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Recently, a tension appears to be developing between the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA). For example, at a recent hearing held by the Congressional Commission on Wartime Contracting, the Commission took DCMA to task for not supporting DCAA audit findings of inadequate internal controls on the part of contractors performing in Iraq and Afghanistan. Further, in a July 2008 report, the Government Accountability Office (GAO) found that contracting officers had exerted an undue influence on DCAA audits impairing the auditors' independence. And on March 13, 2009, DCAA issued Memorandum for Regional Directors (MRD) 09-PAS-004(R) providing guidance on when it would be appropriate for DCAA auditors to begin the process of filing an official DCAA complaint with the DoD Inspector General regarding "unsatisfactory conditions related to actions of Government officials." DCMA administrative contracting officers (ACOs) often have been the government officials who are the targets of such complaints.
History of DMCA: DMCA is a relatively new component of the Department of Defense (DoD). Its history as a defense agency goes back to the 1960s. In 1962, the Defense Supply Agency (DSA) was created to provide common supplies to all DoD components. A few years later, most of the contract administration activities of the military departments were transferred to DSA and its name was changed to the Defense Logistics Agency (DLA).
DLA was responsible for performing most contract administration services at commercial contractors through various DLA Directorates until the mid-1990s, at which time DLA created the Defense Contract Management Command (DCMC) as a subordinate activity of DLA. However, in 2000, DCMA was created as a separate agency by DoD Directive 5105.64.
Pursuant to this Directive, DCMA's mission is to "perform Contract Administration Services (CAS) for the Department of Defense, other authorized Federal Agencies, foreign governments, international organizations, and others as authorized." This mission is accomplished primarily by ACOs.
Organizationally, DCMA reports to and operates under the general direction and control of the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD(AT&L)).
History of DCAA: In contrast, DCAA was created in 1965 by DoD Directive 5105.36 by combining the contract audit arms of the military departments into a single agency that reports to and is "under the authority, direction, and control of the Under Secretary of Defense (Comptroller)/Chief Financial Officer (USD(C)/CFO)." DCAA's mission is to:
3.1. Perform all necessary contract audit for the Department of Defense and provide accounting and financial advisory services regarding contracts and subcontracts to all DoD Components responsible for procurement and contract administration. These services will be provided in connection with negotiation, administration, and settlement of contracts and subcontracts.
3.2. Provide contract audit service to other Government Agencies, as appropriate.
As its mission statement indicates, DCAA only plays an advisory role in regard to the "negotiation, administration, and settlement of contracts and subcontracts." This advice is frequently given to DCMA ACOs.
The courts and various procurement regulations have long recognized that the government can only be bound by the authorized acts of its agents while acting in the scope of their authority. For example, FAR 1.602-1 states that contracting officers "have authority to enter into, administer, or terminate contracts and make related determinations and findings. Contracting officers may bind the Government only to the extent of the authority delegated to them." Similarly, FAR 43.102 provides that:
Only contracting officers acting within the scope of their authority are empowered to execute contract modifications on behalf of the Government. Other Government personnel shall not-
In performing the functions delegated to them, FAR 1.602-2 requires contracting officers to "[r]equest and consider the advice of specialists in audit, law, engineering, information security, transportation, and other fields, as appropriate."
As the forgoing indicates, it is contracting officers who act for the government - DCAA acts merely as an agent of the contracting officer. For example, pursuant to the Allowable Cost and Payment clause, FAR 52.216-7, it is the contracting officer who determines whether costs are allowable and reimbursable to the contractor. This clause also permits the contractor to submit invoices and vouchers to an authorized representative of the contracting officer.
Thus, as a matter of contract, when DCAA approves interim vouchers under cost reimbursement contracts, it is acting as the authorized representative of the contracting officer. Significantly, the Audit clause, FAR 52.215-2 contains similar language when it provides that it is the contracting officer "or an authorized representative" of the contracting officer who has the right to conduct audits under that clause. Finally, by law, regulation and contract, it is the contracting officer who has the authority to resolve all disputes with a contractor in regard to claims "arising under or relating to" a contract subject to the FAR.
In addition to being the only government employees who can bind the government contractually, contracting officers perform other functions that are of concern because of the actions of DCAA. Specifically, contracting officers are the government officials responsible for determining whether a contractor's accounting system is adequate and whether the contractor has adequate internal controls.
Adequate accounting systems are addressed in Parts 9 and 16 of the FAR. Looking at the latter first, FAR 16.104(h) directs contracting officers that before agreeing on a contract type, other than a firm-fixed-price contract, they "shall ensure that the contractor's accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type."
Two things are significant about this. First, the FAR does not contemplate the government requiring contractors to have adequate accounting systems when using a firm-fixed-price contract. Second, what constitutes an adequate accounting system will depend upon the cost data required to be developed by a particular contract. Therefore, the FAR does not foresee a "one size fits all" accounting system.
An adequate accounting system is listed as a prerequisite for the use of three contract types. Specifically, FAR 16.205-3(b) and 16.206-3(b) state that the contractor's accounting system must be "adequate for price redetermination" before a fixed price with prospective price redetermination contract or a fixed-ceiling-price contract with retroactive price redetermination may be used. Finally, FAR 16.301-3(a)(1) provides that a cost reimbursement contract may be used only when the contractor's accounting system is adequate for determining costs applicable to the contract. Obviously, these are different standards for determining adequacy.
Part 9 discusses the general standards of contractor responsibility. FAR 9.104-1(e) provides that a contractor must have the "necessary ... accounting and operational controls." This requirement is not further explained. However, in regard to pre-award surveys, which are usually led by DCMA ACOs, FAR 9.105-1(b)(2)(i)(B) states that the ACO shall obtain from the auditor any information required concerning the adequacy of a prospective contractor's accounting system and the system's "suitability for use in administering the proposed type of contract." Thus, 9.105-1(b) and 16-104(h) both focus on the contract type as being the foundation for determining what would constitute an adequate accounting system.
As noted above, FAR 9.104-1 makes having an adequate accounting system a matter of responsibility. If a contracting officer rejects an offer because the contracting officer has determined that offeror to be non-responsible, FAR 9.105-2 states that "the contracting officer shall make, sign, and place in the contract file a determination of nonresponsibility, which shall state the basis for the determination."
Further, if a contracting officer refuses to award a contract to a small business concern on the grounds that the contractor is non-responsible, that matter must be referred to the Small Business Administration (SBA) for a Certificate of Competency determination in accordance with FAR Subpart 19.6. Accordingly, a DCAA opinion that a contractor does not have an adequate accounting system is not an automatic bar to that contractor getting a contract. The SBA may be the final decision maker in this circumstance.
As for adequate internal controls, since December 24, 2007, contractors who are other than small business concerns have been required by FAR 52.203-13 to have an internal control system that meets certain criteria. Those criteria were broadened by a December 2008 amendment to 52.203-13. Under the 2008 version of the clause, which is to be inserted in all contracts exceeding $5 million and with a performance period of 120 days or more, the contractor's internal control system shall: "(A) Establish standards and procedures to facilitate timely discovery of improper conduct in connection with Government contracts; and (B) Ensure corrective measures are promptly instituted and carried out." The clause goes on to list certain activities that the contractor must achieve in regard to the internal control system. Significantly, the clause does not require the contractor to obtain contracting officer or other approval of its internal control system.
The policy underlying this contractual requirement is applicable to all contractors. Specifically, FAR 3.1002 states that: contractors should have an employee business ethics and compliance training program and an internal control system that-
Based on this policy statement, all contractors are expected, but not contractually or otherwise required, to have an internal control system that meets these criteria. It should be noted that one aspect of FAR policy is that the contractor's internal control system must be "suitable to the size of the company and extent of its involvement in Government contracting." However, DCAA's approach to evaluating internal controls appears to apply a "one size fits all" standard to all contractors.
In addition to the foregoing FAR guidance, DFARS 242.7501 provides:
Contractors receiving cost-reimbursement or incentive type contracts, or contracts which provide for progress payments based on costs or on a percentage or stage of completion, shall maintain an accounting system and related internal controls throughout contract performance which provide reasonable assurance that-
a. Applicable laws and regulations are complied with;
b. The accounting system and cost data are reliable;
c. Risk of misallocations and mischarges are minimized; and
d. Contract allocations and charges are consistent with invoice procedures.
In this provision, the use of the word "shall" indicates these requirements are mandatory for covered contracts, and are to be enforced by ACOs, although there is no DFARS clause contractually implementing this policy. This policy does not apply to contracts for commercial items, and only applies to firm-fixed-price contracts when the contractor receives cost-based or stage-of-completion progress payments. Finally, the policy does not apply to T&M or labor-hour contracts.
Another significant point about this DFARS policy is that the internal controls need only "provide reasonable assurance" that the policy objectives will be achieved. What constitutes "reasonable assurance" is not defined in the DFARS. However, it may be construed to imply that a contractor must have internal controls that make it more likely than not that unallowable costs or mischarging will not occur. In any event, this is a determination the ACO must make.