United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Military Procurement, Committee on

National Security, House of

Representatives

November 1998 DEFENSE TRADE

Weaknesses Exist in

DOD Foreign

Subcontract Data

GAO/NSIAD-99-8

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-279237 

November 13, 1998

The Honorable Duncan Hunter

Chairman, Subcommittee on Military Procurement

Committee on National Security

House of Representatives

Dear Mr. Chairman:

The Department of Defense (DOD) uses contracting data in part to make

decisions on matters relating to defense procurement and defense

industrial base issues. To ensure that DOD has sufficient contract data

available, Congress enacted legislation in fiscal year 1993 requiring

advance notification of contract performance outside the United States.

Since 1982, DOD has required prime contractors and first-tier

subcontractors to report subcontracts placed overseas that meet certain

thresholds. In response to your concern about trends in foreign sourcing

and whether contractors are reporting their foreign subcontracts, we

examined DOD’s foreign procurement data.1

 Specifically, we reviewed DOD’s

reported trends on contracts performed outside the United States. We also

evaluated DOD’s use of foreign subcontract information and the

completeness and accuracy of how DOD collects and manages its data.

Details on our scope and methodology are provided in appendix I.

Results in Brief For prime contracts, DOD purchases the majority of its defense equipment

and services from contractors operating in the United States. Though

subject to annual fluctuations, DOD’s prime contract awards outside the

United States remained about 5.5 percent of total DOD contract awards

from fiscal year 1987 to 1997. Over this period, the value of DOD prime

contracts performed both in and out of the United States declined. Prime

contracts performed outside the United States tended to be concentrated

in certain countries such as Germany, Italy, Japan, South Korea, and the

United Kingdom and in certain sectors such as services, fuel, and

construction. At the subcontract level, the value of DOD’s reported foreign

subcontract awards ranged from almost $2 billion in fiscal year 1990 to

almost $1.1 billion in fiscal year 1997, but this data has its limitations.2

1

For report purposes, we defined foreign subcontracts as contracts for materials manufactured or

services performed outside the United States in support of DOD contracts.

2

The value of DOD’s foreign subcontract awards is calculated using the Office of Foreign Contracting’s

DD 2139 database on foreign subcontracts.

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The Office of Foreign Contracting does not consider the data needs of

industrial base specialists in its efforts to collect foreign subcontract data.

Industrial base specialists are often unaware that data of this nature are

available. Furthermore, weaknesses in the Office of Foreign Contracting’s

data collection and management processes undermine DOD’s ability to use

the foreign subcontract data for defense trade and industrial base

decision-making. The Office has no mechanism for ensuring that

contractors provide required foreign subcontract information, which

contributes to the underrepresentation of foreign subcontract activity. Our

review of selected subcontracts disclosed instances in which foreign

subcontracts were not reported to the Office because contractors were

unaware of the reporting requirement or misunderstood the criteria for

reporting a foreign subcontract. The Office’s poor database management

also compromises the credibility and usefulness of its foreign subcontract

data.

Background DOD collects information on the extent of foreign participation in its

contracts to assess matters related to defense trade balances and domestic

industrial base capabilities. Toward this end, DOD uses different sources of

information. For defense trade information, DOD has one database for

prime contract awards (DD 350 Individual Contracting Action Report) and

a second database for foreign subcontract awards (DD 2139 Report of

Contract Performance Outside the United States). For industrial base

information, DOD periodically conducts studies of specific industry sectors

using industrial base questionnaires. These studies sometimes address the

level of foreign participation in a particular industry sector.

The United States currently conducts defense trade with 21 countries

under the terms of reciprocal defense procurement memoranda of

understanding (MOU).3

 These agreements were designed in the late 1970s

to promote rationalization, standardization, and interoperability of defense

equipment within the North Atlantic Treaty Organization (NATO).4

Consistent with relevant laws and regulations, these MOUs seek to

eliminate the application of nations’ buy-national laws and tariffs relating

to defense procurements. DOD’s Office of Defense Procurement (Foreign

Contracting) monitors the level of two-way defense procurement activity

under MOUs by preparing summaries on the annual defense trade

3

The 21 countries are Australia, Austria, Belgium, Canada, Denmark, Egypt, Finland, France, Germany,

Greece, Israel, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland,

Turkey, and the United Kingdom.

4

The United States also has some reciprocal procurement MOUs with countries outside NATO.

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procurement balances between the United States and the 21 countries.

The Office uses these summaries internally and exchanges the data with

MOU countries that give the United States their defense procurement

statistics. DOD has exchanged data with six MOU countries: Finland,

Germany, Israel, Norway, Spain, and the United Kingdom. DOD does not

compare the other countries’ defense trade information with its own

because it does not know how the other countries define and collect their

defense trade information.5

As part of its efforts to monitor foreign procurements, DOD established in

1982 a reporting requirement to identify certain subcontracts performed

outside the United States. In the fiscal year 1993 defense authorization

legislation, Congress required any firm performing a DOD contract

exceeding $10 million, or submitting a bid or proposal for such a contract,

to notify DOD in advance if (1) the firm or any of its first-tier

subcontractors intends to perform work exceeding $500,000 on that

contract outside the United States and Canada and (2) such work could be

performed inside the United States or Canada.6

 This information must be

made available for preparing required national defense technology and

industrial base assessments.7 DOD regulations also require prime

contractors to submit notification of contracts exceeding $500,000 when

any part of the contract that exceeds $25,000 will be performed outside the

United States, unless a foreign place of performance (1) is the principal

place of performance and (2) is in the firm’s offer.8

 Contracts for

commercial items or identified exceptions need not be reported.9

 First-tier

subcontractors awarded subcontracts in excess of $100,000 are also

subject to the reporting requirement.

Prime contractors and first-tier subcontractors are required on a quarterly

basis to submit information such as the type of supply or service provided,

the principal place of subcontract performance, and the dollar value of the

5

In June 1998, DOD initiated a dialogue with the other MOU signatories to improve the quality of

defense procurement data by developing a joint approach for gathering and analyzing the data.

According to a DOD official, this initiative may be a long-term effort.

6

The National Defense Authorization Act for Fiscal Year 1993 (sec. 840 of P.L. 102-484, 10 U.S.C. 2410g)

required advance notification of contract performance outside the United States and Canada.

7

Periodic national technology and industrial base assessments are required by 10 U.S.C. sec. 2505.

8

DOD raised the required threshold to $100,000 in the Defense Federal Acquisition Regulation

Supplement effective March 1998.

9

Exceptions are contracts for military construction, ores, natural gas, utilities, petroleum products and

crudes, timber, and subsistence.

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transaction.10 The regulation states that reports should be submitted to the

Office of Foreign Contracting on the standard form DD 2139 (Report of

Contract Performance Outside the United States) or in

computer-generated reports. The Office enters the information into its DD

2139 database on foreign subcontracting.

DOD Prime and

Subcontract Awards

Performed Outside

the United States

Although DOD purchases the majority of its defense equipment and

services from contractors performing in the United States, it does

purchase some from firms performing outside the United States.11 While

subject to annual fluctuations, the value of DOD’s prime contract awards

performed outside the United States remained about 5.5 percent of total

DOD procurement awards from fiscal year 1987 to 1997 (see fig. 1).12 These

awards, as a percentage of total DOD prime contract awards, ranged from a

high of approximately 6.8 percent in 1991 to a low of 4.6 percent in 1995.

Though the value of awards outside the United States increased during the

last 2 fiscal years, it represented only 5.8 percent of total DOD prime

contract award values by the end of 1997.

10The regulation governing the reporting of contract performance outside the United States further

requires that for contracts exceeding $10 million, contractors are to report such information at least 

30 days prior to the award of a first-tier subcontract valued at more than $500,000 that is to be

performed outside the United States or Canada.

11For the purposes of this report, we did not consider issues of ownership or control when determining

whether a firm was performing outside the United States.

12To analyze DOD’s prime contract awards, we used the DD 350 database, which includes information

on contracting procedures, competition, financing, statutory requirements, socioeconomic programs,

and other data relating to DOD acquisitions greater than $25,000.

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Figure 1: DOD Prime Contract Awards

by Place of Contract Performance For

Fiscal Years 1987-97

Foreign

Domestic

5.5%

94.5%

Source: GAO analysis of DOD’s DD 350 data.

From fiscal year 1987 through 1997, the value of DOD prime contracts

performed outside the United States declined, which was consistent with

the overall decline in the value of total DOD prime contract awards. As

shown in figure 2, the value of DOD prime contracts performed outside the

United States declined from about $12.5 billion to about $6.9 billion, while

the total value of DOD prime contract awards also declined from about

$197 billion to $119 billion. Data were adjusted and shown in constant

fiscal year 1998 dollars.

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Figure 2: Trends in DOD Prime Contract Award Values in Fiscal Years 1987-97 (in constant fiscal year 1998 dollars)

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

0

2

4

6

8

10

12

14

Fiscal year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Fiscal year

Awards performed outside the United States

Total awards

Awards performed inside the United States

87 88 89 90 91 92 93 94 95 96 97

100

120

140

160

180

200

220

Dollars in billions

Source: GAO analysis of DOD’s DD 350 data.

Prime contracts performed outside the United States tended to be

concentrated in certain countries and products. Although DOD’s prime

contracts were performed in more than 100 different countries between

fiscal year 1987 and 1997, 5 countries—Germany, Italy, Japan, South

Korea, and the United Kingdom—accounted for about 61 percent of total

prime contract values performed outside the United States when countries

were identified. While DOD awarded prime contracts outside the United

States for a wide variety of items, many of the awards were concentrated

in three sectors: services, fuel, and construction. Services accounted for

about 41 percent of all prime contracts performed outside the United

States in fiscal year 1997, while petroleum and other fuel-related products

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B-279237 

accounted for about 19 percent and construction accounted for another

17 percent.

DOD also tracks the award of subcontracts performed outside the United

States, but the subcontract data are limited. According to DOD’s DD 2139

data, the value of annual foreign subcontract awards ranged from a high of

almost $2 billion in fiscal year 1990 to a low of almost $1.1 billion in fiscal

year 1997, averaging about $1.4 billion over this period. As with prime

contracts, DOD’s foreign subcontracts tended to be concentrated in only a

few countries. From 1990 to 1997, Canada, Israel, and the United Kingdom

accounted for about 65 percent of the subcontracts that appeared in DOD’s

foreign subcontract database.13 The foreign subcontracts that appear in

DOD’s database cover a variety of equipment such as computers, circuitry,

and components for engines; aircraft; lenses; and optics as well as services

such as assembly, maintenance, and testing.

Weaknesses Exist in

DOD’s Use,

Collection, and

Management of

Foreign Subcontract

Data

DOD’s Office of Foreign Contracting and DOD industrial base offices both

collect and use foreign subcontract data, but they do not exchange their

data with one another. In addition, the Office of Foreign Contracting has

no safeguards for ensuring the accuracy and completeness of its foreign

subcontract award (DD 2139) database. In our review of selected

subcontracts, we found instances in which foreign subcontracts were not

reported to DOD in accordance with the reporting requirement, resulting in

the underreporting of foreign subcontract values. Also, the Office lacks

standards and procedures for managing its database, which compromises

the database’s usefulness. An Office of Foreign Contracting official said

the Office does not have sufficient resources to validate the collection and

management of data but reviews the reported data for inconsistencies.

DOD’s Use of Foreign

Subcontract Data Is

Limited

DOD’s Office of Foreign Contracting collects foreign subcontract

information from prime contractors and first-tier subcontractors as

required by law and regulation. The Office uses the data to prepare

defense procurement trade balance reports on offshore activity with the 21

countries with which the United States has reciprocal procurement MOUs.

While the Office’s foreign subcontract data are used for a single, narrow

purpose, similar data are sometimes collected by other DOD offices and are

used to prepare industrial base assessments. DOD’s periodic industrial base

assessments sometimes entail evaluating reliance on foreign suppliers for

13According to the law governing the reporting of foreign subcontracts, contractors are not required to

report subcontract performance in Canada. However, DOD’s regulation requires that subcontract

performance in Canada be reported if it meets the identified thresholds.

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specific products. DOD and military industrial base specialists rely on their

own industrial base questionnaires to obtain relevant information to

respond to specific requests from the military services. We spoke with

numerous specialists who were not aware that data collected by the Office

of Foreign Contracting existed. In addition, officials from the Office of

Foreign Contracting said they have not been requested to furnish the

foreign subcontract data for industrial base assessments.

Data Collection Does Not

Capture Complete Foreign

Subcontract Activity

DOD has no process or procedures to systematically ensure that

contractors are complying with the foreign subcontract reporting

requirement. Furthermore, neither the law nor the regulation provides

penalties for noncompliance. DOD officials said they performed a limited

follow-up with contractors and are certain that contractors are reporting

as required. However, responsibility for determining whether a foreign

subcontract is to be reported lies with the contractor. We found that in

several instances contractors had not reported their foreign subcontracts.

Among the 42 foreign subcontracts we examined, 11 subcontracts totaling

about $124 million did not have DD 2139 forms filed with the Office of

Foreign Contracting. Contractors gave various reasons for not filing the

DD 2139 forms. Some said they were unaware of the requirement to report

foreign subcontract awards; others had apparently misinterpreted the law

and regulation. A few of them said that the regulation was not clear and

that a better understanding of the intent of the law and regulation would

help them determine if they needed to report. Examples of their rationale

for not filing included the following:

• Two contractors stated that Defense Acquisition Circular 91-5 rescinded

the DD 2139 form. However, the circular deleted only the form and not the

reporting requirement. Also, a subsequent circular reinstated the DD 2139

form.

• One contractor interpreted the dollar thresholds in the reporting

requirement as applying only to the foreign subcontracts, not to the value

of the prime contract. This contractor did not file a DD 2139 form, even

though the value of the prime contract was above the $500,000 threshold,

because the foreign subcontract was below this amount. The regulation

required a contractor to report foreign subcontracts greater than $25,000

for prime contracts exceeding $500,000.

• One contractor awarded a foreign subcontract as part of a co-production

program with Germany. The contractor cited the existence of an MOU

between the United States and Germany for a specific program as the

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justification for not filing a DD 2139 form. We found no support for the

contractor’s position in the MOU, which aims “to use industrial capabilities

in both countries by providing both industries a fair chance to compete on

a dual-source basis and by initiating co-production of components.” The

MOU is also subject to the respective countries’ national laws, regulations,

and policies.

• One contractor said its foreign subcontract was for a component that had

to be produced outside the United States because its design was solely

owned by a foreign firm. According to the contractor, no U.S. or Canadian

firm was licensed to produce it, although the U.S. company had the

manufacturing capability to produce this item. Given this circumstance, a

company official said that he believed that the company did not have to

report this subcontract. The official, however, expressed uncertainty

about the reporting requirement and later indicated that the company

would report this subcontract to the Office of Foreign Contracting.

We also identified 12 subcontracts, which were valued at almost

$67 million, that were not reported to the Office because of possible

weaknesses in the procedures used to collect foreign subcontract data.

First, contracts should include the foreign subcontract reporting

requirement to ensure that contractors report their foreign subcontracts to

the Office. We found one contractor that did not file the DD 2139 forms for

four subcontracts because the reporting requirement was erroneously

omitted from the prime contract. Second, we found three companies that

did not file DD 2139 forms for eight subcontracts because, consistent with

the reporting requirement, this information was reported in their initial

offers and was submitted either to the contracting officer or to the prime

contractor. However, the information was not forwarded to the Office by

the contracting officers as stipulated by the regulation. The contracting

officers we spoke with were not aware they were required to send this

information to the Office of Foreign Contracting for inclusion in the 

DD 2139 database.

Although the law requires advance notification of contract performance

outside the United States, we spoke with several contractors that regularly

submitted DD 2139 information but used different criteria for identifying a

foreign subcontractor. The various criteria included (1) no U.S. taxpayer

identification number, (2) incorporation outside the United States,

(3) foreign ownership, (4) place of contract performance, and

(5) requirement of an export license. Sometimes this caused contractors to

report transactions differently, which would create inconsistent data. For

example, one contractor said it would report subcontracts awarded to a

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foreign subsidiary of a U.S. company because the subsidiary would be

manufacturing overseas. However, another contractor said it would not

report a subcontract awarded to a foreign subsidiary of a U.S. company

because the subsidiary is domestically owned. Contractors also lack clear

guidance about whether deobligations of foreign subcontracts should be

reported.14 Currently, the Office of Foreign Contracting enters any

subcontract deobligations voluntarily reported by contractors into its

database, but there is no requirement that contractors report these

deobligations. As such, deobligations are being reported inconsistently.

Weaknesses in Database

Management Minimize

Usefulness of the Foreign

Subcontract Data

The DD 2139 database lacks documentation defining the database’s

structure, critical data fields, and procedures for data entry, all of which

makes the data highly questionable. For example, no written procedures

exist for querying the database for the total dollar value of foreign

subcontracts awarded. As a result, determining the dollar value of these

subcontracts can lead to varying values, depending on the method used to

query the database. We queried the database using two different methods

and obtained a difference of $15.3 million in the total dollar value of

foreign subcontracts in fiscal year 1997 and a difference of $2.8 billion for

fiscal year 1990 to 1997.

The current DD 2139 database structure of 30 data fields is based on a

November 1985 version of the DD 2139 form (Subcontract Report of

Foreign Purchases). However, some of the data no longer need to be

reported. For example, the database contains six data fields of dollar

values, but only two of the six fields are needed to calculate the value of

foreign subcontracts awarded. According to an agency official, the

remaining four data fields are irrelevant. The DD 2139 database also

contains two fields related to offsets, but contractors are no longer

required to submit this information.15 The Office of Foreign Contracting,

however, continues to enter into its database offset information when it is

voluntarily provided by contractors.

The lack of standards and procedures for data entry has caused numerous

data entry errors that compromise the database’s usefulness. Data entry

errors included blank critical fields; keypunch errors; duplicate entries;

contract values for U.S. subcontractors; and inconsistent entries of prime

14Deobligation refers to the cancellation or downward adjustment of previously reported subcontract

award data.

15Offsets are all the industrial and commercial compensations provided to foreign governments and

firms as inducements or conditions for the purchase of military goods and services. The Department of

Commerce tracks offset activity.

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contract numbers, prime contractor names, and weapon systems names.

In fiscal year 1997, we found that 2 prime contractors’ names had been

entered with 10 or more different variations. Inconsistent data entry

makes it difficult to query the DD 2139 database or use another database

to validate its completeness.

Programming errors in the DD 2139 database resulted in some

underreporting of foreign source procurements. We examined the

database structure for fiscal year 1997 and found some incorrectly coded

database records. The miscoding of data for 1 year caused 13 out of 1,412

data records to be omitted from the total value of foreign subcontracts. As

a result, the total value of foreign subcontracts for fiscal year 1997 was

understated by $1.15 million, of which $802,249 was related to MOU

countries.

No error detection and correction procedures have been established to

ensure the integrity of the DD 2139 database. As a result, the database

contained information that was inconsistent with the reporting criteria

specified in the statutory requirement. For example, the database should

contain subcontracts awarded to foreign sources only for DOD prime

contracts. For fiscal year 1997, the database included 25 out of 1,412

subcontracts totaling $2.8 million for the National Aeronautics and Space

Administration, an independent civilian agency. We also found that one

U.S. defense contractor reported its foreign subcontracts for sales to both

DOD and foreign governments (the latter sales are known as direct

commercial sales). Although the contractor’s submittal clearly

distinguished between DOD and direct commercial sale subcontracts, the

Office included the data on subcontract awards for direct commercial

sales in the database.

Conclusions Data on DOD subcontracts performed outside the United States could

provide important information for making decisions on foreign sourcing

and industrial base issues. The Office of Foreign Contracting collects

information on contracts performed outside the United States to prepare

defense trade reports. DOD industrial base specialists collect similar

information for periodic industrial base assessments but are unaware of

the data the Office has collected. In addition, weaknesses in the Office’s

data collection process significantly limit DOD’s ability to use consistent

data on foreign subcontract-level procurements. The Office has made no

effort to improve contractor compliance with the foreign subcontract

reporting requirement, resulting in underrepresentation of the level of

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foreign subcontracting activity. Poor database management also

undermines the credibility and usefulness of the Office’s foreign

subcontract data.

Recommendations We recommend that the Secretary of Defense direct the Under Secretary

of Defense for Acquisition and Technology to review the existing

subcontract reporting requirement and amend it, as needed, to ensure that

data collected satisfy the common information needs of the offices

working on defense trade and industrial base issues, thus also avoiding

duplicative data collection efforts within DOD. As part of this effort, DOD

should provide additional guidance containing clear criteria and

definitions for reporting foreign subcontracts. We also recommend that

the Under Secretary of Defense for Acquisition and Technology direct the

Director of the Office of Defense Procurement to

• develop and implement controls and procedures for periodically verifying

compliance with the foreign subcontract reporting requirement and

specify how to transmit the information to the Office of Foreign

Contracting as a means of improving the completeness and consistency of

its data and

• develop and implement procedures for entering data, verifying critical

fields, documenting database programs, and querying the database to

improve the Office’s database management practices.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, DOD did not agree with the need

for our first recommendation to ensure that data being collected satisfy

common user needs. DOD stated that existing regulations and procedures

governing the generation of data needed to address defense trade and

industrial base issues are sufficient as it provides the data it collects to

other groups within DOD. Our review, however, demonstrated that similar

data are being collected by other offices. Further, our recommendation is

in accordance with DOD’s policy that states the Department will regularly

review and evaluate opportunities for improvements to increase the

usefulness of information and reduce the cost of information collection

activities for both DOD and contractors. We have modified our

recommendation to clarify that we are referring to the existing data

collection requirement.

DOD also stated that the reporting requirement is clear from the language in

the relevant Defense Federal Acquisition Regulation Supplement clause.

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However, the reporting requirement has been interpreted differently by

contractor and government officials. The varying interpretations indicate a

lack of understanding about what subcontracts should be reported, which

detracts from the consistency of information actually contained in the

database.

DOD did not fully concur with our second recommendation to improve the

collection and management of foreign subcontract data. Our findings

relating to poor database management arose from our attempts to use the

database to determine the total value of DOD’s foreign subcontract awards.

We could not determine the total value from the database. First, some

entries were coded so as not to be counted in the totals. Second,

subcontracts for National Aeronautics and Space Administration

procurements and for direct commercial sales, which should not be

included in this database, were. Third, subcontracts performed in the

United States, which should not be included in this database, were.

Finally, in our attempt to match entries from the DD 2139 database with

the subset of information on foreign subcontracts found in the Defense

Contract Management District International database, we found

subcontracts that should have been in the DD 2139 database but were not.

Taken together, these findings represent a significant degradation of the

value of the information. If DOD plans to use the data, and a recent

directive by the Under Secretary suggests that it will become more

important, the integrity of the data needs to be enhanced.

Our analysis showed that these problems are directly attributable to the

lack of controls and procedures for periodically verifying compliance with

the reporting requirement and the lack of procedures for managing and

using the database. DOD stated that it already maintains the most complete

database on foreign subcontracting and that periodically verifying

compliance would be too costly. Having the most complete database does

not address the value of the data contained in it. In addition, periodically

verifying compliance with the reporting requirement could be

accomplished as part of contracting officers’ routine oversight

responsibilities.

DOD agreed that there are no written procedures for managing and using

the DD 2139 database, but stated that none are needed. DOD guidance,

however, states that database managers must have written documentation

to maintain their systems. Having written procedures for managing and

using the database, such as controls for data entry and verification, are

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important to ensuring the reliability, accuracy, and usefulness of the

information contained in the DD 2139 database.

DOD’s written comments and our evaluation of them are discussed in

appendix II.

We are sending copies of this report to the Chairmen and Ranking

Minority Members of the Senate Committee on Armed Services and the

House Committee on National Security; the Secretary of Defense; and the

Director, Office of Management and Budget. We will also make copies

available to others upon request.

Please contact me at (202) 512-4841 if you have any questions concerning

this report. Major contributors to this report are listed in appendix III.

Sincerely yours,

Katherine V. Schinasi

Associate Director

Defense Acquisitions Issues

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Contents

Letter 1

Appendix I 

Scope and

Methodology

18

Appendix II 

Comments From the

Department of

Defense

20

Appendix III 

Major Contributors to

This Report

28

Figures Figure 1: DOD Prime Contract Awards by Place of Contract

Performance For Fiscal Years 1987-97

5

Figure 2: Trends in DOD Prime Contract Award Values in Fiscal

Years 1987-97

6

Abbreviations

DCMC Defense Contract Management Command

DCMDI Defense Contract Management District International

DOD Department of Defense

MOU memorandum of understanding

NATO North Atlantic Treaty Organization

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Page 17 GAO/NSIAD-99-8 Defense Trade
Appendix I 

Scope and Methodology

To determine trends in the Department of Defense’s (DOD) foreign

sourcing, we analyzed DOD’s DD 350 data on prime contract awards, which

were adjusted to reflect constant 1998 dollars, from fiscal year 1987 to

1997. We examined the amounts DOD purchased at the prime contractor

level by country and by item. We performed a similar assessment of DOD’s

data on foreign subcontract awards. However, we did not include a trend

analysis of DOD’s foreign subcontract procurements because of the data

weaknesses described in this report. In addition, we reviewed DOD’s annual

reports to Congress on purchases from foreign entities for fiscal year 1995

to 1997 and the laws and regulations requiring advance notification of

contract performance outside the United States. We discussed the law and

regulations with DOD and industry officials. We also examined DOD’s policy

and the chronology of changes to regulations regarding this reporting

requirement.

To determine the completeness of DOD data collection efforts, we tried to

compare the DD 2139 database to other government and commercial

databases. We were unable to use many of the sources we identified

because they did not contain fields that could be readily compared to the

DD 2139 database. We obtained foreign subcontract data from the Defense

Contract Management District International (DCMDI) and the Defense

Contract Management Command’s (DCMC) customs team. Each of these

data sources contained similar information to the DD 2139 database,

including prime and subcontract numbers, transaction values, and

subcontractor names. However, the DCMC import data were based on

actual deliveries and not contract awards, unlike the DD 2139 and DCMDI

data. Given the time difference between contract award and delivery data,

we concentrated on matching the DD 2139 database with the DCMDI

database.

DCMDI’s database is used internally to track foreign subcontracts

administered by the district’s field offices and is not representative of the

universe of foreign subcontracts. We did not perform a reliability

assessment of the DCMDI database because we only used it to identify

possible unreported foreign subcontracts that we could trace back to

original source documentation.

To compare the two databases, we performed an automated and manual

match of fiscal year 1997 DCMDI data with multiple years of the DD 2139

data to verify data entries. We sampled data records from the DCMDI

database, which led us to examine 49 foreign subcontracts. We then

eliminated all National Aeronautics and Space Administration and fuel and

Page 18 GAO/NSIAD-99-8 Defense Trade
Appendix I 

Scope and Methodology

subsistence contracts because these types of subcontracts are excluded

from the foreign subcontract reporting requirement. By comparing the two

data sets, we found 7 subcontracts that matched and 42 subcontracts that

did not appear in the DD 2139 database. For the 42 subcontracts, we

obtained contractual documentation from the DCMC field offices and

contractors to verify information about the prime contracts and

subcontracts and to ensure that the contracts contained the foreign

subcontract reporting requirement clause. We interviewed the contractors

to determine whether they reported the foreign subcontracts to the Office

of Foreign Contracting and discussed reasons for not reporting.

We also interviewed officials from several defense companies, DCMC

representative offices, and program offices. We discussed with company

officials their processes for tracking foreign subcontracts and compliance

with the DD 2139 reporting requirement. We obtained supplier lists for two

defense programs and surveyed several subcontractors about the DD 2139

reporting requirements and corresponding regulations. With DOD officials,

we discussed their procedures for monitoring subcontracts, including

subcontractor performance, and for reviewing and approving requests for

duty-free entry of foreign imports.

To assess DOD’s management of data on foreign subcontract procurements,

we reviewed DOD’s DD 2139 database for fiscal years 1990 through 1997,

which was the only automated data available during our review. We

performed various programming queries to examine the database

structure and critical fields. We discussed with Office of Foreign

Contracting officials the process for ensuring proper data entry, including

error detection and correction procedures, reconciliation of output reports

with input entries, and verification of contractor compliance with the

reporting requirement. We requested documentation describing or

evaluating the data system, but none was available. We did not compare

the DD 2139 data with original source documents because no criteria, such

as written standards for data entry and management, exist.

We performed our review between January and September 1998 in

accordance with generally accepted government auditing standards.

Limitations of the DD 2139 database have been identified and discussed in

earlier sections of the report. Where possible, corroborating evidence was

obtained from other databases and original source documentation. The

DD 350 database provides the most commonly used information on DOD

procurements. However, we did not assure the reliability of the DD 350

data.

Page 19 GAO/NSIAD-99-8 Defense Trade
Appendix II 

Comments From the Department of Defense

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.

Page 20 GAO/NSIAD-99-8 Defense Trade
Appendix II 

Comments From the Department of Defense

Page 21 GAO/NSIAD-99-8 Defense Trade
Appendix II 

Comments From the Department of Defense

Now on p. 12.

See comment 1.

See comment 2.

Page 22 GAO/NSIAD-99-8 Defense Trade
Appendix II 

Comments From the Department of Defense

See comment 2.

Now on p. 12.

See comment 3.

Page 23 GAO/NSIAD-99-8 Defense Trade
Appendix II 

Comments From the Department of Defense

See comment 4.

See comment 5.

Page 24 GAO/NSIAD-99-8 Defense Trade
Appendix II 

Comments From the Department of Defense

The following are GAO’s comments to DOD’s letter dated October 29, 1998.

GAO Comments 1. We are not proposing the establishment of a new data collection

requirement. Instead, we are recommending that the current data

collection efforts be enhanced to satisfy the information needs of the

offices working on defense trade and industrial base issues. Such action

would be in compliance with DOD policy to regularly review and evaluate

opportunities for improvements to increase the usefulness of information

and reduce the cost of information collection activities for both DOD and

contractors. If the collection of foreign subcontracting award data

(DD 2139) were improved, the data could meet multiple information

needs. To avoid further misunderstanding, we have clarified the wording

of our recommendation.

2. Prior to our review, the Office of Industrial Capabilities and

Assessments was unaware of the data collection efforts of the Office of

Foreign Contracting. The Office of Industrial Capabilities and Assessments

has an industrial base questionnaire that, in part, collects information on

subcontractors similar to the information collected by the Office of

Foreign Contracting. The two offices would benefit from coordinating

with each other to avoid some duplication of effort and alleviate burdening

industry for similar information. According to DOD policy, information

should be collected in a nonduplicative and cost-effective manner.

Moreover, the Under Secretary of Defense for Acquisition and Technology

recently initiated reviews of the globalization of the defense industrial

base and its effects on national security. Information on suppliers located

outside the United States, particularly those at lower tiers, such as that

collected by the Office of Foreign Contracting, or owned by foreign

entities, will be instrumental in evaluating the extent and effects of this

globalization.

3. The Office of Foreign Contracting has no mechanism for systematically

verifying contractor compliance with the foreign subcontract reporting

requirement. Unless some verification is performed, DOD has no assurance

of the accuracy of the total value of foreign subcontracts awards. We

recognize that the Office of Foreign Contracting has limited resources for

performing an extensive verification of contractor compliance. To assist in

the verification process, some follow-up could be performed by

contracting officers because defense companies are required to submit

certain DD 2139 information to them. However, the contracting officers

that we spoke with were often unaware of this reporting requirement and,

Page 25 GAO/NSIAD-99-8 Defense Trade
Appendix II 

Comments From the Department of Defense

therefore, would need to be educated about the requirement so that they

could periodically check contractor compliance when performing routine

oversight functions such as certifying duty-free entry of imported items.

In 1989 we reported that the Office of Foreign Contracting sent a letter to

the top 100 prime contractors informing them of the foreign subcontract

reporting requirement and found that about one-third had reported.1

 The

Office of Foreign Contacting has not performed another survey of defense

companies since then. Furthermore, officials from defense companies told

us that the Office of Foreign Contracting had not contacted them to verify

the data they had submitted. Periodic follow-up with the defense

companies would help ensure that erroneous information, such as

subcontract awards for nondefense contracts, would not be submitted.

4. For awarded contracts, the reporting requirement provides instructions

on when and how contractors are to report subcontract performance

outside the United States to the Office of Foreign Contracting. However,

for offers exceeding $10 million, if the company is aware at the time its

offer is submitted that it or its first-tier subcontractor intends to perform

any part of the contract that exceeds $500,000 outside the United States

and Canada, and if that part could be performed inside the United States

or Canada, DD 2139 information must be submitted with the offer to the

contracting officer. The regulation (Defense Federal Acquisition

Regulation Supplement 225.7202) then stipulates that contracting officers

are to forward a copy of reports submitted by successful offerors to the

Office of Foreign Contracting. However, the contracting officers we spoke

with were not aware that the regulation instructed them to forward any

information to the Office of Foreign Contracting and had never provided

the Office with such information. Consequently, information provided in

firms’ offers is not being fully captured by the Office’s database.

5. Poor database management practices undermine the reliability of DOD’s

foreign subcontract data. The Office of Foreign Contracting lacks

appropriate written standards for entering and verifying data. Such

standards are necessary to ensure the reliability and integrity of the data.

Our example of a programming error that resulted in 13 miscoded data

entries merely illustrates the problems that can arise when no system

controls are in place. DOD’s calculation of an error rate based on these 13

entries is erroneous and misleading. It is erroneous because statistical

inferences such as error rates must be based on a random statistical

1

See Industrial Base: Adequacy of Information on the U.S. Defense Industrial Base (GAO/NSIAD-90-48,

Nov. 15, 1989).

Page 26 GAO/NSIAD-99-8 Defense Trade
Appendix II 

Comments From the Department of Defense

sample assessed against defined parameters such as written procedures

for data entry, verification, or database queries. Without such

documentation, we were unable to assess data reliability fully. It is also

misleading because, as detailed in our report, we found numerous other

examples of problems with the DD 2139 database that undermine its

credibility. Besides the programming errors, we found data entry errors

such as the inclusion of National Aeronautics and Space Administration

subcontracts, direct commercial sales subcontracts, and U.S. subcontract

awards. Other problems included evidence of noncompliance with the

reporting requirement and inconsistent treatment of data. These problems

support the need for written standards explaining the DD 2139 database’s

structure, data fields, and procedures for data entry and verification.

Page 27 GAO/NSIAD-99-8 Defense Trade
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Johana Ayers

Catherine Baltzell

Arthur L. James, Jr.

Matthew T. Koehler

Anne-Marie Lasowski

Lillian I. Slodkowski

Karen S. Zuckerstein

Office of General

Counsel, Washington,

D.C.

Raymond J. Wyrsch

(707325) Page 28 GAO/NSIAD-99-8 Defense Trade
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