DoD Seal

Table of Contents


National Performance Review

Report on
Reinventing the Department of Defense
September 1996



DEFENSE CONTRACT AUDIT AGENCY
  • Empowering Employees to Streamline the Travel Process. The Defense Contract Audit Agency (DCAA), Northeastern Region, has worked very hard in "cutting back to basics" to reengineer internal operations. Several examples show what can be achieved if employees are empowered to eliminate duplication and adopt more efficient ways to operate.

The first example relates to an experimental program to reduce travel costs. It required using restricted airfares in economy coach to reduce ticket prices. The test field office was the European Branch Office, since it represents 28 percent of the region's travel budget. Based on the data for the first six months of FY 1996, the region should save about $400 per ticket, or about $80,000 annually.

The second example also involves the European Branch Office, but it relates to streamlining TDY and local travel. The current process requires that claims be filed with the Army in Europe with the disbursements via the TBO (Transactions By Others) process. It can take approximately 4-6 months before being recorded in the official accounting records in the Defense Finance and Accounting Service, Colorado (DFAS-CO). The current approach is to have the claims submitted directly to the DFAS-CO for payment which saves time, increases the accuracy of obligations generated by more timely processing, and increases customer satisfaction as further detailed below:

- It eliminates the cost of no-value handling by the Army, by DFAS Indianapolis, and by

DCAA Headquarters and regional personnel.

- The accuracy of accounting records is improved because travel disbursements are recorded in

the month they are paid. Since the initial obligation entered into the system is an estimate, the new process may result in a surplus of funds -- funds which could be utilized to fund other requirements.

- All of the European Branch office staff utilize the American Express card and use electronic

transfer (EFT) for settlement of travel claims.

- The timeliness for receipt of travel settlements by employees has been significantly improved resulting in satisfied customers.

DCAA continues to look for opportunities to improve government operations and the acquisition process. Success will be achieved by releasing the power of employees to "do the right things right."

  • Integrated Product Teams (IPTs) - A New Way of Doing Business. Integrated Product Teams (IPTs) are the "new" way of doing business in government procurement and the Air Force C-17 program was one of the first to utilize this method of procurement. The group's ability to react to this unusual review approach in a timely manner was critical to the success of the process. The group succeeded, as evidenced by the decision of DoD to continue the program at a reduction in the baseline costs from $24 billion to a not-to-exceed price of $18 billion for the buyout quantity of 80 aircraft; a reduction in the average unit price per aircraft of $75 Million.

Not only did the IPT process save the elapsed time necessary to support the decision on the procurement, it completely changed the nature of the relationship with our customers and the contractor. Heretofore, the relationships between all parties had been strained because of program cost overruns, late deliveries, and technical difficulties. With the interactions needed to make the process work, discussions/negotiations were no longer adversarial in nature. The contractor's Program Manager stated that DCAA's participation in the process removed much of the innate fear that his people had of DCAA. In addition, the customer came to place great reliance on DCAA for valid, on-time, advice. The DCAA group members dedicated themselves, without complaint, to accomplishing the objectives within the time constraints dictated by the customer.

As a result, the group was able to accomplish its task of providing an audit report with no surprises to any member of the IPT in time to support the "handshake" agreement on price. Since all issues had been resolved in the IPT, agreement on price and DoD approval of the buy was realized within an "unheard of" short period of time. Subsequently, the members of the DCAA group were able to turn around a request to review certified "sweep" data provided by the contractor in less than 8 working days.

The IPT process required that the DCAA group audit the contractor's proposal as it was prepared. This meant that, for example, as soon as the manufacturing Basis of Estimate (BoE) was prepared, the appropriate members of the group were to review it even though the proposed hours and dollars were not yet included in a certified SF 1411. This process held true for every element of cost. In addition, as the BoEs were completed, the data was entered into a contractor "cost model" which other members of the DCAA group were responsible for auditing.

DCAA's contribution to the success of the IPT process was its quick turnaround time in providing a final product to its customer. DCAA completed its audit work and issued an audit report 38 days after the final version of the cost model was available and 13 days after the actual receipt of the proposal with the certified SF 1411. DCAA's effort contributed to the success of the IPT process which significantly reduced overall acquisition lead time and effectively facilitated the DoD's decision to continue the program at a significant reduction in baseline costs for the buyout of the 80 aircraft.

  • Northrop Grumman Restructuring Team. A new standard in reviewing highly complex proposals was established by forming a joint government/contractor integrated process team (IPT) to expedite the review and certification of a contractor's multi-billion dollar, multi-segment and multi-phased restructuring proposal. At the heart of the IPT was the DCAA Northrop Grumman Restructuring Team (NGRT) which was tasked to determine the accuracy and reasonableness of the proposed restructuring costs, validate that the proposed savings would be realized, and result in an overall benefit to the government. In order to achieve its objectives, the NGRT initiated the IPT and identified streamlining measures, to overcome barriers, which could have protracted the process.

In April 1994, the Northrop Corporation acquired the Grumman Corporation, forming the Northrop Grumman Corporation. As a result of the merger, Northrop Grumman Corporation initiated several restructuring projects to consolidate its operations. During this same period, Congress enacted legislation requiring that the costs associated with restructuring efforts be audited and certified by the Department of Defense (DoD), in order to be allowable on DoD contracts. The contractor submitted one overall proposal that incorporated all of its restructuring projects. The audit required the involvement of several DCAA Field Audit Offices (FAOs) from around the country. Since the contractor could not be reimbursed for any restructuring costs prior to certification, the Defense Corporate Executive (DCE) required a quick turnaround of our audit to complete the certification process.

Given the complex and evolving nature of the newly enacted restructuring legislation and number of organizational units involved in the review and certification process, the NGRT anticipated there would be a need for numerous policy interpretations, coordination between offices, and high level management review. It was also recognized that normal procedures and control mechanisms would be burdensome and inefficient in the performance of this audit. Therefore, the NGRT developed strategies to overcome existing barriers.

One example, Issue Resolution: - Normally, requests for technical guidance, audit report review, and issue resolution are addressed in a "serial" sequence. After FAO management review of draft audit report issues, regional and Headquarters review is required for sensitive or unusual audits such as restructuring proposals. Following draft report approval the contractor has an opportunity to respond to any reported conditions, normally within 30 days. After receiving the contractor's response, the audit report is finalized and subject to final review. Upon report issuance, the DCE is tasked with resolving any unresolved issues. To expedite the process, the NGRT was formed consisting of auditors from each involved FAO, and regional and headquarters personnel. Policy issues arising during the review were elevated to the team director and discussed during weekly team teleconferences (included local ACOs and DCE). Since the team included Headquarters and regional personnel, policy guidance could be coordinated/resolved in a timely manner. Concurrently, with the internal resolution process, issues were discussed with the DCE and the contractor. This resulted in prompt settlement of issues during the audit, saving time and effort down the line. In addition, the audit expectations for proposal format and content had been coordinated with the DCE and contractor prior to submission of the proposal. This facilitated the development of the scope of audit, a standard audit program, risk assessment, and pro-forma audit report (discussed prior to the start of the audit) to ensure consistency. Control and elimination of existing organizational barriers resulted in the timely completion of the audit and resolution of issues. The audit was completed within 70 days of receipt of the proposal and certification was received in less than 6 months from the date the proposal was submitted. This represents significant cycle time reductions from previous audits of this nature.

  • Overage Contract Close-out Initiative. In August 1994, Defense Contract Management Area Operations (DCMAO) Baltimore had approximately 18,000 overage contracts which represented over 50% of all completed contracts. In addition, between 500 and 1,000 additional contracts were becoming overage every month. By working together, DCAA Mid-Atlantic Region and DCMAO Baltimore were able to reduce the number of overage to below 10,000 which currently represents about 20% of all completed contracts. In order to achieve these results, it was necessary to implement new and innovative contract close-out processes. By keeping in mind the final objective of closing contracts with minimal risk to the government, we were able to significantly streamline the close-out processes. The following are examples of these initiatives:

- Early Close-out - Under this initiative, multiple orders under Indefinite Delivery Type Contracts can be closed prior to final audit. Any adjustments determined by the results of audits are made on remaining open orders under the contract.

- Sharing Information - Mechanization of Contract Administration Services (MOCAS) and

Overhead Databases, and distributed this information to Administrative Contracting Officers (ACOs) and DCAA field auditors. This information provides ACOs and auditors with the necessary information to take the appropriate action to close contracts.

- Bilateral Close-out - Under this initiative, if amounts have been fully paid, the ACO closes

contracts without a final voucher, with the concurrence of the contractor. Under Indefinite Delivery Type Contracts, multiple orders under a single contract are closed without a final voucher. In this situation, any under/over payment is applied to one or a few orders where a final voucher is required.

- Obtaining Contractor Submissions - DCAA Mid-Atlantic and DCMAO Baltimore have

implemented an initiative to obtain overdue contractor incurred cost submissions by writing a series of letters to contractors. If contractors are not responsive, DCAA will recommend the ACO decrement the contractor billing rates. This has resulted in a 75% reduction in overdue submissions prior to 1991.

- DCAA Liaison Auditor - DCAA has temporally assigned an auditor to DCMAO Baltimore to

assist ACOs in closing contracts using incurred cost audit reports, without a DCAA Contract Audit Closing Statement (CACS).

Without these and other initiatives implemented by DCAA Mid-Atlantic Region and DCMAO Baltimore, the number of overage contracts would surely have increased well above 18,000. These initiatives saved the government and government contractors significant resources with no significant increased risk to the Government.

  • Using Participating Work Team Concepts (PWT), Improved Productivity and Reduced Cycle Time on Incurred Cost Audits. Shortly after the audit team received teambuilding training on the concepts of PWTs, the team established a goal to complete incurred cost audits equating to $630 million. Because of initial staffing shortages, the team realized that process improvements were necessary to meet the challenge of auditing significant dollars at over 100 different contractor sites.

By increasing communication with the customers, the suppliers (contractors), and auditor empowerment, this 11 person team was able to exceed the team's goal. Specifically, the team audited 144 contractor fiscal years equating to $660 million. The process improvements resulted in reducing the cycle time of field work from 244 days to 58 days.

To ensure receipt of adequate incurred submissions, the team conducted seminars for over 200 contractors and customers. The seminars addressed the contractor's responsibility to submit timely and adequate submissions. A significant portion of the seminar was devoted to the DCAA "Model Overhead Submission" which detailed the standards required for an adequate submission. These seminars aided in overcoming the contractor's resistance to providing the essential information. Because the contractors now understood the requirements, the quality and timeliness of incurred cost submissions increased.

In the beginning of the management year, the audit team chose their own audits from the pool of planned audits. This empowerment resulted in the reduction of scope (reduced hours) in many audits and built trust through teamwork and ownership.

The audit team developed an "Engagement Letter" to establish commitment by both the auditor and the contractor to cycle time reduction techniques. The contractors were advised upfront that the audit findings would be presented to them during the audit, rather than at the end of the audit. this facilitated the resolution process and reduced cycle days.

  • Reduced Government Oversight for Small Government Contractors with Good Business Systems. Currently, DCAA audits each yearly incurred cost submission at all contractors. A project was initiated to improve the incurred cost audit process without increasing the risk to the Department of Defense.

This project has resulted in an incurred cost process improvement that will reduce audit effort at small, low risk contractors and redirect the savings to other priorities and higher risk areas. Based on prior audit history, small defense contractors' annual incurred cost submissions are categorized as either high or low risk. Contractors that do not have a history of audit problems are grouped into the low risk pool; all others are grouped into the higher risk pool. Using a sampling approach, one-third of the low risk submissions are audited. All higher risk submissions continue to be audited each year. This initiative was fully coordinated with the DoD Inspector General and implemented in August 1995.

The benefits of this initiative include substantial audit hour savings without significant additional risk to the government. DCAA expects to save over 100 staff years annually after all of the benefits from the process improvements are fully achieved. The process improvements will also result in reduced audit cycle time, a key concern to our customers. In addition, the initiative has motivated small contractors to improve their systems so they too can be classified as low risk. Low risk, small contractors will save substantial time and effort preparing submissions and supporting audits.

  • Expand the Use of Parametric Cost Estimating Techniques to Improve the Quality of Price Proposals Submitted to the Government. The objective of this initiative is to expand the use of parametric cost estimating techniques for the purpose of (1) improving contract award cycle time; (2) reducing price proposal preparation, evaluation, and negotiation costs; and (3) increasing customer satisfaction. The objective is also to provide for the use of parametrics as another acceptable estimating tool in those circumstances where parametrics results in better estimates as compared to other tools.

Industry has been using parametric estimating techniques internally for several years to estimate the costs of certain projects. Industry has found, in certain circumstances, the use of parametric estimating techniques will provide a better cost estimate than the traditional bottoms-up estimating techniques. Also, in these circumstances, estimates prepared using parametrics require less time and expense when compared to estimates prepared by the bottoms-up method. Unfortunately, the government has not been able to take advantage of these benefits because of several barriers (e.g., governmental regulations and nonacceptance of parametrics by government buying and audit organizations, and industry program managers). In an initiative to address these barriers, a group of executives, policy formulators, and parametrics practitioners from industry, government buying activities, Defense Contract Management Command, and Defense Contract Audit Agency formed a Steering Committee to work on a comprehensive action plan to eliminate the barriers and to expand the use of parametrics on government price proposals.

The Steering Committee has taken the following actions to expand the use of parametric cost estimating: (1) published a comprehensive joint government/industry Parametric Cost Estimating Handbook and distributed this handbook to industry, buying activities, and oversight organizations; (2) worked with Defense Acquisition University to deliver a training course on parametrics that is based on the handbook; and (3) established a Reinvention Laboratory at 12 major contractor sites to test the expanded use of parametrics. The Lab includes representation from industry, DCMC and DCAA, and the companies' major customers.

The enhanced use of parametrics will result in a more efficient estimating process. Early lab results have shown (1) potential 20% - 40% reduction in proposal preparation costs; (2) potential 20% - 25% reduction in proposal preparation cycle time; and (3) when parametrics are used appropriately, the quality of estimates improves, substantially.