GAO-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-
prot�g� 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): 

GAO on the Web: 
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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protection in the United States. The published product may be 
reproduced and distributed in its entirety without further permission 
from GAO. However, because this work may contain copyrighted images or 
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(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.