Department of Energy Contracting:

Actions Needed to Strengthen Subcontract Oversight

GAO-19-107: Published: Mar 12, 2019. Publicly Released: Mar 12, 2019.

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    INTERACTIVE GRAPHIC: Visualizing Relationships in Department of Energy Contracting

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Allison Bawden
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bawdena@gao.gov

 

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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

Photo of the sign in front of the Department of Energy in Washington, DC

Multimedia:

  • GAO Interactive Graphic
    INTERACTIVE GRAPHIC: Visualizing Relationships in Department of Energy Contracting

Additional Materials:

Contact:

Allison Bawden
(202) 512-3841
bawdena@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

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

DOE, including NNSA, is the largest federal civilian contracting agency, spending about 90 percent of its appropriations on contracts with companies, universities, and others for federal research and development, engineering, and production. DOE headquarters and local offices oversee contractors’ activities, including their management of subcontracts.
 
GAO was asked to review contracting at DOE, including the use of subcontractors. This report examines, for fiscal year 2016, (1) the parties that participated in DOE’s largest prime contracts and the extent to which they subcontracted their work; (2) the extent to which DOE ensured that those contractors audited subcontractors’ costs, as required; and (3) the extent to which DOE ensured that contractors met other subcontract oversight requirements. GAO reviewed DOE’s fiscal year 2016 data and documents, analyzed regulations, and interviewed federal officials and contractor representatives for DOE’s 24 largest fiscal year 2016 prime contracts.

 

What GAO Recommends

 

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.

For more information, contact Allison Bawden at (202) 512-3841 or bawdena@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: 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. DOE agreed to review existing regulations, guidance, and contract provisions on the audit requirement and determine if DOE needs to provide additional guidance. We believe that DOE's plan to review existing guidance and contract provisions is a positive step toward resolving the issues identified in the report; however, we believe that the actions called for in our recommendation remain valid and that DOE could more efficiently address these issues by proceeding to implement the recommended actions. We will continue to monitor and report on DOE's progress in addressing this recommendation.

    Recommendation: 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)

    Agency Affected: Department of Energy

  2. Status: Open

    Comments: 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. We believe that DOE's plan to review existing requirements and guidance is a positive step toward resolving the issues identified in the report; however, we believe that the actions called for in our recommendation remain valid and that DOE could more efficiently address these issues by proceeding to implement the recommended actions. We will continue to monitor and report on DOE's progress in addressing this recommendation.

    Recommendation: 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)

    Agency Affected: Department of Energy

  3. Status: Open

    Comments: 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. We believe that DOE's plan to review existing requirements and guidance is a positive step toward resolving the issues identified in the report; however, we believe that the actions called for in our recommendation remain valid and that DOE could more efficiently address these issues by proceeding to implement the recommended actions. We will continue to monitor and report on DOE's progress in addressing this recommendation.

    Recommendation: 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)

    Agency Affected: Department of Energy

  4. Status: Open

    Comments: DOE did not concur with our recommendation; instead, they plan to issue guidance emphasizing the importance of contracting officers reviewing contractors' disclosing and dealing with issues created by close working relationships, conflicts of interest, or ownership affiliations between prime and subcontractor. We have identified complex relationships among DOE contractors and subcontractors that were not documented by DOE, as well as incidents involving subcontractors related to conflicts of interest that were not disclosed to DOE. We noted that DOE officials-including those in local offices-have access to several databases and other sources of information that would allow them to independently verify ownership information that could allow the local offices to identify potential conflicts of interest that were not disclosed. We will continue to monitor and report on DOE's progress in addressing this recommendation.

    Recommendation: 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)

    Agency Affected: Department of Energy

  5. Status: Open

    Comments: 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. DOE stated that their surveillance does include periodically reevaluating subcontract consent thresholds; however, we found that consent review thresholds are set at the beginning of a contract, and in most instances are not reevaluated because there is no requirement to do so. We believe that DOE's plan to review existing guidance is a positive step toward resolving the issues identified in the report; however, we believe that the actions called for in our recommendation remain valid and that DOE could more efficiently address these issues by proceeding to implement the recommended actions. We will continue to monitor and report on DOE's progress in addressing this recommendation.

    Recommendation: The Director of the DOE Office of Acquisition Management should require local offices to periodically reevaluate consent review thresholds. (Recommendation 5)

    Agency Affected: Department of Energy

  6. Status: Open

    Comments: DOE partially concurred with the recommendation and agreed to review existing guidance and determine if additional guidance is needed to assessment of the contractors' management of subcontractors in Annual Performance Evaluation and Measurement Plans. We believe that DOE's plan to review existing guidance is a positive step toward resolving the issues identified in the report; however, we believe that the actions called for in our recommendation remain valid and that DOE could more efficiently address these issues by proceeding to implement the recommended actions. We will continue to monitor and report on DOE's progress in addressing this recommendation.

    Recommendation: 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)

    Agency Affected: Department of Energy

 

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