Defense Contracting: Contract Risk a Key Factor in Assessing Excessive Pass-Through Charges
GAO-08-269
Published: Jan 25, 2008. Publicly Released: Jan 25, 2008.
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Highlights
One-third of the Department of Defense's (DOD) fiscal year 2006 spending on goods and services was for subcontracts. Concerns have been raised among DOD auditors and Congress about the potential for excessive pass- through charges by contractors that add little or no value when work is subcontracted. To better understand this risk, Congress mandated that GAO assess the extent to which DOD may be vulnerable to these charges. This report examines (1) DOD's approach to assessing the risk of excessive pass-through charges when work is subcontracted, (2) the strategies selected private sector companies use to minimize risks of excessive pass-through charges when purchasing goods and services, and (3) DOD's interim rule to prevent excessive pass-through charges. GAO's work is based on analysis of 32 fiscal year 2005 DOD contract actions at 10 DOD top contracting locations and discussions with DOD acquisition policy, audit, and contracting officials, including Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA) staff. GAO also interviewed nine selected private sector companies with diverse contracting experience.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Defense | As DOD finalizes its rule on preventing excessive pass-through charges and develops implementing guidance to ensure consistency in how contracting officials assess contractor value added, the Secretary of Defense should direct the Director of Defense Procurement and Acquisition Policy to require contracting officials to take risk into account when determining the degree of assessment needed. Risk factors to consider include whether (1) the contract is competed; (2) the contract type requires the government to pay a fixed price or costs incurred by the contractor; and (3) any unique circumstances exist, such as requirements that are urgent in nature. | In May 2008, DOD issued an interim rule in the Defense Federal Acquisition Regulation Supplement (DFARS) on preventing excessive pass through charges. Prior to final implementation of the DFARS change, however, Congress enacted Section 802 of the National Defense Authorization Act (NDAA) for Fiscal Year 2013 which included an additional requirement related to preventing pass through charges, altering any potential changes to the DFARS. Specifically, Section 802 required the Secretary of Defense, the Secretary of State, and the Administrator of the United States Agency for International Development to issue guidance and regulations for situations where the offeror intends to award... subcontracts for more than 70 percent of the total cost of work to be performed under the contract, task order, or delivery order. The contracting officer must (1) consider the availability of alternative contract vehicles and the feasibility of contracting directly with a subcontractor or subcontractors; (2) make a written determination that the contracting approach selected is in the best interest of the government; and (3) document the basis for such determination. In May 2015, the Federal Acquisition Regulation was amended to implement the requirements of Section 802, however these changes do not fully implement our recommendation. In August 2016, an official from DOD's Defense Procurement and Acquisition Policy office explained that DOD decided not to issue guidance because issues such as contract type, risk, unique factors and urgency are factors that contracting officers routinely consider in all contracts. They did, however, create a proposal adequacy checklist which requires the contracting officer to consider various aspects of the proposed costs, such as the level of detail of subcontractor costs and contract type. By determining whether the proposal is adequate using this checklist, the contracting officer is evaluating the risk. As a result of the proposal adequacy checklist and the changes to the FAR implementing section 802 of the NDAA of Fiscal Year 2013, we are closing this recommendation as implemented.
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| Department of Defense | As DOD finalizes its rule on preventing excessive pass-through charges and develops implementing guidance to ensure consistency in how contracting officials assess contractor value added, the Secretary of Defense should direct the Director of Defense Procurement and Acquisition Policy to require contracting officials to document their assessments of contractor value added in the contract files. | In May 2008, DOD issued an interim rule in the Defense Federal Acquisition Regulation Supplement (DFARS) on preventing excessive pass through charges. Prior to final implementation of the DFARS change, however, Congress enacted Section 802 of the National Defense Authorization Act for Fiscal Year 2013 which included an additional requirement related to preventing pass through charges, altering any potential changes to the DFARS. Specifically, Section 802 required the Secretary of Defense, the Secretary of State, and the Administrator of the United States Agency for International Development to issue guidance and regulations for situations where the offeror intends to award subcontracts...
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| Department of Defense | As DOD finalizes its rule on preventing excessive pass-through charges and develops implementing guidance to ensure consistency in how contracting officials assess contractor value added, the Secretary of Defense should direct the Director of Defense Procurement and Acquisition Policy to involve DCAA and DCMA in facilitating assessments as appropriate. | In May 2008, DOD issued an interim rule in the Defense Federal Acquisition Regulation Supplement (DFARS) on preventing excessive pass through charges. Prior to final implementation of the DFARS change, however, Congress enacted Section 802 of the National Defense Authorization Act for Fiscal Year 2013 which included an additional requirement related to preventing pass through charges, altering any potential changes to the DFARS. Specifically, Section 802 required the Secretary of Defense, the Secretary of State, and the Administrator of the United States Agency for International Development to issue guidance and regulations for situations where the offeror intends to award subcontracts...
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