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. Contract documents can be stored and retained after the contracting officer signs and files the contract completion statement. 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. Contractors are required by the FAR to submit proposals that include information on all of their flexibly priced contracts in a fiscal year. 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. 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. 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. 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. 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 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. 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.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 We also found that DOD commands 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. 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. 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. 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. DOD 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). 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.