Bloomberg News

Audits Preventing Taxpayer Overcharges Impeded by Pentagon Cuts

April 03, 2013

U.S. budget cuts may delay the Defense Department’s plan to eliminate a $400 billion backlog of unaudited contractor bills by next year, a Pentagon official said.

The Defense Contract Audit Agency has frozen hiring and will lose about 5 percent of its workforce, or 250 employees, this year as the Pentagon absorbs $41 billion in automatic reductions, said Patrick Fitzgerald, the office’s director.

“It’s going to make it more challenging,” Fitzgerald said in an interview about efforts to work through the backlog. “I’m not willing to give up on that goal yet, even though we’ve got some budget challenges. I think we can still come very close to getting to that goal.”

The backlog of unaudited expenses has more than quadrupled since 2005 as awards surged because of the wars in Iraq and Afghanistan. Contractors that have been snared in the audit backlog wouldn’t get paid until their requests are approved, which might put millions of dollars on hold for years.

“For many companies, there’s real money locked up in these incurred cost audits,” said Alan Chvotkin, executive vice president of the Arlington, Virginia-based Professional Services Council, which represents contractors such as SAIC Inc. (SAI:US) and CACI International Inc. (CACI:US)

Even under ideal circumstances, the goal of getting through the backlog by Sept. 30, 2014, was going to be daunting, Chvotkin said in a phone interview.

“It’s going to be a real, real stretch to eliminate the backlog in ’14, given this fiscal situation and this workforce situation,” he said.

IRS Model

The audits help ensure contractors are charging the government a fair price when they work under cost-reimbursement agreements, or those that aren’t awarded on a fixed-price basis.

As the audit office tries to speed its progress through the bills, employees are focusing more attention on vendors considered at high risk of overcharging the government, Fitzgerald said yesterday at the Pentagon.

They include companies with at least $250 million in expenses, first-time contractors and those with a history of overbilling, he said. All submitted costs are examined, while the agency audits a random sample of bills submitted by companies presenting a lower risk.

“We’re using sort of the IRS model,” Fitzgerald said. “Not every submission would be audited.”

Contract Overcharges

Overcharges uncovered in the backlog may amount to $4 billion, or 1 percent of submitted expenses, Fitzgerald said. That compares with the range of $1.1 billion to $2.2 billion estimated in 2011 by the bipartisan Commission on Wartime Contracting.

The agency is “doing higher-quality audits these days,” which result in more charges being questioned, Fitzgerald said.

The $400 billion backlog includes cost submissions from 2009 and earlier. Fitzgerald didn’t provide an estimate of how much of the backlog remains to be audited.

Pentagon budget cuts may disrupt the audit agency’s attempt to rebuild its workforce after a period of decline. Its staff decreased by more than 40 percent between 1990 and 2008, even as government contract spending increased more than 140 percent, according to department data.

A study by the Army Force Management Support Agency said the audit office needs a workforce of 6,250 by 2015, the wartime contracting commission reported. The agency now has a staff of about 5,200, after hiring about 1,000 people since 2009, Fitzgerald said.

To contact the reporters on this story: Nick Taborek in Washington at ntaborek@bloomberg.net; Danielle Ivory in Washington at divory@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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