Contract Management:

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

GAO-04-381: Published: Apr 5, 2004. Publicly Released: May 6, 2004.

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More small businesses are turning to subcontracting as a way to participate in the federal government's $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) DOD's assessment of the Test Program's effectiveness, (2) the performance of contractors participating in the Test Program, (3) the Defense Contract Management Agency's (DCMA) oversight of contractors' small business subcontracting efforts, and (4) the extent and reasons contractors are subcontracting with businesses performing outside the U.S.

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 DOD's largest contractors participate in the program. A lthough the Test Program was started more than 12 years ago, DOD has yet to establish metrics to evaluate the program's 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 contractors' 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 contractors' 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 GAO's 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.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The efforts of the Comprehensive Small Business Subcontracting Test Program working council are ongoing. The council meets at regular intervals to discuss the individual and collective Test Program participants, improvements to the Test Program and impediments that might hinder its overall success. The assessment report was used as a baseline for a follow-on effort to further review the Test Program and its participants. DOD continues to review overall subcontracting performance by participants and all DOD prime contractors with subcontracting plans. DOD's actions do not fully address our recommendation; since DOD plans no further action, we are closing the recommendation as not implemented.

    Recommendation: In order to evaluate the effectiveness of the Test Program, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD has completed actions on the recommendation to establish procedures to improve the quality of the information in its database of subcontracts performed outside the U.S. DOD has established procedures to improve the quality for the information in its database of subcontracts performed outside the U.S. Specifically, starting in October 2003, the following actions were taken: (1) letters were sent to the top 100 parent companies of DOD contractors reminding them of the reporting obligation, and requesting that these companies ensure that all of their subsidiaries also comply with the reporting requirement; (2) 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; and (3) a memorandum was sent to the Defense Contract Management Agency requesting assistance in periodically verifying that contractors are complying with the reporting requirement.

    Recommendation: 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., the Secretary of Defense should 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 Affected: Department of Defense


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