A surge of defense spending is prompting the Pentagon's audit agency to triple the number of evaluations it will undertake in order to uncover or prevent unjustified profits based on incomplete, flawed or inaccurate cost data.
The Defense Contract Audit Agency intends to complete as many as 60 Truth In Negotiations Act reviews in the coming fiscal year, compared to about 20 in the year ending Sept. 30, according to spokesman Christopher Sherwood. The agency completed 21 such audits in 2018 and 26 in 2017. About half the reviews focused on the top 25 defense contractors.
President Donald Trump's efforts to bolster defense spending were aided by Congress' decision to revise spending caps for the final two years of the 2011 Budget Control Act. That effectively added tens of billions of dollars potential defense spending to the Pentagon budget: $90.3 billion in fiscal year 2020 and $81.3 billion in the following year.
Congress has signaled its concern that the money could be misspent. The staff of Republican Sen. Chuck Grassley, chairman of the Senate Finance Committee, as well as investigators for Democratic Representative Elijah Cummings, chairman of the House Oversight Committee, are already reviewing the Pentagon's enforcement of the law intended to prevent unjustified profits based on incomplete, flawed or inaccurate cost and pricing data for military unique items.
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"The committee is investigating whether defense contractors are providing complete and accurate cost data, as required by law," Cummings said in an emailed statement.
The 1962 Truth In Negotiations Act sought to put government contracting officers on equal footing with company counterparts, requiring firms during negotiations to provide government buyers all the variables that influenced the final price of a product or service unique to the military. They must also legally certify that the information is accurate, complete and current.
The TINA audits are separate from Pentagon reviews that uncover instances of overcharging for basic spare parts such as nuts and pins. Those types of goods are considered "commercial items," normally exempt from the law's price data requirements since there is already publicly available data to compare them with.
Under the ramped up audit policy, the number of "work years," or time devoted to compiling compliance audits, will increase by approximately 500%, Sherwood said.
Previous reviews show there's reason to be concerned. As an example, Shay Assad, the Pentagon's former director of defense pricing and contracting, said evaluations during his tenure showed that essentially 100% of the contracts examined at one top-25 defense contractor had suspect pricing.
"If one looks deep enough there is some element of fraud typically lurking," he said.
Sherwood said the contracts most prone to significant risk of "excess profits" are large, firm-fixed price types. In 2015, the audit agency formed a specialized, 20-person unit to handle reviews of "high-risk" contracts.
Based on initial reviews commissioned before the team was formed, Assad said in a written statement that "it became obvious to us that we needed to step up defective pricing review efforts."
"In a number of cases we expected profit outcomes of 12% to 15%," Assad said, but they found levels of between 25% and 80% on some sole-source weapons contracts. "That does not happen by outstanding performance" but by faulty contractor cost estimating "or in the worst case, fraud," he added. Assad retired this year.
Since 2015, the unit has conducted audits on 108 high-risk contracts totaling $74 billion. Of those, 79 -- or nearly 75% -- uncovered potential defective pricing of $589 million that could eventually translate into contractor repayments after the contested charges go through a negotiations process.
"If both parties arrive at a mutually agreeable settlement, the contractor will make a payment to the government," Sherwood said. But if not, the government's principal negotiator "issues a demand for payment, at which point the contractor may elect to make the payment or pursue legal action," he added.
In that same period, the audit agency has referred 10 compliance audits with "suspected irregular conduct" to the Pentagon's Defense Criminal Investigative Service. Eight of those 10 have resulted in active cases, Sherwood said.