed the delay in initiating an audit once  adequacy is determined to several factors, including the lack of staff, and  when adequate proposals are submitted—the majority of which are  received in June each year, which leaves little time to take action before  the end of the fiscal year. Further, DCAA officials noted that, historically,  DCAA used a “6-24-6” month framework for conducting incurred cost  audits. DCAA officials noted that the FAR provides contractors 6 months  to submit an incurred cost proposal, and, if DCAA is able to complete its  audit of that proposal within 24 months, contracting officers will have 6  months to close out flexibly-priced contracts. Delays in receiving an  adequate proposal will affect contracting officers’ ability to close out the  contracts in a timely manner. Even though the 6-24-6 framework is not  being met in practice, DCAA has not established specific goals for  initiating audits, nor assessed whether the 6-24-6 framework under which  it currently operates should be revised to take into account the realities of  the time frames for contractors to submit adequate proposals or DCAA’s  own staffing shortages. Assessing and implementing options to reduce  the amount of time DCAA takes to begin its incurred cost audit work and  establishing performance measures could help DCAA further reduce its  inventory.
Complicating DCAA’s ability to plan and initiate audit work are proposals  submitted by contractors that are determined to be inadequate. While  DCAA has started, or could start audit work on almost 90 percent of the  backlog of 4,328 incurred cost proposals which were considered  adequate, more than 10 percent—or 452—proposals were still  considered inadequate. For example, we identified 10 proposals of  $1 billion or more in ADV submitted for fiscal years 2011 through 2013 by  major defense contractors that were still considered inadequate as of  September 2016. These 10 proposals collectively amounted to about  $36 billion in ADV, or about 9 percent of DCAA’s total amount of ADV in  its backlog. For fiscal years 2014 through 2016, about 45 percent of the  incurred cost proposals submitted by contractors were considered  inadequate. Figure 5 depicts the extent to which proposals associated  with DCAA’s incurred cost inventory were considered adequate, which  includes proposals pending an adequacy review, and proposals that were  considered inadequate.
DCAA officials acknowledged that they do not currently have insight into  the reasons why DCAA determined that a contractor’s proposal was  inadequate, the number of times that a contractor submits revised  proposals until it is deemed adequate, or the length of time it takes to  receive an adequate proposal, but they noted they recently began an  initiative to do so. Additionally, DCAA recently began to study the  feasibility of developing a web-based submission portal for incurred cost  proposals that could allow contractors the option to submit their proposals  with real time visibility and guidance on common issues. This could  lessen the number of times proposals are returned by DCAA as  inadequate since contractors could identify potential issues prior to  initially submitting proposals.
Additionally, DCAA does not actively track how many proposals are  planned to be closed using multi-year audits. These audits accounted for  19 percent of the total number of incurred cost proposals closed in fiscal  year 2016, and, according to DCAA policy officials, DCAA would like to  continue the use of multi-year audits to gain work efficiencies by  combining proposals under one audit. DCAA has not, however, fully  evaluated how the process could be improved nor established related  performance measures, such as the number of proposals closed, ADV  examined, the timeliness of the audits, or its impact on contractors.  Federal standards for internal control call for 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.  Industry representatives noted that multi-year audits take more effort on  their part to support—especially for older proposals—and do not enable  them to correct deficiencies in a timely fashion. DCAA is aware of these  concerns and has sought contractor input about the efficacy and  usefulness of multi-year audits, but has not done a comprehensive  assessment, including how, if at all, the use of multi-year audits affect  industry or determined how the process could be improved. As a result, it  would be difficult for DCAA to assess if there are areas to multi-year  auditing where additional efficiencies could be gained.
section_title: Conclusions
paragraphs: We found that closing out contracts is not the highest priority for  contracting officers that are charged with awarding and administering  contracts for products and services to meet mission needs. Yet this is a  critical step to ensure the government receives the goods and services it  purchases at the agreed upon price and, if done in a timely manner,  provides opportunities to utilize unspent funds for other needs. Most of  the agencies we reviewed delegated responsibility for closing out  contracts to their components; however, none of the five agencies and  only one of the components we reviewed had the critical elements that  would assist them in overseeing their efforts to more effectively manage  their respective contract closeout backlog. Having centralized information  on the number and type of contracts that need to be closed out and  where the contracts are in the closeout process could help management  address the causes as to why contracts remain open in order to reduce  the contract closeout backlog. While agencies may tailor their approaches  to their specific needs and organizational structures, federal internal  control standards require that agency management use quality  information to make informed decisions and evaluate the entity’s  performance in achieving key objectives and addressing risks—especially  if the risks and challenges are similar across the agency.
DCAA’s investment of significant management attention and resources,  as well as its use of risk-based approaches to conducting audits, has  enabled DCAA to significantly reduce both its overall inventory and its  backlog of older incurred cost proposals. Doing so should help  contracting officers close more of their outstanding flexibly-priced  contracts, enable DCAA to focus more of its resources on other audit  responsibilities, and reduce some of the burden on industry. Despite this  progress, DCAA has 14,208 incurred cost proposals in its inventory,  representing approximately $825 billion in ADV as of fiscal year 2016;  hence, DCAA cannot afford to miss opportunities to further improve its  incurred cost audit processes and timeliness. In this regard, DCAA has  not assessed options and has not established performance measures for  reducing the length of time to begin audit work on incurred cost  proposals; the primary reason for the delay is due to the availability of  DCAA staff to begin the audit work. Further, DCAA has not fully assessed  or established performance measures on the use of multi-year audits,  which it hopes to expand to help further reduce its inventory. Without  such information, DCAA will be missing opportunities to assess options  for further reducing its inventory of incurred cost proposals.
section_title: Recommendations for Executive Action
paragraphs: To enhance management attention to closing out contracts, we are  making the following seven recommendations, one to each of the five  agencies in our review and two to DCAA to manage its incurred cost  inventory.
The Secretary of Defense should develop a means for department- wide oversight into components’ progress in meeting their goals on  closing contracts and the status of contracts eligible for closeout.  (Recommendation 1)
The Secretary of Health and Human Services should develop a  means for department-wide oversight into components’ progress in  meeting their goals on closing contracts and the status of contracts  eligible for closeout. (Recommendation 2)
The Secretary of Homeland Security should develop a means, either  at the agency or the component level, to track where the contracts are  in the closeout process, and establish goals and performance  measures for closing contracts. (Recommendation 3)
The Attorney General should direct the Senior Procurement Executive  to ensure the development of a means to track data on the number  and type of contracts eligible for closeout and where the contracts are  in the closeout process, as well as a means to assess—at the agency  or component level—progress by establishing goals and performance  measures for closing contracts. (Recommendation 4)
The Secretary of State should develop a means at the agency level to  track data on the entirety of the number and type of contracts eligible  for closeout, where the contracts are in the closeout process, and  establish goals and performance measures for closing contracts.  (Recommendation 5)
The Director, DCAA should assess and implement options for  reducing the length of time to begin incurred cost audit work and  establish related performance measures. (Recommendation 6)
The Director, DCAA should comprehensively assess the use and  effect of multi-year audits on both DCAA and contractors and  establish related performance measures. (Recommendation 7)
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD, DHS, State, HHS, and DOJ for  review and comment. With the exception of DHS, the agencies concurred  with our recommendations. DOD, DHS, and State provided written  comments, which are reprinted in appendixes I-III, respectively, and  summarized below. In comments provided in emails from the respective  audit liaisons, DOJ and HHS concurred with the recommendations. DOD,  DHS, and DOJ also provided technical comments, which we incorporated  as appropriate.
DOD concurred with our recommendation to develop a means for  department-wide oversight into components progress in meeting their  goals on closing contracts and the status of contracts eligible for closeout.  Additionally, DOD concurred with our recommendations that the Director,  DCAA, assess and implement options for reducing the length of time to  begin incurred cost audit work and to comprehensively assess the use  and effect of multi-year audits. DOD also agreed that the length of time to  start an incurred cost audit should be minimized to the maximum extent  practicable. DOD noted that in addition to the initiatives identified in our  report, DCAA will continue to assess options to improve timeliness and  implement actions to do so. Further, DOD agreed to conduct a more  comprehensive analysis regarding the use and effect of multi-year audits  on the contractors being audited as well as customers relying on the audit  reports. DOD plans to complete these actions by March 31, 2018. Our  draft report also included a recommendation that DCAA develop a means  to centrally track risk assessments determinations. In responding to our  draft report, DCAA provided additional information on how risk  determinations were tracked and provided supporting data. We verified  that information and, as a result, removed the recommendation and  incorporated the data into the report as appropriate.
DHS did not concur with our recommendation to develop a means to  track where contracts are in the closeout process and establish related  performance goals and measures. DHS agreed that contract closeout  was a critical step in the procurement process, but noted that contract  closeout activities are limited to available resources. DHS stated that the  agency does not have a tool to track where contracts are in the closeout  process and that obtaining such a tool would be resource-intensive.  Further, DHS noted that having such a tool would not provide DHS with  an effective way to remove bottlenecks from the closeout process. DHS  noted, however, that it is committed to improving the closeout process  and intends to establish a working group to assess current close out  metrics and related performance measures. Additionally, the working  group will assess the list of contracts eligible for closeout, monitor the  progress of reducing the backlog and determine whether existing tools  are available for obtaining information on the closeout process. The  working group will also recommend improvements based on the  availability of resources for closeout actions by November 30, 2018.  While we did not call on DHS to obtain a new tracking tool, we believe  that the planned efforts of the working group could meet the intent of our  recommendation.
State agreed with our recommendation to develop a means to track  where contracts are in the closeout process and establish related  performance goals and measures. State noted that it anticipates  developing goals and performance measures by December 2019.
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; the Director, Defense Logistics Agency; the Secretaries of Health  and Human Services, Homeland Security, and State; the Attorney  General; 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.
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 V.
section_title: Appendix I: Comments from the Department of Defense
section_title: Appendix II: Comments from the Department of Homeland Security
section_title: Appendix III: Comments from the Department of State
section_title: Appendix IV: Defense Contract Audit Agency’s (DCAA) Average Inventory Calculation
paragraphs: Congress enacted a provision in the National Defense Authorization Act  (NDAA) for Fiscal Year 2016 which prohibited the Defense Contract Audit  Agency (DCAA) from conducting audits for non-defense agencies unless  the Secretary of Defense certified that DCAA’s backlog of incurred cost  audits was less than 18 months of incurred cost inventory. The law  defined DCAA’s incurred cost inventory as the level of contractor incurred  cost proposals from prior fiscal years that were currently being audited by  DCAA. In September 2016, the Under Secretary of Defense (Comptroller)  certified to Congress that DCAA had reduced its incurred cost proposal  inventory below the required 18 month threshold to an average of 17.6  months.
To support this determination, DCAA used its total inventory of incurred  cost proposals that were in its inventory as of August 2016. DCAA made  several adjustments to this total inventory to remove those incurred cost  proposals for which it could not conduct an audit (i.e. were determined to  be inadequate) and removed the number of reimbursable proposals  (since these proposals are primarily for non-defense agencies which  DCAA was prohibited from doing by the NDAA for Fiscal Year 2016) and  direct-cost only work. Using the revised number, DCAA then took the  number of elapsed days since the contractor submitted an adequate  incurred cost proposal and divided by 30 days to approximate the number  of elapsed months. The number of elapsed months was then averaged  across the inventory to arrive at their total inventory calculation.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Bruce Thomas (Assistant  Director), Anh Nguyen (Analyst-in-Charge), Peter Anderson, Giny  Cheong, William Cordrey, Lorraine Ettaro, Kurt Gurka, Julia Kennon,  Elisha Matvay, and Roxanna Sun made major contributions to this report.