Don’t Bank on Relief from DCAA Audits

By Herb Fenster and Jason Workmaster

Photo: iStock

The Truth in Negotiations Act is a statute with which defense contractors are likely familiar. It requires contractors to submit current, accurate and complete cost or pricing data when negotiating certain contracts with the government.

Gathering and producing this data can be an arduous process and can result in the inadvertent disclosure of information that does not entirely satisfy the TINA standard. In such situations, contractors often will voluntarily notify the government of the issue and seek to resolve it. 

In such situations, it is only reasonable for the contractor to expect the government not to conduct a full-scope audit by the Defense Contract Audit Agency (DCAA) but rather to recognize the contractor’s good-faith conduct and agree to a limited review. Such has not been the case, however, resulting in industry calls for regulatory action to rein in the agency. 

On Nov. 20, the Defense Department responded to these calls and published a proposed rule to amend the Defense Federal Acquisition Regulation Supplement. The change would require contracting officers to request a limited-scope audit if a contractor voluntarily discloses that cost or pricing data was inaccurate, incomplete or not current when submitted, unless a full-scope audit is “appropriate for the circumstances.” In theory, the proposed rule would give a contracting officer the flexibility to focus an audit on the inaccurate portions disclosed by the contractor. But as currently drafted, the rule offers no meaningful assurance of relief for contractors. 

The proposed rule amends the DFARS to:

• Require contracting officers to request a limited-scope audit, unless a full-scope audit is appropriate under the circumstances, when a contractor voluntarily discloses inaccurate or otherwise defective pricing after contract award;

• Require the contracting officer to consult with the DCAA to determine the appropriate scope of an audit following a voluntary disclosure, based on an evaluation of the completeness of the contractor’s disclosure; the accuracy of the contractor’s cost impact calculation for the affected contract; and the potential impact on existing contracts, task orders, delivery orders or other proposals submitted by the contractor; and

• Clarify that voluntary disclosure of defective pricing does not waive government entitlement to the recovery of any overpayments, or the rights to pursue claims based on inaccurate, incomplete or outdated cost or pricing data.

Under TINA, a contracting officer may unilaterally adjust a contract price to exclude any significant amount by which the contract price was increased due to inaccurate pricing. The Defense Department is authorized to examine and audit “all records” related to the contract to evaluate the accuracy, completeness and currency of certified cost or pricing data required to be submitted under the act.

To avoid these contract adjustments and audits, contractors frequently resubmit certified cost or pricing data — sometimes reflecting only minor changes — because data that are frequently updated are less likely to be considered outdated or inaccurate. The resubmissions are burdensome for contractors who must conduct repeated “sweeps” for updated data.   

The Defense Department initiated a study published in September to identify “unnecessary requirements for which costs exceed benefits.” Among the recommended changes was a suggested return to a 1980s practice allowing contractors to voluntarily disclose inaccurate or incomplete pricing data post award and provide the Defense Department with refunds, without risk of initiating contractual adjustments or associated audits. As a result of this study’s recommendations, the department directed the defense procurement and acquisition policy office to submit a revision to the DFARS to eliminate the requirement that a contracting officer must request an audit if a contractor voluntarily discloses inaccurate pricing post award.

But the proposed rule fails to adopt the suggestion for refunds without audit risk or meaningfully address contractors’ underlying concerns. It provides no solid assurances to contractors about what to expect following a disclosure of inaccurate pricing information and does nothing to reduce the burden of repeated submission.

While the proposed rule allows a contracting officer the discretion to order a limited-scope audit, the standards for this determination are vague, and the incentive for the contracting officer to make this determination is unclear. It directs a contracting officer to request a limited-scope audit following a voluntary disclosure, unless a full-scope audit is “appropriate for the circumstances,” based on consultation with DCAA. The proposed rule provides no guidance as to when a full-scope audit may be “appropriate,” giving significant discretion to contracting officers and DCAA. The lack of guidance makes disagreement between the contracting officer and the agency likely — putting a contracting officer in the challenging, and often untenable, position of having to defy the DCAA in order to issue a limited-scope audit. The proposed rule expressly states that contractors who voluntarily disclose defective pricing may still be subject to claims based on the submission of inaccurate, incomplete or outdated pricing information, despite voluntary disclosure. 

The Defense Department should amend the proposed rule before finalizing. First, the rule should provide clear guidance on what circumstances require a full audit following a voluntary disclosure, to reduce uncertainty for contractors and disagreement between contracting officers and the DCAA.

Second, the rule should guarantee contractors insight into the government’s determination on the scope of an audit following voluntary disclosure. 

Finally, the department should adopt the recommendation to allow contractors to voluntarily disclose inaccurate pricing data and provide it with refunds without facing the risk of contractual adjustments or the associated audits.  

Herb Fenster, Terra Fulham and Jason Workmaster are partners at the government contracts group at the law firm of Covington & Burling LLP.

Topics: Defense Contracting, Defense Department, DOD Policy

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