	Background

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. DCAA Implemented Initiative to Focus on High Risk Incurred Cost Proposals, but Has Not Yet Fully Developed Measures to Evaluate the Initiative’s Results

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. Of 13,522 risk  assessments completed, DCAA determined that 7,815 proposals were  high risk, or about two-and-a-half times more than anticipated. The military departments generally do not have data on  the extent or nature of their contract closeout backlog, while DCMA is  missing key information that would allow it to identify contracts on which it  could take action. Additionally, the military departments generally lack  performance metrics on contract closeout. In  contrast, DCMA has established two agency-wide performance metrics  related to contract closeout with regular reporting to the head of the  agency on progress in meeting goals. DOD Has Limited Data on Its Contract Closeout Backlog

Data on the extent and nature of the contract closeout backlog can help  organizations identify or tailor approaches to address the backlog. At the local level, seven out of the nine contracting offices we spoke with  collected some information about their over-age contracts, such as the  total number of contracts in the backlog and the type of contracts, but the  offices generally were unable to provide us with detailed information as to  where the contracts were in the closeout process, such as the number  awaiting a DCAA incurred cost audit. We found that  the Army recently communicated a goal to its commands for closing over- age contracts, but the Navy and Air Force did not have established  performance metrics for closing out contracts within their organization. Conclusions

DOD has fallen far behind in closing out its contracts, in part due to the  large backlog of incurred cost audits that must be performed by DCAA. The Army is just starting to collect the information necessary to  determine if it can realistically meet its goal of closing over-age contracts  and has not issued an implementation plan. Recommendations for Executive Action

To improve DCAA’s ability to assess whether its incurred cost backlog  initiative is achieving the objectives of reducing the incurred cost audit  backlog while continuing to protect the taxpayer’s interests, we  recommend that the Director, DCAA, develop a plan that includes time  frames and measures to assess progress towards achieving its  objectives, and as appropriate, to identify how it will assess whether the  changes in DCAA’s procedures and criteria are appropriate or require  further revisions. DOD concurred  with the four recommendations and identified a number of ongoing and  planned actions to address them. Appendix I: Objectives, Scope, and Methodology

The Senate Armed Services Committee report accompanying the  National Defense Authorization Act for Fiscal Year 2012 directed us to  review the Defense Contract Audit Agency’s (DCAA) criteria and  procedures for conducting incurred cost audits and recommend steps  DCAA could take to reduce the backlog, and to consider the feasibility  and advisability of three options aimed at reducing the contract closeout  backlog. In response, this report addresses (1)  DCAA’s efforts to reduce the backlog of incurred cost audits, and (2) the  challenges the Department of Defense (DOD) faces in addressing the  contract closeout backlog. We also reviewed  prior GAO and DOD Inspector General reports pertaining to challenges at  DCAA and the Defense Contract Management Agency (DCMA), and  contract closeout at DOD, including contract closeout in a contingency  environment.
Why GAO Did This Study

DOD has a large volume of contracts that have not been closed on time. Closing a contract includes tasks such as verifying that the goods and services were provided and making final payment to the contractor. Closing contracts within required time frames can limit the governments exposure to certain financial risks. One reason why some contracts are not being closed is the large backlog of incurred cost audits that must first be completed. These audits, conducted by DCAA, ensure that the costs contractors have incurred are permissible under government regulations.
The Senate Armed Services Committee report accompanying the National Defense Authorization Act for Fiscal Year 2012 directed GAO to review the criteria and procedures for conducting incurred cost audits, among other things. In response, GAO assessed (1) efforts to reduce the backlog of incurred cost audits and (2) the challenges DOD faces in addressing the contract closeout backlog. GAO reviewed DCAAs policies and procedures for incurred cost audits; analyzed data on the audit and contract closeout backlogs; and interviewed officials in the military departments and agencies.

What GAO Found

To reduce the backlog of incurred cost audits, the Defense Contract Audit Agency (DCAA) implemented an initiative to focus its resources on auditing contractors' incurred costs that involve high dollar values or are otherwise determined to be high risk. Incurred cost audits are conducted on a contractor's annual proposal that includes all costs incurred on certain types of contracts in that fiscal year. Under the initiative, DCAA raised the dollar threshold that triggers an automatic audit on a contractor's incurred cost proposal from $15 million to $250 million, revised the criteria used to determine a proposal's risk level, and significantly reduced the number of low risk audits that will be randomly sampled. This initiative appears promising, and DCAA plans to track certain characteristics, such as the number of risk determinations made and audits completed. But DCAA has not fully developed the measures by which it will assess whether the initiative reduces the backlog in a manner that protects the taxpayers' interests. Specifically, DCAA does not have a plan for how it will determine whether key features of the initiative, such as the revised risk criteria and the revised sampling percentages, should be adjusted in the future. By 2016, DCAA estimates it will reduce the backlog and reach a steady state of audits, which it defines as two fiscal years of proposals awaiting review. DCAA's ability to achieve this goal will depend on a number of factors, including the number of proposals determined to be high risk, which as of September 2012 was about two-and-a-half times more than anticipated.
Reducing the backlog of incurred cost audits will ease one obstacle to closing over-age contracts, but other obstacles, such as limited data and performance metrics, must still be overcome. The military departments have limited data on the extent and nature of their contract closeout backlog, and the Defense Contract Management Agency (DCMA)--which performs contract administration services for the Department of Defense (DOD)--is missing information that would allow it to identify contracts that it could act on. Such data can cue agencies on how to identify or tailor approaches to address the backlog. Further, the military departments generally do not have performance metrics to measure progress in closing out contracts. The Army recently announced a goal of closing over 475,000 contracts by September 2014; however, it does not yet have the information necessary to know if it can reach this goal and does not have an implementation plan. The Navy and the Air Force had not established any department-wide performance metrics for contract closeout. In contrast, DCMA has established two agency-wide performance metrics related to contract closeout that are regularly monitored. While many officials said contract closeout was not a priority, GAO found some local contracting activities taking action to bring attention to contract closeout.

What GAO Recommends

GAO is recommending that DCAA develop a plan to assess its incurred cost audit initiative; that DCMA improve data on over-age contracts; and that the military departments develop contract closeout data and establish performance measures. DOD concurred with the recommendations and identified ongoing and planned actions to address them.