Penny Wise, Pound Foolish: Cuts to Auditors Cost Us More in Savings

Cuts due to sequestration at the Defense Contract Audit Agency (DCAA) led to higher contract costs that are larger than the cuts, according to DCAA estimates provided to the Center for Effective Government. The $11 million sliced out of DCAA’s budget and the resulting reduction in auditing led to as much as $74 million in excessive contractor billing passed on to the government that otherwise might have been spotted by auditors. This is based on the agency estimate last year that “the return on taxpayers’ investment in DCAA was approximately $6.70 for each dollar invested.”

Although DCAA is little known, it is an important watchful eye over federal spending that goes to contractors not just at the Defense Department but at numerous other departments that use its services as well. “Given the direct relationship to DCAA’s audit mission and its impact on both cost avoidance and checks written by contractors to return funds to the US treasury, DCAA is one of the top oversight organizations in providing realized versus potential savings to the taxpayer and warfighter,” the agency states in a document projecting the impacts of cuts. The document was obtained through the Freedom of Information Act and posted on the website

DCAA admits the $74 million estimate is not perfect and is likely overstated; however, even if it were half as large, the costs of sequestration are more than threefold its savings.

“The estimate is at a very high level and is based on a simple calculation of our average savings number from FY 2012 applied to the reduced funding,” according to an email from a Defense Department spokesman. “For example, our current estimate of $74 million is calculated by applying the $6.70 to the reduced funding due to the furlough of $11 million.”

The DCAA, like many other federal agencies, mitigated the impact of the sequester so early predictions of more dire impacts were averted. 

“Our original bi-weekly sequestration reports included an estimate of potential lost savings of $868 million,” according to the spokesman, “Please notice that as events with sequestration and their attendant budget impact changed, our estimate of lost savings also changed.  Specifically, after FY 2013’s continuing resolution ended, our estimate of lost savings was reduced to $187.6 million.”

“Further, with the recent reduction in furlough days from 11 to only 6, our estimate of lost savings is now about $74 million,” the spokesman added. DCAA also was able to shuffle around funding to pay for travel to conduct high-risk audits.

However, the sequester and the prospect of lower budgets in the longer term will have impacts that reverberate beyond this year. The spokesman stated that DCAA is ending the fiscal year this month with 600 fewer employees than it wanted to have at this point.

While federal government contracting has been on a slight decline in recent years, it is still high by historic standards after a mammoth increase after 2000, particularly at the Defense Department.

A 2008 review by the Defense Business Board found that DCAA has been understaffed for most of that contracting boom:

While DCAA staffing levels have stayed relatively stable from FY2000 to current (around 4,000 employees), DoD contract actions increased by about 1 million from FY2000 to FY2007, (a 328% increase) and DoD contract dollars have increased by from $132 billion to $337 billion (a 155% increase). Government-wide contract spending increased from $219 billion to $466 billion during same period.

Government contracting increased even more after that until the last few years.

Subsequent to the Defense Business Board’s review, the DCAA began significantly expanding its ranks. However, the DCAA still did not have enough staff to deal with its workload properly (although it has also fallen behind for some reasons not directly related to staffing levels).

At a 2011 Senate hearing, Senator Claire McCaskill (D-MO) said, “A recent report by Army officials found that DCAA staff would require a workforce exceeding 6,250 personnel by 2015 to accomplish its mission. This is over 1,000 more personnel than DCAA has now, even with the 500 additional auditors hired in the past 2 years.”

At DCAA’s peak in 1990, it had a staff of 6,900. At the end of fiscal year 2012, it had nearly 5,200 employees [update: according to the defense spokesman, there are now about 4,900 on staff] so it has not budged much since McCaskill's statement and perhaps has even reversed course.

If sequestration hits again in the next fiscal year, the cuts will be deeper than those that affected DCAA this year.

As part of a Defense Department-wide budget exercise, DCAA stated the impact of a deep 20 percent budget cut “would be devastating on our workforce and mission,” according to a document obtained by While the Defense Department would not face an overall 20 percent cut under sequestration next year (it would be closer to 10 percent from Budget Control Act levels), the department could use greater budget flexibility it will have next year to distribute deeper cuts to some of the department to preserve or bump up funding elsewhere.

Cuts this deep would mean DCAA could not just allow some of its older current staff to retire and have staff reductions through attrition solely—the agency would have to resort to “harsh staffing reduction measures.”

“Combining a fiscal year 2013 hiring freeze and a 20 percent reduction in fiscal year 2014 will cause the DCAA to reduce in two years the programmed staff growth which we have achieved over the last four years,” according to the DCAA document.

Because “DCAA’s audit requirements have always outpaced its resources,” the document states, “the Agency has implemented a risk-based approach to planning and performing audits. This strategy focuses on audit effort with the highest payback to the taxpayer and warfighter.”

“However, this risk-based approach means the Agency has already divested itself of almost all of its low-risk work. Therefore, a 20 percent reduction to the Agency’s budget will severely harm the ability of the Agency to carry out high risk audits.”

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