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Special Report: IG-0885

April 17, 2013

Management and Operating Contractors' Subcontract Audit Coverage

The Department of Energy (Department) employs 28 Management and Operating (M&O) contractors that perform essential mission work under cost reimbursable contracts.  To achieve the Department's mission, M&O contractors often utilize the services of subcontractors, which are also funded by the Department.  When these subcontracts are structured as cost-type, including time and materials, and cost reimbursable subcontracts, M&O contractors are contractually required to ensure that associated costs incurred are audited to provide assurance that the costs are allowable.  The M&O contractors may use their internal audit staff, engage contract auditors, or use the services of the Defense Contract Audit Agency (DCAA) to audit the subcontractors.  Internally performed audits must, at a minimum, meet professional standards prescribed by the Institute of Internal Auditors.  M&O contractors presumably rely on audits of subcontractors when completing required annual certifications that all of their incurred costs are allowable.  The Office of Inspector General identified contract management as a management challenge in its report on Management Challenges at the Department of Energy (DOE/IG-0874, October 2012).  The Department has committed to improving contract management and we recognize that such a significant issue requires a concerted effort over time.  The objective of this report is to highlight the issues we identified in previous reports and stress the need for a top-down emphasis to ensure that all M&O contractors develop robust procedures for subcontract audits. Between 2010 and 2012, the Office of Inspector General reported subcontract audit weaknesses with nine M&O contractors.  Subcontracts valued in excess of $906 million had not been audited or were reviewed in a manner that did not meet audit standards.  The subcontract costs were not audited because the Department did not ensure that its M&O contractors developed and implemented procedures to meet their contractual requirements.  For example, although the M&O contractors are contractually required to conduct or arrange for audits of their cost-type subcontracts, Los Alamos National Laboratory approved audit strategy only required audits of subcontracts with annual incurred costs that exceeded $15 million.  Under this threshold, only 2 of 1,404 subcontracts were required to be audited.  We noted that while some sites have taken action in response to our reports, we believe that a greater Department-wide emphasis on auditing cost-type subcontracts is needed.  In response to our report, management concurred with the findings and recommendations and agreed to take corrective actions.

Topic: Management & Administration