February 3, 2015

Incurred Cost Audit Coverage of Non-Management and Operating Contractors

As it has for many years, the Office of Inspector General identified contract management as a challenge area in its report on Management Challenges at the Department of Energy − Fiscal Year 2015 (DOE/IG-0924, October 2014). A key control for improving overall contract management and reducing the risk that unallowable costs will be incurred by contractors is a risk-based incurred cost audit approach. Although the Department of Energy (Department) has generally committed to improving contract management, over the past several years we have identified a significant gap in audit coverage of non-Management and Operating (non-M&O) contracts and subcontracts. This report highlights audit coverage issues related to the non-M&O contracts and it identifies the associated risks to the Department.

Historically, the Department has met its non-M&O contract cost audit requirements through an agreement with the Defense Contract Audit Agency (DCAA). DCAA provides audit and financial advisory services to the Department of Defense and also services Federal civilian agencies responsible for acquisition and contract administration. However, over the past several years, as responsible Department officials confirmed, DCAA has been unable to perform many of its audits on a timely basis. In fact, DCAA itself reported delays from 1 year to more than 8 years for audits of the Department's non-M&O contracts and related Department-funded subcontracts. These delays resulted in a backlog of audits of contracts and subcontracts with incurred costs valued at billions of dollars per year.

DCAA has been unable to meet the non-M&O contract audit needs of the Department and has asserted that it simply does not have the resources to meet all Department of Defense and civilian agency audit requests. As it pertains to the Department, this situation was exacerbated by the fact that the Department lacked a comprehensive strategy to ensure that non-M&O contractor costs were subjected to necessary audits.

To help resolve the issues identified in this report, we recommended that the Department coordinate with DCAA to develop a risk-based approach for audit coverage of non-M&O contractor incurred costs. We also recommended it develop a comprehensive strategy to supplement DCAA's audit coverage to ensure necessary and required audit of incurred costs until the backlog of DCAA audits can be eliminated.

Topic: Management & Administration