DOD’s government property approach: reinventing the wheel by spinning it again

Authored by Alex Mikhelson

The Department of Defense (DOD) has a problem (30+ years in the making), which means it will likely become a contractor problem. DOD is the only federal executive agency that has not passed a financial statement audit.

Turns out, DOD can’t satisfy the auditors on its accounting for over $1 trillion of assets. Auditors like to physically verify what’s on the books and vice versa, but that seems to be an insurmountable challenge. A big chunk of DOD’s property resides in contractor possession (at least 11%[i] of the DOD assets administered by the Defense Contract Management Agency (DCMA)).

A contractor’s Government Property Management System (FAR 52.245-1) should provide DOD with the accountability and assurance necessary to satisfy its financial statement auditors. However, despite years of audit readiness efforts and numerous audits by property administrators and financial auditors, the DOD still can’t clear up the material weaknesses. DCMA’s reviews of contractor property management systems rarely uncover significant deficiencies, but it appears DOD will spin this wheel again and again hoping for a different outcome.

Back in December 2019, the Office of the Undersecretary of Defense for Acquisition and Sustainment issued a memo that brought contractors’ Government Property Systems back into the spotlight directing DCMA to “fix it.” DOD tasked DCMA with increasing scrutiny on specific aspects of Property Management System Assessments (PMSAs) using more stringent sampling and outcome guidelines.

Now, a mere six months later, DOD is saying the same thing, only louder and more broadly. DOD’s latest memo[ii], now aimed at all Defense Agencies, the DOD Inspector General, Military Departments, DOD field activities and others, takes an all-hands-on-deck approach to addressing DOD’s property-related material weaknesses. The memo directs Government personnel to improve internal controls over Government Property Management, and prescribes specific steps for Agencies and Departments to take to ensure that their inventory and accountability records reconcile to DOD financial statements (and vice versa). A part of that direction specifically calls for DOD personnel to:

“Test and report the results of internal controls used by contractors to account for government provided supplies and assets, to include Government furnished materials and reportable contractor acquired property. Initiate or direct contractor corrective action plans as appropriate.”

This is more of the same wheel spinning, only now everyone from DCMA to the Inspector General to internal and external auditors are encouraged to get into a contractor’s knitting. DOD’s approach seems to ignore a contractor’s existing business system status, date of last PMSA, and perhaps most importantly, the concept of “materiality.” Anecdotally, we’ve heard that government property administrators have already kicked off new PMSAs as a result of this memo.

The problem that contractors now face is that every new contestant that looks at your system brings a new lens with which to identify weaknesses/deficiencies through either different sampling approaches or a lack of understanding on how you do business. Due to the interconnectedness of a contractor’s business systems, there is always a risk (and perhaps more so now) that deficiencies identified in one system will cascade to other business systems. For government contractors bracing for this new wave of reviews and audits, we urge you to arm yourselves:

Know your system

• Button up policies and procedures
• Update flowcharts, narratives and internal control matrices
• Get self-assessments underway
• Update corrective action plans and milestones
• Be aware of interconnections to other business system that may put those systems at risk as well

Know your contract(s)

• Make sure that you have and are complying with the FAR 52.245-1 clause (and associated DFARS clauses as applicable)
• Identify any Government Property inventory/reporting requirements lurking in contract terms beyond the usual clauses

Know your customer(s)

• Inform your customer of any increases to cost or impacts to schedule due to additional reviews
• Engage with your customers and discuss what level of reviews are in and out of the scope of your contractual requirements
• Some of these reviews and audits may be driven and directed by parties outside of your immediate customers

Know when to ask for help

• If you’re new to Government Property or government contracting in general, organize a team that will help you prioritize and respond to new reviews and inquiries
• Assemble a team of experts that can act as force multipliers, address Government Property system requirements, and prevent deficiencies from affecting any of your other business systems

Unfortunately, until DOD gets a handle on its assets and passes a financial statement audit, contractors should expect to stay in the oversight spotlight regardless of current business system status and the demonstrated quality of information provided by the system.

[1] DCMA managed property as reported in CPAS as of 10/22/2019

[1] Undersecretary of Defense for Acquisition and Sustainment Memorandum CRC-20-270, ““Execution of the Secretary of Defense’s FY-2019 Audit Priorities” June 02, 2020