DCAA backlog: What it means for industry.

• Author: Freling, Scott
• Position: Government Contracting Insights

* The Defense Contract Audit Agency's audit backlog is old news, but Congress's recent attempt to cure that backlog has garnered industry attention--and more than a few raised eyebrows. In an apparent effort to redirect resources toward alleviating the problem, Congress has prohibited DCAA from providing audit support for non-defense agencies. But what does this mean for contractors?

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Section 893 of the 2016 National Defense Authorization Act aims to improve DCAA's audit support function and resolve the backlog by prohibiting it from providing audit support for non-defense agencies until its "backlog for incurred cost audits is less than 18 months of incurred cost inventory."

The provision also attempts to remove any financial incentive for DCAA to flout this restriction; beginning in fiscal year 2017, it reduces the agency's appropriated funding "by an amount equivalent to any reimbursements received by" DCAA for audit support provided to non-defense agencies.

In a Jan. 7 memorandum, DCAA narrowly construed Section 893's reach. As an initial matter, it interpreted the restriction as pertaining only to audit support, concluding that the agency remains available to provide other services such as negotiation support, litigation support, investigative support and non-audit services to civilian agencies.

In addition, DCAA has determined that it may continue performing audits that contain a mix of Defense Department and non-DoD contracts under certain conditions. Audits of indirect cost rates, also known as incurred cost audits, necessarily require auditing of all the indirect costs incurred by the contractor to determine a rate to be charged to all contracts. Because these audits cannot be segregated by a contracting entity, DCAA reasoned that such audits should remain within its purview. And although direct costs can be segregated by contract, the agency further concluded that its auditors may retain that work as long as including the non-DoD contracts in the audit requires only "de minimis additional effort."

In either kind of blended audit, the benefit received by the non-DoD agency will remain reimbursable to the Defense Contract Audit Agency; however, any reimbursement received from the non-DoD agency will reduce the appropriated funds available to DCAA.

While DCAA and procuring agencies figure out how to work with and around Section 893's constraints, contractors are left to wonder what this means for them. Below are...