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Report to the Committee on Small Business, House of Representatives:

United States General Accounting Office:

GAO:

April 2004:

Contract Management:

DOD Needs Measures for Small Business Subcontracting Program and Better 
Data on Foreign Subcontracts:

GAO-04-381:

GAO Highlights:

Highlights of GAO-04-381, a report to Committee on Small Business, 
House of Representatives 

Why GAO Did This Study:

More small businesses are turning to subcontracting as a way to 
participate in the federal governmentís $250 billion procurement 
program. DOD, accounting for about two-thirds of federal procurements, 
has a critical role in providing opportunities to small businesses 
through subcontracting programs such as the Test Program for 
Negotiation of Comprehensive Small Business Subcontracting Plans (Test 
Program). In addition, Congress raised concerns about the potential for 
small businesses to lose opportunities to firms performing work outside 
of the United States.

GAO was asked to review (1) DODís assessment of the Test Programís 
effectiveness, (2) the performance of contractors participating in the 
Test Program, (3) the Defense Contract Management Agencyís (DCMA) 
oversight of contractorsí small business subcontracting efforts, and 
(4) the extent and reasons contractors are subcontracting with 
businesses performing outside the U.S.

What GAO Found:

In order to foster small business participation in subcontracting, 
government contractors with larger dollar value contracts are required 
to have subcontracting plans that establish goals for contractors to 
award small businesses a percentage of subcontract dollars. DOD created 
the Test Program to provide more small business opportunities and 
reduce the administrative burden for contractors in managing their 
subcontracting programs. Many of DODís largest contractors participate 
in the program.

Although the Test Program was started more than 12 years ago, DOD has 
yet to establish metrics to evaluate the programís results and 
effectiveness. As a result, there is no systematic way of determining 
whether the program is meeting its intended objectives and whether 
further changes need to be made. DOD contracted for an assessment of 
the Test Program in 2002, but the results of the assessment are 
considered preliminary and, therefore, have not been reported. DOD is 
required to report the results of the Test Program in 2005, when the 
program is set to expire. 

DOD contractors participating in the Test Program have experienced 
mixed success in meeting their various small business subcontracting 
goals. DOD and contractor officials noted that a changing acquisition 
environment has added to their challenge in meeting small business 
goals. Two of the major challenges they identified include (1) the 
increased breadth, scope, and complexity of DOD prime contracts that 
require, among other things, teaming arrangements with other, typically 
large contractors and (2) prime contractorsí strategic sourcing 
decisions to leverage their purchasing power by reducing the number of 
their suppliers including small businesses.

DCMA plays a key role in overseeing the performance of contractors in 
the Test Program and has made significant changes to its policy and 
guidance. The revised approach is designed to better monitor 
contractorsí efforts, provide more consistency in assessing contractor 
performance, and hold contractors accountable for achieving their 
subcontracting goals. DCMA is still in the process of revamping its 
oversight activities.

GAO could not assess the full extent contractors used firms performing 
outside the U.S. because of data reliability concerns. Contractors in 
GAOís review reported several reasons for awarding subcontracts to 
firms performing outside the U.S., such as fulfilling commitments 
included in offset agreements or executing teaming arrangements for 
major defense programs. Without accurate and complete information on 
subcontracts to firms performing outside the U.S., DOD cannot make 
informed decisions on industrial base issues.

What GAO Recommends:

GAO recommends that the Secretary of Defense (1) establish metrics to 
assess the overall effectiveness of the Test Program and (2) establish 
procedures to improve the quality of the information in its database of 
subcontracts to firms performing outside the U.S. DOD concurred with 
GAOís recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-381.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact David Cooper at (202) 
512-4841 or cooperd@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

DOD Has Yet to Assess the Overall Outcome of Its Test Program:

DOD Contractors Have Mixed Success in Reaching Small Business Goals:

DCMA Is Taking Steps to Improve Oversight of the Subcontracting 
Program:

Extent of Subcontracting Activity with Firms Performing Outside U.S. Is 
Unknown, and Reasons for Subcontracting Varied:

Conclusions:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: Scope and Methodology:

Appendix II: Small Business Concern Categories:

Appendix III: Comments from the Department of Defense:

Related GAO Products:

Table:

Table 1: Total Subcontract and Small Business Subcontract Awards from 
DOD Contracts, Fiscal Years 1993 through 2002:

Figure:

Figure 1: Percentage of Total Subcontract Dollars Awarded to Small 
Businesses from DOD Contracts, Fiscal Years 1993 through 2002:

Abbreviations:

DCMA: Defense Contract Management Agency:

FAR: Federal Acquisition Regulation:

HUBZone: Historically Underutilized Business Zone:

LMI: Logistics Management Institute:

United States General Accounting Office:

Washington, DC 20548:

April 5, 2004:

The Honorable Donald A. Manzullo: 
Chairman: 
The Honorable Nydia M. Velazquez: 
Ranking Democratic Member: 
Committee on Small Business: 
House of Representatives:

Recognizing the importance of creating a dynamic environment where 
small businesses--with their innovation and diversity--can flourish, 
the federal government has sought to improve small business access to 
its $250 billion procurement program. Small businesses more and more 
are turning to subcontracting as a way to participate in federal 
procurements. Contractors with larger dollar value contracts[Footnote 
1] are required to have subcontracting plans that establish goals for 
small business' share of subcontract dollars to be awarded. Some in 
Congress have raised concerns about the need to improve access of small 
businesses to federal contracting opportunities. In addition, they have 
raised concerns about small businesses losing subcontracting 
opportunities to firms performing work outside of the United States.

The Department of Defense (DOD) plays a key role in the success of the 
federal government's small business programs because it accounts for 
about two-thirds of federal procurements. Over the last several years, 
information reported by DOD contractors shows that the dollar amount of 
subcontracts awarded to small businesses[Footnote 2] has increased and 
is higher than it has ever been. On the other hand, the share of DOD's 
contracting activity awarded to small businesses as subcontracts has 
declined steeply in recent years--from about 43 percent in 1995 to 
about 34 percent in 2002. DOD created the Test Program for Negotiation 
of Comprehensive Small Business Subcontracting Plans (Test Program) to 
provide more small business opportunities and reduce the administrative 
burden for contractors in managing their subcontracting 
programs.[Footnote 3] Many of DOD's largest contractors participate in 
the Test Program, and the Defense Contract Management Agency (DCMA) 
plays a key role in overseeing their performance.

Due to DOD's critical role in providing opportunities to small 
business, we reviewed (1) DOD's assessment of the Test Program's 
effectiveness, (2) the performance of contractors participating in the 
Test Program, (3) DCMA oversight of contractors' small business 
subcontracting efforts, and (4) the extent and reasons contractors are 
subcontracting with businesses performing outside the U.S.[Footnote 4]

To conduct this work, we interviewed and obtained documentation from 
the Office of the Under Secretary of Defense, Office of Small and 
Disadvantage Business Utilization, DCMA, DOD's Office of Program 
Acquisition and International Contracting, and several contractors. We 
limited our review of internal controls to reviewing DCMA's plans, 
methods, and procedures used to meet its small business subcontracting 
program mission, goals, and objectives. Because of concerns about data 
reliability of prime contract data,[Footnote 5] we limited our use of 
this data to providing background information and identifying 
contractors. We did not independently verify subcontract data obtained 
from DOD and contractors but, instead, relied on DCMA reviews of 
contractors' reporting systems to assure data accuracy and 
completeness. We performed our work from March 2003 to March 2004 in 
accordance with generally accepted government auditing standards. A 
more detailed description of our scope and methodology is found in 
appendix I.

Results in Brief:

Although the Test Program was started more than 12 years ago, DOD has 
yet to establish metrics to evaluate the program's overall results and 
effectiveness. DOD contracted for an assessment of the Test Program in 
2002. However, the results of that assessment are considered 
preliminary, and the report has not been issued.[Footnote 6] DOD, DCMA, 
and contractor officials we interviewed have various views on the 
strengths and weaknesses of the program. Some officials believe the 
Test Program increases high-level corporate attention, while others 
thought it reduces accountability at lower corporate-levels and 
visibility of contractors meeting their small business goals for 
individual contracts. DOD is required to report the results of the Test 
Program in 2005 when the program is set to expire.

DOD contractors participating in the Test Program have experienced 
mixed success in meeting their various small business subcontracting 
goals. DOD and contractor officials noted that a changing acquisition 
environment has added to their challenge in meeting small business 
goals. Two of the major challenges they identified include (1) the 
increased breadth, scope, and complexity of DOD prime contracts that 
require, among other things, teaming arrangements with other, typically 
large contractors and (2) prime contractors' strategic-sourcing 
decisions to leverage their purchasing power by reducing the number of 
their suppliers including small businesses. According to DOD and 
contractor officials, both have the potential to either restrict 
subcontracting opportunities for small businesses or push those 
opportunities to lower tiers of the supply chain. Contractor officials 
also said their ability to meet some small business goals is influenced 
by the limited supply of qualified small businesses that could provide 
the needed goods and services.

To improve oversight of contractor performance in meeting small 
business subcontracting goals, DCMA began changing its approach in 
2002. The revised approach is designed to better monitor contractors' 
efforts, provide more consistency in assessing contractor performance, 
and hold contractors accountable for achieving their subcontracting 
goals. While DCMA has made significant changes to its policy and 
guidance, it is still in the process of revamping its oversight 
activities.

We could not assess the full extent contractors' subcontract with firms 
performing outside the U.S. because of data reliability concerns. DOD 
only recently took action to improve the information collected on 
subcontracting with overseas firms. Contractors in our review reported 
several reasons for awarding subcontracts to firms performing outside 
the U.S., such as fulfilling commitments included in offset 
agreements[Footnote 7] or executing teaming arrangements for major 
defense programs.

This report contains two recommendations to the Secretary of Defense to 
establish metrics to assess the overall effectiveness of the Test 
Program and improve the quality of the information in its database of 
subcontracts to firms performing outside the U.S. In written comments 
on a draft of this report, DOD concurred with both recommendations.

Background:

Over the last 10 years, DOD prime contract and total subcontract dollar 
awards have increased. From 1993 to 2002, DOD prime contract dollars 
increased almost 15 percent, from $136.8 billion to $157.1 
billion.[Footnote 8] As shown in table 1, total subcontract dollars 
awarded by DOD contractors[Footnote 9] increased more than 40 percent, 
from $53.0 billion to $75.5 billion. In addition, small businesses have 
generally received increasing dollar amounts from DOD contractors over 
a 10-year period--from $19.9 billion in fiscal year 1993 to $25.8 
billion fiscal year 2002.[Footnote 10]

Table 1: Total Subcontract and Small Business Subcontract Awards from 
DOD Contracts, Fiscal Years 1993 through 2002:

Dollars in billions.

Fiscal year[A]: 1993; 
Total subcontract dollars awarded: $53.0; 
Subcontract dollars awarded to small businesses: $19.9.

Fiscal year[A]: 1994; 
Total subcontract dollars awarded: 52.4; 
Subcontract dollars awarded to small businesses: 20.1.

Fiscal year[A]: 1995; 
Total subcontract dollars awarded: 50.9; 
Subcontract dollars awarded to small businesses: 21.7.

Fiscal year[A]: 1996; 
Total subcontract dollars awarded: 52.5; 
Subcontract dollars awarded to small businesses: 21.9.

Fiscal year[A]: 1997; 
Total subcontract dollars awarded: 59.1; 
Subcontract dollars awarded to small businesses: 24.5.

Fiscal year[A]: 1998; 
Total subcontract dollars awarded: 56.9; 
Subcontract dollars awarded to small businesses: 23.9.

Fiscal year[A]: 1999; 
Total subcontract dollars awarded: 55.3; 
Subcontract dollars awarded to small businesses: 22.7.

Fiscal year[A]: 2000; 
Total subcontract dollars awarded: 57.0; 
Subcontract dollars awarded to small businesses: 22.4.

Fiscal year[A]: 2001; 
Total subcontract dollars awarded: 61.3; 
Subcontract dollars awarded to small businesses: 23.8.

Fiscal year[A]: 2002; 
Total subcontract dollars awarded: $75.5; 
Subcontract dollars awarded to small businesses: $25.8. 

Source: GAO analysis of DOD-provided data.

[A] In constant fiscal year 2002 dollars.

[End of table]

However, as shown in figure 1, small businesses' share of total 
subcontract dollars from DOD contractors has decreased in recent years. 
The percent share that small business received has ranged from a high 
of about 43 percent ($21.7 billion) in fiscal year 1995 to a low of 
about 34 percent ($25.8 billion) in fiscal year 2002.[Footnote 11]

Figure 1: Percentage of Total Subcontract Dollars Awarded to Small 
Businesses from DOD Contracts, Fiscal Years 1993 through 2002:

[See PDF for image]

[End of figure]

In order to foster the participation of small businesses in 
subcontracting, the Federal Acquisition Regulation (FAR) requires DOD 
contractors to have subcontracting plans for most contracts of more 
than $500,000 ($1 million for construction contracts).[Footnote 12] 
These plans document what actions the contractor will take to provide 
various types of small businesses with the maximum practicable 
opportunities to participate in subcontracting. See appendix II for 
description of small business categories. Contractors with DOD are to 
provide semiannual reports to DCMA on their small business achievements 
for each contract that has a subcontracting plan as well as semiannual 
summary reports that encompass all their contracts with a particular 
agency.

The National Defense Authorization Act for Fiscal Years 1990 and 1991 
authorized DOD to establish the Test Program for Negotiation of 
Comprehensive Small Business Subcontracting Plans (Test Program), which 
allowed the negotiation, administration, and reporting of 
subcontracting plans on a plant, division, or companywide basis rather 
than a plan for each individual contract. The purpose of the Test 
Program is to increase subcontracting opportunities for various types 
of small businesses while reducing the administrative burdens on 
contractors. The companies that participated in this Test Program in 
fiscal year 2002 accounted for about 41 percent of DOD's subcontracting 
activity in that same fiscal year. The Office of the Under Secretary of 
Defense, Office of Small and Disadvantage Business Utilization is 
responsible for the overall assessment of the Test Program. Originally 
scheduled for fiscal years 1991 through 1992, the Test Program has been 
extended several times and is scheduled to end September 30, 
2005.[Footnote 13] Under the Test Program, small business goals are 
negotiated annually, whereas for individual plans, goals are generally 
negotiated once for the life of the contract.[Footnote 14]

As of fiscal year 2003, 15 contractors have comprehensive plans under 
the Test Program. DCMA is responsible for reviewing DOD contractors' 
subcontracting plans and monitoring and assessing contractor's 
performance to determine how well contractors are implementing their 
plans and meeting their small business goals. DCMA is also involved in 
annually negotiating goals with contractors participating in the Test 
Program.

Since 1982, DOD has required prime contractors to report quarterly to 
DOD's Office of Program Acquisition and International Contracting on 
contracts exceeding $500,000 when the contractor or its first tier 
subcontractor will perform any part of the contract that exceeds 
$100,000 outside the U.S., unless a foreign place of performance (1) is 
the principal place of performance and (2) is identified in the firm's 
offer.[Footnote 15] First-tier subcontractors that award subcontracts 
in excess of $100,000 to be performed outside the U.S. are also subject 
to the reporting requirement. Reported information is to include the 
type of supply or service provided, the principal place of subcontract 
performance, and the dollar value of the transaction. The information 
is used as part of DOD's efforts to monitor foreign procurements and 
assess matters related to defense trade balances and domestic 
industrial base capabilities.[Footnote 16] DOD's Office of Program 
Acquisition and International Contracting reports to the Director of 
Defense Procurement and Acquisition Policy.

DOD Has Yet to Assess the Overall Outcome of Its Test Program:

Although the Test Program has been in existence since fiscal year 1991, 
DOD does not know if it is achieving its intended objectives to provide 
more small business subcontracting opportunities and to reduce 
administrative burden for contractors. The Office of the Under 
Secretary of Defense, Office of Small and Disadvantage Business 
Utilization, which is to report the results of the Test Program in 
December 2005, shortly after the program is set to expire, commissioned 
a preliminary study of the program in 2002. The data assessing the 
merits of the program were never formally released, but the resulting 
preliminary report had a number of recommendations. DOD recognizes that 
it needs to establish metrics and other criteria for measuring program 
results in meeting the intended objectives. We found that DOD and 
contractor officials have various views on the strengths and weaknesses 
of the program.

Past Assessment of the Test Program Was Preliminary:

To assess the Test Program, DOD commissioned a preliminary review of 
the program by the Logistics Management Institute (LMI). LMI noted in 
its draft report that, in terms of achievements for subcontracting to 
small businesses, the Test Program results improved impressively 
between 1991 and 1996--from small businesses receiving 12 percent of 
total subcontracts to receiving about 36 percent--but declined to about 
29 percent by 2000. LMI attributed the decline to factors external to 
the program--some of which we discuss later. Most of its 
recommendations dealt with addressing ways of improving small business 
achievements, but also included program-specific recommendations, such 
as:

* increasing visibility of subcontracting activity at the corporation's 
division and program level, where feasible;

* deducting directed-source procurements from subcontracting 
achievement calculations;

* allowing subcontracting plan renegotiations to reflect major contract 
awards that occur after negotiations;

* establishing annual meetings of program participants and DCMA to 
allow exchange of ideas, best practices, and lessons learned;

* permitting removal of poor performing participants after appropriate 
notice;

* requiring participants to track and annually report administrative 
savings and costs and results of their outreach activities; and:

* limiting enrollment to 20 participants.

While the final report has not been issued, DOD officials said they 
have taken into consideration a number of the recommendations from the 
study by LMI. For example, DCMA has taken steps to improve oversight of 
contractor performance and hold contractors more accountable for 
achieving their subcontracting goals, and DOD has chartered a council 
to share Test Program knowledge and experience. In addition, some DOD 
program offices require contractors to report on their subcontracting 
activity at the program level to increase visibility of subcontracting 
to small businesses.

DOD Lacks Test Program Measurements to Assess Overall Effectiveness:

Despite DOD's attempts to assess the program, it still does not know 
whether using the Test Program is affecting subcontracting 
opportunities for small businesses and reducing administrative burden 
for the contractors. DOD, through DCMA, is to report on each 
participating contractor's performance by December 15, 2005 by 
comparing the contractor's performance under the program with its 
performance for 3 fiscal years before the acceptance into the 
program.[Footnote 17] DOD officials told us they are uncertain how they 
will measure contractors' performance to meet their reporting 
requirement and assess trends over time. This uncertainty is in part 
due to not having the original participants in the program to establish 
a baseline to evaluate performance and changes in company compositions. 
Further, these officials noted that mergers and acquisitions can 
greatly change company compositions and business bases from year to 
year making trend determinations difficult. DCMA officials told us they 
plan on hiring a contractor to help them complete their review of the 
overall results of the Test Program and will use the results of the LMI 
study as a tool to help develop Test Program metrics.

Views Varied on Merits of the Test Program:

DCMA and contractor officials we interviewed gave varied opinions--both 
positive and negative--on the Test Program. Some said that while they 
were uncertain about its increasing small business opportunities, they 
thought participating in the Test Program helped increase the 
visibility of the results of small business program companywide or 
divisionwide. Others said the comprehensive plan sometimes resulted in 
lost visibility of individual contract performance and reduced 
accountability at the program level. In fact, one contractor recently 
stopped participating in the program because of the lost ability to 
monitor individual contract performance. DCMA and contractor officials 
we interviewed said they were uncertain if there had been a reduction 
of administrative burden since, for example, under the Test Program 
contractors were required to prepare a detailed plan, negotiate small 
business goals each year, and submit performance data semiannually. 
Plus, certain large DOD programs requested contractors to report small 
business data. Many agreed that, regardless of what type of plan 
contractors used, success of the small business program relies on 
contractor management's commitment to meeting small business goals. 
DCMA and contractor officials also stated that contractor management 
must have the ability to monitor company performance on those goals.

DOD Contractors Have Mixed Success in Reaching Small Business Goals:

Between fiscal years 1999 and 2003, the DOD contractors we reviewed had 
varied success in meeting their small business goals. DOD and 
contractor officials provided several reasons for the mixed success of 
the subcontracting program, but DOD has not formally studied those 
factors that may encourage or discourage the participation of small 
businesses in DOD subcontracts.

Contractors Have Met Some Small Business Goals, but Results Are 
Inconsistent:

In the past 5 years, the 15 DOD contractors participating in the Test 
Program had varying success in meeting their small business goals 
established in their subcontracting plans. Overall, the contractors in 
the Test Program were not consistent from year to year in meeting their 
goals for the traditional small business categories. For example, in at 
least 3 of the past 5 years, 11 of the 15 contractors met their overall 
small business goals, seven contractors met their goals for small 
disadvantaged businesses, and six contractors met their goals for 
women-owned small businesses.

Changing Contracting Environment May Affect Contractors' Ability to 
Meet Small Business Goals:

DOD and contractor officials noted that a changing acquisition 
environment has added to the challenge in meeting their small business 
goals. Changes included (1) the increased breadth, scope, and 
complexity of DOD prime contracts that require, among other things, 
teaming arrangements with other, typically large contractors and (2) 
prime contractors' strategic sourcing decisions to leverage their 
purchasing power by reducing the number of their suppliers including 
small businesses. Contractor officials also said that the relatively 
limited supply of qualified small businesses that could provide the 
needed goods and services also increases the difficulty in meeting 
small business goals. DOD has not studied to what degree the changing 
acquisition environment or other factors contribute to the success or 
failure of its small business subcontracting program.

Contractor and DCMA officials report that the breadth, scope, and 
complexity of DOD prime contracts for weapons systems has increased 
over the years. According to officials, this has had several 
consequences, which have limited the opportunities for small 
businesses. First, prime contractors are increasingly relying on 
teaming arrangements to win contracts. Their teaming partners, 
typically large businesses, receive a sizable portion of the first-tier 
subcontracts. For example, under a major defense contract, the 
contractor awarded about 56 percent of its total subcontract dollars to 
its teaming partners, significantly reducing the opportunities of small 
businesses to win first-tier subcontracts. Also, prime contractors are 
increasingly serving as systems integrators instead of systems 
manufacturers and are buying major assemblies rather than parts and 
components. Systems integrators are often responsible for the 
development, management, and eventual delivery of a large weapon 
system. Consequently, as in the case of teaming arrangements, systems 
integrators often use large businesses as first-tier subcontractors. 
Contractor officials said that although small businesses may still be 
receiving contract dollars through second-or lower-tier subcontracts, 
contractors could only count their first-tier subcontract awards 
towards their small business goals.

In addition, many contractors have made the strategic-sourcing decision 
to reduce the number of suppliers in their supplier base. Contractors 
report reducing their supplier bases by as much as 50 percent over the 
past 5 years in a move to leverage their purchases, cut costs, and 
improve performance to remain competitive in the world market.[Footnote 
18] Contractors also noted that by reducing the number of contractors, 
they often relied on larger corporatewide contracts, which could also 
affect their small business suppliers. For example, officials of one 
contractor noted that when it went to a single information systems 
contractor, it no longer contracted with a number of small firms.

Finally, contractors report difficulty in finding qualified small 
businesses to provide the goods and services needed. Contractor 
officials said this is particularly true for small business programs 
with certification requirements--such as the programs for small 
disadvantaged businesses and Historically Underutilized Business Zone 
(HUBZone) businesses--and for very recent programs, such as the 
service-disabled veterans program. The Small Business Administration 
has certified significantly fewer small disadvantaged businesses and 
HUBZone firms than hoped. Consequently, contractors often have 
difficulty meeting small disadvantaged business goals, and few have met 
their HUBZone goals.[Footnote 19] Further, according to DCMA officials 
responsible for on site monitoring of subcontracting plans, qualified 
businesses in different small business categories usually compete for 
the same type of work. Consequently, according to these DCMA officials, 
contractors have difficulty meeting goals for all small business types 
and often report wide fluctuations in subcontracting achievements among 
the groups, depending on which ones win contracts in a given year. The 
categories of small business that DOD uses include small businesses, 
small disadvantaged businesses, women-owned small businesses, veteran-
owned and service-disabled veteran-owned small businesses, HUBZone 
businesses, Historically Black Colleges and Universities, and Minority 
Institutions.[Footnote 20]

DCMA Is Taking Steps to Improve Oversight of the Subcontracting 
Program:

Since 2002, DCMA has taken steps to help improve its oversight of DOD's 
small business program. These steps include issuing an updated policy 
for monitoring contractors' small business subcontracting programs, 
issuing new guidance to help DCMA personnel in implementing small 
business program requirements, and developing new criteria for rating 
contractor performance.

DCMA Role Encompassed a Broad Range of Responsibilities:

Previously, DCMA, through its small business specialists, carried out 
its small business subcontracting program responsibilities through (1) 
contractor orientation and training, (2) small business outreach and 
"matchmaking," (3) Test Program review and negotiation, and (4) 
contractor performance evaluations. Training primarily involved 
informing the contractors and other DCMA personnel of contractor 
responsibilities and small business program requirements. Outreach and 
"matchmaking" activities included attending or arranging small business 
conferences and open houses and identifying qualified small businesses 
to contractors.

DCMA policies and procedures also required small business specialists 
to review contractors' subcontracting performance and perform two kinds 
of reviews: annual reviews of Test Program participants and reviews of 
contractor subcontract performance.[Footnote 21]

* Test Program plan reviews--annually assess each contractor 
participating in the Test Program. The review includes determining how 
well the contractor is performing under the plan, including whether it 
met its goals for the year. However, these reviews do not result in an 
overall rating.

* Contractors' subcontract-performance reviews--assess all DOD 
contractor facilities with subcontracting plans, whether comprehensive 
or individual.[Footnote 22] In general, DCMA reviews the DOD 
contractors it is responsible for monitoring on an annual 
basis.[Footnote 23] The review assesses contractor policies and 
procedures, outreach activities, record keeping and reporting 
procedures, training that contractor personnel received to implement 
their small business subcontracting program, and contractor performance 
on meeting small business goals. DCMA assigned ratings on a 5-point 
scale from "outstanding" to "unsatisfactory." DCMA small business 
specialists said that because the rating criteria were loosely defined, 
contractors could receive different ratings depending on the 
interpretation of the small business specialist. For example, in fiscal 
year 2001, one company's performance received a "highly successful" 
rating even though it had not met any of its three long-standing small 
business goals[Footnote 24] for that period of the review. In fiscal 
year 2002, DCMA rated another company's performance as "unacceptable" 
although it had demonstrated similar performance on its goals.

DCMA Has Increased Focus on Oversight:

DCMA's new policy and guidance emphasizes the agency's oversight 
function. In July 2003, DCMA published an updated policy for monitoring 
contractors' small business subcontracting programs. While DCMA 
continues to conduct its reviews under its revised policy, it created 
more specific criteria for determining contractor performance. The 
criteria particularly emphasize contractors' small business goal 
achievements and contractor accountability, including the contractors 
participating in the Test Program. For example, under DCMA's new rating 
criteria, to receive a "highly successful" performance rating, the 
contractor must meet three long-standing small business goals and at 
least one of the newer goals (e.g. veteran-owned small business) as 
well as demonstrating significant success in other initiatives 
identified in its subcontracting plan.

In September 2003, DCMA published a new procedural guide to assist DCMA 
Small Business Specialists in implementing the small business program. 
For example, the guidance provides factors, such as a contractor's past 
performance, that should be considered when negotiating goals with Test 
Program participants. DCMA continues to assess the oversight of the 
Test Program and whether further changes need to be made.

Other steps DCMA has taken that allow the more efficient use of its 
resources include establishing a risk-based approach to its reviews of 
contractors and limiting its training and outreach functions. The risk-
based approach allows DCMA to skip a review of a contractor for 1 year 
if the contractor's previous year's rating was "outstanding," there 
were no significant changes in their contracting activity, and there 
were no significant personnel changes affecting the contractor's small 
business program. In addition, according to DCMA officials, DCMA is 
significantly limiting its training and outreach functions on the basis 
that other organizations, such as the Small Business Administration and 
Procurement Technical Assistance Centers,[Footnote 25] already provide 
these services.

Extent of Subcontracting Activity with Firms Performing Outside U.S. Is 
Unknown, and Reasons for Subcontracting Varied:

We could not determine the extent of subcontracting to firms performing 
outside the U.S. because of inconsistent reporting of subcontracting 
activities by contractors and poor database management by DOD. 
According to the contractors in our review, most subcontracts to firms 
performing outside the U.S. accounted for a small percentage of their 
total subcontract dollars. Further, the contractors stated that most of 
the dollars to firms performing outside the U.S. were awarded on a 
noncompetitive basis. These contractors reported several reasons for 
awarding subcontracts to firms performing outside the U.S in fiscal 
year 2002.

Concerns Remain about Reliability of Data on Subcontracts Performed 
Outside U.S.

We could not assess the full extent that defense contractors' 
subcontract with firms performing outside the U.S. In November 1998, we 
reported that DOD's Office of Program Acquisition and International 
Contracting did not have safeguards for ensuring the completeness and 
accuracy of its database of subcontracts to firms performing outside 
the U.S.[Footnote 26] At that time, we found instances in which DOD 
contractors did not report their subcontracts to firms performing 
outside the U.S. in accordance with DOD's reporting requirements 
because they were unaware of the reporting requirements or 
misunderstood the criteria for reporting this type of subcontract. 
Plus, we identified that DOD lacked standards and procedures for 
managing this database.

In October 2003, during our review, the Director of Defense Procurement 
and Acquisition Policy--through the Office of Program Acquisition and 
International Contracting--began to take the following actions to 
address contractor compliance:

* sent letters to the top 100 parent companies of DOD contractors to 
remind them about DOD reporting requirements for subcontracts to firms 
performing outside the U.S. and requested they ensure all their 
subsidiaries also comply with this reporting requirement,

* sent a memorandum to the Senior Acquisition Executives of the 
Military Department and the Defense Agencies requesting they remind 
their contracting officers of the reporting requirement,

* engaged in outreach efforts with government and industry personnel to 
help ensure this effort to improve contractor compliance was fully 
communicated,

* sent a memorandum to DCMA requesting its assistance in periodically 
verifying that contractors are complying with the reporting 
requirements, and:

* clarified reporting requirements for subcontracts to firms performing 
outside the U.S.

The Office of Program Acquisition and International Contracting intends 
to perform periodic verification of reporting of subcontracts to firms 
performing outside the U.S. and is in the process of establishing those 
procedures. Because no action had been taken to improve data 
reliability until recently, we could not rely on the data available to 
determine the extent that DOD contractors were subcontracting with 
firms outside the U.S.

Contractors Report Awarding a Small Percentage of Subcontract Dollars 
to Firms Performing Outside the U.S.

Contractors at four of the five locations we visited spent between 
approximately 2 and 6 percent of their total DOD subcontracting dollars 
in fiscal year 2002 on subcontracts to firms performing outside the 
U.S.[Footnote 27] The fifth contractor subcontracted about 18 percent 
of its subcontracting dollars with firms performing outside the U.S. in 
fiscal year 2002 due to a teaming arrangement for a large defense 
contract it was awarded. According to a contractor official, this 
percentage would more typically be around 10 percent. At the five 
contractor locations, the total subcontract dollars to firms performing 
outside the U.S. ranged between approximately $29 million and $1.9 
billion in fiscal year 2002. These subcontracts were for items such as 
parts for military systems, communication equipment for satellites, 
components for military aircraft, and sensors for satellite weather 
forecasting.

While one contractor reported awarding most of its subcontract dollars 
to firms performing outside the U.S. on a competitive basis in fiscal 
year 2002, four contractors reported awarding the majority of their 
subcontract dollars non-competitively. Consequently, small businesses 
generally did not have the opportunity to compete for these types of 
subcontracts. Contractor officials said that even when their 
subcontracts with firms performing outside the U.S. were competed, they 
were not necessarily for the type of products that small businesses had 
the expertise or technology to provide. For example, one contractor 
competitively awarded a contract for an amplifier used in communication 
equipment to a firm outside the U.S. The contractor did not identify or 
solicit small businesses in the competition because of the unique 
technology and expertise required for that particular amplifier.

Subcontracts Awarded for Various Reasons:

Contractor officials said the reasons for the awards to firms 
performing outside the U.S. in fiscal year 2002 include:

* Directed source--Contractor officials stated some subcontracts were 
awarded to companies outside the U.S. because DOD directed them to 
subcontract with a certain supplier. For example, a prime contractor 
was directed by DOD to award a subcontract to a company outside the 
U.S. to produce a sensor for a weather forecasting satellite because 
the company previously had a contract directly with the U.S. 
Government.

* Offset agreements[Footnote 28]--The contractors said that to sell 
military goods and services to other countries, they often have to form 
agreements with foreign countries that necessitate subcontracting with 
foreign firms to some degree. For example, one U.S. prime contractor 
awarded a subcontract to a firm in a foreign country because a prior 
offset agreement required the contractor to purchase about $1 billion 
in goods and services from firms in that country. The $32.3 million 
subcontract was for a structural frame for the troop ramp and an air 
deflector for the C-17 transport aircraft.

* International agreements--Sometimes subcontracts are awarded to 
companies outside the U.S. because of international agreements between 
the U.S. and foreign countries. For instance, a contractor awarded a 
series of subcontracts to firms performing outside the U.S. based on an 
international agreement in which a 13-nation consortium contributed to 
the development of components for a missile to be used by these 
nations.[Footnote 29] Some of the components produced by the various 
countries included control systems, rocket motors, and guidance 
systems.

* Team Arrangements--This is an arrangement where two or more 
contractors form a partnership or joint venture to act as a potential 
prime contractor or a potential prime contractor agrees with one or 
more other contractors to have them act as its subcontractors under a 
specified Government contract or acquisition program.[Footnote 30]

* Product specialization--Contractor officials said it was very 
expensive to develop and change suppliers of specialized parts; 
therefore, DOD contractors typically continue to award contracts to the 
same supplier that originally supplied the products. That supplier may 
be located outside the U.S. For instance, one contractor awarded a 
subcontract to such a supplier because it was the only one that had a 
specification drawing for the production of pedestals for a radar 
system. In another case, a DOD contractor awarded a subcontract to a 
company outside the U.S. because it was the only supplier that already 
had the tools and the expertise to manufacture and produce a horizontal 
stabilizer for the F-5 aircraft.

Conclusions:

Because of its large contracting operations, DOD is critical to the 
success of federal programs designed to provide opportunities for small 
businesses. DOD has recognized the importance of its role in federal 
contracting; has taken limited steps to help improve opportunities for 
small businesses, such as the Test Program; and has revised DCMA 
guidance to hold contractors more accountable for their small business 
goals. However, after 12 years of implementing the Test Program, DOD 
does not know whether these initiatives are effective. While DOD has 
collected data over the years, it has not established metrics to 
evaluate the effectiveness of the Test Program. As a result, there is 
no systematic way of determining whether the program is meeting its 
intended objectives and whether further changes need to be made.

In addition, the reliability of the data submitted by contractors on 
their subcontracts to firms performing outside the U.S. remains a 
concern. DOD has only recently started to take action on improving its 
data collection and has yet to establish procedures for validating the 
information. Without accurate and complete information on subcontracts 
to firms performing outside the U.S., DOD cannot make informed 
decisions on industrial base issues.

Recommendations for Executive Action:

We are making the following two recommendations to the Secretary of 
Defense:

In order to evaluate the effectiveness of the Test Program, we 
recommend the Secretary of Defense direct the Office of the Under 
Secretary of Defense, Office of Small and Disadvantage Business 
Utilization, to develop metrics to assess the overall results of its 
Test Program.

Also, to ensure DOD has the information it needs to accurately 
determine the number and dollar amount of subcontracts to firms 
performing outside the U.S., we recommend the Secretary of Defense 
direct DOD's Office of Program Acquisition and International 
Contracting to establish procedures to improve the quality of the 
information in its database of subcontracts performed outside the U.S.

Agency Comments and Our Evaluation:

DOD provided us with written comments on a draft of this report. DOD 
concurred with our findings and recommendations and noted some 
additional actions it took or is taking to address our recommendations. 
We incorporated these actions in this report where appropriate. DOD's 
comments appear in appendix III.

As requested by your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of it until 30 
days from the date of this letter.

At that point, copies of this report will be sent to interested 
congressional committees and the Secretary of Defense. We will also 
make copies available to others upon request. In addition, the report 
will be available at no charge on the GAO Web site at http://
www.gao.gov.

Please contact me at (202) 512-4841, or Hilary Sullivan at (214) 777-
5652, if you have any questions regarding this report. Major 
contributors to this report were Vijay Barnabas, David Bennett, 
Frederick Day, Michael Gorin, Gary Middleton, Pauline Reaves, Sylvia 
Schatz, and Suzanne Sterling.

David E. Cooper: 
Director, Acquisition and Sourcing Management:

[End of section]

Appendix I: Scope and Methodology:

To determine DOD's assessment of the Test Program's effectiveness, we 
reviewed legislation, regulations, directives, and policies regarding 
this program. We also reviewed a July 2002 study conducted by LMI for 
DOD that looked at the overall results of the Test Program. In 
addition, we met with officials at DCMA headquarters, district, and 
field locations as well as officials at selected contractor locations 
to discuss their views on the advantages and disadvantages of the Test 
Program.

To determine the performance of contractors participating in the Test 
Program, we collected data on the 15 DOD contractors (i.e., parent 
companies or their subsidiaries) participating in the Test Program. 
More specifically, we obtained 5 years of small business goal and 
performance data, fiscal years 1999 to 2003, on the extent that the 
contractors were meeting their small business goals from DCMA 
headquarters and district officials as well as contractor officials. 
The contractors in the Test Program as of fiscal year 2003 are the 
following:

* The Boeing Company;

* General Electric Aircraft Engines;

* Harris Corporation, Government Communications Systems Division;

* Lockheed Martin Aeronautics Company;

* Lockheed Martin Simulation, Training & Support (formerly Information 
Systems);

* Lockheed Martin Missiles & Fire Control;

* Lockheed Martin Space Systems Company;

* Northrop Grumman Air Combat Systems;

* Northrop Grumman Electronic Systems and Sensors;

* Raytheon Company;

* Textron Systems, a Textron Company;

* Bell Helicopter Textron Inc.;

* United Technologies Corp, Hamilton Sundstrand Division;

* United Technologies Corp, Pratt & Whitney Government Division; and:

* United Technologies Corp, Sikorsky Aircraft Division.

To determine DCMA's oversight of contractors' small business 
subcontracting efforts, we met with officials at DCMA headquarters, 
district, and field locations as well as officials at selected 
contractor locations to identify and discuss DCMA's role. We also 
gathered information on updated policy and guides for monitoring 
contractors' small business subcontracting programs and new criteria 
for rating contractor performance. We limited our review of internal 
controls to reviewing DCMA's plans, methods, and procedures used to 
meet its small business subcontracting program mission, goals, and 
objectives.

To determine the reasons and extent contractors are subcontracting with 
businesses performing outside the U.S.[Footnote 31] we identified the 
contractors' rationale with officials at the five selected contractor 
locations. We also gathered information for the most current year that 
data was available, fiscal year 2002, from contractor officials at same 
five locations. We did not independently verify this data. In addition, 
we reviewed the steps DOD had taken to address past database 
deficiencies and discussed recent changes at DOD's Office of Program 
Acquisition and International Contracting on their management of the 
database of subcontracts performed by contractors outside the U.S.

We conducted our review between March 2003 and March 2004 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: Small Business Concern Categories:

Program: Small business concern; Description: A small business concern 
is one that is independently owned and operated and is not dominant in 
its field of operation. 15 U.S.C. 632(a)(1). A small business concern 
is further defined as (1) a business entity that is organized for 
profit; (2) with a place of business located in the U.S.; and (3) which 
operates primarily within the U.S. or which makes a significant 
contribution to the U. S. economy through tax payments or use of 
American products, materials, or labor; and (4) meets the size standard 
for its primary business activity or industry as designated by the 
applicable North American Industry Classification System (NAICS) codes. 
13 C.F.R. 121.101(a); 121.105(a); FAR 19.001.

Program: Small disadvantaged business concern; Description: A small 
disadvantaged business is a small business concern that is 51% or more 
owned by one or more socially and economically disadvantaged persons 
who manage and operate the concern. 15 U.S.C. 637(d)(3)(C). Black 
Americans, Hispanic Americans, Asian Pacific Americans, Subcontinent 
Asian Americans, and Native Americans are presumed by regulation to be 
socially disadvantaged. 13 C.F.R. 124.103(b). Other individuals can 
qualify if they show by a "preponderance of the evidence" that they are 
socially disadvantaged. 13 C.F.R. 124.103(c). A small disadvantaged 
must also (1) meet SBA's established size standard for its main 
industry; and (2) have principals who have a net worth, excluding the 
value of the business and personal home, of less than $750,000. 13 
C.F.R. 124.1002(b) (c).

Program: Woman-owned small business concern; Description: A woman-owned 
business is a small business concern that is 51% owned by one or more 
women who manage and operate the concern. 15 U.S.C. 637(d)(3)(D); FAR 
2.101.

Program: Veteran-owned small business concern; Description: A veteran-
owned business is a small business concern that is 51% owned by one or 
more veterans who manage and operate the concern. 15 U.S.C. 
637(d)(3)(E); FAR 2.101.

Program: Service-disabled veteran-owned small business concern; 
Description: A service-disabled veteran-owned business is a small 
business concern that is 51% owned by one or more service-disabled 
veterans who manage and operate the concern. 15 U.S.C. 632(q)(2); FAR 
2.101.

Program: HUBZone small business concern; Description: A HUBZone is a 
small business concern that (1) meets SBA's size standards for its 
primary industry classification; (2) is owned and controlled by one or 
more U.S. citizens; (2) has a principal office located in a HUBZone (a 
historically underutilized business zone, which is in an area located 
within one or more qualified census tracts, qualified non-metropolitan 
counties, or lands within the external boundaries of an Indian 
reservation); and (3) has at least 35 percent of its employees residing 
in a HUBZone. 15 U.S.C. 632(p)(3) (5); 13 C.F.R. 126.103; 126.203.

Program: Historically black college or university; Description: A 
historically black college or university means an institution 
determined by the Secretary of Education to meet the requirements of 34 
C.F.R. 608.2. FAR 2.101.

Program: Minority institution; Description: A minority institution is 
an institution of higher education whose enrollment of a single 
minority or a combination of minorities (American Indian, Alaskan 
Native, Black, and Hispanic--Mexican, Puerto Rican, Cuban, and Central 
or South American) exceeds 50 percent of the total enrollment. FAR 
2.101; 20 U.S.C. 1067k(2) (3).

Source: GAO review of laws and regulations.

[End of table]

[End of section]

Appendix III: Comments from the Department of Defense:

Note: Page numbers in the draft report may differ from those in this 
report.

OFFICE OF THE UNDER SECRETARY OF DEFENSE:

3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000:

March 10, 2004:

ACQUISITION, TECHNOLOGY AND LOGISTICS:

Mr. David E. Cooper:

Director, Acquisition and Sourcing Management 
U.S. General Accounting Office:
441 G Street, N.W., Washington, D.C. 20548:

Dear Mr. Cooper:

This is the Department of Defense (DoD) response to the GAO draft 
report, "CONTRACT MANAGEMENT: DOD Needs Measures for Small Business 
Subcontracting Program and Better Data on Foreign Subcontracts," dated 
February 12, 2004 (GAO Code 120206/GAO-04-381).

The report contained two recommendations as follow:

Recommendation 1: That the Secretary of Defense direct the Office of 
Small and Disadvantaged Business Utilization to develop metrics to 
assess the overall results of its test program.

Recommendation 2: That the Secretary of Defense direct DoD's Office of 
Program Acquisition and International Contracting to establish 
procedures to improve the quality of the information in its database of 
subcontracts performed outside the U.S.

The Department concurs with the recommendations. The detailed response 
is enclosed.

Signed by: 

FRANK M. RAMOS 
Director:

Small and Disadvantaged Business Utilization:

Enclosure:

GAO DRAFT REPORT - DATED FEBRUARY 12, 2004 GAO CODE 120206/GAO-04-381:

"CONTRACT MANAGEMENT: DOD NEEDS MEASURES FOR SMALL BUSINESS 
SUBCONTRACTING PROGRAM AND BETTER DATA ON FOREIGN SUBCONTRACTS":

DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:

RECOMMENDATION 1: The GAO recommended that the Secretary of Defense 
direct the Office of Small and Disadvantaged Business Utilization to 
develop metrics to assess the overall results of its test program. (p. 
20/GAO Draft Report):

DOD RESPONSE: Concur.

As noted in the report, GAO has expressed concern that the share of 
DoD's contracting activity awarded to small businesses as subcontracts 
has declined steeply in recent years - from 43 percent in 1995 to 34 
percent in 2002. In attempting to establish a cause as to why this small 
business share of activity has decreased, the GAO has spent 
considerable effort reviewing, among other things, the Test Program for 
Negotiation of Comprehensive Small Business Subcontracting Plans (Test 
Program). In particular they reviewed (1) DoD's assessment of the Test 
Program's effectiveness, (2) the performance of contractor's 
participating in the Test Program, and (3) DCMA's oversight of 
contractors' small business subcontracting efforts.

At the Test Program's inception the only goals (and subsequent 
performance reporting) required to be incorporated into the 
subcontracting plan were for small and small disadvantaged businesses. 
A women-owned small business goal was later added. Today, Test Program 
participants provide subcontracting goals and report performance for 
small, small disadvantaged, women-owned small, HUB zone small, veteran-
owned small and service-disabled veteran owned small businesses. We 
mention this to note that the Test Program as it was originally 
implemented is not the Test Program of today; contributing to the 
difficulty in developing and evaluating appropriate metrics.

Originally there were eight contractor's participating in the Test 
Program:

Textron Inc., 
Bell Helicopter Division 
McDonnell Douglas Helicopter 
Litton, Inc., Ingalls Shipbuilding 
Unisys, Paramax Systems Corporation 
Boeing Corporation:
Martin Marietta - Aerospace Division 
General Electric - Aircraft Engine Group:

Lockheed Georgia company:

These prime contractors were selected because they represented a 
variety of industry sectors and also represented contracting activity 
across all the Military Services. The original metrics were to look at 
the performance of these eight participants against a control group 
(i.e. other prime contractors in the same industry sectors). In 1994, 
the Under Secretary of Defense (Acquisition and Technology) issued a 
report on the Test Program. The report concluded that the Test Program, 
thus far, did not lead to a definitive conclusion that the Test should 
be continued or discontinued. However, the report did provide several 
recommendations that might be considered if the Test Program were to be 
continued. The Test Program was continued and several changes were 
made.

The most basic challenge in establishing meaningful metrics is that the 
eight original Test Program participants identified above are not the 
participants today. Our intent was for the performance of those 
original participants to form a baseline from which to evaluate 
performance (positive or negative) in future years. The current 
participants, in large part, are not those eight. Mergers and 
acquisitions, which greatly changed company compositions and businesses 
bases, made the original baseline essentially meaningless.

What metrics do we use today?

DoD, through DCMA, tracks each participating contractor's performance 
against itself by comparing its performance under the Program with 
prior years' performance. While this may provide an indication of how a 
particular contractor is performing, it does not address the larger 
issue of the overall success of the Test Program.

DoD, through DCMA, performs an annual review that assesses a 
contractor's performance against its subcontracting plan. Again, while 
this may provide an indication of individual performance, it does not 
address the overall Test Program.

DoD also tracks overall subcontracting goals and accomplishments. This 
is accomplished by the Standard Form (SF) 295 reporting. This metric 
addresses the broad category of subcontracting and includes all prime 
contractors with subcontracting plans, but does not limit itself to 
those contractors participating in the Test Program.

We concur with your recommendation that metrics be established to 
assess the overall results of the Test Program. Toward this end, we 
have or will be taking the following steps:

* DCMA has recently improved its oversight of the overall small business 
subcontracting program. They have done this by:

* Updating policy for monitoring contractor's subcontracting programs; * 
Issuing new guidance for DCMA personnel tasked with assisting 
contractors to achieve their goals; and:

*  Developing new criteria for rating contractor performance.

* DoD has chartered the Department of Defense Comprehensive Small 
Business Subcontracting Test Program Working Council. The mission of 
this Council is to bring together the collective knowledge and 
experience of the DoD, DCMA and Military Services to establish a 
coalition to achieve the vision of increased subcontracting to small 
businesses by major Defense contractors. The Council's vision is to 
determine and then remove barriers to increased participation by small 
businesses in DoD subcontracting with Test Program participants.

DoD is thoroughly reviewing the Logistics Management Institute (LMI) 
DRAFT report, Review of the Department of Defense Comprehensive 
Subcontracting Plan Test Program. As noted in this GAO report, we have 
implemented several of the recommendations contained in the LMI draft. 
We are continuing to review this report and will use it as a tool, 
where appropriate, to develop consequential Test Program metrics.

As outlined above, participants in the Test Program are reviewed and 
monitored. Determining the overall accomplishments of the Test Program 
is important to us and we will take all appropriate steps to measure 
and manage the Program accordingly.

RECOMMENDATION 2: The GAO recommended that the Secretary of Defense 
direct DoD's Office of Program Acquisition and International 
Contracting to establish procedures to improve the quality of the 
information in its database of subcontracts performed outside the U.S. 
(p. 20/GAO Draft Report):

DoD RESPONSE: Concur.

As noted in the report, GAO has expressed concern that DoD has no 
mechanism for ensuring contractor compliance with the reporting 
requirement at 252.225-7004 and as a result, foreign subcontract data 
may be understated. To alleviate GAO's concerns about contractor 
compliance with the DFARS requirement, the Director of Defense 
Procurement and Acquisition Policy (DPAP) has taken the following 
steps:

The Director, DPAP, wrote letters to the top 100 parent companies of 
DoD contractors reminding them of the reporting obligation and 
requesting that these companies ensure that all their subsidiaries also 
comply with the reporting requirement.

* A memorandum was sent to the Senior Acquisition Executives of the 
Military Department and the Defense Agencies requesting that they 
remind their contracting officers of this reporting requirement and 
requesting that their contracting officers pass this reminder on to DoD 
defense contractors.

* The Director, DPAP, sent a memorandum to the Defense Contract 
Management Agency (DCMA) requesting assistance in periodically 
verifying that contractors:

are complying with the reporting requirement. The Office of Program 
Acquisition and International Contracting (PAIL) will be meeting with 
DCMA to develop appropriate procedures that will facilitate the 
verification process without unduly burdening either DCMA personnel or 
defense contractors.

* In line with the foregoing, DPAP engaged in an extensive outreach 
effort with government and industry personnel to ensure that this 
endeavor was fully communicated to all stakeholders.

* PAIC requested the Defense Acquisition Regulation Council open a 
Defense Federal Acquisition Regulation Supplement (DFARS) case to 
ensure that the existing provisions and clauses clearly and succinctly 
lay out the reporting requirements. The International Acquisition 
Committee has met and drafted a proposed revision to the provisions and 
clauses governing foreign subcontractor reporting. A proposed rule will 
be published in the Federal Register sometime in the next month or so 
and public comments will be solicited. We are also revising the DD 2139 
itself to facilitate the manner in which contractors enter 
subcontracting data.

As discussed above, we are making every effort to ensure the 
completeness and accuracy of subcontractor data, including the 
management of the database. Since the 1998 GAO report, we have removed 
outdated fields and re-organized the database in a manner that 
facilitates data entry. We have also instituted a process for verifying 
database entries into critical fields and have developed an initial set 
of procedures for database entry and verification. We continually review 
the process to determine if there are other improvements that can be 
made. We believe DoD has undertaken the appropriate steps to manage its 
foreign subcontracting database.

[End of section]

Related GAO Products:

Joint Strike Fighter Acquisition: Cooperative Program Needs Greater 
Oversight to Ensure Goals Are Met. GAO-03-775. Washington D.C.: July 
21, 2003.

Sourcing And Acquisition: Challenges Facing the Department of Defense. 
GAO-03-574T Washington D.C.: March 19, 2003.

Small Business Contracting: Concerns About the Administration's Plan to 
Address Contract Bundling Issues. GAO-03-559T. Washington D.C.: March 
18, 2003.

Small Business Administration: The Commercial Marketing Representative 
Role Needs to Be Strategically Planned and Assessed. GAO-03-54. 
Washington D.C.: November 1, 2002.

Best Practices: Taking a Strategic Approach Could Improve DOD's 
Acquisition of Services. GAO-02-230. Washington D.C.: January 18, 2002.

Small Business Subcontracting Report Validation Can Be Improved. GAO-
02-166R. Washington D.C.: December 13, 2001.

Small Business: More Transparency Needed in Prime Contract Goal 
Program. GAO-01-551. Washington D.C.: August 1, 2001.

Small Business: Status of Small Disadvantaged Business Certifications. 
GAO-01-273. Washington D.C.: January 19, 2001.

Small Business: Trends in Federal Procurement in the 1990s. GAO-01-119. 
Washington D.C.: January 18, 2001.

Defense Trade: Observations on Issues Concerning Offsets. GAO-01-278T. 
Washington D.C.: December 15, 2000.

Defense Trade: Weaknesses Exist in DOD Foreign Subcontract Data. GAO/
NSIAD-99-8. Washington D.C.: November 13, 1998.

FOOTNOTES

[1] Subcontracting plans are required for most contracts over $500,000 
or $1 million for construction contracts. FAR 19.702(a)(1); 13 CFR ß 
125.3(a).

[2] According to DCMA officials, DOD contractors are supposed to report 
actual subcontract achievements on the Standard Form 294 or 295. How 
contractors report the data depends on their accounting system. For 
example, if they are on an accrual basis, they may capture the 
subcontract award at any convenient point in time (e.g., when they 
execute the subcontract or purchase order). If they operate on a cash 
basis, they would capture the transaction when they pay the 
subcontractor. The government allows contractors to decide which way as 
long as they follow Generally Accepted Accounting Principles (GAAP). 
One of the principles of GAAP is that a contractor must apply the same 
methodology consistently. 

[3] National Defense Authorization Act for Fiscal Years 1990 and 1991, 
P.L. 101-189, ß 834.

[4] DOD collects data about businesses performing work outside the 
U.S., but not data on whether businesses are domestic or foreign-owned. 


[5] For more information about data reliability concerns, see U.S. 
General Accounting Office, Reliability of Federal Procurement Data, 
GAO-04-295R (Washington, D.C.: Dec. 30, 2003). 

[6] Logistics Management Institute, Review of the Department of Defense 
Comprehensive Subcontracting Plan Test Program, AQ001R2 (Mclean, Va.: 
July 2002), Draft.

[7] An agreement between a U.S. supplier of defense articles or 
services and a foreign country under which the supplier agrees to 
purchase goods and services of the foreign country in consideration for 
the country's purchase of the supplier's defense articles or services. 
22 U.S.C. 2776(e)(1). 

[8] The total dollar amounts are for dollars submitted on Individual 
Contracting Action Reports, DD Form 350, for actions that obligate or 
de-obligate more than $25,000.

[9] The annual subcontracting data was obtained from the Office of the 
Under Secretary of Defense, Office of Small and Disadvantage Business 
Utilization for fiscal years 1993 through 2002. We did not 
independently test the reliability of the data received from this 
office, which relies on DOD contractors to report this subcontract 
information semi-annually on Standard Form 295 (SF 295). 

[10] The dollars reported in this paragraph are in constant fiscal year 
2002 dollars.

[11] All dollars are in constant fiscal year 2002 dollars.

[12] FAR 19.702 (a). However, subcontracting plans are not required (1) 
from small businesses; (2) for personal service contracts; (3) for 
contracts or contract modifications performed outside a state, 
territory, or possession of the U.S., the District of Columbia, and the 
Commonwealth of Puerto Rico; or (4) for modifications of contracts 
within the general scope of the contract that do not contain the clause 
at FAR 52.219-8, Utilization of Small Business Concerns. FAR 19.702 
(b).

[13] Section 817, P.L. 106-65. 

[14] Under the Test Program, the comprehensive subcontracting plan is 
to target specific industry categories where types of small businesses 
have not historically participated. For individual plans, the 
contractor must pay liquidated damages if the contracting officer 
determines the contractor failed to make a good faith effort to comply 
with the subcontracting plan. For both types of plans, the reporting 
requirement is semiannually.

[15] DFARS 252.225-7004(a)(2). Contracts and subcontracts for 
commercial items, military construction, ores, natural gas, utilities, 
petroleum products and crudes, timber, and subsistence are not required 
to be reported.

[16] 10 U.S.C. sec 2505 requires periodic national technology and 
industrial base assessments.

[17] 65 FR 7509 (Feb. 15, 2000).

[18] For more information on supplier base management, see U.S. General 
Accounting Office, Best Practices: Taking a Strategic Approach Could 
Improve DOD's Acquisition of Services, GAO-02-230 (Washington D.C.: 
Jan. 18, 2002).

[19] For more information on the small disadvantaged business and 
HUBZone programs, see U.S. General Accounting Office, Small Business: 
Status of Small Disadvantaged Business Certifications, GAO-01-273 
(Washington, D.C.: Jan. 19, 2001) and Small Business: HUBZone Program 
Suffers From Reporting and Implementation Difficulties, GAO-02-57 
(Washington, D.C.: Oct. 26, 2001).

[20] See appendix II for more information on the various small business 
concerns.

[21] These are often referred to as "640 Reviews" because of the form 
used.

[22] For more discussion on DCMA's reviews, see U.S. General Accounting 
Office. Small Business Subcontracting Report Validation Can be 
Improved, GAO-02-166R (Washington, D.C.: Dec. 13, 2001). 

[23] DCMA officials said they review almost all of the contractors 
included in their reviews annually.

[24] DOD considers the long-standing small business goals to include 
the overall small business, small disadvantaged business, and woman-
owned small business.

[25] States, colleges and universities, tribal organizations, and non-
profit organizations under contract with DOD typically run these 
centers. They are to provide assistance in contracting with federal, 
state, and local governments.

[26] U.S. General Accounting Office, Defense Trade: Weaknesses Exist in 
DOD Foreign Subcontract Data, GAO/NSIAD-99-8 (Washington, D.C.: Nov. 
1998).

[27] The five contractor locations we visited are: Raytheon Company, 
Space and Airborne Systems, El Segundo, Calif.; The Boeing Company, 
Integrated Defense Systems, El Segundo, Calif.; Northrop Grumman Corp., 
Air Combat Systems, El Segundo, Calif.; Northrop Grumman Corp., Space 
and Technology (formerly TRW Space and Electronics), Redondo Beach, 
Calif.; and Lockheed Martin Aeronautics Company, Ft. Worth, Tex.

[28] An agreement between a U.S. supplier of defense articles or 
services and a foreign country under which the supplier agrees to 
purchase goods and services of the foreign country in consideration for 
the country's purchase of the supplier's defense articles or services. 
22 U.S.C. 2776(e)(1).

[29] According to a contractor official at this firm, the number of 
countries involved in the program can change from year to year 
depending on various circumstances. In fiscal year 2002, 10 countries, 
including the U.S., were in the program.

[30] For additional information on contractor team arrangements, see 
FAR 9.6.

[31] DOD collects data about businesses performing work outside the 
U.S. but does not request information if the business is domestic or 
foreign-owned. 

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