Critical Commentary

All of the published comments we have encountered have expressed approval of the threshold and percentage increases to quick closeout procedures and none have expressed disapproval of the fee withhold provisions since they are not really substantially different than what went before. However, the apparent changes to the ICP have generated a great deal of commentary where there is encouragement to voice your opinion to the FAR Council before the October 17 deadline. We will focus on a commentary written by the Beason and Nalley group since it is typical of the commentary we have seen.

The FAR case basically codifies what has become an inappropriate expansion of what is considered to be requirements of an ICP and supporting data which comes directly from DCAA’s guidance in Chapter 6 of DCAA Information for Contractors. It shifts long standing authority from the contracting officer to DCAA as to what constitutes an adequate ICP. The proposed FAR 42.705-1 provision would state “(ii) The cognizant auditor will make a written determination on the adequacy of the contractor’s proposal for audit.” Of added interest the same FAR provision, which has traditionally provided the justification for varying the ICP format, will retain the statement “The required content of the proposal and supporting data will vary depending on such factors as business type, size and accounting system capabilities”. However, FAR 52.216-7 will add verbiage that basically eliminates any flexibility on the format where specific schedules, information and data will be required of all contractors regardless of type, size and accounting system. The writers state such requirements will impose “an enormous burden on many contractors” who will, for example have to develop information, adapt existing information in prescribed formats and adopt administrative actions that provide no value to accomplishing the FAR objective of timely settling final indirect rates with the least amount of supporting cost data.

The writers state that the FAR amendments were likely drafted by DCAA and provides confirmation on what the “requirements” for an adequate ICP are which they have been using as the basis for rejecting “hundreds of ICPs as inadequate.” The proposal is consistent with what the DCAA Director has gone on the record as stating DCAA opinions should be mandatory with respect to “business systems.” The writers state the proposal to have only the cognizant auditor determine adequacy of ICP is consistent with “DCAA’s quest to be the deciding official as opposed to be advisory to a contracting officer.”

Looking at the history of the development of the current FAR case, the writers emphasize the intention was to come up with changes to improve the contract close out process, including quick close out procedures. Though the DRAP included mention of indirect cost proposals, the writers express confusion on how a proposal to improve contract closeouts grew to include the need to provide Schedules A through O and supplemental schedules mirroring DCAA prescriptions.

Though DCAA has long argued that their ICP requirements help the contract close out process, there is no empirical evidence to support this contention. Though there has been recent success in closing out large numbers of contracts such success has nothing to do with the expansive requirements of the DCAA Model ICP. Rather it has been due to the common sense approach of closing out huge numbers of task orders by use of audit sampling applied to batch processing of final vouchers as opposed to 100% review. Rather than helping the process, the writers contend the extensive list of requirements including supplemental schedules has delayed the process that include routine rejections of ICPs for inconsequential shortcomings such as failure to include supplemental information at the same time as “required” schedules.

The ICP requirements include numerous schedules that have no connection to contract close outs, citing such supplemental schedules as “annual internal audit plans for the future” where future plans should have nothing to do with historical costs. Further, for those schedules that do facilitate contract closeout they state there is no logic or evidence why DCAA insistence that data contained and reasonably available in the contractor’s books and records must be converted into DCAA prescribed schedules. The writers go on to state conversion of accounting data into other formats is in defiance of FAR 52.215-2(d)(2) that states access to records “may not be construed to require the contractor or subcontractor to create or maintain any record the contractor does not maintain in the ordinary course of business or pursuant to a provision of law.” Additionally, the conversion of data from it native form to a different application creates an unnecessary opportunity for error.

One new requirement of the new case violates even prior DCAA practice. The proposed rule will require the contractor to update cumulative costs claimed and billed (the Cumulative Allowable Cost Worksheet) within 60 days of rate settlement while also including the schedule in the ICP. The real benefit of this significant schedule is after the indirect rates have been finalized so the parties will have a convenient schedule to see audit determined costs. In fact, the prior DCAA Director recognized the need for the schedule but only after rate settlement where its long standing practice was to accept an ICP without the schedule as long as the contractor agreed to prepare it after the rates were finalized. That has now been changed.

The writers add that the model ICP, with its exhibits and supplemental data have no connection with facilitating contract closeouts but, instead are designed to shift resource costs from DCAA to the contractor. So instead of having DCAA spending the time to perform an audit step as it has done in the past, the contractor is now require to complete a schedule for the auditor. For example, Schedule H-1 that breaks down indirect rate bases by contract type has no relevance to cost allowability or allocability nor contract closeouts but does provide the auditor with information for audit risk. Further, required supplemental data comparing current and prior expense data only helps the auditor identify audit risk but has nothing to do with the basic requirement of an ICP to present the costs of the current fiscal year.

There are numerous other schedules that do not enhance contract closeouts. One could make the argument that a standard ICP will result in more efficient and predictable outcomes of DCAA audits which do help the closeout process. However, the writers assert, there is no empirical evidence that audits have been speeded up. In fact, because DCAA audits are no longer subject to due dates and budgets like they were in the past, there is neither evidence audits have been processed quicker nor are there any predictions of when audits will be completed to help the closeout process.

The writers make the last point that the assertion that the changes are expressed as “clarifications” rather than new is incorrect. The significance of the distinction, they point out, is if the proposed rule is considered new, DCAA actions to reject hundreds of ICPs as inadequate because they were not consistent with the model or subsequent rescinding of direct billing privileges or assertions of inadequate billing because of inadequate ICPs would be considered to be DCAA enforcing a non-existent regulatory requirement. Hence the need to assert the proposal is a clarification. The writers disagree that the proposal is merely a “clarification” of existing rules. First, why insert a long list of requirements describing an adequate ICP when there is already a reference to a model ICP that accomplishes the objective. Next, DCAA’s model ICP was incorporated into the FAR as an “example” as opposed to the current “requirement.” Moreover, DCAA has made extensive changes to the model over the years since it has been an example but if they were existing rules than such changes have not gone through the FAR rulemaking process.

Both the writers and other commentators point out that interested parties should submit written comments to the FAR Council before October 17.