Recent developments in the federal government contracts field have significantly changed the landscape for contractors and may well result in more contentious relationships between and among contractors, contracting officers and auditors, with more litigation in sight for issues that used to be amicably resolved. Now is the time to seek guidance from experienced government contracts practitioners to understand these changes, help head off issues before or as they arise, or, ultimately, to assist in litigating the issues if they prove to be as intractable as some predict.

Many are aware that the Defense Contract Audit Agency (DCAA) has been under fire recently — GAO issued reports and Congress held hearings in which the objectivity and ability of DCAA auditors were questioned. The head of DCAA was "reassigned" and overseers issued new (and much harsher) guidance memoranda on how auditors could interact with contractors and contracting officers, and what they could access, ask for and examine. The end result is a new climate in which the auditors of allowable costs under government contracts (who are advisors to and assistants of the holders of ultimate authority, the Contracting Officers), are now "presumptively correct" and the Contracting Officers may be loathe to disagree with them for fear of having their agency's Inspector General come knocking on their door or having the DCAA auditor "appeal" to their superiors, particularly if the contract involves DoD. As a leader in the government contracting field said last week, this "could turn out to be a choke point in the decision-making process, posing problems for Contracting Officers and contractors alike."1

As another very knowledgeable practitioner put it in a panel on the Changed Roles of DCMA and DCAA in Contract Administration:

" - Summation

  • DCAA's ability to perform reliable audits is impaired
  • DCMA reluctance to resolve audit findings against DCAA
  • Contract Administration system is breaking down
  • Regulatory oversight is increasing
  • Contract compliance has become more significant
  • Disproportionate penalties for non-compliance issues
  • Increasingly difficult for contactors to resolve audit and/or contract administration issues with agencies   

- Conclusion

  • Increasingly, litigation is a contractor's only option"2

This seemingly harsh judgment stems from the fact that a number of recent developments have led DCAA auditors to assume ever increasing authority in areas once reserved (and arguably still legally reserved) to Contracting Officers. FAR 1.102-4(a) states that  " … the contracting officer must have the authority to the maximum extent practicable and consistent with law, to determine the application of rules, regulations, and policies, on a specific contract." The Contracting Officer is the key government official with "authority to enter into, administer, or terminate contracts and make related determinations and findings." FAR 1.602-1(a).

Now, however, DCAA and DoD have issued a series of "guidance" memoranda which assert DCAA authority, among other things, to:

  1. Interview contractor personnel. DCAA Audit Guidance 08-PAS-042(R), December 19, 2008
  2. Review and monitor the adequacy of contractor Codes of Business Ethics and Conduct and compliance programs, including verifying the adequacy of contractor procedures and actions for timely and appropriate reporting and disclosure to the Government when there is "credible evidence" of certain criminal law violations, evaluating the appropriateness of contractor corrective actions taken, etc. DCAA Audit Guidance 09-PAS-014 (R) on FAR Revisions Related to Contractor Codes of Business Ethics and Conduct [The New Far Mandatory Disclosure Rules under FAR Part 3.10 and FAR 52.20.-13], July 23, 2009
  3. Go over the head of Contracting Officers, directly to the agency IG. Audit Guidance 09-PAS-004(R) Audit Guidance on Reporting Significant/Sensitive Unsatisfactory Conditions Related to Actions of Government Officials, March 13, 2009.
  4. Go over the head of Contracting Officers, to Component Managers or, ultimately, to the most senior acquisition policy person at DoD, Shay Assad, Director, Defense Procurement and Acquisition Policy (DPAP). Shay Assad Memorandum of December 4, 2009, "Resolving Contract Audit Recommendations."
In addition, new proposed DFARS rules have been issued for comment that, if passed, could affect your ability to get paid if one or more deficiencies are found in your business systems. See, e.g., DFARS Case 2009-D038, 75 Fed. Reg. 2457 et seq. (January 15, 2010).

These and other recent changes in the rules of the game are new, important and somewhat arcane. But, their importance as sea changes in the way government contractors interact with their government, combined with the new mandatory compliance program, make it essential that any company with a government contract understand these new rules and be prepared to deal with the changed modus operandi of those within the government with whom they deal.

1 Pachter, John, "The Incredible Shrinking Contracting Officer," American Bar Association Public Contract Law Section 16th Annual Federal Procurement Instituted,  March 4, 2010, Vol. I, Tab F, at 2.
2 McDonald, Peter, "The Changed Roles of DCMA and DCAA in Contract Administration," American Bar Association 16th Annual Federal Procurement Institute, March 4, 2010, Vol. I,  Tab G at 9.