Department of Energy Contracting: Actions Needed to Strengthen Subcontract Oversight
Fast Facts
Almost the entire $30 billion Department of Energy budget goes to contracts, most of which have subcontracts.
What sort of scrutiny do these subcontracts get?
In a 10-year look back, we found more than $3.4 billion in subcontract costs that had not been audited as required—some of which was already past the 6-year statute of limitations to recover unallowable costs.
Yet Energy has not clarified which subcontracts should be audited and what an audit should entail.
We made 6 recommendations to address these and other issues we found with Energy's subcontract oversight.
Photo of the sign in front of the Department of Energy in Washington, DC
Highlights
What GAO Found
In fiscal year 2016, 28 entities participated in the Department of Energy’s (DOE) and its National Nuclear Security Administration’s (NNSA) 24 largest prime contracts, which totaled $23.6 billion of DOE’s fiscal year 2016 obligations. The contractors awarded about $6.9 billion (nearly 30 percent) of those obligations to thousands of subcontractors. Further, multiple companies, universities, and other entities can join together to bid on a contract (i.e., become a “party to” a contract). GAO’s review of data about these contracts and subcontracts identified complex ownership relationships among the contractors and subcontractors. For example, GAO found that almost all of the 28 parties to the prime contracts in its review were also subcontractors to some prime contracts, holding a total of nearly 3,000 subcontracts with fiscal year 2016 obligations totaling about $927 million (see figure). GAO found that it can be difficult to track changes in the ownership of parties to the contracts and to understand the relationships between parties.
Distribution of DOE’s Fiscal Year 2016 Obligations for Its 24 Largest Prime Contracts
DOE and NNSA did not always ensure that contractors audited subcontractors’ incurred costs as required in their contracts. GAO’s review of 43 incurred-cost assessment and audit reports identified more than $3.4 billion in subcontract costs incurred over a 10-year period that had not been audited as required, and some subcontracts remained unaudited or unassessed for more than 6 years. Completing audits in a timely manner is important because of a 6-year statute of limitations to recover unallowable costs that could be identified through such audits. DOE headquarters has not issued procedures or guidance that requires local offices to monitor contractors to ensure that required subcontract audits are completed in a timely manner, consistent with federal standards for internal control. Without such procedures or guidance, unallowable costs may go unidentified beyond the 6-year limitation period of the Contract Disputes Act, preventing DOE from recovering those costs.
DOE and NNSA perform several reviews to ensure that contractors meet other subcontract oversight requirements. For example, DOE’s local offices review proposed subcontracts to ensure they are awarded consistent with policies related to potential conflicts of interest. However, local officials do not independently review information on subcontractor ownership because doing so is not required, although such information could alert officials to potential conflicts of interest. By requiring contracting officers to independently review subcontractor ownership information, DOE and NNSA would have better assurance that contractors are adequately identifying and mitigating organizational conflicts of interest.
Why GAO Did This Study
Recommendations
GAO is making six recommendations, including that DOE develop procedures that require local offices to monitor contractors to ensure timely completion of required subcontract audits, and require local DOE officials to independently review subcontractor ownership information to identify potential conflicts of interest. DOE partially concurred with five of GAO’s six recommendations but did not agree to independently review subcontractor ownership information. GAO maintains that the recommended actions are valid.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Energy | The Director of the DOE Office of Acquisition Management should clearly define—in guidance or other documents—which subcontracts should be audited, how an audit is defined, and how to meet subcontract audit requirements if Defense Contract Audit Agency is unable to conduct the audit.(Recommendation 1) |
In its comments on a draft of the report, DOE partially concurred with the recommendation, but stated that there is no government-wide requirement that defines an audit or prescribes the auditing of subcontracts. According to officials, DOE reviewed existing regulations, guidance, and contract provisions on audit requirements and determined that a need exists for additional guidance or contract provisions on audits for major contracts. DOE has not clarified which subcontracts should be audited. DOE submitted a case to the Civilian Agency Acquisition Council to recommend a government-wide requirement to define audit and prescribe when to obtain audits of subcontracts. As of March 2024, we were waiting on information from DOE on the status of the case. DOE officials said this is an issue that must be resolved governmentwide by audit organizations and DOE does not plan to take additional actions. DOE has taken action on the third part of the recommendation and included in its Acquisition Guide information on audit options when the Defense Contract Audit Agency is unable to conduct an audit.
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| Department of Energy |
Priority Rec.
The Director of the DOE Office of Acquisition Management should develop documented procedures or guidance that requires DOE's local offices to monitor the contractors' progress in completing required subcontract audits in a manner that ensures unallowable costs can be recovered within the 6-year limitation period in the Contract Disputes Act. (Recommendation 2) |
DOE partially concurred with the recommendation and agreed to review existing requirements and guidance and consider the extent to which it requires its field activities to monitor contractors' progress in completing required subcontract audits and determine if DOE needs to provide additional guidance. As of June 2020, DOE improved its Procurement Evaluation and Re-Engineering Team (PERT) Program, which includes a Peer Review Program that is designed to provide internal accountability. The PERT Risk Assessment Tool Manual and appendices contain guidance for contracting officers to review prime contractor auditing of subcontracts as part of their annual assessment to ensure subcontract audits are conducted so unallowable costs are recovered within the Contract Disputes Act 6-year limitation period.
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| Department of Energy | The Director of the DOE Office of Acquisition Management should review the differences in the frequency of DOE's accounting system reviews and approvals and develop guidance that includes criteria to determine the appropriate frequency of such reviews for prime contracts. (Recommendation 3) |
DOE partially concurred with the recommendation and agreed to review existing requirements and guidance and evaluate if additional guidance should be issued to guide DOE's field activities in determining the appropriate frequency of performing accounting system reviews. In August 2020, DOE issued an update to its Acquisition Guide to clarify that an accounting system review must be performed (1) prior to the award of a cost reimbursable contract, (2) if any changes are made to the accounting system after the contract is awarded, and (3) if during an annual review of a contractor's final indirect cost rate proposal the auditor decides the contractor's accounting system is not adequate for auditing the contractor's proposal.
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| Department of Energy |
Priority Rec.
The Director of the DOE Office of Acquisition Management should require local officials to independently review subcontractor ownership information as part of DOE consent reviews and assess potential conflicts of interest to ensure contractors are mitigating them. (Recommendation 4) |
In January 2022, DOE issued a Policy Flash that requires contracting officers to independently review subcontractor ownership information using available resources and information as part of subcontract consent reviews. Additionally, the Policy Flash summarizes the regulations, policies, and procedures that require contracting officers to perform independent analyses when reviewing potential organizational conflicts of interest.
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| Department of Energy | The Director of the DOE Office of Acquisition Management should require local offices to periodically reevaluate consent review thresholds. (Recommendation 5) |
DOE partially concurred with the recommendation and agreed to review existing guidance and evaluate if additional guidance is needed for field activities that emphasizes the importance of encouraging contractors to maintain a sufficient level of surveillance to confirm they are effectively managing their purchasing programs. As of June 2020, DOE officials said they reviewed existing federal and departmental policies, procedures, and available tools and determined sufficient guidance and oversight exists to ensure periodic review of consent thresholds by DOE contracting officers. Specifically, consent reviews are to be addressed when assessing contracting offices during Procurement Management Reviews, conducting Contractor Purchasing System Reviews under DOE's Procurement Evaluation and Re-Engineering Team program, and annually when contracting officers complete the standardized contractor Risk Assessment Tool.
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| Department of Energy | The Director of the DOE Office of Acquisition Management should require contracting officers to include assessments of the contractors' management of subcontractors as part of annual Performance Evaluation and Measurement Plans, as appropriate. (Recommendation 6) |
DOE partially concurred with the recommendation and agreed to review existing guidance and determine if additional guidance is needed to conduct an assessment of the contractors' management of subcontractors in annual Performance Evaluation and Measurement Plans. In June 2020, DOE officials said they had reviewed existing federal and departmental policies, procedures, and available tools and determined sufficient guidance exists for contracting officers to make informed decisions on whether to include contractor management of subcontractors in annual Performance Evaluation and Measurement Plans based on the characteristics, circumstances, and requirements of a specific contract. In January 2021, DOE updated its Contracting Officer's Risk Assessment Tool Manual to include additional guidance to contracting officers to ensure oversight of contractors' management of its subcontractors. We believe this meets the intent of our recommendation.
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