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Federal Subcontracting: Further Actions Needed to Improve Oversight of Pass-through Contracts

GAO-15-200 Published: Dec 22, 2014. Publicly Released: Dec 22, 2014.
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Highlights

What GAO Found

Congress required the Department of Defense (DOD), the Department of State (State), and the United States Agency for International Development (USAID) to issue guidance and regulations as necessary to ensure that contracting officers complete additional analyses prior to awarding pass-through contracts—contracts meeting certain criteria and in which prime contractors plan to subcontract 70 percent or more of the total cost of work to be performed—by July 2013. (See figure.)

Notification, Review, and Determination Requirements for Pass-through Contracts at the Departments of Defense, State, and U.S. Agency for International Development

Notification, Review, and Determination Requirements for Pass-through Contracts at the Departments of Defense, State, and U.S. Agency for International Development

DOD, State, and USAID varied in their implementation of Section 802. Specifically, GAO's analysis of the agencies' policies and regulations found the following:

USAID issued a policy directive in June 2013 restating Section 802 requirements and is updating checklists used by contracting officers.

State issued a procurement bulletin in July 2014 that restated Section 802 requirements but has not taken further steps.

Neither USAID nor State has provided its contracting officers additional information to help them implement these new requirements, such as by identifying how to assess alternative contracting arrangements or how to document their decisions.

DOD has not taken any actions and is waiting for revisions to the Federal Acquisition Regulation—expected to be completed by March 2015—before deciding what, if any, changes to its guidance are needed.

As of November 2014, none of the agencies have updated their management review processes to reflect Section 802 requirements.

Federal government internal control standards state that control activities, such as policies and procedures, help to ensure that management directives are carried out and actions are taken to address risk. The lack of guidance and updated management review processes limits the agencies' ability to minimize the potential risk of paying excessive pass-through costs.

Why GAO Did This Study

DOD, State, and USAID collectively spent approximately $322 billion on goods and services in fiscal year 2013. Nearly two-thirds of this dollar amount was awarded to prime contractors reportedly having a plan for using subcontractors. Concerns remain that the government could overpay contractors that provide no, or little, added value for work performed by lower-tier subcontractors. Section 802 of the NDAA for fiscal year 2013, mandated DOD, State, and USAID to issue guidance and regulations as necessary to ensure that contracting officers take additional steps prior to awarding pass-through contracts.

The accompanying conference report mandated that GAO evaluate the implementation of these requirements. This report assesses the extent to which DOD, State, and USAID issued guidance and regulations consistent with Section 802. GAO reviewed policies, guidance, and regulations at the three agencies and interviewed acquisition officials.

Recommendations

To help ensure contracting officers carry out Section 802 requirements, GAO recommends that DOD, State, and USAID take two actions: issue guidance to help contracting officers perform the additional steps required, and revise management review processes and guidance to verify implementation. DOD and State agreed with GAO's recommendations but USAID did not, stating that additional guidance might limit its contracting officers' discretion. GAO maintains that both recommended actions are still warranted for USAID.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Defense To help ensure contracting officers carry out the requirements of Section 802, the Secretary of Defense, Secretary of State, and Administrator of USAID should issue guidance to assist contracting officers by identifying approaches for or examples of how to assess alternative contracting approaches to include the feasibility of contracting directly with proposed subcontractors, and documenting a determination that the approach selected is in the best interests of the government.
Closed – Implemented
DOD concurred with GAO's recommendation and began work to revise its formal Procedures, Guidance, Information (PGI) to assist contracting officers as they carry out requirements established by Section 802 of the National Defense Authorization Act for Fiscal Year 2013. In July 2019, the Office of Defense Pricing and Contracting reported that a new PGI update would be drafted to provide contracting officers with guidance on how to assess alternative contracting approaches and document their decisions in contract files. In December 2019, DOD revised PGI 215.4, which is focused on contract pricing, to include several factors contracting officials should consider when carrying out the new requirements and directed the DoD components to check for compliance with the new rules in routine procurement reviews. This new guidance will help ensure that contracting officers will complete the appropriate analysis when prime contractors propose subcontracting significant portions of the work placed on contract.
Department of State To help ensure contracting officers carry out the requirements of Section 802, the Secretary of Defense, Secretary of State, and Administrator of USAID should issue guidance to assist contracting officers by identifying approaches for or examples of how to assess alternative contracting approaches to include the feasibility of contracting directly with proposed subcontractors, and documenting a determination that the approach selected is in the best interests of the government.
Closed – Implemented
In response to our recommendation, the Department of State issued a Procurement Information Bulletin (PIB) in December 2014 that summarizes the updated pass-through contract requirements now included in the Federal Acquisition Regulation, describes the associated responsibilities for contracting officers, and provides guidance to contracting officers on how to determine the best procurement approach for the government. Further, the PIB includes an example of how contracting officers could document their assessment of alternate contracting approaches.
U.S. Agency for International Development To help ensure contracting officers carry out the requirements of Section 802, the Secretary of Defense, Secretary of State, and Administrator of USAID should issue guidance to assist contracting officers by identifying approaches for or examples of how to assess alternative contracting approaches to include the feasibility of contracting directly with proposed subcontractors, and documenting a determination that the approach selected is in the best interests of the government.
Closed – Implemented
In response to GAO's recommendation, USAID issued a procurement executive bulletin (PEB) in September 2016 to provide clarification and guidance to contracting officers concerning the requirements of Section 802 of the National Defense Authorization Act for Fiscal Year 2013. The PEB contains background on the limitations of pass-through charges, notes requirements placed upon contracting officers, provides guidance for analyzing these charges, and informs contracting officers of how and where their final determinations should be recorded in the contract file. The bulletin includes an example of the language that contracting officers could use to record their final determination.
Department of Defense To help ensure contracting officers carry out the requirements of Section 802, the Secretary of Defense, Secretary of State, and Administrator of USAID should revise the processes and guidance governing management reviews of procurements to ensure that such reviews assess whether contracting officers are complying with the provisions of Section 802.
Closed – Implemented
DOD concurred with GAO's recommendation. Following a May 2015 Federal Acquisition Regulation update to reflect the requirements of Section 802 of the National Defense Authorization Act for Fiscal Year 2013, the Office of Defense Procurement and Acquisition Policy drafted supplementary information for an update of the agency's Procedures, Guidance, and Information (PGI) that was considered and rejected by Defense Acquisition Regulation Council. In July 2019, the Office of Defense Pricing and Contracting reported that new PGI guidance would be drafted that will require management reviews to consider compliance with Section 802 requirements included in the Federal Acquisition Regulation. Additionally, the office provided updated program management review guidance used by DCMA that included these requirements. The revised PGI guidance was implemented in December 2019, restating the requirements of the FAR and directing DoD components to incorporate them into procurement management reviews or other inspections. In November 2020, the Air Force notified GAO that this requirement was fulfilled by incorporating Section 802 requirements into its contracting self-inspection program. We also found that the Army's January 2021 procurement management review guidance covered these same requirements. Later, in July 2021, the Navy updated the Navy and Marine Corps Acquisition Regulation Supplement to include Section 802 requirements in a new annex focused on business clearance memorandum requirements. Similar guidance was provided by the Army that reflected certain price negotiation memorandum requirements. These guidance updates should help ensure that contracting officers across the Department of Defense are compliant the with Section 802 and associated FAR and DFARS requirements.
Department of State To help ensure contracting officers carry out the requirements of Section 802, the Secretary of Defense, Secretary of State, and Administrator of USAID should revise the processes and guidance governing management reviews of procurements to ensure that such reviews assess whether contracting officers are complying with the provisions of Section 802.
Closed – Implemented
In response to our recommendation, the Department of State issued a Procurement Information Bulletin (PIB) in December 2014 that summarizes the updated pass-through contract requirements in the Federal Acquisition Regulation, describes the associated responsibilities for contracting officers, and provides guidance to contracting officers on how to determine the best procurement approach for the government. Further, the PIB states that Heads of Contracting Activities will review certain contract files for the inclusion of the required determinations as part of the contract approval process and that other contract management reviews will check for compliance with these requirements in sample contracts.
U.S. Agency for International Development To help ensure contracting officers carry out the requirements of Section 802, the Secretary of Defense, Secretary of State, and Administrator of USAID should revise the processes and guidance governing management reviews of procurements to ensure that such reviews assess whether contracting officers are complying with the provisions of Section 802.
Closed – Implemented
Effective October 2014, USAID acquisition evaluations have incorporated a more thorough analysis of subcontracting levels through their use of risk assessment score cards and negotiation memorandum reviews to ensure adequate documentation is completed that fully supports subcontracting pass-through levels and award decisions. In addition, USAID acquisition officials will also analyze random files during its reviews to see if contracting officers are taking appropriate steps in instances where an offeror proposes to award subcontracts for more than 70 percent of the total award. Documentation used during these contracting officer evaluations references the requirements put forth in Section 802 of the National Defense Authorization Act for Fiscal Year 2013.

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Policies and proceduresSubcontractingBudget obligationsContract administrationContract oversightContract termsContracting officersFederal procurementFederal regulationsInternal controlsPrime contractorsPrime contractsSubcontractorsSubcontracts