The previous procedure resulted in approximately 12

significant reports per year submitted to departmental levels. Therefore, it is not anticipated that a large administrative effort will be required. The task force recommends the procedure set forth in TAB A be published as a Department of Defense Instruction.

B. ASPR PROVISIONS CONCERNING CONSULTANTS' COSTS

DASD (Procurement) advised the task force he had requested the ASPR Committee to review all ASPR Section XV cost principles in light of the recent disclosures and effect appropriate changes. The preliminary views of the task force concerning professional and consultant service costs were communicated to the ASPR Committee by DASD (P). (See TAB B.) The task force later concluded that the following changes should be made:

1. Except for certain retainers, consultants' fees will be allowable only when there is evidence that services were actually rendered.

2. Payments for retainers will be allowed on a showing that the services were necessary, customary, and the level of past services justifies the retainer. In addition, there should be a showing that the retainer is cost effective compared with the cost of maintaining an in-house capability.

3. The present CWAS designation of the cost principle

will be changed to CWAS-NA.

DASD(P) will notify the Chairman of the ASPR Subcommittee to develop the implementing language and submit the proposed ASPR revision to the task force for final approval.

C. CONTRACTOR CERTIFICATION REGARDING UNALLOWABLE COSTS The task force extensively discussed the need and desirability of obtaining a one-time certification from contractors that they did not claim reimbursement for costs of entertaining Government employees. We concluded such an action would be desirable and recommend the letter contained in TAB C, requiring such certification, be signed by the Deputy Secretary of Defense and sent to all major Defense contractors with significant negotiated procurement.

D. AUDITOR AND ADMINISTRATIVE CONTRACTING OFFICER ROTATION The task force reviewed the policy and practices on the rotation of auditors and other personnel in residence at contractor plants. It ascertained that the DCAA has a policy of rotating its resident auditors every 5 years; any exceptions to this policy must be personally approved by the Director of DCAA, and only four such exceptions have been allowed. The task force also learned that DCAA had initiated action to extend this rotation policy to levels below the resident auditor. It concluded DCAA efforts in this area were completely adequate.

The policy and practices regarding the rotation of administrative contracting officer personnel in contract administrative organizations were mixed and past efforts to enforce mandatory rotation of these people have not been very successful. The task force, therefore, recommended the Assistant Secretary of Defense (I&L) emphasize the importance of an effective rotation policy to all DoD contract administrative organizations and urge positive action to initiate and maintain such a policy. The ASD (I&L) implementing memorandum is in TAB D.

E. CONTRACTOR WEIGHTED AVERAGE SHARE (CWAS) IN COST RISK The task force reexamined the CWAS concept and procedures and concluded certain changes should be made:

1. The DASD(P) will take immediate steps to change and simplify the procedure by making the sole criteria for CWAS qualification the ratio of commercial work and Government competitive firm fixed price work to total work. A threshold of 75 percent will be established as the CWAS qualification level.

2. Guidelines will be developed covering the use of CWAS at corporate and intermediate groups and the relationship of CWAS to Public Law 87-653 (Truth in Negotiation) and Public Law 91-379 (Cost Accounting Standards).

3. Consideration will be given to excluding special purpose groups, such as "Washington offices," from CWAS coverage.

The CWAS evaluation group will evaluate the effectiveness of the revised CWAS procedure. Before the end of 1976, it will recommend to the task force whether the modified concept should be continued, further changed, or completely eliminated. (See TAB E.)

The task

F. AUDIT RESPONSIBILITY TO REVIEW UNCLAIMED COSTS force reviewed the present DCAA policy concerning the audit responsibility for unallowable costs incurred by contractors but not claimed or charged to Government contracts. DCAA considers it is responsible for reviewing only those costs charged against Government contracts but would report any significant irregularities disclosed during the normal course of its reviews.

The task force concluded the present DCAA policy seemed appropriate. (See TAB F.) However, this policy is being carefully reviewed by DCAA during the current audits of contractor Washington offices discussed in item H. below. Contractors generally do not voluntarily exclude corollary costs such as employees' salaries, occupancy and other costs associated with unallowable activities (entertaining, lobbying, etc.). Previous audits performed by DCAA indicate it is difficult to identify such corollary costs without some knowledge of the unallowable functions performed. DCAA will submit a recommendation to the task force for a continuation or modification

of its present policy upon completion of the special reviews of contractor Washington offices.

The task

G. ASPR PROVISIONS TO IDENTIFY UNALLOWABLE COSTS force considered the desirability of incorporating Cost Accounting Standard 405, Accounting for Unallowable Costs, into Part 2 of ASPR XV. This standard requires contractors to exclude from CAS covered contracts costs which are expressly unallowable or mutually agreed to be unallowable (including corollary costs) from any billing, claim, or proposal applicable to a Government contract. Incorporating CAS 405 as an ASPR requirement would emphasize the contractor's responsibility, provide a consistent policy for all contracts, and probably increase contractor identification and exclusion of unallowable costs of the type discussed in recent disclosures concerning activities of some Defense contractors.

The task force recommends that CAS 405 be incorporated into the ASPR as suggested in the proposal set forth in TAB G. In addition, the detail and depth of access to records (pertaining to unclaimed cost) required under CAS 405 will be pursued during the review of contractor Washington offices. (See items F and H.)

H. REVIEW OF CONTRACTOR WASHINGTON OFFICES In the past, Washington office expenses of major Defense contractors were screened by DCAA incident to its audits of those companies' corporate office expenses, and tested to the extent commensurate with the amounts allocated to Government contracts. Under this policy, DCAA generally did not perform detailed audits of Washington office expenses in the light of cost/benefit and materiality considerations.

In view of recent disclosures relating to entertainment and lobbying activities at some of the Washington offices, DCAA initiated special reviews at the Washington offices of eight major contractors. The results of these reviews will be studied by DCAA and conclusions reached regarding the desirability of expanding its audit effort in this area after considering its total audit responsibilities and manpower resources. The task force considered whether increased audit resources should be expended on audits of Washington offices of Defense contractors. We concluded we could best reach a decision after DCAA completed its current special reviews and presented its recommendations.

I. SETTLEMENT OF OVERHEAD COSTS The task force reviewed DoD's present methods of establishing final overhead reimbursements and considered ways of improving DoD posture on cost allowability by devising methods which would increase the visibility of specific cost determinations. Extensive discussions were held on the pros and cons of overhead settlement by centralized and decentralized negotiation and audit determination. The task force concluded that criteria should be developed and used as guides in determining the most suitable overhead settlement methods. Inasmuch as considerable study at Washington and field levels would be required to accomplish this job, the task force requested DASD (P) and DASD (Audit) to assume this task and report their findings and suggestions. Upon receipt of their report, the task force will submit its final recommendation to the Deputy Secretary of Defense.