01.19.11

The Era of Cost Recovery and Minimizing Costs

As evidenced by two recent initiatives, the U.S. Federal Government is focused more than ever on cost recovery and minimization of costs. The Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA) have jointly targeted cost recovery and closing prior audit issues as key initiatives. In addition, the U.S. Agency for International Development (USAID) has issued an Implementation and Procurement Reform (IPR) that includes a focus on cost efficiency on opportunities with the agency. The joint DCAA / DCMA initiative is focused on recovering costs from past activities and includes issues around allowability, and ensuring the “best value” to the Government. The USAID reform includes conducting future acquisition activities with more effective planning, staffing, organization, control and leadership. This article summarizes both initiatives and the anticipated impact on industry.

The joint initiative by DCAA and DCMA involves recovering taxpayer dollars from previously identified audit issues. The recovery opportunities stem from suspended costs, quantified impacts of cost accounting practice changes and Cost Accounting Standards (CAS) non- compliances, and costs that have been questioned as a result of allowability and allocability issues. In a joint memo issued on October 29, 2010, the DCAA and DCMA prioritize efforts to clear “400 reportable audits and about 300 “Form 1’s” valued at $295 million” over the next year. According to the memo, the initiative will be implemented in a phased approach. Phase I will involve resolving all open audits including CAS non-compliances, questioned costs from the audit of incurred cost submissions, and other Government compliance issues. Phase II will involve resolving all outstanding Form 1s. In Phase III, all other miscellaneous audit issues will be addressed. Under the initiative, DCMA Administrative Contracting Officers (ACOs) will be responsible for making decisions on disposition of issues identified and assigned by DCAA and DCMA. ACOs will be able to request DCAA’s accounting and financial assistance if necessary. Due to aggressive targeting, a joint Senior Steering Committee and joint working group have been established headed by DCMA Contracts Policy and DCAA Accounting and Cost Principles divisions.

The Department of Defense launched this initiative as a result of the Air Force winning a defective pricing case against McDonnell Douglas Services Inc. However, despite prevailing in the courts, the Government was precluded from collecting damages as a result of an expiration of the statute of limitations¹. This was the first time the Contract Dispute Act's six-year statute of limitations was enforced to defeat a Government claim.

It is expected that the joint initiative by DCAA and DCMA will impact contractors in a short period of time. It is also likely that the ACO determinations related to cost issues will be performed in a more time aggressive manner order to reach DCAA’s and DCMA’s target recovery plan. This undoubtedly will lead to more litigation.

Contractors may be faced with new audit requests on old issues and forced to support or document old issues again. It is not clear what role contractors may actually have in disputing the Government’s position. However, industry is concerned that determinations may be made in haste, without the same level of detail and consideration for contractor responses. Further, contractors will likely be put in situations where they must, in a relatively short period of time, decide to concede a dispute or otherwise litigate. In doing so, contractors need to carefully consider the impact of such decisions on open incurred cost submissions and claims as well as any precedent that would be set on outstanding and future submissions.

The USAID has a similar focus targeting effective cost minimization with its procurement reform efforts. The agency’s strategy is to increase the effectiveness of foreign assistance efforts and deliver more aid money through local and Partner country organizations. The primary objectives of the IPR are:

• Capacity building by strengthening the capacity of USAID Partner Governments and strengthening Private Sector and Local Civil Society Capacity
• Increasing competition and broadening the Agency’s partner base
• Using U.S. resources more effectively and efficiently
• Boosting U.S. Ties with other bilateral and multilateral donors
• Rebuilding the Agency’s internal capacity

USAID’s recent suspension of the Academy for Education Development (AED) emphasizes the ongoing concerns about the way the U.S. provides foreign assistance efforts. USAID plans to increase the number of partner country organizations, and the amount of direct grants/ contracts for non-governmental organizations (NGOs or not-for profits) and local private businesses. To reduce transaction and compliance costs, USAID will simplify the eligibility criteria. USAID has also proposed to enhance participation from a wider range of U.S. organizations including small, disadvantaged and women-owned businesses and NGOs through direct awards. To reduce the cost burden on contractors, USAID will revise its request for proposal (RFP) and request for applicants (RFA) to streamline the process.

This procurement strategy would likely not influence existing contracts, but would have an effect on future opportunities with the Agency. Industry will face a reduction in reliance on indefinite quantity contracts (IQCs) and additional set-aside funds will be reserved for U.S. based small, disadvantaged and women-owned businesses. In an effort to further reduce costs, the USAID plans to increase the use of fixed-price contracts where feasible and increase competition for stand-alone grants and contracts.

The changes to future procurements could result in favoring certain types of entities over others, and result in expanding work directly with U.S. based small, disadvantage and women-owned businesses. Prime contractors will face enforcement of requirements to ensure compliance for using local/partner country nonprofit/private business and U.S. small or disadvantaged businesses as subcontractors for administrative and programmatic support.

Both initiatives are ambitious and face several issues that may impact the results in the specified time-frame. DCAA and DCMA’s focus on cost recovery may result in substantive litigation due to quick decisions being made that are potentially not fair, unreasonable and/or otherwise without merit. The USAID has the need to enhance in-house capability by hiring more technical staff due to the substantial workload the reform will bring to the Agency. Significant changes will need to be made to USAID policies and procedures to ensure procurement reform maintains fair and reasonable competition for all parties. The USAID is not the only Agency with these future cost effectiveness plans; the Department of State has addressed their intent within the draft of the recent Quadrennial diplomacy and development review (QDDR), and the Department of Defense has stated its goal for increasing cost efficiency by 3% per year. We will keep you informed as these and other similar initiatives are issued.

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1 Armed Services Board of Contract Appeals (ASBCA) case No. 56568 on December 2, 2009 for an Air Force contract with McDonnell Douglas Services, Inc.

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