DEFENSE ACQUISITIONS
Additional Guidance Needed to Improve Visibility into the Structure and Management of Major Weapon System Subcontracts Gao ID: GAO-11-61R October 28, 2010According to some Department of Defense (DOD) and industry experts, consolidation of the defense industry along with a shift in prime-contractor business models has resulted in prime contractors subcontracting more work on the production of weapon systems and concentrating instead on systems integration. Based on some estimates, 60 to 70 percent of work on defense contracts is now done by subcontractors, with certain industries aiming to outsource up to 80 percent of the work. At the same time, there is evidence that subcontractor performance may contribute to cost and schedule delays on weapon system programs. Congress has raised questions about the extent to which primes are awarding subcontracts competitively and about the government's insight into the process prime contractors use for determining what work to make in-house and what work should be bought from subcontractors (make-or-buy decisions). In the 2009 Weapon Systems Acquisition Reform Act (WSARA), Congress directed DOD, as part of efforts to improve competition throughout the life cycle of major defense programs, to ensure that contractors' make-or-buy decisions are fair and objective. Specifically, the Secretary of Defense was directed to require prime contractors to give full and fair consideration to qualified sources other than the prime contractor for the development or construction of major subsystems and components of major weapon systems. These actions were to be taken by November 22, 2009. Congress also directed DOD to revise its acquisition regulation regarding organizational conflicts of interest (OCI). In response to both of these requirements, DOD has drafted revisions to its acquisition regulation that are pending final approval. The 2010 National Defense Authorization Act required us to study the structure and management of major subcontracts under contracts for the acquisition of selected major weapon systems. In response to this mandate and given the reliance on subcontracts and the possible implications for government oversight, we (1) examined how government and prime contractors defined "major" subcontract, and the number and value of those considered major, (2) analyzed prime contractors' approach to selecting and managing major subcontractors, (3) examined the extent to which the government has visibility into major subcontracts and, finally, (4) examined how potential OCIs are addressed and the government's role in selecting the approach chosen.
While the Federal Acquisition Regulation (FAR) provides dollar thresholds for reporting on subcontracts, there is no set definition for major subcontract. Prime contractors and various government entities (program and contracting offices, as well as DCMA and DCAA) define "major" subcontract differently, for example based on a certain dollar value or on the criticality of the item being purchased. These differing definitions could affect levels of government or prime contractor insight, particularly with regard to contractor subsidiaries or affiliates, which the primes did not always consider to be subcontractors. The number and value of major subcontracts also varied considerably among programs in our review--particularly when affiliates and subsidiaries were included. One program had as many as 364 major subcontracts, representing 58 percent of the total value of all subcontracts. Another program had 13 major subcontracts, but they made up over 90 percent of the total value of all subcontracts. Prime contractors did not always include subsidiaries or affiliates in their definitions of major subcontract, even when they were managed as such. (2) Prime contractors in our review told us they structure their subcontracts to provide the required items, while reducing their risk exposure and maximizing their profit potential. For example, prime contractors generally attempted to shift cost risk onto their subcontractors through the use of fixed-price subcontracts even when their own contract with the government was cost-reimbursement. Primes also use make-or-buy processes to define what products and services must be retained internally to exploit their core competencies, and what should be outsourced to qualified suppliers to achieve cost efficiency. While primes define work performed by affiliates as part of their company's core competency--that is "make" activities--they often select and manage affiliates using similar methods to those used with external subcontractors. (3) The FAR emphasizes the prime contractor's responsibility in managing its subcontractors. Officials in our case studies underscored the limited role of the government in selecting and managing subcontracts. Prior to contract award, the government's visibility into subcontracts is restricted to the minimum amount of information necessary to determine that subcontract costs are fair and reasonable. To a great extent, the prime contract approach has implications on the degree of government's visibility into subcontract costs. For prime contracts awarded competitively, programs generally rely on the prime contractor to evaluate subcontractor proposals (even when subcontracts are not awarded competitively). For prime contracts awarded noncompetitively, the government has greater visibility into subcontract costs by validating noncompetitively awarded subcontractors' cost and pricing data over certain thresholds. Four of the six prime contracts we reviewed were competed in the development phase, and all six low-rate production contracts are planned to be awarded on a sole-source basis. In addition, when the prime contractor designates a subcontract as a commercial item, the government's visibility is significantly limited, including DCMA's postaward monitoring. (4) Most programs we reviewed displayed limited concern about the potential for organizational conflicts of interest (OCI) in their contracts. Although the FAR requires contracting officers to identify and evaluate potential OCIs, government officials told us that it was the prime contractors' responsibility to identify an OCI at both the prime and subcontract level. Some contracting officers also stated that they assume the OCI clauses are included in any support contracts, such as for testing and evaluation, and that they saw no need to include the clause in the weapon system contract itself. Consequently, most programs did not use contract clauses as a means to prevent an OCI.
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: Cristina T. Chaplain Team: Government Accountability Office: Acquisition and Sourcing Management Phone: (202) 512-4859GAO-11-61R, DEFENSE ACQUISITIONS: Additional Guidance Needed to Improve Visibility into the Structure and Management of Major Weapon System Subcontracts
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October 28, 2010:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate: The Honorable Ike Skelton:
Chairman:
The Honorable Howard P. McKeon:
Ranking Member:
Committee on Armed Services: House of Representatives:
Subject: Defense Acquisitions: Additional Guidance Needed to Improve
Visibility into the Structure and Management of Major Weapon System
Subcontracts:
According to some Department of Defense (DOD) and industry experts,
consolidation of the defense industry along with a shift in prime-
contractor business models has resulted in prime contractors
subcontracting more work on the production of weapon systems and
concentrating instead on systems integration. Based on some estimates,
60 to 70 percent of work on defense contracts is now done by
subcontractors, with certain industries aiming to outsource up to 80
percent of the work. At the same time, there is evidence that
subcontractor performance may contribute to cost and schedule delays on
weapon system programs.
Congress has raised questions about the extent to which primes are
awarding subcontracts competitively and about the government's insight
into the process prime contractors use for determining what work to
make in-house and what work should be bought from subcontractors (make-
or-buy decisions).[Footnote 1] In the 2009 Weapon Systems Acquisition
Reform Act (WSARA), Congress directed DOD, as part of efforts to
improve competition throughout the life cycle of major defense
programs, to ensure that contractors' make-or-buy decisions are fair
and objective. Specifically, the Secretary of Defense was directed to
require prime contractors to give full and fair consideration to
qualified sources other than the prime contractor for the development
or construction of major subsystems and components of major weapon
systems. These actions were to be taken by November 22, 2009. Congress
also directed DOD to revise its acquisition regulation regarding
organizational conflicts of interest (OCI).[Footnote 2] In response to
both of these requirements, DOD has drafted revisions to its
acquisition regulation that are pending final approval.[Footnote 3]
The 2010 National Defense Authorization Act[Footnote 4] required us to
study the structure and management of major subcontracts under
contracts for the acquisition of selected major weapon systems. In
response to this mandate and given the reliance on subcontracts and the
possible implications for government oversight, we (1) examined how
government and prime contractors defined "major" subcontract, and the
number and value of those considered major, (2) analyzed prime
contractors' approach to selecting and managing major subcontractors,
(3) examined the extent to which the government has visibility into
major subcontracts and, finally, (4) examined how potential OCIs are
addressed and the government's role in selecting the approach chosen.
This letter summarizes our results, the details of which are in the
enclosed briefing (enc. II).
To conduct our work, we selected six major defense acquisition programs
as case studies (two programs each from the Army, Air Force, and Navy).
Based on data from the December 2007 Selected Acquisition Reports
(SAR)[Footnote 5] we selected Acquisition Category ID[Footnote 6]
programs with total program costs above $5 billion and with the start
of development after 2000. We excluded programs that currently involved
more than one prime contractor or that are currently part of a
multinational joint venture, and limited our selections to programs
that were under contract with a top-five defense contractor based on
earnings in 2009. The six programs are:
Army:
(1) Stryker Family of Vehicles--General Dynamics (Land
Systems)[Footnote 7]:
(2) Joint Land Attack Cruise Missile Defense Elevated Netted Sensor
System (JLENS)--Raytheon (Integrated Defense Systems)[Footnote 8]:
(3) Navy: Gerald Ford-Class Aircraft Carrier Program (CVN 78-class)--
Northrop Grumman (Newport News Shipbuilding):
(4) P-8A Poseidon Aircraft--Boeing (Defense, Space, and Security):
Air Force:
(5) C-5 Aircraft Reliability Enhancement and Reengining Program
(RERP)-- Lockheed Martin (Aeronautics):
(6) F-35 Lightning II Aircraft (previously Joint Strike Fighter
(JSF))[Footnote 9]--Lockheed Martin (Aeronautics).
For each case study, we met with the prime contractor, government
program office, and contracting officer, as well as cognizant Defense
Contract Management Agency (DCMA) or Supervisor of Shipbuilding and
Conversion (SUPSHIP) and Defense Contract Audit Agency (DCAA)
officials. We also met with officials from the Office of the Under
Secretary of Defense, Acquisition, Technology, and Logistics; Naval Air
Systems Command; DCAA and DCMA headquarters; and experts in the field
of defense acquisitions to gain insight into subcontract management and
OCI issues across DOD. We analyzed pertinent contract documents,
including the requests for proposals for the prime contracts,[Footnote
10] acquisition plan or strategy, and contracting officer's summary of
negotiations. We also analyzed information from the prime contractors,
including make-or-buy, source-selection, and OCI policies and
procedures. In addition, we reviewed GAO and DOD inspector general
reports concerning DOD supplier base and OCI issues.[Footnote 11] The
briefing slides provide additional detail on our methodology. We
conducted this performance audit from March 2010 to October 2010 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
"Major" Subcontract Defined Differently by Prime Contractors and
Government Entities:
While the Federal Acquisition Regulation (FAR) provides dollar
thresholds for reporting on subcontracts, there is no set definition
for major subcontract. Prime contractors and various government
entities (program and contracting offices, as well as DCMA and DCAA)
define "major" subcontract differently, for example based on a certain
dollar value or on the criticality of the item being purchased. These
differing definitions could affect levels of government or prime
contractor insight, particularly with regard to contractor subsidiaries
or affiliates, which the primes did not always consider to be
subcontractors. The number and value of major subcontracts also varied
considerably among programs in our review--particularly when affiliates
and subsidiaries were included. One program had as many as 364 major
subcontracts, representing 58 percent of the total value of all
subcontracts. Another program had 13 major subcontracts, but they made
up over 90 percent of the total value of all subcontracts.
Prime contractors did not always include subsidiaries or affiliates in
their definitions of major subcontract, even when they were managed as
such. Prime Contractors Structure Subcontracts to Reduce Their Risk and
Manage Performance through Various Mechanisms:
Prime contractors in our review told us they structure their
subcontracts to provide the required items, while reducing their risk
exposure and maximizing their profit potential. For example, prime
contractors generally attempted to shift cost risk onto their
subcontractors through the use of fixed-price subcontracts even when
their own contract with the government was cost-reimbursement.[Footnote
12] Primes also use make-or-buy processes to define what products and
services must be retained internally to exploit their core
competencies, and what should be outsourced to qualified suppliers to
achieve cost efficiency. Several case-study programs rely on prime
contractor affiliates and subsidiaries to perform significant amounts
of work. While primes define work performed by affiliates as part of
their company's core competency--that is "make" activities--they often
select and manage affiliates using similar methods to those used with
external subcontractors.
Once the prime contract has been awarded, "major" subcontractors
typically remain the same over the life cycle of the program--from
development to production--even if the subcontracts were originally
competed. We found only a few examples of a change in a major
subcontractor in any of our case studies. Most notable was the prime's
decision to replace the subcontractor responsible for designing a
highly complex sensor system on the P-8A Poseidon aircraft due to
performance issues. During program execution, prime contractors
evaluate subcontractor performance and financial health by tracking
metrics that identify underperformance, spur corrective actions and
guide investments in subcontractor development. This information is
routinely offered to the government upon request, even if not
contractually required. While primes have significant visibility into
and control of their first-tier subcontractors, they acknowledge the
challenges of managing subtier suppliers across highly complex supply
chains.
Government Visibility into Major Subcontracts Is Generally Limited:
The FAR emphasizes the prime contractor's responsibility in managing
its subcontractors.[Footnote 13] Officials in our case studies
underscored the limited role of the government in selecting and
managing subcontracts. Prior to contract award, the government's
visibility into subcontracts is restricted to the minimum amount of
information necessary to determine that subcontract costs are fair and
reasonable. To a great extent, the prime contract approach has
implications on the degree of government's visibility into subcontract
costs. For prime contracts awarded competitively, programs generally
rely on the prime contractor to evaluate subcontractor proposals (even
when subcontracts are not awarded competitively). For prime contracts
awarded noncompetitively, the government has greater visibility into
subcontract costs by validating noncompetitively awarded
subcontractors' cost and pricing data over certain thresholds. Four of
the six prime contracts we reviewed were competed in the development
phase, and all six low-rate production contracts are planned to be
awarded on a sole-source basis. In addition, when the prime contractor
designates a subcontract as a commercial item, the government's
visibility is significantly limited,[Footnote 14] including DCMA's
postaward monitoring. For example, DCMA does not have access to the
plant of two commercial subcontractors, even though those
subcontractors are responsible for critical components of the weapon
systems in our review.
To help ensure that subcontract prices are fair and reasonable, the
government reviews prime contractors' business systems. Prime
contractors rely on business systems, such as those for estimating and
purchasing, as a means to select and manage their subcontracts.
However, we found a number of issues with contractor estimating and
purchasing systems that may present challenges in the government's
ability to ensure subcontract price reasonableness. For example, DCAA
determined that one contractor's estimating system was inadequate
because the company failed to perform appropriate cost analysis for
subcontracts necessary to certify the prime contract's price. Moreover,
we found one example in which more than 10 years had passed since the
administrative contracting officer had issued an evaluation of a
contractor's purchasing system.
While WSARA directed DOD to ensure that prime contractors' make-or-buy
decisions are fair and reasonable, government program and contracting
officials in our review, for the most part, did not see the benefits of
requesting the contractor's make-or-buy plan to provide perspective on
the degree of competition at the subsystem level or on the prime's
rationale for its make-or-buy decisions. In fact, only one of the
selected case-study programs--CVN 78-class aircraft carrier--had
requested the contractor's make-or-buy plan. Citing the doctrine
"privity of contract,[Footnote 15]" some contracting officers stated
that even asking for the make-or-buy plan would embroil them in the
contractor's decision-making process and could possibly make the
government financially liable for decisions resulting from directing
the prime contractor methods for completing the work. Proposed changes
to DOD's acquisition regulation incorporate the provisions on make-or-
buy outlined in WSARA, but do not provide additional guidance on
implementation.
None of our case-study programs exercised another FAR provision, the
consent-to-subcontract clause, to provide visibility into subcontracts
prior to prime-contract award. This clause would provide the government
with an opportunity to examine the reasonableness of subcontract costs
before costs are incurred. Further, only one included a contract
deliverable that required submission of a subcontract management plan
to provide additional insight into the prime's organization, process,
and management of subcontracts.[Footnote 16] A number of contracting
officials told us that their programs' contracts were awarded during
the acquisition reform era of the 1990s, when the goal was to limit
contractual requirements.
Programs in our case studies relied primarily on the prime to manage
their subcontracts during program execution. Again, concerns about
privity of contract were a factor. Officials told us they do not want
to be in the position of directly instructing subcontractors, which may
have implications for government liability. While all program offices
require the primes to provide periodic updates on program execution,
the primes generally determine what information will be included--
including information on subcontractor status. Instead of contractual
requirements, program offices rely heavily on informal communication,
such as weekly telephone calls, with the prime contractor for regular
visibility into subcontractor performance. The degree of insight into
subcontracts tends to increase when the program reaches critical phases
of its life cycle, such as transition to production or when issues with
a subcontractor threaten overall program performance. While case-study
programs used a variety of methods to gain insight into subcontractor
performance, most programs relied heavily on updates from the DCMA
office located at the prime contractor's facility.
Government Officials Generally Expect Organizational Conflicts of
Interest to Be Identified by the Prime Contractor:
Most programs we reviewed displayed limited concern about the potential
for organizational conflicts of interest (OCI) in their
contracts.[Footnote 17] Although the FAR requires contracting officers
to identify and evaluate potential OCIs, government officials told us
that it was the prime contractors' responsibility to identify an OCI at
both the prime and subcontract level. Some contracting officers also
stated that they assume the OCI clauses are included in any support
contracts, such as for testing and evaluation, and that they saw no
need to include the clause in the weapon system contract itself.
Consequently, most programs did not use contract clauses as a means to
prevent an OCI.
One case study (the Stryker program) identified a potential OCI in its
upcoming modernization contract if the current prime or its affiliates
chose to compete as suppliers of a major subsystem, since the prime
contractor performed system engineering for the program. To mitigate
this potential OCI, the government plans to conduct the competition for
subsystem modernization (rather than allowing the prime to do so) if
the prime contractor or its affiliates choose to compete. Prime
contractors told us that they have well-developed systems and
procedures for identifying OCIs among their subsidiaries and
affiliates. While prime contractors will initiate OCI review procedures
when they suspect a conflict, the process is mandatory on all
solicitations that contain an OCI clause. We found that OCI clauses are
not consistently flowed down to subcontractors by the prime contractors
in the case studies we reviewed. Impending DFARS changes are aimed at
tightening regulations regarding OCIs, including the use of standard
clauses as a means to identify and resolve potential conflicts for
primes and their affiliates. However, the effect of this regulation is
not yet known.
Conclusions:
Consolidation of the defense industry, as well as earlier defense
acquisition reform, has had a profound effect on how weapon system
programs are awarded and managed today. Programs in our case studies
rely on the prime contractor to design, develop, and manage the work
effort. Prime contractors, in turn, rely on major subcontractors to
varying degrees for a large share of the work effort. While lack of
privity of contract means that the government does not have a direct
contractual relationship with the subcontractor, it also means that the
prime contractor is responsible for its subcontracts. Privity of
contract issues notwithstanding, the government ultimately plays a role
in ensuring a program's success. Programs we reviewed used a number of
informal methods for gaining insight into subcontract performance.
However, program officials seemed reluctant to use available
acquisition provisions, such as the make-or-buy plan, that enable the
government to gain visibility into the prime contractor's
subcontracting effort, largely because of fears regarding government
liability. Further, government officials often questioned the overall
purpose of these provisions. Nevertheless, Congress directed DOD in
WSARA to ensure that prime contractors' make-or-buy decisions are fair
and reasonable. Provisions such as the make-or-buy plan represent
important tools that the government can use to gain insight into the
prime contractor's methods for awarding subcontracts. Moreover, these
provisions can help programs to understand the degree of competition at
the subcontract level--a first step in meeting requirements for WSARA.
While there is awareness of the importance of supplier issues, programs
showed little concern about the potential for an OCI. The government
relies exclusively on prime contractors to identify OCIs at the prime
and subcontract level. However, proposed DFARS changes will likely put
more onus on contracting officers to identify and resolve potential
OCIs.
Recommendation for Executive Action:
We recommend that the Secretary of Defense direct the Office of the
Under Secretary of Defense for Acquisition, Technology and Logistics to
develop additional guidance for contracting officers on implementing
make-or-buy provisions in weapon system programs as outlined in the
2009 Weapon Systems Acquisition Reform Act, including factors to
consider in conducting the required make-or-buy analyses.
Agency Comments and Our Evaluation:
We provided draft copies of this letter and briefing to DOD for review
and comment. DOD concurred with our recommendation to develop
additional guidance for contracting officers on implementing make-or-
buy provisions, noting that this is a task assigned to the Panel on
Contracting Integrity. DOD expects to have additional guidance
available by June 30, 2011. DOD's written comments are reprinted in
enclosure I.
We are sending copies of this letter and briefing to DOD and other
interested congressional committees. In addition, these documents will
be available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions, please contact me at (202) 512-
4841 or: chaplainc@gao.gov. Contact points for our Offices of
Congressional Relations and: Public Affairs may be found on the last
page of this letter. Key contributors to this report were Michele
Mackin, Assistant Director; Jacob Beier; Robert Bullock; Avius Carroll;
Morgan Delaney Ramaker; John Krump; Diana Moldafsky; Leigh Ann Nally;
and Roxanna Sun.
Signed by:
Cristina T. Chaplain:
Director Acquisition and Sourcing Management:
Enclosures:
[End of section]
Enclosure I: Comments From the Department of Defense:
Office Of The Under Secretary Of Defense:
3000 Defense Pentagon:
Washington, DC 20301-3000:
Acquisition, Technology And Logistics:
October 22, 2010:
Ms. Cristina Chaplain:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.:
Washington, DC 20548:
Dear Ms. Chaplain:
This is the Department of Defense (DoD) response to the GAO draft
report, GAO-11-6IR, "Defense Acquisitions: Additional Guidance Needed
to Improve Visibility into the Structure and Management of Major Weapon
System Subcontracts," dated October 1, 2010 (GAO Code 120894). Detailed
comments on the report recommendations are enclosed.
We appreciate the opportunity to comment on the draft report.
Sincerely,
Signed by:
Shay D. Assad:
Director, Defense Procurement and Acquisition Policy:
Enclosure:
As stated:
GAO Draft Report Dated October 1, 2010 GAO-11-61R (GAO CODE 120894):
"Defense Acquisitions: Additional Guidance Needed To Improve Visibility
Into The Structure And Management Of Major Weapon System Subcontracts":
Department Of Defense Comments To The Gao Recommendations:
Recommendation: The GAO recommends that the Secretary of Defense direct
the Office of the Under Secretary of Defense for Acquisition,
Technology, and Logistics to develop additional guidance for
contracting officers on implementing make or buy provisions in weapon
system programs as outlined in the 2009 Weapon Systems Acquisition
Reform Act, including factors to consider in conducting the required
make or buy analyses.
DoD Response: Concur. The task of providing the recommended guidance
will be assigned to the Panel on Contracting Integrity for 2011 action.
We expect to have additional guidance for contracting officers by June
30, 2011.
[End of section]
Enclosure II: Briefing for Senate and House Armed Services Committees
October 28, 2010:
Structure and Management of Subcontracts under Major Weapon System
Contracts:
Briefing for Senate and House Armed Services Committees:
October 28, 2010:
Contents:
* Introduction
* Objectives, Scope, and Methodology:
* Summary:
* Background:
* Objective 1: Definition of Major Subcontract:
* Objective 2: Prime Contractors‘ Approach to Selecting and Managing
Subcontracts:
* Objective 3: Government Visibility into Subcontracts Pre- and Post–
Prime Contract Award:
* Objective 4: Organizational Conflicts of Interest (OCI):
* Detailed Scope and Methodology:
Introduction:
According to some Department of Defense (DOD) and industry experts,
prime contractors are subcontracting more work on the production of
weapon systems and concentrating instead on systems integration.
Based on some estimates, 60 to 70 percent of work on defense contracts
is now done by subcontractors, with some industries aiming to outsource
up to 80 percent of their work.
At the same time, there is evidence that subcontract performance is
contributing to cost and schedule delays on weapon system programs.
2010 National Defense Authorization Act required GAO to study the
structure and management of major subcontracts under prime contracts
for the acquisition of selected major weapon systems.
Objectives, Scope, and Methodology:
Section 844 of the 2010 National Defense Authorization Act directed GAO
to conduct a study on the structure and management of major
subcontracts under contracts for the acquisition of selected major
weapon systems (see below).
On the basis of the mandate and in consultation with staff from the
Senate and House Armed Services Committees, we used the following
reporting objectives for the purposes of this review:
* How do government and prime contractors define "major" subcontracts
and what is the number and value of those considered major?
* What is the prime contractor‘s approach to selecting and managing
major subcontractors?
* To what extent does the government have visibility into major
subcontracts?
* How are potential OCIs addressed and what role, if any, does the
government play in selecting the approach chosen?
To address the mandate, we used a case-study approach and selected two
programs from each of the military services:
Navy:
* CVN 78 Gerald Ford–Class Aircraft Carrier Program (CVN 78):
* P-8A Poseidon Aircraft:
Army:
* Stryker Family of Vehicles:
* Joint Land Attack Cruise Missile Defense Elevated Netted Sensor
System (JLENS) Air Force:
* C-5 Reliability Enhancement and Re-Engining Program (RERP):
* F-35 Lightning II Joint Strike Fighter (JSF)[Footnote 18]
See information below for more details on our case studies.
For a complete discussion of our scope and methodology, including case-
study selection, see below.
Summary:
Prime contractors and government officials define "major" subcontract
differently, which could affect levels of government or prime
contractor insight, particularly with regard to contractor subsidiaries
or affiliates. The number and value of major subcontracts also varied
considerably among programs in our review.
Prime contractors‘ approach to subcontracts aims to maximize profit,
while reducing their risk exposure as they make decisions related to
subcontract award and manage first-tier subcontract performance through
a variety of mechanisms.
Government visibility into major subcontracts is generally limited:
* Prior to prime-contract award, government visibility is largely
dependent upon the prime contractor‘s approach to the subcontract and
the adequacy of the contractor‘s systems.
* Contracting officers are generally not making use of Federal
Acquisition Regulation (FAR) provisions that could provide additional
insight. For example, contracting officers did not see the benefit of
requesting make-or-buy plans, citing concerns about possible government
liability if they were to become embroiled in the contractors'
subcontracting decisions.
* Government officials also cite concerns about possible government
liability as a reason for taking a limited role in overseeing
subcontracts; however, all program offices require primes to provide
periodic updates on program execution, which may include information on
subcontractor status, and generally rely on the Defense Contract
Management Agency (DCMA) to provide surveillance of the prime contract”
and subcontracts”when deemed necessary.
Government officials generally expect OCIs to be identified by the
prime contractor and displayed limited concern about potential OCIs for
weapon system programs.
Background: Case-Study Programs[Footnote 19]:
Table 1: Case-Study Program Descriptions:
C-5 Reliability Enhancement and Re-Engining Program (C-5 RERP):
Lockheed Martin (Aeronautics):
The Air Force's C-5 RERP is one of two major upgrades for the C-5. The
RERP is designed to enhance the reliability, maintainability, and
availability of the C-5 by replacing the propulsion system; modifying
the mechanical, hydraulic, avionics, fuel, and landing gear systems;
and making other structural modifications. Together with the C-5
avionics modernization program, these upgrades are intended to improve
C-5 mission- capability rates and reduce total ownership costs. The
RERP is currently in production.
[Refer to PDF for image: Aircraft]
Source: Lockheed Martin.
CVN 78 Gerald Ford–Class Aircraft Carrier Program (CVN 78):
Northrop Grumman (Newport News Shipbuilding):
The Gerald Ford–class nuclear-powered aircraft carrier (CVN 78) is the
planned successor to the Nimitz-class (CVN 68). The new carriers are
expected to include advanced technologies in propulsion, aircraft
launch and recovery, and survivability designed to improve operational
efficiency and enable higher sortie rates while reducing required
manpower. The Navy awarded a construction-preparation contract for the
lead ship in May 2004. Construction began in September 2008 and the
Navy expects delivery of this ship by September 2015. The Navy is
currently preparing for construction of the first follow-on ship, CVN
79.
[Refer to PDF for image: Ship]
Source: U.S. Navy.
Joint Land Attack Cruise Missile Defense Elevated Netted Sensor Systems
(JLENS): Raytheon (Integrated Defense Systems):
The Army‘s JLENS is designed to provide over-the-horizon detection and
tracking of land-attack cruise missiles and other targets. The system
consists of two tethered aerostats with advanced sensors for
surveillance and tracking, as well as mobile mooring stations,
communication payloads, and processing stations. JLENS also provides
surveillance and engagement support to other systems. The Army awarded
the initial development contract in 1998 and plans to begin low-rate
production in May 2012.
[Refer to PDF for image: Sensor Systems]
Source: U.S. Army.
Joint Strike Fighter (JSF):
Lockheed Martin (Aeronautics):
The JSF program plans to develop and field a family of stealthy strike
fighter aircraft for the Air Force, Marine Corps, Navy, and U.S.
allies, with the goal of maximizing commonality to minimize costs. The
carrier-suitable variant will complement the Navy's F/A-18E/F aircraft.
The conventional-takeoff-and-landing variant will primarily be an air-
to-ground replacement for the Air Force's F-16 and A-10 aircraft, and
will complement the F-22A. The short-takeoff-and-vertical landing
variant will replace the Marine Corps' F/A-18 and AV-8B aircraft. The
program expects to deliver an initial capability to the Marine Corps in
March 2012.
[Refer to PDF for image: Aircraft]
Source: Lockheed Martin.
P-8A:
Boeing (Defense, Space, and Security):
The Navy's P-8A Poseidon is a Boeing 737 commercial derivative that
includes an open-architecture mission system and next-generation
sensors that will replace the P-3C Orion turboprop aircraft. The P-8A
system is designed to sustain and improve the Navy's maritime and
littoral intelligence, surveillance, and reconnaissance capabilities.
Its primary roles are antisubmarine warfare and antisurface warfare.
The program expects to deliver its first increment of capability in
June 2013.
[Refer to PDF for image: Aircraft]
Source: U.S. Navy.
Stryker:
General Dynamics (Land Systems)[Footnote 20]:
The Army's Stryker is a family of vehicles built on a common chassis
and is largely derived from existing military components. The Stryker
is the primary ground combat platform for the Stryker Brigade Combat
Team and is air-transportable in a C-130 aircraft. The Stryker Family
of Vehicles comprises 10 configurations that have a range of functions,
such as infantry transport, fire support, and medical evacuation. Eight
of the 10 Stryker configurations are in full-rate production and the
remaining two variants are in extended low-rate production. The Army is
currently making plans to modernize the fleet.
[Refer to PDF for image: Army Vehicle]
Source: PM-Stryker Brigade Combat Team.
Table Source: Prime contractors and DOD.
[End of table]
Background: Regulations Governing Subcontracts in Defense Acquisitions:
The FAR defines "subcontracts" as contracts that are entered into by a
prime contractor or subcontractor for the purpose of obtaining
supplies, materials, equipment, or services of any kind under a prime
contract.[Footnote 21]
For the purposes of contract pricing, the FAR also defines
"subcontract" as the transfer of commercial items between divisions,
subsidiaries, or affiliates of a contractor or a subcontractor.
A number of FAR and Defense Federal Acquisition Regulation Supplement
(DFARS) provisions govern the use of subcontracts (see below).
Background: Selected Regulations Governing Subcontracts in Defense
Acquisitions:
Table 2: Selected Regulations Governing Subcontracts in Defense
Acquisitions:
Topic: Make-or-buy programs;
Description: Contractor proposals shall contain information such as
items and work included, categorization as "must make," "must buy," or
"can either make or buy," and identification of proposed subcontractors
if known. Can help government ensure negotiation of reasonable contract
prices, and satisfactory performance;
Applicability: Plan submission may be required for acquisitions of
$11.5 million or more (apart from limited cases such as certain
research and development contracts) or under $11.5 million if deemed
necessary by the contracting officer. Minimum amount for "items and
work included" section of contractor proposal is $1 million;
FAR/DFARS section: Section: FAR 15.407-2, DFARS 215.407-2;
Provision/clause: FAR 52.215-9.
Topic: Small-business subcontracting plans;
Description: Plan shall include separate percentage goals for using the
different types of small-business concerns as subcontractors,
description of principal supplies/services to be subcontracted and
methods used to identify sources. Can enhance subcontracting
opportunities for small- business concerns;
Applicability: Any contractor receiving a contract for more than the
simplified acquisition threshold (generally $100,000) must agree that
small business concerns will have maximum practicable opportunity to
participate in contract performance. Except under certain
circumstances, contracts expected to exceed $550,000 and with
subcontracting possibilities shall require submission of an acceptable
subcontracting plan;
FAR/DFARS section: Section: FAR 19.7, DFARS 219.7; Provision/clause:
FAR 52.219-9, DFARS 252.219-7003.
Topic: Consent-to-subcontracts;
Description: For subcontracts identified in the clause, a prime with an
approved purchasing system has to secure consent from the contracting
officer. Evaluation of consent can include consideration of whether the
prime has adequately substantiated the selection as offering greatest
value to government;
Applicability: If prime has an approved purchasing system, consent
required for subcontracts specifically identified by contracting
officer. If prime does not have an approved system, consent required
for a range of subcontracts including most cost-type, and fixed-price
over certain thresholds;
FAR/DFARS section: FAR 44.2, DFARS 244.2; Provision/clause FAR 52.244-
2.
Source: GAO analysis of FAR and DFARS.
[End of table]
Background: Defense Industry Consolidation
Mid-1990s defense industry consolidation: through mergers and
acquisition, over 50 major defense suppliers consolidated into 5 major
prime contractors
Since the 1990s the prime-contractor business model has shifted from
"vertical integration" to serving as overall system integrators. Prime
contractors moved towards outsourcing a substantial amount of
development, fabrication and subassembly work:
* Based on some estimates, 60 to 70 percent of work is now done by
subcontractors.
* According to some industry experts, prime contractors may aim to
outsource up to 80 percent of work.
Background: Acquisition Reform:
In the mid-1990s, DOD sought to streamline the acquisition process to
reduce the costs of new weapons.
DOD sought "to reduce management layers, eliminate certain reporting
requirements, use commercial off-the-shelf systems and subsystems,
reduce oversight from within as well as from outside DOD, and eliminate
perceived duplication of testing."[Footnote 22]
DOD structured programs using Lead System Integrators (LSI) and Total
System Performance Responsibility (TSPR) models that limited government
management and gave prime contractors considerable authority over
system engineering, subsystem make-or-buy decisions, and allocation of
research and development resources to the supplier base.
Background: 2009 Weapon System Acquisition Reform Act (WSARA):
To improve competition throughout the life cycle of weapon system
acquisitions, including at the subsystem level, Congress required DOD
in Section 202(c) to take actions to ensure fair and objective make-or-
buy decisions by prime contractors.
* In particular, Section 202(c) requires DOD to:
- ensure that prime contractors give full and fair consideration to
qualified sources other than themselves for the development or
construction of major subsystems and components of major weapon systems;
- provide government surveillance of the process by which prime
contractors consider and determine whether to develop or construct work
in-house or through a subcontract; and:
- assess the extent to which a prime contractor has given full and fair
consideration to qualified sources other than itself in sourcing
decisions as a part of past-performance evaluations.
Provisions in Section 202(c) took effect on November 22, 2009, for all
major defense acquisition programs.
These provisions were incorporated in DFARS on February 24, 2010.
Section 207 requires DOD to revise DFARS in order to tighten existing
regulations regarding OCIs.
Background: Organizational Conflicts of Interest (OCI):
The term "OCI" refers to a firm that is potentially unable to render
impartial assistance or advice to the government, or its objectivity in
performing work may be impaired, or it has an unfair competitive
advantage because of other activities or relationships.
Experts have noted an increase in the number of OCIs due in part to
defense industry consolidation that creates situations in which
different business units of the same firm can end up with the service
and production side of a program.
GAO has developed a body of bid-protest case law interpreting OCI
regulations and analyzing mitigation strategies. GAO bid protest case
law divides OCIs into three types:
1. Impaired Objectivity: a company is asked to perform tasks that
require objectivity, but another role the company plays casts doubt on
the company‘s ability to be truly objective (for example, when a
company is to give the government an assessment of the performance of
firms, where one of those firms is an affiliate of the company giving
the assessment).
2. Unequal Access to Information: a company has access to nonpublic
information (typically through performance of a contract) that gives it
an unfair advantage in the competition for a later contract.
3. Biased Ground Rules: situations in which a company sets the ground
rules for a future competition by, for example, writing the
specifications that competitors for a contract must meet.
Background: FAR, DFARS, and Service-Level OCI Regulations:
FAR Subpart 9.5 provides the legal framework governing OCIs in federal
procurement.
* The FAR requires agencies‘ contracting officers to:
- identify and evaluate potential OCIs as early in the acquisition
process as possible; and:
- avoid, neutralize, or mitigate significant potential conflicts before
contract award.
* In situations in which avoiding, neutralizing, or mitigating an OCI
would not be in the government‘s interest, the FAR also allows for the
head of an agency (or a designee) to waive any of the OCI general rules
or procedures.
DFARS and service-level regulations supplement the FAR, in certain
areas, by providing specific information on waiver authority,
prohibitions against the use of LSIs, and language that should be
included as contract clauses in situations in which a potential OCI is
suspected.
Objective 1: Definition of Major Subcontract:
* Definitions of "Major" Subcontract Vary between and within Programs:
* Varying Definitions of "Major" Subcontract Could Affect Government
Insight into Subcontractor Performance and Identification of Risk:
* Number and Value of Major Subcontracts Vary by Program:
Objective 2: Prime Contractors‘ Approach to Selecting and Managing
Subcontracts:
Objective 3: Government Visibility into Subcontracts Pre–and Post–Prime
Contract Award:
Objective 4: Organizational Conflicts of Interest (OCI) * Detailed
Scope and Methodology:
Objective 1: Definition of Major Subcontract:
Definitions of "Major" Subcontract Vary between and within Programs:
FAR/DFARS present different thresholds for reporting on subcontracts
that could be interpreted as definitions for "major" subcontract:
Table 3: Acquisition Regulations That Provide Definitions of Major
Subcontract:
Covered Information: General Submission of Cost or Pricing Data
(>$650,000);
FAR/DFARS Provision: FAR 15.403-4 (a) (1) requires the contracting
officer to obtain certified cost and pricing data for acquisitions
exceeding $650,000 where no other exceptions to cost or pricing data
requirements exist. Exceptions include the contracting officer‘s
determination that prices are based on adequate price competition or
when a commercial item is being acquired.
Covered Information: Subcontract Submission of Cost or Pricing Data
(Greater than/equal to $11.5 million);
FAR/DFARS Provision: FAR 15.404-3 (c) (1) (i)(ii) requires contractors
to submit cost or pricing data to the government for subcontracts that
are the lower of either $11.5 million or more; or exceed 10 percent of
the prime contractor‘s proposed price.
Covered Information: Earned Value Management (EVM) System Data
Submissions (Greater than/equal to or Greater than/equal to $50
million);
FAR/DFARS Provision: DFARS 234.201 requires a contractor‘s EVM system
to comply with specific industry guidelines[Footnote 23] if it is a
cost or incentive contract/subcontract valued at $20 million or more.
For cost or incentive contracts/subcontracts valued at $50 million or
more, the cognizant federal agency must approve the contractor‘s EVM
system.
Source: GAO analysis of FARS and DFARS.
[End of table]
Defense Contract Audit Agency (DCAA) officials responsible for five of
six programs in our case studies told us that they rely on the FAR‘s
$650,000 cost and pricing threshold to determine the major subcontracts
that require cost analyses.
Prime contractors and government agencies in our case studies had
varying definitions of major subcontract (see below).
Table 4: Prime Contractor, Program Office, and DCMA/Supervisor of
Shipbuilding, Conversion, and Repair (SUPSHIP) Definitions Of Major
Subcontract in Case-Study Programs:
System: C-5 RERP;
Prime Contractor: (1) involves acquisition of material, software,
services, or subsystems that are large, complex, or unique; (2)
considered critical to fulfilling contractual and program obligations;
(3) designated as major or critical in the prime contract;
Program office: uses prime‘s list of 13 major subcontracts that
represent the highest dollar values and 90 percent of the bill of
materials;
DCMA/SUPSHIP: (1) dollar threshold in which key suppliers have contract
values in excess of $650,000; and (2) risk and historical performance.
System: CVN 78;
Prime Contractor: (1) components that are not currently in use by the
Navy and are not raw materials (2) components that require engineering
using a new design or a significant modification to an existing design;
Program office: over $11.5 million (FAR definition), but program
officials stated that they do not manage the program according to major
subcontracts;
DCMA/SUPSHIP: items requiring government inspection at the
subcontractors‘ facility, which tend to be naval nuclear materials.
System: JLENS;
Prime Contractor: (1) an item over a significant dollar value that
cannot be produced by Raytheon or would require significant resources
to develop; (2) an item over a significant dollar value, that Raytheon
can produce, but chooses not to;
Program office: over $25 million;
DCMA/SUPSHIP: over $1 million threshold.
System: JSF;
Prime Contractor: (1) a major teammate or supplier with a significant
percentage of total program value; (2) a major technology supplier that
is vital to the program;
Program office: varies within program office depending on function
(e.g., contracting versus production/manufacturing);
DCMA/SUPSHIP: any subcontract with EVM requirements or representing
more than 20 percent of program acquisition cost.
System: P-8A;
Prime Contractor: has significant leverage on Boeing‘s ability to
successfully complete the program within cost, schedule, and technical
performance requirements;
Program office: at least 10 percent of the proposed total contract
price;
DCMA/SUPSHIP: considers factors related to quality, risk/criticality,
and requirements.
System: Stryker;
Prime Contractor: exceeds a $10 million threshold; criticality and
availability also factors if subcontract does not meet dollar
threshold;
Program office: subcontracts reviewed by DCAA;
DCMA/SUPSHIP: (1) purchase orders of $1 million or more; (2) provides a
critical part, or (3) has a history of problems.
Source: GAO analysis of DOD and prime-contractor data.
[End of table]
Varying Definitions of "Major" Subcontract Could Affect Government
Insight into Subcontractor Performance and Identification of Risk:
Government and prime contractors often define subcontracts as "major"
to identify the need for additional insight or management attention.
Some case studies do not include subsidiaries or affiliates in
definitions of major subcontracts.
SUPSHIP Newport News only defines "major" subcontract from a quality-
assurance perspective; in particular, materials that require government
inspection at the subcontractor‘s facility.
According to DCAA officials, the FAR does not specifically state
whether or not primes are required to aggregate the total value of
purchase orders from a single supplier.
* Two of the primes in our case studies only provided the government
with cost and pricing data supporting subcontractor proposals if an
individual purchase order was above the cost and pricing data
threshold.
* Consequently, primes in these instances did not provide pricing data
if a single supplier had multiple purchase orders that totaled $650,000
or above.
Objective 1: Number of Major Subcontracts:
Number and Value of Subcontracts Vary by Program:
Table 5: Number and Value of Major Subcontracts Based on Prime-
Contractor Data:
[Refer to PDF for image: table and bar graph]
Program: C-5 RERP[B];
Total number of major subcontracts[A]: 13;
Total value of major subcontracts (dollars in millions)[A]: 529;
Subcontracts as a percentage of current contract value: 60;
Major subcontracts as a percentage of all subcontracts: 93.
Program: CVN 78[C];
Total number of major subcontracts[A]: 364;
Total value of major subcontracts (dollars in millions)[A]: 976;
Subcontracts as a percentage of current contract value: 22;
Major subcontracts as a percentage of all subcontracts: 58.
Program: JLENS;
Total number of major subcontracts[A]: 4;
Total value of major subcontracts (dollars in millions)[A]: Raytheon
Proprietary;
Subcontracts as a percentage of current contract value: 14;
Major subcontracts as a percentage of all subcontracts: 83.
Program: JSF[D];
Total number of major subcontracts[A]: 16;
Total value of major subcontracts (dollars in millions)[A]: 3,394;
Subcontracts as a percentage of current contract value: 61;
Major subcontracts as a percentage of all subcontracts: 94.
Program: P-8A;
Total number of major subcontracts[A]: 9;
Total value of major subcontracts (dollars in millions)[A]: 604;
Subcontracts as a percentage of current contract value: 41;
Major subcontracts as a percentage of all subcontracts: 30.
Program: Stryker[E];
Total number of major subcontracts[A]: 17;
Total value of major subcontracts (dollars in millions)[A]: 1,100;
Subcontracts as a percentage of current contract value: 30;
Major subcontracts as a percentage of all subcontracts: 61.
Note: Percentage of all subcontracts includes the value of corporate
affiliates even if not considered a subcontract by the prime
contractor. For example, Boeing‘s agreement with its affiliate, Boeing
Commercial Airplanes (BCA).
[A] As defined by case-study prime contractors. In the case of Stryker,
this includes one affiliate with a subcontract valued at $101.2
million, and in the case of JSF this includes three affiliates with
contracts valued at $550 million (low-rate initial production [LRIP]
Lots 1-3).
[B] Refers to C-5 RERP contracts for LRIP Lots 1-4.
[C] Refers to the total current target price for the Detail Design and
Construction contract and the construction preparation contract for CVN
78.
[D] Refers to JSF LRIP contract for Lots 1-3. The prime contractor
estimates that subcontracts will constitute 74 percent of the total
contract value of the upcoming LRIP 4 contract.
[E] Refers to the Stryker contract for follow-on requirements.
[End of table]
Contents:
Objective 1: Definition of Major Subcontract:
Objective 2: Prime Contractors‘ Approach to Selecting and Managing
Subcontracts:
* Primes‘ Contracting Approach Aims to Reduce Their Exposure to Cost
Risk:
* Primes Use Make-or-Buy Processes to Further Minimize Risk and
Maximize Profit:
* Primes Consider Core Competencies and Supplier Capabilities to
Achieve Best Value:
* Government Generally Does Not Influence Subcontract Competition
Decisions:
* Major Subcontracts Rarely Recompeted over Program Lifecycle:
* Some Primes Select Affiliates and Manage Their Work Like Other
Subcontracts:
* Primes Monitor All First-Tier Subcontractors to Identify Where
Intervention Is Necessary:
* Subcontractor Information Is Shared with Government”Regardless of
Contract Requirements:
* Prime Insight into and Control over First-Tier Subcontractors Is Not
Matched at Lower Tiers:
Objective 3: Government Visibility into Subcontracts Pre–and Post–Prime
Contract Award:
Objective 4: Organizational Conflicts of Interest (OCI):
* Detailed Scope and Methodology:
Objective 2: Prime Contractors‘ Approach (Subcontract Selection):
Primes‘ Contracting Approach Aims to Reduce Their Exposure to Cost
Risk:
Prime contractors frequently shift cost risk onto subcontractors by
means of fixed-price subcontracts, even when their own contract with
the government is cost-reimbursement (with developmental items
typically bought on cost-reimbursement contracts, and increased fixed-
price contracting for production items).
Fixed-price contracts do not pay based on resources or time expended by
the supplier, placing the risk of absorbing cost overruns on the
supplier. Cost-reimbursement contracts, in contrast, reimburse the
supplier for expenses incurred, and place more risk of absorbing cost
overruns on the buyer.
Examples from case studies include the following:
* C-5 RERP: development contract was cost plus award fee, yet all of
approximately 220 subcontracts were fixed price (including all major
subcontracts).
* P-8A: While the development contract is a cost-type contract, over 70
percent of subcontract value is on fixed-price subcontracts, including
five of the eight subcontracts identified as major.
* Stryker: all production-related subcontracts are fixed price
(including all 17 "majors"):
- Prime contract can be cost-reimbursement or fixed price, depending on
scope of work.
- Representatives from General Dynamics stated that the company
"believes that fixed-price subcontracts are appropriate and that
passing the risk quotient on to the subcontractors is fair in a
production environment."
* CVN 78: While the construction contract is a cost-type contract, all
but three subcontracts are fixed price, including critical technologies
such as the Advanced Weapons Elevator and Air Conditioning Plant.
Primes Use Make-or-Buy Processes to Further Minimize Risk and Maximize
Profit:
Make-or-buy processes determine what work should be done in-house, and
what should be bought from external suppliers.
Primes use make-or-buy processes to manage risk and deliver shareholder
value when working on major defense programs.
These processes define what products and services must be retained
internally, and what can be outsourced to qualified sources.
Make-or-buy processes typically include evaluation of the ability of
the supplier base to support program requirements (see fig.1). Primes
might test the marketplace as part of this assessment and then decide
to do work in-house based on what is best for the business.
Figure 1: Main Elements of Prime Contractor Make-or-Buy Processes:
[Refer to PDF for image: Chart]
1. Establish corporate-or division-level policy;
2. Assign responsibilities;
3. Define corporate levels of reviews;
4. Perform make-or-buy analysis for specific program;
a. Identify core competence & map to requirements;
b. Determine internal capacity and capability;
See next slide for more discussion of step 4.
5. Documents & report decisions;
6. Select source.
Source: GAO analysis of prime contractor data.
[End of figure]
Primes Consider Core Competencies and Supplier Capabilities to Achieve
Best Value:
Primes‘ make-or-buy analyses aim to exploit their core competencies,
get the best value from the marketplace, and reduce supply-chain
uncertainty (see fig 2).
For example:
* For a JLENS component, Raytheon‘s make-or-buy analysis guided both
initial outsourcing and; as the supplier‘s ability to execute the
original design came into question, Raytheon‘s decision to make the
revised design of the component in-house.
* Northrop Grumman Shipbuilding Newport News considers all work
requiring welding to certain Navy specifications as "core," but also
emergent work and work for which there are no qualified vendors. Figure
2: Illustrative Prime Contractor Make-or-Buy Analysis Source: GAO
analysis of prime contractor data.
Figure 2: Illustrative Prime Contractor Make-or-Buy Analysis:
[Refer to PDF for Image: Illustration]
Capability and Cost Effectiveness of Supplier Base Relative to Prime:
Strategic Important of Item to the Prime:
Core: Must Make;
Noncore: Can Make or Buy (Low);
Noncore: Must Buy (High).
Source: GAO analysis of prime contractor data.
[End of figure]
Government Generally Does Not Influence Subcontract Competition
Decisions:
Prime contractors and government officials stated that the government
does not play a role in determining whether to award subcontracts
competitively or sole source.
Contracting officials in our case studies stated that the government
wants to avoid influencing major decisions such as subcontract
competition to prevent government assumption of the prime‘s
responsibilities.
We found only one example from our case studies where there was some
government direction. On the Stryker program the government directed
General Dynamics to use an antitank system developed by Raytheon.
Only two programs competed more than 50 percent of their subcontracts
(see fig. 3).
Figure 3: Competition for Major Subcontracts:
[Refer to PDF for Image: Bar Graph]
Program Percent of major subcontracts originally competed
Program: C-5 RERP;
Percent of major subcontracts originally completed: 62.
Program: CVN 78;
Percent of major subcontracts originally completed: 65.
Program: JLENS;
Percent of major subcontracts originally completed: 0.
Program: JSF;
Percent of major subcontracts originally completed: 19.
Program: P-8A;
Percent of major subcontracts originally completed: 33.
Program: Stryker;
Percent of major subcontracts originally completed: 47.
Source: GAO analysis of prime contractor data.
[End of figure]
Major Subcontracts Rarely Recompeted over Program Lifecycle:
WSARA requires the Secretary of Defense to ensure that acquisition
strategies for new or revised programs include measures to ensure
competition or the option of competition throughout the life cycle at
both the prime and the subcontract level.
Major subcontractors for case-study programs rarely changed across the
life cycle of each program.
We found only a few exceptions:
* Only one C-5 RERP major subcontractor (for wiring harnesses) changed
between development and production contracts. This had been a core
competency made in-house by Lockheed Martin, which decided to "buy" for
the production contract due to advances in the wiring-harnesses
industry and increased affordability.
* During development of P-8A, Boeing determined that its original
supplier of a highly complex sensor system would be unable to provide
the required solution, and ultimately selected a replacement for this
major subcontractor.
Primes‘ reasons cited for lack of competition for follow-on major
subcontracts include the following:
* cost to qualify new suppliers (however, some government officials
told us that these costs are generally paid for by the government);
* capital investment required of suppliers during development; and:
* lack of other suppliers able to fulfill the production contract.
Some Primes Select Affiliates and Manage Their Work Like Other
Subcontracts:
Prime contractors rely heavily on affiliates within their own companies
to perform work.
* A contract awarded to an affiliate is larger than any other
subcontract on the Stryker program, representing over 20 percent of the
total major subcontract value.
* On the P-8A program, an agreement with Boeing Commercial Airplanes
(BCA) division is larger than any subcontract under the prime contract.
The FAR defines a "make item" as "an item or work effort to be produced
or performed by the prime contractor or its affiliates, subsidiaries,
or divisions."
Some prime contractors in our review select and manage affiliates that
may work on their programs using some of the same methods as with
external subcontractors. Examples of how these methods are applied
include the following:
* Selection: If Raytheon issues Requests for Proposals (RFP) and a
Raytheon affiliate is on the competitive sources list and receives a
copy, the affiliate‘s proposal must receive fair evaluation alongside
all other competitors.
* Management: Lockheed Martin requires work awarded to affiliated
divisions to undergo the same rigorous management as similar
subcontracts, including clear definition of cost, schedule, and
technical requirements, as well as adequate staffing.
Primes Monitor All First-Tier Subcontractors to Identify When
Intervention Is Necessary:
For major subcontractors and other first-tier suppliers, primes have
processes for gathering and analyzing large amounts of information that
allow them to:
* evaluate subcontractor performance by tracking metrics on quality and
rejections, delivery and schedule, responsiveness, and technical
performance; and:
* assess financial health using commercial tools for predicting
supplier solvency problems as well as internal databases and
investigative capabilities.
Primes also have a range of procedures for resolving subcontractor
issues raised through analysis of this information, including:
* corrective action programs with assigned owners and closure dates;
* engagement with prime executives and government customers;
* prime verification and validation of steps taken towards problem
resolution; and:
* when necessary, subcontract exit strategies for chronic
nonperformance;
Primes often support subcontractor development by investing their own
resources in improving subcontractor capabilities: for example, mentor-
protégé relationships and upgrading of quality and manufacturing
processes.
Subcontractor Information Is Shared with Government” Regardless of
Contract Requirements:
While some subcontractor data is contractually required by the
government, prime contractors noted that large amounts of additional
data they gather are shared with the government. Examples include the
following:
* Raytheon, General Dynamics, and Boeing routinely share information
about supplier issues (beyond that which is contractually required)
with program office representatives. Only periodic data reporting is
contractually required.
* For JSF, Lockheed Martin has created a supplier management "war room"
to track key metrics and monitor the performance of major
subcontractors. Although not contractually required, there is an almost
identical room at the program office so the prime and the government
have a similar level of insight into major subcontractors.
For prime facilities where they are colocated, DCMA officials also have
access to subcontractor information tracked by the prime. DCMA is also
typically invited to recurring customer meetings, such as program
reviews and site-level executive advisory groups.
Prime Insight into and Control over First-Tier Subcontractors Is Not
Matched at Lower Tiers:
Prime contractors have developed mechanisms for managing their direct
subcontractors.
Primes have less control over lower-tier suppliers because they only
have contractual relationships with their first tier.
However, delivery and quality problems that affect program performance
may stem from subtier suppliers.
The size and complexity of their supply chains further reduces primes‘
visibility into individual subtier suppliers.
Risk due to diminishing manufacturing sources is a particular concern
if a subtier provider decides to stop production of a critical item,
leaving the prime with limited (and costly) mitigation options.
Counterfeit materials can also enter the defense supply chain at lower
tiers, complicating identification and prevention efforts.
Prime contractors are attempting to address this issue, but acknowledge
the challenges presented by their complex supply chains. For example,
Lockheed Martin provides its personnel with guidance on how to identify
critical subtier suppliers and assess risk but also notes the
difficulty posed by the complexity of the company‘s supply chains and
customer concerns about the lack of visibility and control at lower
tiers.
Contents:
* Objective 1: Definition of Major Subcontract:
* Objective 2: Prime Contractors‘ Approach to Selecting and Managing
Subcontracts:
* Objective 3: Government Visibility into Subcontracts Pre–and Post–
Prime Contract Award:
* Contracting Approach at Prime Level Affects Government‘s Visibility
into Subcontract Costs:
* Government Reviews of Prime-Contractor Business Systems Can Help
Ensure Subcontract Prices Are Reasonable:
- Programs Do Not Consistently Use Available FAR Provisions or
Potential Contract Deliverables to Provide Visibility into Subcontract
Awards:
- Programs Rely on Prime Contractors to Monitor and Manage
Subcontractors:
- Case-Study Programs Use Different Methods to Oversee Subcontracts:
- Commercial-Item Designation Limits Government Visibility into
Subcontractor Performance:
* Objective 4: Organizational Conflicts of Interest (OCI):
* Detailed Scope and Methodology:
Objective 3: Government Visibility (Preaward):
Contracting Approach at Prime and Subcontract Level Affects
Government‘s Visibility into Subcontract Costs:
Competitiveness of the prime contract determines, in part, the level of
government visibility into subcontract costs:
* Four of six prime contracts we reviewed were competed in the
development phase, and all six programs awarded or plan to award the
production contract as sole source.
* For prime contracts awarded competitively, the government relies on
market forces to produce the best subcontracting solution. There is no
requirement to obtain cost and pricing data on competitively awarded
contracts, though the government must assess whether the price is
reasonable.
* For sole source awards, the government can ask DCAA to validate
subcontractors‘ cost and pricing data and evaluate the subcontractors‘
proposals.
Subcontracts for commercial items are exempt from cost and pricing data
requirements. The government relies on market forces to ensure
reasonable costs. Examples from our case studies include the following:
* P-8A: Prime concluded in its upcoming production contract that the
modified Boeing 737 aircraft produced by BCA met the FAR‘s definition
of a commercial item. According to the contracting officer, the
government recognizes that by agreeing with the commercial-item
determination, it does not have full access to the contractor‘s cost
and pricing data, but weighed this against the assumed cost benefits of
a commercial item. However, DCAA has had concerns with the prime‘s
determination because of the extent of modification to the aircraft,
which it estimated to cost over $460 million.
* Stryker: Contractor determined that a number of key components were
commercial items including the engine, transmission, fire extinguishing
system, and winch.
Government Reviews of Prime-Contractor Business Systems Can Help Ensure
Subcontract Prices Are Reasonable:
Prime contractors generally rely on their estimating, purchasing, and
billing systems as a means to manage their subcontracts.
Prime contractors must have estimating systems that consistently
produce well-supported proposals acceptable as a basis for negotiation
of fair and reasonable prices, including proposed subcontract prices.
DCAA conducts audits of business systems at all major contractors on a
periodic basis. We found examples in which DCAA deemed prime contractor
systems inadequate:
* JSF: In 2007 DCAA reported that inadequacies with Lockheed Martin‘s
(Aeronautics) estimating system could adversely affect the company‘s
ability to formulate, process, summarize, and report cost estimates in
a manner that is consistent with applicable contract laws and
regulations. Moreover, DCAA recently reported weaknesses in the prime‘s
purchasing system.
* CVN 78: In 2009 DCAA reported estimating system deficiencies,
including failures by Northrop Grumman (Newport News Shipbuilding) to
perform appropriate cost analysis for applicable subcontracts prior to
certification of the prime contract price. According to DCAA‘s draft
purchasing system review, deficiencies at Northrop Grumman (Newport
News Shipbuilding) could adversely affect the contractor‘s ability to
report material costs (including subcontracts) of $1.2 billion per
year.
While the FAR requires that the administrative contracting officer
(ACO) determine if a review of the contractor‘s purchasing system is
necessary at least every 3 years, we found issues with the timeliness
of these reviews in the case of the CVN program.
* The ACO (usually DCMA, but SUPSHIP in the case of shipbuilding
programs) reviews the contractor‘s purchasing system (known as a CPSR)
to evaluate the efficiency and effectiveness with which the contractor
spends government funds and complies with government policy when
subcontracting, in particular as they relate to ensuring competition at
the subcontract level.
* The last CPSR for CVN 78 was in 2000. Since then the Navy has awarded
contracts for the CVN 78–class worth over $8.3 billion. SUPSHIP is
currently drafting an updated CPSR.
Programs Do Not Consistently Use Available FAR Provisions or Potential
Contract Deliverables to Provide Visibility into Subcontract Awards:
Case-study programs generally did not include FAR provisions available
for insight into subcontracting, such as the consent-to-subcontract
clause or make-or-buy plan, as well as potential contract deliverables,
such as a subcontract management plan.
A number of officials noted that their program contracts were awarded
during the acquisition reform era when the goal was to limit
contractual requirements.
Consent-to-Subcontract Clause:
None of our case-study programs have exercised a consent-to-subcontract
clause in the prime contract, but the contracting officer for the JSF
program told us that it plans to use the clause in the upcoming JSF
production contract.
The FAR requires the contractor to obtain the contracting officer‘s
consent to subcontract prior to awarding certain subcontracts for
contractors who don‘t have an approved purchasing system.
However, contracting officers may also require a consent-to-subcontract
clause if a subcontract is high value, complex, or critical.
According to DCAA, a consent clause provides the government with an
opportunity to examine the reasonableness of subcontract costs before
costs are incurred.
Subcontract Management Plan:
Only the C-5 RERP program required submission of a subcontract
management plan (beyond the required small- business subcontracting
plan).
Subcontract management plans define the strategies, plans, processes,
and procedures the prime will use to manage its subcontracts.
The CVN 78, JSF, and P-8A programs did not require a plan but required
information on how the prime planned to manage its subcontractors as
part of the proposal or contract.
Make-or-Buy Program Plans:
In an effort to ensure competition at the subcontract level, DOD
implements WSARA by requiring that prime contractors make fair and
objective "make-buy" decisions by fully considering contractors other
than themselves for the development or construction of major subsystems
and components of major weapon systems.
FAR 15.407-2(a) states that, when required, the government may reserve
the right to review and agree on the contractor‘s make-or-buy program
when necessary to ensure negotiation of reasonable contract prices.
Only one of the selected case-study programs (CVN 78) required a make-
or-buy plan to gain perspective on prime contractor‘s decision to make
in-house or subcontract out.
Contracting officers and program officials we spoke with generally did
not see a benefit in requiring such a plan, stating that they rely on
the prime contractor to evaluate the supply chain to achieve cost
efficiency.
Contracting officers and program officials also stated that requiring a
make-or-buy plan would embroil them in the prime‘s decision-making
process and could possibly make the government financially liable for
decisions resulting from directing the prime contractor.
DCAA officials for the JSF program stated that requiring a make-or-buy
plan provides the government with an important tool to evaluate the
degree of subcontract competition and ultimately price reasonableness.
Without a make-or-buy plan clause, the prime contractor is not required
to provide the government with this information.
Programs Rely on Prime Contractors to Monitor and Manage
Subcontractors:
Program offices cite "privity of contract" as a reason for taking a
limited role in overseeing subcontracts.
* Government only has a contractual relationship with the prime, not
with subcontractors.
* Officials in our review told us they do not want to be in the
position of directly instructing subcontractors, which may have
implications for government liability.
* Program offices in our review emphasized that they only interact with
subcontractors with the consent or presence of the prime.
All program offices require primes to provide periodic updates on
program execution, which may include information on subcontractor
status.
* On the C-5 RERP program, the prime conducts semiannual, 3-day program-
management reviews; and quarterly, 1-day, technical-interchange
meetings with the government, where it reports on the C-5 production
progress (including any issues with subcontractors).
* The JLENS statement of work requires that the contractor conduct
quarterly program reviews and present subcontractor award schedules and
status.
Instead of contractual requirements, program offices rely heavily on
informal communication (for example, weekly check-in calls) from the
prime contractor for regular visibility into subcontractor performance.
* Stryker program officials stated that someone at various levels of
the program office is in contact with the prime regarding
subcontracting activity on a daily basis and that the prime holds
weekly meetings with the program office, which includes issues with
subcontractors.
* The P-8A program office holds weekly meetings with Boeing, where the
program office would be informed of potential issues with the
subcontractors.
Level of government insight tends to increase when an issue with a
subcontractor threatens overall program performance, or when the
program reaches critical phases of its life cycle (e.g., transition to
production), or both.
Case-Study Programs Use Different Methods to Oversee Subcontracts:
A number of methods are available to programs to gain insight into
subcontract performance during program execution. Programs used these
methods to varying degrees:
* Earned Value Management (EVM):
- DFARS requires that cost-type subcontracts over $20 million must
submit EVM data.
- Since almost all major subcontracts in our study are fixed price, EVM
data are not required.
- Only three programs required EVM submissions for any of their major
subcontracts during the development phase (10 subcontracts on JSF; 3 on
P-8A; and 3 on JLENS).
* Subcontractor facility visits: All of the programs in our review
noted that they have visited suppliers but all stated that they involve
or inform the prime contractor before doing so.
* Government participation in subcontractor negotiations: No program
stated that it participated in subcontract negotiations.
Subcontractor focus in DCMA/SUPSHIP surveillance:
* Since DCMA/SUPSHIP are colocated at the prime contractor‘s facility,
officials noted that they are well positioned to oversee the prime
contractor‘s performance, including its supplier management. If
additional information on a particular subcontract is needed, DCMA and
SUPSHIP will issue letters of delegation to the DCMA office responsible
for the subcontractor‘s facility.
* All DCMA offices provide periodic reports to the program office on
program performance. These reports may include data on supplier
performance.
* DCMA officials for the JLENS program provide a monthly report to the
program office, which contains a separate section on supply-chain
performance.
* DCMA officials for the C-5 program hired supply-chain management
experts to increase oversight in the lower levels of the supply chain.
* P-8A and JSF programs have DCMA surveillance plans that specifically
highlight supplier issues as a reporting requirement.
Commercial-Item Designation Limits Government Visibility into
Subcontractor Performance:
Government lacks insight into the performance of commercial
subcontractors, presenting considerable challenges for government
quality assurance, as illustrated by two examples from our case
studies:
Since Boeing designated the airframe on the P-8A program a commercial
item, government surveillance is extremely limited.
* BCA produces the airframe, including installation of the engines,
fuel tanks, fuselage, and airwings, in its commercial production
facility.
* While DCMA believes that the aircraft contains ’significant“
structural modifications as compared to a commercial 737, neither DCMA
nor the prime has access to BCA‘s production facilities. As such, there
remains no government surveillance of aircraft parts or BCA processes.
* According to government officials, while the government lacks
oversight, using a commercial aircraft is believed to be the most cost-
effective approach for production.
Caterpillar manufactures a commercial engine for Stryker and has
elected not to allow DCMA quality-assurance personnel into its plant or
to allow the prime to inspect the engines while they are in production.
* According to DCMA officials, this lack of access meant that the prime
and government were not allowed to inspect the engines even after
Caterpillar dropped its original engine and replaced it with another
model.
* The switch occurred after production of about 3,000 Stryker vehicles
and resulted in software integration issues with the new model.
FAR 12.208 provides that the government shall rely on contractors‘
existing quality assurance instead of government inspection and testing
unless customary commercial practice include in- process inspection.
Contents:
* Objective 1: Definition of Major Subcontract:
* Objective 2: Prime Contractors‘ Approach to Selecting and Managing
Subcontracts:
* Objective 3: Government Visibility into Subcontracts Pre–and Post–
Prime Contract Award:
* Objective 4: Organizational Conflicts of Interest (OCI):
- Government Does Not Generally Consider Potential OCIs in Weapon
System Contracts:
- Most Programs Only Had Limited Guidance and Instruction Regarding
Government OCI Procedures
- Stryker Program: Potential OCI Identified and Mitigation Strategy
Developed:
- Prime Contractors Have OCI Procedures That Are Most Effectively
Triggered by Contract Clauses:
- OCI Clause Not Consistently Flowed Down to Subcontractors:
- While Effect of Proposed DFARS Rule Is Unknown, Primes Are Responding
to Changing OCI Requirements:
* Detailed Scope and Methodology:
Objective 4: OCI:
Government Does Not Generally Consider Potential OCIs in Weapon System
Contracts:
Contracting officers generally believed that primes are responsible for
identifying and informing the government of any potential OCIs at both
the prime and subcontract level”regardless of whether a clause is
included in the RFP or contract.
GAO bid protests have often been sustained because an agency failed to
initially identify an OCI, or, having recognized a potential OCI,
failed to properly mitigate or resolve OCIs.
Most programs displayed limited concern about potential OCIs.
* Contracting officers in our case studies generally did not believe
that OCIs could occur in weapon system contracts.
* Some officials assumed that the contracting officers responsible for
support contracts (such as for testing or requirements definition)
would notify them in the event there was an OCI with their program.
However, no programs‘ contracting officers that we spoke with
specifically contacted any other contracting officer to ensure that a
potential OCI did not exist.
Most case-study programs did not include an OCI clause in contracts or
RFPs that would specifically outline the contractor‘s responsibility to
ensure that neither the prime nor its subcontractors had a potential
OCI.
* Only the JLENS program featured an OCI clause in its initial RFP from
1997:
- Clause specifically stated that the prime contractor was responsible
for ensuring that both it and its subcontractors did not have any
conflicts.
- Subsequent contract and contract modifications did not include an OCI
clause.
- Stryker program plans to include contract language aimed at
minimizing a potential OCI (see below).
Most Programs Only Had Limited Guidance and Instruction Available
Regarding OCI Procedures:
Contracting officers we spoke with were not aware of any service-level
guidance or instructions that outlined the procedures for identifying
and mitigating potential OCIs.
While all services had OCI clauses that could be included in contracts,
there was limited guidance regarding specific OCI procedures available
for programs included in our review:
* Air Force guidance only notes that contracting officers should notify
offerors of the potential use of an OCI clause and provides that OCIs
should be a mandatory topic of discussion at acquisition planning
meetings.
* Specific OCI procedures are not included in the contract-specialist
handbooks at either of the Navy‘s two buying commands responsible for
case studies included in our review.
* The Army command responsible for JLENS provided the most detailed
instruction, including procedures to staff OCI actions, methods to
preclude OCIs, and directions to contracting officers to include a
standard OCI provision in all RFPs.
Contracting officers we spoke with were also not aware of any specific
OCI points of contact at their command, but assumed they could contact
their legal department if necessary.
Stryker Program: Potential OCI Identified and Mitigation Strategy
Developed:
Stryker program officials stated that as a result of WSARA the
government needs to be more proactive in identifying OCI issues,
especially at the subsystem level.
Program officials recognized the potential OCI in the follow-on
contract for Stryker modernization if the current prime or its
affiliates chose to compete as suppliers of a major subsystem since
General Dynamics performed system engineering and software integration
/ software system-architecture development for the Stryker program:
According to program officials, without mitigation, there is a
potential OCI because of:
* unequal access to information for affiliates or subsidiaries of
General Dynamics,
* biased ground rules if the prime conducted the competition and
determined the statement of work, and:
* impaired objectivity if the prime was in a situation of evaluating
its affiliates or subsidiaries.
To mitigate a potential OCI, the government plans to conduct the
competition for Stryker subsystem modernization, rather than the prime
contractor, if other business units or affiliates of General Dynamics
choose to compete.
The program office plans to use the following mitigation strategies:
* the prime will not competitively evaluate any General Dynamics
business units or affiliates,
* the government will determine subsystem specifications by developing
the statement of work, and:
* General Dynamics will use Proprietary Data Agreements in order to
protect competing companies‘ proprietary information.
The Stryker program plans to include contract language that will
require General Dynamics to submit a competition plan that specifies
its role in preparing scopes of work and specifications, providing
systems engineering and technical support, as well as its access to
proprietary information and disclosure of affiliates that plan to
compete.
Prime Contractors Have OCI Procedures That Are Most Effectively
Triggered by Contract Clauses:
All prime contractors we reviewed had established corporate OCI
policies and procedures.
Select primes have OCI reporting systems that distribute notices of new
business opportunities throughout the company to identify and assess
potential OCIs.
All prime contractors we reviewed had personnel including members of
the legal departments, OCI focal points/coordinators, or OCI reviewers
to assist in evaluating OCI language, determining whether an actual or
potential OCI exists, and selecting firewalls or mitigation plans.
* For example, General Dynamics stood up a department to handle
corporate- and division-level OCI issues, and every business unit has
an OCI coordinator to help address potential issues.
While prime contractors will initiate OCI review procedures when a
conflict is suspected (for example, when the work effort includes
preparation of work statements or specifications or technical
direction), the process is mandatory on all solicitations that contain
an OCI clause.
Prime contractors told us that the inclusion of an OCI in a RFP or
contract ensures that the business opportunity will be investigated by
the company.
OCI Clause Not Consistently Flowed Down to Subcontractors:
Prime contractor OCI procedures are designed to identify risks to the
company and its affiliates, but primes have different policies
regarding whether OCI clauses are flowed down to their subcontracts.
* Officials from General Dynamics stated that while there is no
requirement to flow down OCI clauses included in the prime contract to
the subcontract level, the company is now doing so for new programs.
* Raytheon policy states that OCI clauses are only flowed down to
suppliers when the government specifically denotes this requirement in
the contract or solicitation.
* Lockheed Martin flows OCI requirements in the prime contract to its
subcontracts when deemed necessary.
If an OCI clause is not included, prime contractors believe that it is
the subcontractor‘s responsibility to notify them of any potential OCI.
While Effect of Proposed DFARS Rule Is Unknown, Primes Are Responding
to Changing OCI Requirements:
Changes to DFARS are in progress as a result of WSARA.[Footnote 24]
* The proposed rule seeks to implement section 207 of WSARA by
providing uniform guidance and tightening existing requirements for
OCIs in major defense acquisition programs.
* While it is not yet known how these changes may ultimately affect
government management of OCIs, the proposed rule does include
additional requirements for the contracting officer in identifying and
resolving OCIs for both the prime contractor and its affiliates.
* The proposed rule includes standard OCI provisions and clauses that
contracting officers can include as appropriate:
Despite uncertainty, primes have responded to the imminent OCI
requirements changes.
* Northrop Grumman and Lockheed Martin have recently sold or plan to
sell subsidiaries in order to avoid potential future OCIs.
* Some of the prime contractors we spoke to are in the process of
updating corporate OCI policy to reflect the additional requirements
that DFARS is likely to impose.
Contents:
* Objective 1: Definition of Major Subcontract:
* Objective 2: Prime Contractors‘ Approach to Selecting and Managing
Subcontracts:
* Objective 3: Government Visibility into Subcontracts Pre– and Post–
Prime Contract Award:
* Objective 4: Organizational Conflicts of Interest (OCI):
* Detailed Scope and Methodology:
Detailed Objectives, Scope, and Methodology:
Objectives:
Section 844 of the 2010 National Defense Authorization Act directed GAO
to conduct a study on the structure and management of major
subcontracts under contracts for the acquisition of selected major
weapon systems, addressing the following:
1. The number of major subcontracts under each prime contract reviewed.
2. The manner in which the prime contractor addressed decisions to
conduct work in- house or through subcontracts.
3. The manner in which any potential organizational conflicts of
interest were addressed and the government‘s role (if any) in selecting
the approach chosen.
4. The manner in which such subcontracts were awarded (including the
degree of competition) and the government‘s role (if any) in such award
decisions.
5. Any recommendations that the Comptroller General may have for
improving government oversight, reducing the oversight burden on the
acquisition workforce, or otherwise improving the management of
subcontractors under contracts for the acquisition of major weapon
systems.
In consultation with staff from the Senate and House Armed Services
Committees, we used the following reporting objectives for the purposes
of this review:
1. How do government and prime contractors define "major" subcontract
and what is the number and value of those considered major?
2. What is the prime contractor‘s approach to selecting and managing
major subcontractors?
3. To what extent does the government have visibility into major
subcontracts?
4. How are potential OCIs addressed and what role, if any, does the
government play in selecting the approach chosen?
Scope and Methodology:
To address the mandate, we used a case-study approach and selected two
programs from each of the military services, using the following
criteria:
* Major Defense Acquisition Program (MDAP) in Acquisition Category
ID[Footnote 25]:
* Total program cost greater than $5 billion.
* Development start dates of 2000 or later.
* DOD-only programs”no partnerships with other agencies.
* Major prime contractor. We selected the top five defense contractors
in 2009 (according to revenue).
* Major prime contractor not currently working on program as part of
multinational joint venture or in partnership with another prime.
We selected case studies that represented a variety of platforms
(aircraft, ship, land, and surveillance systems):
Using our criteria, we selected the following programs:
Navy:
* CVN 78 Gerald Ford–Class Aircraft Carrier Program (CVN 78):
* P-8A Poseidon Aircraft:
Army:
* Stryker Family of Vehicles:
* Joint Land Attack Cruise Missile Defense Elevated Netted Sensor
System (JLENS):
Air Force:
* C-5 Reliability Enhancement and Re-Engining Program (RERP):
* F-35 Lightning II Joint Strike Fighter (JSF):
For each of the case studies, we met with:
* prime contractor,
* government program office and contracting officer, and:
* cognizant Defense Contract Management Agency (DCMA), Supervisor of
Shipbuilding and Conversion (SUPSHIP) and Defense Contract Audit Agency
(DCAA) officials.
To gain insight into subcontract management and OCI issues across DOD
and the individual services, we met with:
* Office of the Under Secretary of Defense, Acquisition, Technology,
and Logistics;
* Naval Air Systems Command, Cost Department;
* DCAA headquarters;
* DCMA headquarters; and:
* experts in the field of defense acquisitions.
To understand issues pertaining to subcontract award, we analyzed
pertinent contract documents for each of the case studies, including
the request for proposals for the prime contract, acquisition plan and
strategy, and contracting officer‘s summary of negotiations.
We compared primes‘ and government‘s definitions of major subcontract
and examined the number and total value of major subcontracts using
data reported by the prime contractors.
We analyzed corporate policies and procedures for each of our case
studies (when available), including:
* make-or-buy procedures,
* purchasing of goods and services,
* subcontract management plans, and:
* supplier performance metrics.
We analyzed the government‘s visibility into subcontractor performance
after the prime contract was awarded by examining relevant DCAA and
DCMA reports for each of our case studies.
We reviewed relevant parts of the Federal Acquisition Regulation (FAR),
Defense Federal Acquisition Regulation Supplement (DFARS), and service-
level acquisition regulations.
We also reviewed GAO and DOD Inspector General reports on supplier base
and OCI issues.
We conducted this performance audit from March 2010 through October
2010 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
(120894):
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Web site: [hyperlink, http://www.gao.gov/]:
Contact:
Chuck Young, Managing Director, Public Affairs, youngc1@gao.gov:
(202) 512-4800, U.S. Government Accountability Office:
441 G Street NW, Room 7149, Washington, D.C. 20548:
Copyright:
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reproduced and distributed in its entirety without further permission
from GAO. However, 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.
(120894):
[End of section]
Footnotes:
[1] Weapon Systems Acquisition Reform Act of 2009 (WSARA), Pub. L. No.
111-23 § 202 (2009). These provisions were incorporated in the Defense
Federal Acquisition Regulation Supplement (DFARS) on Feb. 24, 2010.
"Make or buy" refers to the prime contractor's written plan for a
contract identifying those major items to be produced or work efforts
to be performed in the prime contractor's facilities and those to be
subcontracted. "Make" items include those produced or performed by the
prime's affiliates, subsidiaries, or divisions. (FAR 2.1 and 15.407-2
[b]).
[2] Pub. L. No. 111-23 § 207 (2009).
[3] Defense Federal Acquisition Regulation Supplement; Acquisition
Strategies to Ensure Competition Through out the Life Cycle of Major
Defense Acquisition Programs, 75 Fed. Reg. 8272 (Feb. 24, 2010);
Defense Federal Acquisition Regulation Supplement; Organizational
Conflicts of Interest in Major Defense Acquisition Programs, 75
Fed.Reg. 20954 (Apr. 22, 2010).
[4] National Defense Authorization Act for Fiscal Year 2010, Pub. L.
No. 111-84, § 844 (2009).
[5] The most recent SARs available at the time we started our review.
[6] Acquisition Category ID denotes programs with special interest
based on one or more factors, including: technological complexity;
congressional interest; a large commitment of resources; and critical
to achievement of a capability. DOD Instruction 5000.02, enclosure 2,
Paragraph 9.a. (Dec. 8, 2008).
[7] At the time of program start, the prime contractor was GM GDLS
Defense Group LLC; a joint venture of General Dynamics (Land Systems)
and General Motors Corporation. In 2003, General Dynamics (Land
Systems) bought General Motors Defense-Canada. The prime contract for
Stryker is with GM GDLS Defense Group LLC. However, the program is
managed by General Dynamics (Land Systems).
[8] Hereafter, for the purposes of this review, we refer to the prime
contractors by their corporate names. We refer to the prime contractor
by its division only when necessary for clarity.
[9] For the purposes of this briefing we refer to this program as the
JSF. While the JSF program does include multinational partners as part
of its acquisition approach, there is only one prime contractor for the
air system--Lockheed Martin Aeronautics, which is based in Ft. Worth,
Texas. Our analysis of the JSF program only covers the prime contracts
for the air system and does not cover the propulsion systems.
[10] We analyzed contracts for system design and development as well
as, where applicable, low-rate initial production.
[11] GAO, Department of Defense: A Departmentwide Framework to Identify
and Report Gaps in the Defense Supplier Base Is Needed,
http://www.gao.gov/products/GAO-09-5] (Washington, D.C.: Oct. 7, 2008).
DOD Inspector General Report No. D- 2010-024, Contracted Advisory and
Assistance Services for the U.S. Army Future Combat Systems, Nov. 24,
2009.
[12] Under a fixed-price contract, the buyer pays a fixed price and is
guaranteed an end item or service whether the actual total cost falls
short of or exceeds the contract price. The seller assumes the risk of
a cost overrun. Under a cost-reimbursement contract, the buyer pays the
seller's allowable costs, plus a fee, and the seller makes a good faith
effort to meet the buyer's needs within the estimated cost. However,
the risk of a cost overrun is on the buyer.
[13] FAR 42.202 (e) 2.
[14] FAR 12.208 provides that contracts for commercial items shall rely
on contractors' existing quality assurance as a substitute for
government inspection and testing unless customary market practices
include in-process inspections.
[15] The legal relationship and responsibilities between parties to the
same contract. It is commonly understood to mean that the government's
contractual relationship is with the prime contractor; therefore the
government is generally without authority to direct the subcontractor
to perform tasks under the contract.
[16] However, prime contractors did submit small-business
subcontracting program plans.
[17] The term "OCI" refers to a person that is unable to or potentially
unable to render impartial assistance or advice to the government, or
its objectivity in performing work may be impaired, or it has an unfair
competitive advantage because of other activities or relationships. FAR
2.101. "Person" is used in the customary legal sense, which includes a
company or organization. Companies and organizations are the conflicted
party when reviewing OCIs.
[18] JSF is a joint Air Force and Navy program, but was under Air Force
leadership at the time of selection. We consider it an Air Force
program for the purposes of this audit. Our analysis of the JSF program
only covers the prime contracts for the air system and does not cover
the propulsion systems.
[19] Hereafter, for the purposes of this review we refer to the prime
contractors by their corporate names. We refer to the prime contractors
by their division only when necessary for clarity.
[20] The prime contract for Stryker is with GM GDLS Defense Group LLC,
however, the program is managed by General Dynamics Land Systems.
[21] Subcontracts also may include purchase orders.
[22] Thomas Christie, "What Has 35 Years of Acquisition Reform
Accomplished?" United States Naval Institute Proceedings, vol. 132, no.
2 (2006).
[23] American National Standards Institute / Electronic Industries
Alliance Standard 748, Earned Value Management Systems (ANSI/EIA-748).
[24] DOD is currently reviewing comments submitted by the public and is
drafting the final rule.
[25] Acquisition Category ID denotes programs with special interest
based on one or more factors including: technological complexity;
congressional interest; a large commitment of resources; and critical
to achievement of a capability.
