Defense Contract Audit Agency (DCAA) audit reports provide valuable information for awarding, administering, and closing out contracts. The Internal Revenue Service (IRS) primarily requests proposal and incurred cost audit reports from the DCAA. Proposal audit reports assist the contracting officer (CO) in negotiating a fair and reasonable price, while incurred cost audit reports establish the final indirect cost rates needed to close out completed contracts.

The overall objective of this review was to determine whether the IRS is effectively using DCAA audit reports. Using DCAA proposal audit reports received in Fiscal Years (FY) 1998 and 1999 and other negotiation skills, the COs saved the government approximately $31 million. However, additional emphasis is needed to ensure incurred cost audit reports are used effectively to settle indirect cost rates.

The COs are effectively using the Cost and Pricing Branch within the Office of Procurement Policy to help determine whether a proposal audit is necessary and if the contractors’ proposed prices are fair and reasonable. By using the DCAA proposal audit reports received in FYs 1998 and 1999 and other negotiation skills, COs were able to achieve significant cost savings for the government. While the Office of Procurement effectively used the Cost and Pricing Branch and DCAA proposal audit reports to establish price reasonableness, we believe additional emphasis is needed to assist the COs in working with contractors to settle indirect cost rates on completed contracts and task orders. We identified approximately $70,000 of funds that remained obligated on four completed task orders and found that the COs had not attempted to identify excess funds.

We reviewed six contracts where DCAA incurred cost audit reports had been received by the IRS and noted that only one CO had received the applicable DCAA audit reports and could explain how to use the reports to determine the monetary effect of the final indirect rates. In the remaining five instances, the CO either never received the DCAA report, received the report after settlement, or was awaiting guidance before closing out the completed task order.

Incurred cost audit reports are used to assist in adjusting the indirect costs billed under the contract to the actual indirect costs incurred by the contractor. Completed cost reimbursable contracts cannot be closed out and excess funds deobligated until the final indirect costs are established and settled. These final indirect costs can be established and settled using either the incurred cost audit reports or quick close-out procedures. Quick close-out procedures facilitate settlement of unaudited indirect costs on a contract-by-contract basis, where agreement can be reached on a reasonable estimate of allocable dollars and the allocable indirect costs are relatively insignificant. In most instances, the COs we interviewed were either not familiar with or were not using the incurred cost audit reports or quick close-out procedures. As a result, we identified four completed task orders with approximately $70,000 of obligated funds for which the COs had not attempted to identify excess funds.

The Director of Procurement should ensure that Procurement personnel are aware of the applicable guidance regarding the use of incurred cost audit reports and encourage the use of quick close-out procedures, when practical. In addition, the database used to monitor DCAA activity should be modified to capture additional information needed by the COs.

Management’s Response: The Procurement function will issue guidance to all Procurement personnel to emphasize the use of incurred cost audit reports and the benefits of quick close-out procedures. Also, the incurred costs database will be modified and accessibility to COs will be expanded. Management’s complete response to the draft report is included as Appendix V.