Contract Management
DOD Needs Measures for Small Business Subcontracting Program and Better Data on Foreign Subcontracts Gao ID: GAO-04-381 April 5, 2004More small businesses are turning to subcontracting as a way to participate in the federal government's $250 billion procurement program. DOD, accounting for about two-thirds of federal procurements, has a critical role in providing opportunities to small businesses through subcontracting programs such as the Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans (Test Program). In addition, Congress raised concerns about the potential for small businesses to lose opportunities to firms performing work outside of the United States. GAO was asked to review (1) DOD's assessment of the Test Program's effectiveness, (2) the performance of contractors participating in the Test Program, (3) the Defense Contract Management Agency's (DCMA) oversight of contractors' small business subcontracting efforts, and (4) the extent and reasons contractors are subcontracting with businesses performing outside the U.S.
In order to foster small business participation in subcontracting, government contractors with larger dollar value contracts are required to have subcontracting plans that establish goals for contractors to award small businesses a percentage of subcontract dollars. DOD created the Test Program to provide more small business opportunities and reduce the administrative burden for contractors in managing their subcontracting programs. Many of DOD's largest contractors participate in the program. A lthough the Test Program was started more than 12 years ago, DOD has yet to establish metrics to evaluate the program's results and effectiveness. As a result, there is no systematic way of determining whether the program is meeting its intended objectives and whether further changes need to be made. DOD contracted for an assessment of the Test Program in 2002, but the results of the assessment are considered preliminary and, therefore, have not been reported. DOD is required to report the results of the Test Program in 2005, when the program is set to expire. DOD contractors participating in the Test Program have experienced mixed success in meeting their various small business subcontracting goals. DOD and contractor officials noted that a changing acquisition environment has added to their challenge in meeting small business goals. Two of the major challenges they identified include (1) the increased breadth, scope, and complexity of DOD prime contracts that require, among other things, teaming arrangements with other, typically large contractors and (2) prime contractors' strategic sourcing decisions to leverage their purchasing power by reducing the number of their suppliers including small businesses. DCMA plays a key role in overseeing the performance of contractors in the Test Program and has made significant changes to its policy and guidance. The revised approach is designed to better monitor contractors' efforts, provide more consistency in assessing contractor performance, and hold contractors accountable for achieving their subcontracting goals. DCMA is still in the process of revamping its oversight activities. GAO could not assess the full extent contractors used firms performing outside the U.S. because of data reliability concerns. Contractors in GAO's review reported several reasons for awarding subcontracts to firms performing outside the U.S., such as fulfilling commitments included in offset agreements or executing teaming arrangements for major defense programs. Without accurate and complete information on subcontracts to firms performing outside the U.S., DOD cannot make informed decisions on industrial base issues.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-381, Contract Management: DOD Needs Measures for Small Business Subcontracting Program and Better Data on Foreign Subcontracts
This is the accessible text file for GAO report number GAO-04-381
entitled 'Contract Management: DOD Needs Measures for Small Business
Subcontracting Program and Better Data on Foreign Subcontracts' which
was released on May 06, 2004.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Committee on Small Business, House of Representatives:
United States General Accounting Office:
GAO:
April 2004:
Contract Management:
DOD Needs Measures for Small Business Subcontracting Program and Better
Data on Foreign Subcontracts:
GAO-04-381:
GAO Highlights:
Highlights of GAO-04-381, a report to Committee on Small Business,
House of Representatives
Why GAO Did This Study:
More small businesses are turning to subcontracting as a way to
participate in the federal government‘s $250 billion procurement
program. DOD, accounting for about two-thirds of federal procurements,
has a critical role in providing opportunities to small businesses
through subcontracting programs such as the Test Program for
Negotiation of Comprehensive Small Business Subcontracting Plans (Test
Program). In addition, Congress raised concerns about the potential for
small businesses to lose opportunities to firms performing work outside
of the United States.
GAO was asked to review (1) DOD‘s assessment of the Test Program‘s
effectiveness, (2) the performance of contractors participating in the
Test Program, (3) the Defense Contract Management Agency‘s (DCMA)
oversight of contractors‘ small business subcontracting efforts, and
(4) the extent and reasons contractors are subcontracting with
businesses performing outside the U.S.
What GAO Found:
In order to foster small business participation in subcontracting,
government contractors with larger dollar value contracts are required
to have subcontracting plans that establish goals for contractors to
award small businesses a percentage of subcontract dollars. DOD created
the Test Program to provide more small business opportunities and
reduce the administrative burden for contractors in managing their
subcontracting programs. Many of DOD‘s largest contractors participate
in the program.
Although the Test Program was started more than 12 years ago, DOD has
yet to establish metrics to evaluate the program‘s results and
effectiveness. As a result, there is no systematic way of determining
whether the program is meeting its intended objectives and whether
further changes need to be made. DOD contracted for an assessment of
the Test Program in 2002, but the results of the assessment are
considered preliminary and, therefore, have not been reported. DOD is
required to report the results of the Test Program in 2005, when the
program is set to expire.
DOD contractors participating in the Test Program have experienced
mixed success in meeting their various small business subcontracting
goals. DOD and contractor officials noted that a changing acquisition
environment has added to their challenge in meeting small business
goals. Two of the major challenges they identified include (1) the
increased breadth, scope, and complexity of DOD prime contracts that
require, among other things, teaming arrangements with other, typically
large contractors and (2) prime contractors‘ strategic sourcing
decisions to leverage their purchasing power by reducing the number of
their suppliers including small businesses.
DCMA plays a key role in overseeing the performance of contractors in
the Test Program and has made significant changes to its policy and
guidance. The revised approach is designed to better monitor
contractors‘ efforts, provide more consistency in assessing contractor
performance, and hold contractors accountable for achieving their
subcontracting goals. DCMA is still in the process of revamping its
oversight activities.
GAO could not assess the full extent contractors used firms performing
outside the U.S. because of data reliability concerns. Contractors in
GAO‘s review reported several reasons for awarding subcontracts to
firms performing outside the U.S., such as fulfilling commitments
included in offset agreements or executing teaming arrangements for
major defense programs. Without accurate and complete information on
subcontracts to firms performing outside the U.S., DOD cannot make
informed decisions on industrial base issues.
What GAO Recommends:
GAO recommends that the Secretary of Defense (1) establish metrics to
assess the overall effectiveness of the Test Program and (2) establish
procedures to improve the quality of the information in its database of
subcontracts to firms performing outside the U.S. DOD concurred with
GAO‘s recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-04-381.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David Cooper at (202)
512-4841 or cooperd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DOD Has Yet to Assess the Overall Outcome of Its Test Program:
DOD Contractors Have Mixed Success in Reaching Small Business Goals:
DCMA Is Taking Steps to Improve Oversight of the Subcontracting
Program:
Extent of Subcontracting Activity with Firms Performing Outside U.S. Is
Unknown, and Reasons for Subcontracting Varied:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Small Business Concern Categories:
Appendix III: Comments from the Department of Defense:
Related GAO Products:
Table:
Table 1: Total Subcontract and Small Business Subcontract Awards from
DOD Contracts, Fiscal Years 1993 through 2002:
Figure:
Figure 1: Percentage of Total Subcontract Dollars Awarded to Small
Businesses from DOD Contracts, Fiscal Years 1993 through 2002:
Abbreviations:
DCMA: Defense Contract Management Agency:
FAR: Federal Acquisition Regulation:
HUBZone: Historically Underutilized Business Zone:
LMI: Logistics Management Institute:
United States General Accounting Office:
Washington, DC 20548:
April 5, 2004:
The Honorable Donald A. Manzullo:
Chairman:
The Honorable Nydia M. Velazquez:
Ranking Democratic Member:
Committee on Small Business:
House of Representatives:
Recognizing the importance of creating a dynamic environment where
small businesses--with their innovation and diversity--can flourish,
the federal government has sought to improve small business access to
its $250 billion procurement program. Small businesses more and more
are turning to subcontracting as a way to participate in federal
procurements. Contractors with larger dollar value contracts[Footnote
1] are required to have subcontracting plans that establish goals for
small business' share of subcontract dollars to be awarded. Some in
Congress have raised concerns about the need to improve access of small
businesses to federal contracting opportunities. In addition, they have
raised concerns about small businesses losing subcontracting
opportunities to firms performing work outside of the United States.
The Department of Defense (DOD) plays a key role in the success of the
federal government's small business programs because it accounts for
about two-thirds of federal procurements. Over the last several years,
information reported by DOD contractors shows that the dollar amount of
subcontracts awarded to small businesses[Footnote 2] has increased and
is higher than it has ever been. On the other hand, the share of DOD's
contracting activity awarded to small businesses as subcontracts has
declined steeply in recent years--from about 43 percent in 1995 to
about 34 percent in 2002. DOD created the Test Program for Negotiation
of Comprehensive Small Business Subcontracting Plans (Test Program) to
provide more small business opportunities and reduce the administrative
burden for contractors in managing their subcontracting
programs.[Footnote 3] Many of DOD's largest contractors participate in
the Test Program, and the Defense Contract Management Agency (DCMA)
plays a key role in overseeing their performance.
Due to DOD's critical role in providing opportunities to small
business, we reviewed (1) DOD's assessment of the Test Program's
effectiveness, (2) the performance of contractors participating in the
Test Program, (3) DCMA oversight of contractors' small business
subcontracting efforts, and (4) the extent and reasons contractors are
subcontracting with businesses performing outside the U.S.[Footnote 4]
To conduct this work, we interviewed and obtained documentation from
the Office of the Under Secretary of Defense, Office of Small and
Disadvantage Business Utilization, DCMA, DOD's Office of Program
Acquisition and International Contracting, and several contractors. We
limited our review of internal controls to reviewing DCMA's plans,
methods, and procedures used to meet its small business subcontracting
program mission, goals, and objectives. Because of concerns about data
reliability of prime contract data,[Footnote 5] we limited our use of
this data to providing background information and identifying
contractors. We did not independently verify subcontract data obtained
from DOD and contractors but, instead, relied on DCMA reviews of
contractors' reporting systems to assure data accuracy and
completeness. We performed our work from March 2003 to March 2004 in
accordance with generally accepted government auditing standards. A
more detailed description of our scope and methodology is found in
appendix I.
Results in Brief:
Although the Test Program was started more than 12 years ago, DOD has
yet to establish metrics to evaluate the program's overall results and
effectiveness. DOD contracted for an assessment of the Test Program in
2002. However, the results of that assessment are considered
preliminary, and the report has not been issued.[Footnote 6] DOD, DCMA,
and contractor officials we interviewed have various views on the
strengths and weaknesses of the program. Some officials believe the
Test Program increases high-level corporate attention, while others
thought it reduces accountability at lower corporate-levels and
visibility of contractors meeting their small business goals for
individual contracts. DOD is required to report the results of the Test
Program in 2005 when the program is set to expire.
DOD contractors participating in the Test Program have experienced
mixed success in meeting their various small business subcontracting
goals. DOD and contractor officials noted that a changing acquisition
environment has added to their challenge in meeting small business
goals. Two of the major challenges they identified include (1) the
increased breadth, scope, and complexity of DOD prime contracts that
require, among other things, teaming arrangements with other, typically
large contractors and (2) prime contractors' strategic-sourcing
decisions to leverage their purchasing power by reducing the number of
their suppliers including small businesses. According to DOD and
contractor officials, both have the potential to either restrict
subcontracting opportunities for small businesses or push those
opportunities to lower tiers of the supply chain. Contractor officials
also said their ability to meet some small business goals is influenced
by the limited supply of qualified small businesses that could provide
the needed goods and services.
To improve oversight of contractor performance in meeting small
business subcontracting goals, DCMA began changing its approach in
2002. The revised approach is designed to better monitor contractors'
efforts, provide more consistency in assessing contractor performance,
and hold contractors accountable for achieving their subcontracting
goals. While DCMA has made significant changes to its policy and
guidance, it is still in the process of revamping its oversight
activities.
We could not assess the full extent contractors' subcontract with firms
performing outside the U.S. because of data reliability concerns. DOD
only recently took action to improve the information collected on
subcontracting with overseas firms. Contractors in our review reported
several reasons for awarding subcontracts to firms performing outside
the U.S., such as fulfilling commitments included in offset
agreements[Footnote 7] or executing teaming arrangements for major
defense programs.
This report contains two recommendations to the Secretary of Defense to
establish metrics to assess the overall effectiveness of the Test
Program and improve the quality of the information in its database of
subcontracts to firms performing outside the U.S. In written comments
on a draft of this report, DOD concurred with both recommendations.
Background:
Over the last 10 years, DOD prime contract and total subcontract dollar
awards have increased. From 1993 to 2002, DOD prime contract dollars
increased almost 15 percent, from $136.8 billion to $157.1
billion.[Footnote 8] As shown in table 1, total subcontract dollars
awarded by DOD contractors[Footnote 9] increased more than 40 percent,
from $53.0 billion to $75.5 billion. In addition, small businesses have
generally received increasing dollar amounts from DOD contractors over
a 10-year period--from $19.9 billion in fiscal year 1993 to $25.8
billion fiscal year 2002.[Footnote 10]
Table 1: Total Subcontract and Small Business Subcontract Awards from
DOD Contracts, Fiscal Years 1993 through 2002:
Dollars in billions.
Fiscal year[A]: 1993;
Total subcontract dollars awarded: $53.0;
Subcontract dollars awarded to small businesses: $19.9.
Fiscal year[A]: 1994;
Total subcontract dollars awarded: 52.4;
Subcontract dollars awarded to small businesses: 20.1.
Fiscal year[A]: 1995;
Total subcontract dollars awarded: 50.9;
Subcontract dollars awarded to small businesses: 21.7.
Fiscal year[A]: 1996;
Total subcontract dollars awarded: 52.5;
Subcontract dollars awarded to small businesses: 21.9.
Fiscal year[A]: 1997;
Total subcontract dollars awarded: 59.1;
Subcontract dollars awarded to small businesses: 24.5.
Fiscal year[A]: 1998;
Total subcontract dollars awarded: 56.9;
Subcontract dollars awarded to small businesses: 23.9.
Fiscal year[A]: 1999;
Total subcontract dollars awarded: 55.3;
Subcontract dollars awarded to small businesses: 22.7.
Fiscal year[A]: 2000;
Total subcontract dollars awarded: 57.0;
Subcontract dollars awarded to small businesses: 22.4.
Fiscal year[A]: 2001;
Total subcontract dollars awarded: 61.3;
Subcontract dollars awarded to small businesses: 23.8.
Fiscal year[A]: 2002;
Total subcontract dollars awarded: $75.5;
Subcontract dollars awarded to small businesses: $25.8.
Source: GAO analysis of DOD-provided data.
[A] In constant fiscal year 2002 dollars.
[End of table]
However, as shown in figure 1, small businesses' share of total
subcontract dollars from DOD contractors has decreased in recent years.
The percent share that small business received has ranged from a high
of about 43 percent ($21.7 billion) in fiscal year 1995 to a low of
about 34 percent ($25.8 billion) in fiscal year 2002.[Footnote 11]
Figure 1: Percentage of Total Subcontract Dollars Awarded to Small
Businesses from DOD Contracts, Fiscal Years 1993 through 2002:
[See PDF for image]
[End of figure]
In order to foster the participation of small businesses in
subcontracting, the Federal Acquisition Regulation (FAR) requires DOD
contractors to have subcontracting plans for most contracts of more
than $500,000 ($1 million for construction contracts).[Footnote 12]
These plans document what actions the contractor will take to provide
various types of small businesses with the maximum practicable
opportunities to participate in subcontracting. See appendix II for
description of small business categories. Contractors with DOD are to
provide semiannual reports to DCMA on their small business achievements
for each contract that has a subcontracting plan as well as semiannual
summary reports that encompass all their contracts with a particular
agency.
The National Defense Authorization Act for Fiscal Years 1990 and 1991
authorized DOD to establish the Test Program for Negotiation of
Comprehensive Small Business Subcontracting Plans (Test Program), which
allowed the negotiation, administration, and reporting of
subcontracting plans on a plant, division, or companywide basis rather
than a plan for each individual contract. The purpose of the Test
Program is to increase subcontracting opportunities for various types
of small businesses while reducing the administrative burdens on
contractors. The companies that participated in this Test Program in
fiscal year 2002 accounted for about 41 percent of DOD's subcontracting
activity in that same fiscal year. The Office of the Under Secretary of
Defense, Office of Small and Disadvantage Business Utilization is
responsible for the overall assessment of the Test Program. Originally
scheduled for fiscal years 1991 through 1992, the Test Program has been
extended several times and is scheduled to end September 30,
2005.[Footnote 13] Under the Test Program, small business goals are
negotiated annually, whereas for individual plans, goals are generally
negotiated once for the life of the contract.[Footnote 14]
As of fiscal year 2003, 15 contractors have comprehensive plans under
the Test Program. DCMA is responsible for reviewing DOD contractors'
subcontracting plans and monitoring and assessing contractor's
performance to determine how well contractors are implementing their
plans and meeting their small business goals. DCMA is also involved in
annually negotiating goals with contractors participating in the Test
Program.
Since 1982, DOD has required prime contractors to report quarterly to
DOD's Office of Program Acquisition and International Contracting on
contracts exceeding $500,000 when the contractor or its first tier
subcontractor will perform any part of the contract that exceeds
$100,000 outside the U.S., unless a foreign place of performance (1) is
the principal place of performance and (2) is identified in the firm's
offer.[Footnote 15] First-tier subcontractors that award subcontracts
in excess of $100,000 to be performed outside the U.S. are also subject
to the reporting requirement. Reported information is to include the
type of supply or service provided, the principal place of subcontract
performance, and the dollar value of the transaction. The information
is used as part of DOD's efforts to monitor foreign procurements and
assess matters related to defense trade balances and domestic
industrial base capabilities.[Footnote 16] DOD's Office of Program
Acquisition and International Contracting reports to the Director of
Defense Procurement and Acquisition Policy.
DOD Has Yet to Assess the Overall Outcome of Its Test Program:
Although the Test Program has been in existence since fiscal year 1991,
DOD does not know if it is achieving its intended objectives to provide
more small business subcontracting opportunities and to reduce
administrative burden for contractors. The Office of the Under
Secretary of Defense, Office of Small and Disadvantage Business
Utilization, which is to report the results of the Test Program in
December 2005, shortly after the program is set to expire, commissioned
a preliminary study of the program in 2002. The data assessing the
merits of the program were never formally released, but the resulting
preliminary report had a number of recommendations. DOD recognizes that
it needs to establish metrics and other criteria for measuring program
results in meeting the intended objectives. We found that DOD and
contractor officials have various views on the strengths and weaknesses
of the program.
Past Assessment of the Test Program Was Preliminary:
To assess the Test Program, DOD commissioned a preliminary review of
the program by the Logistics Management Institute (LMI). LMI noted in
its draft report that, in terms of achievements for subcontracting to
small businesses, the Test Program results improved impressively
between 1991 and 1996--from small businesses receiving 12 percent of
total subcontracts to receiving about 36 percent--but declined to about
29 percent by 2000. LMI attributed the decline to factors external to
the program--some of which we discuss later. Most of its
recommendations dealt with addressing ways of improving small business
achievements, but also included program-specific recommendations, such
as:
* increasing visibility of subcontracting activity at the corporation's
division and program level, where feasible;
* deducting directed-source procurements from subcontracting
achievement calculations;
* allowing subcontracting plan renegotiations to reflect major contract
awards that occur after negotiations;
* establishing annual meetings of program participants and DCMA to
allow exchange of ideas, best practices, and lessons learned;
* permitting removal of poor performing participants after appropriate
notice;
* requiring participants to track and annually report administrative
savings and costs and results of their outreach activities; and:
* limiting enrollment to 20 participants.
While the final report has not been issued, DOD officials said they
have taken into consideration a number of the recommendations from the
study by LMI. For example, DCMA has taken steps to improve oversight of
contractor performance and hold contractors more accountable for
achieving their subcontracting goals, and DOD has chartered a council
to share Test Program knowledge and experience. In addition, some DOD
program offices require contractors to report on their subcontracting
activity at the program level to increase visibility of subcontracting
to small businesses.
DOD Lacks Test Program Measurements to Assess Overall Effectiveness:
Despite DOD's attempts to assess the program, it still does not know
whether using the Test Program is affecting subcontracting
opportunities for small businesses and reducing administrative burden
for the contractors. DOD, through DCMA, is to report on each
participating contractor's performance by December 15, 2005 by
comparing the contractor's performance under the program with its
performance for 3 fiscal years before the acceptance into the
program.[Footnote 17] DOD officials told us they are uncertain how they
will measure contractors' performance to meet their reporting
requirement and assess trends over time. This uncertainty is in part
due to not having the original participants in the program to establish
a baseline to evaluate performance and changes in company compositions.
Further, these officials noted that mergers and acquisitions can
greatly change company compositions and business bases from year to
year making trend determinations difficult. DCMA officials told us they
plan on hiring a contractor to help them complete their review of the
overall results of the Test Program and will use the results of the LMI
study as a tool to help develop Test Program metrics.
Views Varied on Merits of the Test Program:
DCMA and contractor officials we interviewed gave varied opinions--both
positive and negative--on the Test Program. Some said that while they
were uncertain about its increasing small business opportunities, they
thought participating in the Test Program helped increase the
visibility of the results of small business program companywide or
divisionwide. Others said the comprehensive plan sometimes resulted in
lost visibility of individual contract performance and reduced
accountability at the program level. In fact, one contractor recently
stopped participating in the program because of the lost ability to
monitor individual contract performance. DCMA and contractor officials
we interviewed said they were uncertain if there had been a reduction
of administrative burden since, for example, under the Test Program
contractors were required to prepare a detailed plan, negotiate small
business goals each year, and submit performance data semiannually.
Plus, certain large DOD programs requested contractors to report small
business data. Many agreed that, regardless of what type of plan
contractors used, success of the small business program relies on
contractor management's commitment to meeting small business goals.
DCMA and contractor officials also stated that contractor management
must have the ability to monitor company performance on those goals.
DOD Contractors Have Mixed Success in Reaching Small Business Goals:
Between fiscal years 1999 and 2003, the DOD contractors we reviewed had
varied success in meeting their small business goals. DOD and
contractor officials provided several reasons for the mixed success of
the subcontracting program, but DOD has not formally studied those
factors that may encourage or discourage the participation of small
businesses in DOD subcontracts.
Contractors Have Met Some Small Business Goals, but Results Are
Inconsistent:
In the past 5 years, the 15 DOD contractors participating in the Test
Program had varying success in meeting their small business goals
established in their subcontracting plans. Overall, the contractors in
the Test Program were not consistent from year to year in meeting their
goals for the traditional small business categories. For example, in at
least 3 of the past 5 years, 11 of the 15 contractors met their overall
small business goals, seven contractors met their goals for small
disadvantaged businesses, and six contractors met their goals for
women-owned small businesses.
Changing Contracting Environment May Affect Contractors' Ability to
Meet Small Business Goals:
DOD and contractor officials noted that a changing acquisition
environment has added to the challenge in meeting their small business
goals. Changes included (1) the increased breadth, scope, and
complexity of DOD prime contracts that require, among other things,
teaming arrangements with other, typically large contractors and (2)
prime contractors' strategic sourcing decisions to leverage their
purchasing power by reducing the number of their suppliers including
small businesses. Contractor officials also said that the relatively
limited supply of qualified small businesses that could provide the
needed goods and services also increases the difficulty in meeting
small business goals. DOD has not studied to what degree the changing
acquisition environment or other factors contribute to the success or
failure of its small business subcontracting program.
Contractor and DCMA officials report that the breadth, scope, and
complexity of DOD prime contracts for weapons systems has increased
over the years. According to officials, this has had several
consequences, which have limited the opportunities for small
businesses. First, prime contractors are increasingly relying on
teaming arrangements to win contracts. Their teaming partners,
typically large businesses, receive a sizable portion of the first-tier
subcontracts. For example, under a major defense contract, the
contractor awarded about 56 percent of its total subcontract dollars to
its teaming partners, significantly reducing the opportunities of small
businesses to win first-tier subcontracts. Also, prime contractors are
increasingly serving as systems integrators instead of systems
manufacturers and are buying major assemblies rather than parts and
components. Systems integrators are often responsible for the
development, management, and eventual delivery of a large weapon
system. Consequently, as in the case of teaming arrangements, systems
integrators often use large businesses as first-tier subcontractors.
Contractor officials said that although small businesses may still be
receiving contract dollars through second-or lower-tier subcontracts,
contractors could only count their first-tier subcontract awards
towards their small business goals.
In addition, many contractors have made the strategic-sourcing decision
to reduce the number of suppliers in their supplier base. Contractors
report reducing their supplier bases by as much as 50 percent over the
past 5 years in a move to leverage their purchases, cut costs, and
improve performance to remain competitive in the world market.[Footnote
18] Contractors also noted that by reducing the number of contractors,
they often relied on larger corporatewide contracts, which could also
affect their small business suppliers. For example, officials of one
contractor noted that when it went to a single information systems
contractor, it no longer contracted with a number of small firms.
Finally, contractors report difficulty in finding qualified small
businesses to provide the goods and services needed. Contractor
officials said this is particularly true for small business programs
with certification requirements--such as the programs for small
disadvantaged businesses and Historically Underutilized Business Zone
(HUBZone) businesses--and for very recent programs, such as the
service-disabled veterans program. The Small Business Administration
has certified significantly fewer small disadvantaged businesses and
HUBZone firms than hoped. Consequently, contractors often have
difficulty meeting small disadvantaged business goals, and few have met
their HUBZone goals.[Footnote 19] Further, according to DCMA officials
responsible for on site monitoring of subcontracting plans, qualified
businesses in different small business categories usually compete for
the same type of work. Consequently, according to these DCMA officials,
contractors have difficulty meeting goals for all small business types
and often report wide fluctuations in subcontracting achievements among
the groups, depending on which ones win contracts in a given year. The
categories of small business that DOD uses include small businesses,
small disadvantaged businesses, women-owned small businesses, veteran-
owned and service-disabled veteran-owned small businesses, HUBZone
businesses, Historically Black Colleges and Universities, and Minority
Institutions.[Footnote 20]
DCMA Is Taking Steps to Improve Oversight of the Subcontracting
Program:
Since 2002, DCMA has taken steps to help improve its oversight of DOD's
small business program. These steps include issuing an updated policy
for monitoring contractors' small business subcontracting programs,
issuing new guidance to help DCMA personnel in implementing small
business program requirements, and developing new criteria for rating
contractor performance.
DCMA Role Encompassed a Broad Range of Responsibilities:
Previously, DCMA, through its small business specialists, carried out
its small business subcontracting program responsibilities through (1)
contractor orientation and training, (2) small business outreach and
"matchmaking," (3) Test Program review and negotiation, and (4)
contractor performance evaluations. Training primarily involved
informing the contractors and other DCMA personnel of contractor
responsibilities and small business program requirements. Outreach and
"matchmaking" activities included attending or arranging small business
conferences and open houses and identifying qualified small businesses
to contractors.
DCMA policies and procedures also required small business specialists
to review contractors' subcontracting performance and perform two kinds
of reviews: annual reviews of Test Program participants and reviews of
contractor subcontract performance.[Footnote 21]
* Test Program plan reviews--annually assess each contractor
participating in the Test Program. The review includes determining how
well the contractor is performing under the plan, including whether it
met its goals for the year. However, these reviews do not result in an
overall rating.
* Contractors' subcontract-performance reviews--assess all DOD
contractor facilities with subcontracting plans, whether comprehensive
or individual.[Footnote 22] In general, DCMA reviews the DOD
contractors it is responsible for monitoring on an annual
basis.[Footnote 23] The review assesses contractor policies and
procedures, outreach activities, record keeping and reporting
procedures, training that contractor personnel received to implement
their small business subcontracting program, and contractor performance
on meeting small business goals. DCMA assigned ratings on a 5-point
scale from "outstanding" to "unsatisfactory." DCMA small business
specialists said that because the rating criteria were loosely defined,
contractors could receive different ratings depending on the
interpretation of the small business specialist. For example, in fiscal
year 2001, one company's performance received a "highly successful"
rating even though it had not met any of its three long-standing small
business goals[Footnote 24] for that period of the review. In fiscal
year 2002, DCMA rated another company's performance as "unacceptable"
although it had demonstrated similar performance on its goals.
DCMA Has Increased Focus on Oversight:
DCMA's new policy and guidance emphasizes the agency's oversight
function. In July 2003, DCMA published an updated policy for monitoring
contractors' small business subcontracting programs. While DCMA
continues to conduct its reviews under its revised policy, it created
more specific criteria for determining contractor performance. The
criteria particularly emphasize contractors' small business goal
achievements and contractor accountability, including the contractors
participating in the Test Program. For example, under DCMA's new rating
criteria, to receive a "highly successful" performance rating, the
contractor must meet three long-standing small business goals and at
least one of the newer goals (e.g. veteran-owned small business) as
well as demonstrating significant success in other initiatives
identified in its subcontracting plan.
In September 2003, DCMA published a new procedural guide to assist DCMA
Small Business Specialists in implementing the small business program.
For example, the guidance provides factors, such as a contractor's past
performance, that should be considered when negotiating goals with Test
Program participants. DCMA continues to assess the oversight of the
Test Program and whether further changes need to be made.
Other steps DCMA has taken that allow the more efficient use of its
resources include establishing a risk-based approach to its reviews of
contractors and limiting its training and outreach functions. The risk-
based approach allows DCMA to skip a review of a contractor for 1 year
if the contractor's previous year's rating was "outstanding," there
were no significant changes in their contracting activity, and there
were no significant personnel changes affecting the contractor's small
business program. In addition, according to DCMA officials, DCMA is
significantly limiting its training and outreach functions on the basis
that other organizations, such as the Small Business Administration and
Procurement Technical Assistance Centers,[Footnote 25] already provide
these services.
Extent of Subcontracting Activity with Firms Performing Outside U.S. Is
Unknown, and Reasons for Subcontracting Varied:
We could not determine the extent of subcontracting to firms performing
outside the U.S. because of inconsistent reporting of subcontracting
activities by contractors and poor database management by DOD.
According to the contractors in our review, most subcontracts to firms
performing outside the U.S. accounted for a small percentage of their
total subcontract dollars. Further, the contractors stated that most of
the dollars to firms performing outside the U.S. were awarded on a
noncompetitive basis. These contractors reported several reasons for
awarding subcontracts to firms performing outside the U.S in fiscal
year 2002.
Concerns Remain about Reliability of Data on Subcontracts Performed
Outside U.S.
We could not assess the full extent that defense contractors'
subcontract with firms performing outside the U.S. In November 1998, we
reported that DOD's Office of Program Acquisition and International
Contracting did not have safeguards for ensuring the completeness and
accuracy of its database of subcontracts to firms performing outside
the U.S.[Footnote 26] At that time, we found instances in which DOD
contractors did not report their subcontracts to firms performing
outside the U.S. in accordance with DOD's reporting requirements
because they were unaware of the reporting requirements or
misunderstood the criteria for reporting this type of subcontract.
Plus, we identified that DOD lacked standards and procedures for
managing this database.
In October 2003, during our review, the Director of Defense Procurement
and Acquisition Policy--through the Office of Program Acquisition and
International Contracting--began to take the following actions to
address contractor compliance:
* sent letters to the top 100 parent companies of DOD contractors to
remind them about DOD reporting requirements for subcontracts to firms
performing outside the U.S. and requested they ensure all their
subsidiaries also comply with this reporting requirement,
* sent a memorandum to the Senior Acquisition Executives of the
Military Department and the Defense Agencies requesting they remind
their contracting officers of the reporting requirement,
* engaged in outreach efforts with government and industry personnel to
help ensure this effort to improve contractor compliance was fully
communicated,
* sent a memorandum to DCMA requesting its assistance in periodically
verifying that contractors are complying with the reporting
requirements, and:
* clarified reporting requirements for subcontracts to firms performing
outside the U.S.
The Office of Program Acquisition and International Contracting intends
to perform periodic verification of reporting of subcontracts to firms
performing outside the U.S. and is in the process of establishing those
procedures. Because no action had been taken to improve data
reliability until recently, we could not rely on the data available to
determine the extent that DOD contractors were subcontracting with
firms outside the U.S.
Contractors Report Awarding a Small Percentage of Subcontract Dollars
to Firms Performing Outside the U.S.
Contractors at four of the five locations we visited spent between
approximately 2 and 6 percent of their total DOD subcontracting dollars
in fiscal year 2002 on subcontracts to firms performing outside the
U.S.[Footnote 27] The fifth contractor subcontracted about 18 percent
of its subcontracting dollars with firms performing outside the U.S. in
fiscal year 2002 due to a teaming arrangement for a large defense
contract it was awarded. According to a contractor official, this
percentage would more typically be around 10 percent. At the five
contractor locations, the total subcontract dollars to firms performing
outside the U.S. ranged between approximately $29 million and $1.9
billion in fiscal year 2002. These subcontracts were for items such as
parts for military systems, communication equipment for satellites,
components for military aircraft, and sensors for satellite weather
forecasting.
While one contractor reported awarding most of its subcontract dollars
to firms performing outside the U.S. on a competitive basis in fiscal
year 2002, four contractors reported awarding the majority of their
subcontract dollars non-competitively. Consequently, small businesses
generally did not have the opportunity to compete for these types of
subcontracts. Contractor officials said that even when their
subcontracts with firms performing outside the U.S. were competed, they
were not necessarily for the type of products that small businesses had
the expertise or technology to provide. For example, one contractor
competitively awarded a contract for an amplifier used in communication
equipment to a firm outside the U.S. The contractor did not identify or
solicit small businesses in the competition because of the unique
technology and expertise required for that particular amplifier.
Subcontracts Awarded for Various Reasons:
Contractor officials said the reasons for the awards to firms
performing outside the U.S. in fiscal year 2002 include:
* Directed source--Contractor officials stated some subcontracts were
awarded to companies outside the U.S. because DOD directed them to
subcontract with a certain supplier. For example, a prime contractor
was directed by DOD to award a subcontract to a company outside the
U.S. to produce a sensor for a weather forecasting satellite because
the company previously had a contract directly with the U.S.
Government.
* Offset agreements[Footnote 28]--The contractors said that to sell
military goods and services to other countries, they often have to form
agreements with foreign countries that necessitate subcontracting with
foreign firms to some degree. For example, one U.S. prime contractor
awarded a subcontract to a firm in a foreign country because a prior
offset agreement required the contractor to purchase about $1 billion
in goods and services from firms in that country. The $32.3 million
subcontract was for a structural frame for the troop ramp and an air
deflector for the C-17 transport aircraft.
* International agreements--Sometimes subcontracts are awarded to
companies outside the U.S. because of international agreements between
the U.S. and foreign countries. For instance, a contractor awarded a
series of subcontracts to firms performing outside the U.S. based on an
international agreement in which a 13-nation consortium contributed to
the development of components for a missile to be used by these
nations.[Footnote 29] Some of the components produced by the various
countries included control systems, rocket motors, and guidance
systems.
* Team Arrangements--This is an arrangement where two or more
contractors form a partnership or joint venture to act as a potential
prime contractor or a potential prime contractor agrees with one or
more other contractors to have them act as its subcontractors under a
specified Government contract or acquisition program.[Footnote 30]
* Product specialization--Contractor officials said it was very
expensive to develop and change suppliers of specialized parts;
therefore, DOD contractors typically continue to award contracts to the
same supplier that originally supplied the products. That supplier may
be located outside the U.S. For instance, one contractor awarded a
subcontract to such a supplier because it was the only one that had a
specification drawing for the production of pedestals for a radar
system. In another case, a DOD contractor awarded a subcontract to a
company outside the U.S. because it was the only supplier that already
had the tools and the expertise to manufacture and produce a horizontal
stabilizer for the F-5 aircraft.
Conclusions:
Because of its large contracting operations, DOD is critical to the
success of federal programs designed to provide opportunities for small
businesses. DOD has recognized the importance of its role in federal
contracting; has taken limited steps to help improve opportunities for
small businesses, such as the Test Program; and has revised DCMA
guidance to hold contractors more accountable for their small business
goals. However, after 12 years of implementing the Test Program, DOD
does not know whether these initiatives are effective. While DOD has
collected data over the years, it has not established metrics to
evaluate the effectiveness of the Test Program. As a result, there is
no systematic way of determining whether the program is meeting its
intended objectives and whether further changes need to be made.
In addition, the reliability of the data submitted by contractors on
their subcontracts to firms performing outside the U.S. remains a
concern. DOD has only recently started to take action on improving its
data collection and has yet to establish procedures for validating the
information. Without accurate and complete information on subcontracts
to firms performing outside the U.S., DOD cannot make informed
decisions on industrial base issues.
Recommendations for Executive Action:
We are making the following two recommendations to the Secretary of
Defense:
In order to evaluate the effectiveness of the Test Program, we
recommend the Secretary of Defense direct the Office of the Under
Secretary of Defense, Office of Small and Disadvantage Business
Utilization, to develop metrics to assess the overall results of its
Test Program.
Also, to ensure DOD has the information it needs to accurately
determine the number and dollar amount of subcontracts to firms
performing outside the U.S., we recommend the Secretary of Defense
direct DOD's Office of Program Acquisition and International
Contracting to establish procedures to improve the quality of the
information in its database of subcontracts performed outside the U.S.
Agency Comments and Our Evaluation:
DOD provided us with written comments on a draft of this report. DOD
concurred with our findings and recommendations and noted some
additional actions it took or is taking to address our recommendations.
We incorporated these actions in this report where appropriate. DOD's
comments appear in appendix III.
As requested by your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution of it until 30
days from the date of this letter.
At that point, copies of this report will be sent to interested
congressional committees and the Secretary of Defense. We will also
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at http://
www.gao.gov.
Please contact me at (202) 512-4841, or Hilary Sullivan at (214) 777-
5652, if you have any questions regarding this report. Major
contributors to this report were Vijay Barnabas, David Bennett,
Frederick Day, Michael Gorin, Gary Middleton, Pauline Reaves, Sylvia
Schatz, and Suzanne Sterling.
David E. Cooper:
Director, Acquisition and Sourcing Management:
[End of section]
Appendix I: Scope and Methodology:
To determine DOD's assessment of the Test Program's effectiveness, we
reviewed legislation, regulations, directives, and policies regarding
this program. We also reviewed a July 2002 study conducted by LMI for
DOD that looked at the overall results of the Test Program. In
addition, we met with officials at DCMA headquarters, district, and
field locations as well as officials at selected contractor locations
to discuss their views on the advantages and disadvantages of the Test
Program.
To determine the performance of contractors participating in the Test
Program, we collected data on the 15 DOD contractors (i.e., parent
companies or their subsidiaries) participating in the Test Program.
More specifically, we obtained 5 years of small business goal and
performance data, fiscal years 1999 to 2003, on the extent that the
contractors were meeting their small business goals from DCMA
headquarters and district officials as well as contractor officials.
The contractors in the Test Program as of fiscal year 2003 are the
following:
* The Boeing Company;
* General Electric Aircraft Engines;
* Harris Corporation, Government Communications Systems Division;
* Lockheed Martin Aeronautics Company;
* Lockheed Martin Simulation, Training & Support (formerly Information
Systems);
* Lockheed Martin Missiles & Fire Control;
* Lockheed Martin Space Systems Company;
* Northrop Grumman Air Combat Systems;
* Northrop Grumman Electronic Systems and Sensors;
* Raytheon Company;
* Textron Systems, a Textron Company;
* Bell Helicopter Textron Inc.;
* United Technologies Corp, Hamilton Sundstrand Division;
* United Technologies Corp, Pratt & Whitney Government Division; and:
* United Technologies Corp, Sikorsky Aircraft Division.
To determine DCMA's oversight of contractors' small business
subcontracting efforts, we met with officials at DCMA headquarters,
district, and field locations as well as officials at selected
contractor locations to identify and discuss DCMA's role. We also
gathered information on updated policy and guides for monitoring
contractors' small business subcontracting programs and new criteria
for rating contractor performance. We limited our review of internal
controls to reviewing DCMA's plans, methods, and procedures used to
meet its small business subcontracting program mission, goals, and
objectives.
To determine the reasons and extent contractors are subcontracting with
businesses performing outside the U.S.[Footnote 31] we identified the
contractors' rationale with officials at the five selected contractor
locations. We also gathered information for the most current year that
data was available, fiscal year 2002, from contractor officials at same
five locations. We did not independently verify this data. In addition,
we reviewed the steps DOD had taken to address past database
deficiencies and discussed recent changes at DOD's Office of Program
Acquisition and International Contracting on their management of the
database of subcontracts performed by contractors outside the U.S.
We conducted our review between March 2003 and March 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Small Business Concern Categories:
Program: Small business concern; Description: A small business concern
is one that is independently owned and operated and is not dominant in
its field of operation. 15 U.S.C. 632(a)(1). A small business concern
is further defined as (1) a business entity that is organized for
profit; (2) with a place of business located in the U.S.; and (3) which
operates primarily within the U.S. or which makes a significant
contribution to the U. S. economy through tax payments or use of
American products, materials, or labor; and (4) meets the size standard
for its primary business activity or industry as designated by the
applicable North American Industry Classification System (NAICS) codes.
13 C.F.R. 121.101(a); 121.105(a); FAR 19.001.
Program: Small disadvantaged business concern; Description: A small
disadvantaged business is a small business concern that is 51% or more
owned by one or more socially and economically disadvantaged persons
who manage and operate the concern. 15 U.S.C. 637(d)(3)(C). Black
Americans, Hispanic Americans, Asian Pacific Americans, Subcontinent
Asian Americans, and Native Americans are presumed by regulation to be
socially disadvantaged. 13 C.F.R. 124.103(b). Other individuals can
qualify if they show by a "preponderance of the evidence" that they are
socially disadvantaged. 13 C.F.R. 124.103(c). A small disadvantaged
must also (1) meet SBA's established size standard for its main
industry; and (2) have principals who have a net worth, excluding the
value of the business and personal home, of less than $750,000. 13
C.F.R. 124.1002(b) (c).
Program: Woman-owned small business concern; Description: A woman-owned
business is a small business concern that is 51% owned by one or more
women who manage and operate the concern. 15 U.S.C. 637(d)(3)(D); FAR
2.101.
Program: Veteran-owned small business concern; Description: A veteran-
owned business is a small business concern that is 51% owned by one or
more veterans who manage and operate the concern. 15 U.S.C.
637(d)(3)(E); FAR 2.101.
Program: Service-disabled veteran-owned small business concern;
Description: A service-disabled veteran-owned business is a small
business concern that is 51% owned by one or more service-disabled
veterans who manage and operate the concern. 15 U.S.C. 632(q)(2); FAR
2.101.
Program: HUBZone small business concern; Description: A HUBZone is a
small business concern that (1) meets SBA's size standards for its
primary industry classification; (2) is owned and controlled by one or
more U.S. citizens; (2) has a principal office located in a HUBZone (a
historically underutilized business zone, which is in an area located
within one or more qualified census tracts, qualified non-metropolitan
counties, or lands within the external boundaries of an Indian
reservation); and (3) has at least 35 percent of its employees residing
in a HUBZone. 15 U.S.C. 632(p)(3) (5); 13 C.F.R. 126.103; 126.203.
Program: Historically black college or university; Description: A
historically black college or university means an institution
determined by the Secretary of Education to meet the requirements of 34
C.F.R. 608.2. FAR 2.101.
Program: Minority institution; Description: A minority institution is
an institution of higher education whose enrollment of a single
minority or a combination of minorities (American Indian, Alaskan
Native, Black, and Hispanic--Mexican, Puerto Rican, Cuban, and Central
or South American) exceeds 50 percent of the total enrollment. FAR
2.101; 20 U.S.C. 1067k(2) (3).
Source: GAO review of laws and regulations.
[End of table]
[End of section]
Appendix III: Comments from the Department of Defense:
Note: Page numbers in the draft report may differ from those in this
report.
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000:
March 10, 2004:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
Mr. David E. Cooper:
Director, Acquisition and Sourcing Management
U.S. General Accounting Office:
441 G Street, N.W., Washington, D.C. 20548:
Dear Mr. Cooper:
This is the Department of Defense (DoD) response to the GAO draft
report, "CONTRACT MANAGEMENT: DOD Needs Measures for Small Business
Subcontracting Program and Better Data on Foreign Subcontracts," dated
February 12, 2004 (GAO Code 120206/GAO-04-381).
The report contained two recommendations as follow:
Recommendation 1: That the Secretary of Defense direct the Office of
Small and Disadvantaged Business Utilization to develop metrics to
assess the overall results of its test program.
Recommendation 2: That the Secretary of Defense direct DoD's Office of
Program Acquisition and International Contracting to establish
procedures to improve the quality of the information in its database of
subcontracts performed outside the U.S.
The Department concurs with the recommendations. The detailed response
is enclosed.
Signed by:
FRANK M. RAMOS
Director:
Small and Disadvantaged Business Utilization:
Enclosure:
GAO DRAFT REPORT - DATED FEBRUARY 12, 2004 GAO CODE 120206/GAO-04-381:
"CONTRACT MANAGEMENT: DOD NEEDS MEASURES FOR SMALL BUSINESS
SUBCONTRACTING PROGRAM AND BETTER DATA ON FOREIGN SUBCONTRACTS":
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Office of Small and Disadvantaged Business Utilization to
develop metrics to assess the overall results of its test program. (p.
20/GAO Draft Report):
DOD RESPONSE: Concur.
As noted in the report, GAO has expressed concern that the share of
DoD's contracting activity awarded to small businesses as subcontracts
has declined steeply in recent years - from 43 percent in 1995 to 34
percent in 2002. In attempting to establish a cause as to why this small
business share of activity has decreased, the GAO has spent
considerable effort reviewing, among other things, the Test Program for
Negotiation of Comprehensive Small Business Subcontracting Plans (Test
Program). In particular they reviewed (1) DoD's assessment of the Test
Program's effectiveness, (2) the performance of contractor's
participating in the Test Program, and (3) DCMA's oversight of
contractors' small business subcontracting efforts.
At the Test Program's inception the only goals (and subsequent
performance reporting) required to be incorporated into the
subcontracting plan were for small and small disadvantaged businesses.
A women-owned small business goal was later added. Today, Test Program
participants provide subcontracting goals and report performance for
small, small disadvantaged, women-owned small, HUB zone small, veteran-
owned small and service-disabled veteran owned small businesses. We
mention this to note that the Test Program as it was originally
implemented is not the Test Program of today; contributing to the
difficulty in developing and evaluating appropriate metrics.
Originally there were eight contractor's participating in the Test
Program:
Textron Inc.,
Bell Helicopter Division
McDonnell Douglas Helicopter
Litton, Inc., Ingalls Shipbuilding
Unisys, Paramax Systems Corporation
Boeing Corporation:
Martin Marietta - Aerospace Division
General Electric - Aircraft Engine Group:
Lockheed Georgia company:
These prime contractors were selected because they represented a
variety of industry sectors and also represented contracting activity
across all the Military Services. The original metrics were to look at
the performance of these eight participants against a control group
(i.e. other prime contractors in the same industry sectors). In 1994,
the Under Secretary of Defense (Acquisition and Technology) issued a
report on the Test Program. The report concluded that the Test Program,
thus far, did not lead to a definitive conclusion that the Test should
be continued or discontinued. However, the report did provide several
recommendations that might be considered if the Test Program were to be
continued. The Test Program was continued and several changes were
made.
The most basic challenge in establishing meaningful metrics is that the
eight original Test Program participants identified above are not the
participants today. Our intent was for the performance of those
original participants to form a baseline from which to evaluate
performance (positive or negative) in future years. The current
participants, in large part, are not those eight. Mergers and
acquisitions, which greatly changed company compositions and businesses
bases, made the original baseline essentially meaningless.
What metrics do we use today?
DoD, through DCMA, tracks each participating contractor's performance
against itself by comparing its performance under the Program with
prior years' performance. While this may provide an indication of how a
particular contractor is performing, it does not address the larger
issue of the overall success of the Test Program.
DoD, through DCMA, performs an annual review that assesses a
contractor's performance against its subcontracting plan. Again, while
this may provide an indication of individual performance, it does not
address the overall Test Program.
DoD also tracks overall subcontracting goals and accomplishments. This
is accomplished by the Standard Form (SF) 295 reporting. This metric
addresses the broad category of subcontracting and includes all prime
contractors with subcontracting plans, but does not limit itself to
those contractors participating in the Test Program.
We concur with your recommendation that metrics be established to
assess the overall results of the Test Program. Toward this end, we
have or will be taking the following steps:
* DCMA has recently improved its oversight of the overall small business
subcontracting program. They have done this by:
* Updating policy for monitoring contractor's subcontracting programs; *
Issuing new guidance for DCMA personnel tasked with assisting
contractors to achieve their goals; and:
* Developing new criteria for rating contractor performance.
* DoD has chartered the Department of Defense Comprehensive Small
Business Subcontracting Test Program Working Council. The mission of
this Council is to bring together the collective knowledge and
experience of the DoD, DCMA and Military Services to establish a
coalition to achieve the vision of increased subcontracting to small
businesses by major Defense contractors. The Council's vision is to
determine and then remove barriers to increased participation by small
businesses in DoD subcontracting with Test Program participants.
DoD is thoroughly reviewing the Logistics Management Institute (LMI)
DRAFT report, Review of the Department of Defense Comprehensive
Subcontracting Plan Test Program. As noted in this GAO report, we have
implemented several of the recommendations contained in the LMI draft.
We are continuing to review this report and will use it as a tool,
where appropriate, to develop consequential Test Program metrics.
As outlined above, participants in the Test Program are reviewed and
monitored. Determining the overall accomplishments of the Test Program
is important to us and we will take all appropriate steps to measure
and manage the Program accordingly.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct DoD's Office of Program Acquisition and International
Contracting to establish procedures to improve the quality of the
information in its database of subcontracts performed outside the U.S.
(p. 20/GAO Draft Report):
DoD RESPONSE: Concur.
As noted in the report, GAO has expressed concern that DoD has no
mechanism for ensuring contractor compliance with the reporting
requirement at 252.225-7004 and as a result, foreign subcontract data
may be understated. To alleviate GAO's concerns about contractor
compliance with the DFARS requirement, the Director of Defense
Procurement and Acquisition Policy (DPAP) has taken the following
steps:
The Director, DPAP, wrote letters to the top 100 parent companies of
DoD contractors reminding them of the reporting obligation and
requesting that these companies ensure that all their subsidiaries also
comply with the reporting requirement.
* A memorandum was sent to the Senior Acquisition Executives of the
Military Department and the Defense Agencies requesting that they
remind their contracting officers of this reporting requirement and
requesting that their contracting officers pass this reminder on to DoD
defense contractors.
* The Director, DPAP, sent a memorandum to the Defense Contract
Management Agency (DCMA) requesting assistance in periodically
verifying that contractors:
are complying with the reporting requirement. The Office of Program
Acquisition and International Contracting (PAIL) will be meeting with
DCMA to develop appropriate procedures that will facilitate the
verification process without unduly burdening either DCMA personnel or
defense contractors.
* In line with the foregoing, DPAP engaged in an extensive outreach
effort with government and industry personnel to ensure that this
endeavor was fully communicated to all stakeholders.
* PAIC requested the Defense Acquisition Regulation Council open a
Defense Federal Acquisition Regulation Supplement (DFARS) case to
ensure that the existing provisions and clauses clearly and succinctly
lay out the reporting requirements. The International Acquisition
Committee has met and drafted a proposed revision to the provisions and
clauses governing foreign subcontractor reporting. A proposed rule will
be published in the Federal Register sometime in the next month or so
and public comments will be solicited. We are also revising the DD 2139
itself to facilitate the manner in which contractors enter
subcontracting data.
As discussed above, we are making every effort to ensure the
completeness and accuracy of subcontractor data, including the
management of the database. Since the 1998 GAO report, we have removed
outdated fields and re-organized the database in a manner that
facilitates data entry. We have also instituted a process for verifying
database entries into critical fields and have developed an initial set
of procedures for database entry and verification. We continually review
the process to determine if there are other improvements that can be
made. We believe DoD has undertaken the appropriate steps to manage its
foreign subcontracting database.
[End of section]
Related GAO Products:
Joint Strike Fighter Acquisition: Cooperative Program Needs Greater
Oversight to Ensure Goals Are Met. GAO-03-775. Washington D.C.: July
21, 2003.
Sourcing And Acquisition: Challenges Facing the Department of Defense.
GAO-03-574T Washington D.C.: March 19, 2003.
Small Business Contracting: Concerns About the Administration's Plan to
Address Contract Bundling Issues. GAO-03-559T. Washington D.C.: March
18, 2003.
Small Business Administration: The Commercial Marketing Representative
Role Needs to Be Strategically Planned and Assessed. GAO-03-54.
Washington D.C.: November 1, 2002.
Best Practices: Taking a Strategic Approach Could Improve DOD's
Acquisition of Services. GAO-02-230. Washington D.C.: January 18, 2002.
Small Business Subcontracting Report Validation Can Be Improved. GAO-
02-166R. Washington D.C.: December 13, 2001.
Small Business: More Transparency Needed in Prime Contract Goal
Program. GAO-01-551. Washington D.C.: August 1, 2001.
Small Business: Status of Small Disadvantaged Business Certifications.
GAO-01-273. Washington D.C.: January 19, 2001.
Small Business: Trends in Federal Procurement in the 1990s. GAO-01-119.
Washington D.C.: January 18, 2001.
Defense Trade: Observations on Issues Concerning Offsets. GAO-01-278T.
Washington D.C.: December 15, 2000.
Defense Trade: Weaknesses Exist in DOD Foreign Subcontract Data. GAO/
NSIAD-99-8. Washington D.C.: November 13, 1998.
FOOTNOTES
[1] Subcontracting plans are required for most contracts over $500,000
or $1 million for construction contracts. FAR 19.702(a)(1); 13 CFR §
125.3(a).
[2] According to DCMA officials, DOD contractors are supposed to report
actual subcontract achievements on the Standard Form 294 or 295. How
contractors report the data depends on their accounting system. For
example, if they are on an accrual basis, they may capture the
subcontract award at any convenient point in time (e.g., when they
execute the subcontract or purchase order). If they operate on a cash
basis, they would capture the transaction when they pay the
subcontractor. The government allows contractors to decide which way as
long as they follow Generally Accepted Accounting Principles (GAAP).
One of the principles of GAAP is that a contractor must apply the same
methodology consistently.
[3] National Defense Authorization Act for Fiscal Years 1990 and 1991,
P.L. 101-189, § 834.
[4] DOD collects data about businesses performing work outside the
U.S., but not data on whether businesses are domestic or foreign-owned.
[5] For more information about data reliability concerns, see U.S.
General Accounting Office, Reliability of Federal Procurement Data,
GAO-04-295R (Washington, D.C.: Dec. 30, 2003).
[6] Logistics Management Institute, Review of the Department of Defense
Comprehensive Subcontracting Plan Test Program, AQ001R2 (Mclean, Va.:
July 2002), Draft.
[7] An agreement between a U.S. supplier of defense articles or
services and a foreign country under which the supplier agrees to
purchase goods and services of the foreign country in consideration for
the country's purchase of the supplier's defense articles or services.
22 U.S.C. 2776(e)(1).
[8] The total dollar amounts are for dollars submitted on Individual
Contracting Action Reports, DD Form 350, for actions that obligate or
de-obligate more than $25,000.
[9] The annual subcontracting data was obtained from the Office of the
Under Secretary of Defense, Office of Small and Disadvantage Business
Utilization for fiscal years 1993 through 2002. We did not
independently test the reliability of the data received from this
office, which relies on DOD contractors to report this subcontract
information semi-annually on Standard Form 295 (SF 295).
[10] The dollars reported in this paragraph are in constant fiscal year
2002 dollars.
[11] All dollars are in constant fiscal year 2002 dollars.
[12] FAR 19.702 (a). However, subcontracting plans are not required (1)
from small businesses; (2) for personal service contracts; (3) for
contracts or contract modifications performed outside a state,
territory, or possession of the U.S., the District of Columbia, and the
Commonwealth of Puerto Rico; or (4) for modifications of contracts
within the general scope of the contract that do not contain the clause
at FAR 52.219-8, Utilization of Small Business Concerns. FAR 19.702
(b).
[13] Section 817, P.L. 106-65.
[14] Under the Test Program, the comprehensive subcontracting plan is
to target specific industry categories where types of small businesses
have not historically participated. For individual plans, the
contractor must pay liquidated damages if the contracting officer
determines the contractor failed to make a good faith effort to comply
with the subcontracting plan. For both types of plans, the reporting
requirement is semiannually.
[15] DFARS 252.225-7004(a)(2). Contracts and subcontracts for
commercial items, military construction, ores, natural gas, utilities,
petroleum products and crudes, timber, and subsistence are not required
to be reported.
[16] 10 U.S.C. sec 2505 requires periodic national technology and
industrial base assessments.
[17] 65 FR 7509 (Feb. 15, 2000).
[18] For more information on supplier base management, see U.S. General
Accounting Office, Best Practices: Taking a Strategic Approach Could
Improve DOD's Acquisition of Services, GAO-02-230 (Washington D.C.:
Jan. 18, 2002).
[19] For more information on the small disadvantaged business and
HUBZone programs, see U.S. General Accounting Office, Small Business:
Status of Small Disadvantaged Business Certifications, GAO-01-273
(Washington, D.C.: Jan. 19, 2001) and Small Business: HUBZone Program
Suffers From Reporting and Implementation Difficulties, GAO-02-57
(Washington, D.C.: Oct. 26, 2001).
[20] See appendix II for more information on the various small business
concerns.
[21] These are often referred to as "640 Reviews" because of the form
used.
[22] For more discussion on DCMA's reviews, see U.S. General Accounting
Office. Small Business Subcontracting Report Validation Can be
Improved, GAO-02-166R (Washington, D.C.: Dec. 13, 2001).
[23] DCMA officials said they review almost all of the contractors
included in their reviews annually.
[24] DOD considers the long-standing small business goals to include
the overall small business, small disadvantaged business, and woman-
owned small business.
[25] States, colleges and universities, tribal organizations, and non-
profit organizations under contract with DOD typically run these
centers. They are to provide assistance in contracting with federal,
state, and local governments.
[26] U.S. General Accounting Office, Defense Trade: Weaknesses Exist in
DOD Foreign Subcontract Data, GAO/NSIAD-99-8 (Washington, D.C.: Nov.
1998).
[27] The five contractor locations we visited are: Raytheon Company,
Space and Airborne Systems, El Segundo, Calif.; The Boeing Company,
Integrated Defense Systems, El Segundo, Calif.; Northrop Grumman Corp.,
Air Combat Systems, El Segundo, Calif.; Northrop Grumman Corp., Space
and Technology (formerly TRW Space and Electronics), Redondo Beach,
Calif.; and Lockheed Martin Aeronautics Company, Ft. Worth, Tex.
[28] An agreement between a U.S. supplier of defense articles or
services and a foreign country under which the supplier agrees to
purchase goods and services of the foreign country in consideration for
the country's purchase of the supplier's defense articles or services.
22 U.S.C. 2776(e)(1).
[29] According to a contractor official at this firm, the number of
countries involved in the program can change from year to year
depending on various circumstances. In fiscal year 2002, 10 countries,
including the U.S., were in the program.
[30] For additional information on contractor team arrangements, see
FAR 9.6.
[31] DOD collects data about businesses performing work outside the
U.S. but does not request information if the business is domestic or
foreign-owned.
GAO's Mission:
The General Accounting Office, the investigative arm of Congress,
exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. General Accounting Office
441 G Street NW,
Room LM Washington,
D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.
General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.
20548:
