In its annual report to Congress, the Defense Contract Audit Agency (“DCAA”) released impressive metrics about its progress during the 2017 fiscal year. For many years, DCAA has struggled to manage a substantial number of backlogged incurred cost audits—most of which extended back several years, including some which extended back almost a decade. However, according to DCAA’s March 31, 2018 report to Congress (which was recently made available to the public), DCAA examined $281 billion in contract costs, identified $7.1 billion in audit exceptions, and reported $3.5 billion in net savings, all of which produced a return on taxpayer investment of approximately $5.20 to $1. Notably, DCAA advised that it had only 2,860 incurred cost audits in backlog at the close of 2017 and that DCAA expected to clear this inventory in 2018. While DCAA does not consider an audit to be backlogged until the submission has been pending for two or more years, the reported statistics mark a significant milestone for the agency. Indeed, going forward, DCAA advised that it expects to be fully compliant with Congress’s mandate in the 2018 National Defense Authorization Act (“NDAA”) that DCAA’s audit backlog inventory must not exceed one year.

DCAA’s 2018 annual report paints a far different landscape than those in DCAA’s prior reports to Congress. For example, in 2011, at the height of the audit backlog, DCAA had over 21,000 open audits in incurred cost submissions alone and immediate, subsequent years did not meaningfully reduce that caseload. Accordingly, just a short time ago, DCAA had nearly 10 times the number of open incurred cost audits that it had pending as of the close of 2017. This represents only 14.3 months of outstanding inventory, which is a substantial improvement over the 17.6-month average in 2016, many times the average in 2011, and just shy of the one-year backlog requirement newly imposed by Congress for 2018.
Continue Reading

The Department of Defense (“DoD”) recently issued a final rule regarding contractor disclosures of defective pricing issues on DoD contracts, which can arise where the contractor’s certified cost or pricing data is inaccurate, incomplete or is not current.  In such cases, these errors and omissions can result in significant contract overpayments by the government.  While the new rule incentivizes contractors to voluntarily disclose defective pricing matters, the rule’s impact may be somewhat muted by contractors’ existing mandatory disclosure obligations under the Federal Acquisition Regulation (‘FAR”).

On May 4, 2018, DoD issued Defense Federal Acquisition Regulation Supplement (“DFARS”) 215.407-1(c)(i), Defective certified cost or pricing data.  The new rule, which can be found here, provides that, when in receipt of a contractor’s voluntary disclosure of a defective pricing matter, the contracting officer will discuss the level of involvement needed from the Defense Contract Audit Agency (“DCAA”) in reviewing the disclosure, which can range from a technical review of discrete cost elements, to a limited scope audit, or the requirement for a full scope audit of the contractor.  The contracting officer is, at a minimum required to discuss with DCAA:

  • The completeness of the contractor’s voluntary disclosure on the affected contract;
  • The accuracy of the contractor’s cost impact calculation for the affected contract; and
  • The potential impact on existing contracts, task or deliver orders, or other proposals the contractor has submitted to the government.


Continue Reading

In Appeal of American West Construction, LLC, the Armed Services Board of Contract Appeals considered whether the U.S. Army Corps of Engineers (Government) lost its right to claim a credit under the Changes Clause by waiving its right to insist on compliance with the contract specifications prior to insisting on such compensation.  Finding the Government was fully aware of the Contractor’s use of a less expensive construction method than in the specifications, the Board found the right to claim there was a change to the contract was “dead” and no credit was owed for the work not performed.

American West was awarded a MATOC contract for design-build construction services.  In August 2015, the Government awarded Delivery Order 02 (DO2) under the MATOC contract for construction of bridges over irrigation canals in El Paso, Texas.  The DO2 specifications provided that the work would be performed by first building two temporary bridges over the canals so the Contractor could access the site.  The Contractor, however, sought access to the construction site via a levee owned by the local water district.  However, because negotiations with the water district over access to the levee were pending and the Contractor could not be sure that access would be granted, the Contractor proceeded under the assumption the temporary bridges would still be necessary.
Continue Reading

6869764745_7087710505_zIt is common for corporations to compensate executives (and other employees) based upon stock price performance.  Tax implications lend support for this practice with respect to high-paid employees, as executive compensation is only deductible up to a limit of $1 million per year, so companies are inclined to compensate executives with stock performance-based compensation