The High Risk of Incurred Cost Low-Risk Memos

Abstract

Despite the high risk of cost-reimbursement contracts to the government, it is a necessary contract type usedin Department of Defense (DOD) acquisition. The high risks may be avoided with adequate contract administration oversight and proper auditing procedures. The purpose of this research was to analyze the impact of the DOD USD Class Deviation 2012-O0013—Defense Contract Audit Agency (DCAA) Policy and Procedure for Sampling Low-Risk Incurred Cost Proposals on the quantity of audits performed and amount of questioned costs identified, as well as analyze the impact of the low-risk memos (LRM) issued under this class deviation on incurred cost proposals not audited. This research highlights the possible risks of performing less incurred cost proposal audits on DOD contractors and the increased reliance of LRMs in the contract administration and closeout of high-risk cost-reimbursement contracts. The research findings indicate a significant reduction in the quantity of incurred cost proposal audits and the amount of questioned costs identified, existence of questioned costs in contracts subject to LRMs, and a major audit policy non-compliance. Recommendations include notifying senior contracting officials of a non-compliance in DCAA audit policy pertaining to Class Deviation 2012-O0013, revising the low-risk sampling criteria, and establishing additional procedures in the administration and closeout of cost-reimbursement contracts.