United States General Accounting Office 

Washington, DC 20548 

December 13, 2001


The Honorable Christopher S. Bond


Ranking Minority Member


Committee on Small Business and Entrepreneurship


United States Senate


Subject: Small Business Subcontracting Report Validation Can Be Improved


Dear Senator Bond: 

This letter responds to your request that we assess how agencies validate data 

submitted by prime contractors on their subcontracting achievements. 

Subcontracting is an important avenue for enabling small businesses to participate in 

large dollar federal contracts. Of a total of $77 billion reported subcontracted dollars 

in fiscal year 2000, $31 billion went to various types of small businesses, such as 

women-owned, and small disadvantaged businesses, as well as those located in 

historically underutilized business zones called HUBZones. 

You also requested that we answer two specific questions on subcontracting 

substitution and evaluations of contractor past performance. Our responses are 

provided in enclosure III. 

RESULTS IN BRIEF 

Civilian and defense agencies follow a similar process to validate their subcontracting 

data—one that involves visiting contractors, assessing their compliance with their 

subcontracting plans, and evaluating accounting systems as well as management 

support of the subcontracting program. These assessments have found that most 

contractors that were reviewed are making good faith efforts to comply with their 

subcontracting plans. However, there are some areas where these reviews could be 

improved in order to enhance the validation and use of subcontracting data, and we 

have identified actions that can be taken to bring about these improvements. We 

received written comments on a draft of this letter from the Department of Defense 

(DOD) and the Small Business Administration (SBA). DOD concurred with our 

findings and recommendations and had no further comment. SBA also concurred 

with our recommendations but expressed concerns about how we characterized 

SBA's compliance efforts. DOD's and SBA's written comments are provided in 

enclosures I and II. 

GAO-02-166R Subcontracting Data 
BACKGROUND 

Under the Small Business Subcontracting Program,

1

 a contractor is not required to 

subcontract with small businesses, but in receiving a contract for more than $100,000, 

the contractor must agree in the contract that various types of small businesses will 

have the “maximum practical opportunity” to participate in contract performance. A 

prospective contractor is required to submit a subcontracting plan for each 

solicitation or contract modification that individually is $500,000 or more ($1 million 

for construction contracts) and that has subcontracting possibilities.

2

 DOD accounts 

for about $55 billion, or 71 percent, of the reported subcontracting dollars, and the 

civilian agencies account for about $22 billion, or 29 percent. 

The plan must document what actions the prospective contractor will take to provide 

the various types of small businesses with the maximum practical opportunities to 

participate in subcontracting. Specifically, it must include, among other things: 

•	 the percentage goals that will be subcontracted to specific types of small 

businesses, 

•	 the total dollars planned to be subcontracted and the contractor’s total 

subcontracting dollars to these businesses, 

•	 the type of work to be subcontracted and the types planned for subcontracting to 

these businesses, and 

•	 the efforts the contractor will make to ensure subcontracting opportunities to 

these businesses.3 

After contracts are awarded, the contractor must periodically submit to the 

government a subcontracting report for each individual contract that contains a 

subcontracting plan, which includes the subcontracting goals and dollars awarded to 4

the various types of small businesses. The contractor must also submit a summary 

subcontracting report that encompasses all its contracts with a particular agency 

within a fiscal year, including the total dollars subcontracted to various types of small 

businesses. 

1

 Federal Acquisition Regulation (FAR) 19.7. 

2

 FAR 19.702. However, subcontracting plans are not required (1) from small businesses; (2) for 

personal services contracts; (3) for contracts or contract modifications performed outside a state, 

territory, or possession of the United States, 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. 

3

 FAR 19.704(a) (1) (2) (3) (8). 

4

 Contractors under DOD's Comprehensive Subcontracting Plan Test Program would not report on 

individual contracts. Instead, the test program authorizes the negotiation, administration, and 

reporting of subcontracting plans on a plant, division, or companywide basis as appropriate. At the 

time of our review, DOD had 20 active plans with contractors under this test program. 

Page 2 GAO-02-166R Subcontracting Data 
AGENCIES USE DCMA AND 

SBA TO VALIDATE DATA 

Civilian agencies rely on SBA and DOD relies on the Defense Contract Management 

Agency (DCMA) to validate information provided by contractors or otherwise 

measure contractor compliance with their subcontracting plans. Both SBA and 

DCMA take similar approaches to validating compliance through on-site reviews of 

contractors—visiting and interviewing contractors, reviewing a sample of 

subcontracting plans and the contractors’ policies and procedures for implementing 

5

their small business program, and rating contractors based on their assessments. 

Both agencies found that most contractors that were reviewed were making good 

faith efforts to achieve their subcontracting goals. Specifically, for fiscal year 2000, 

SBA reported that only 3 percent of the contractors it reviewed were performing in a 

less than acceptable manner, while DCMA found that 8 percent were performing in a 

less than an acceptable manner. Both DCMA and SBA work with contractors who 

have unacceptable ratings to bring them into compliance. 

DIFFERENCES IN APPROACHES 

There are differences between the DCMA and SBA reviews of contractors' 

subcontracting programs. DCMA reviews more contractors with subcontracting 

plans than SBA. Specifically, the small business specialists that carry out DCMA 

reviews reported that they performed on-site reviews of about 93 percent of their 

portfolio of 1,010 contractors with subcontracting plans in fiscal year 2000. SBA 

reviewers, by contrast, reported that they performed on-site reviews of about 15 6 percent of their portfolio of 1,780 contractors with subcontracting plans. Both SBA 

and DCMA have guidance that instructs reviewers to prioritize reviews according to 

compliance risks such as the date of last review and the number of contracts not 

meeting established goals. Unlike DCMA, SBA on-site reviews are not always done 

according to the compliance risks posed by the contractor. Instead, they are done 

based on the time available to do the reviews and the proximity of the contractor to 

the reviewer because of travel and staff limitations, according to SBA officials. This 

approach does not ensure that the highest risk contracts are adequately covered. 

In addition, DCMA consistently submits its findings to responsible contracting 

officers. SBA does not consistently do this--even in cases when the contractors 

received marginal ratings. This is important since the contracting officer is 7 responsible for monitoring the contractor’s performance. 

5

 SBA and DCMA have an agreement that ensures that both agencies’ compliance review process and 

ratings are similar. 

6

 SBA officials said they conducted 894 desk reviews in fiscal year 2000 of contractors’ performance in 

addition to the on-site reviews of contractors' subcontracting programs. Desk reviews, also called 

"performance reviews," are used to identify contractors not meeting their subcontracting goals. 

However, these desk reviews do not assess the validity of the provided data or rate how well 

contractors are performing on their subcontracting plans. 

7

 FAR 19.706. 

Page 3 GAO-02-166R Subcontracting Data 
Neither SBA nor DCMA summarizes the results of their reviews in ways that would 

facilitate assessments of subcontracting data governmentwide (e.g., in terms of what 

percentage of contractors are meeting their goals for a given year and what progress 

contractors are making over time in terms of dollars awarded, goals achieved, or 

ratings). SBA maintains a database containing contractor ratings, but it is not 

complete and up-to-date and it does not readily provide information on trends 

regarding compliance with subcontracting plans. DCMA has two districts, which 

collect information on their reviews, but the agency does not maintain a centralized 

agencywide database. Both SBA and DCMA are aware of the limitations of their data 

collection and reporting systems and are working to develop databases that would 

address some of these issues. SBA plans to have a new subcontracting database 

operating by December 2001, and DCMA plans to have a new agencywide 

subcontracting database in 6 to 9 months. 

Further details on how DCMA and SBA conduct their reviews are provided in table 1. 

Table 1: Steps Generally Taken to Review Compliance with Subcontracting Plans 

• Evaluate how the contractor maintains an • Select a sample of subcontracting plans and 

accounting system that collects information the determine whether the contracting officer 

contractor needs to prepare its subcontract responsible for that contract has approved any goal 

reports. modifications or special exemptions from goals. 

• Assess whether the contractor has achieved • Track sample invoices to verify dollar amounts 

its subcontracting goals. on subcontracting reports. 

• Assess actions the contractor has taken to • Determine whether a subcontractor’s selfimprove program performance. certification of each of the categories of small 

businesses meets the FAR definition of that 

category of small business. 

• Assess written policies and procedures on the • Assess upper management support of the 

contractor’s small business program. small business program. 

• Assess the contractor’s practices to ensure • Based on the on-site compliance review, rate 

accurate reporting. the contractor as outstanding, highly 

successful, acceptable, marginal, or 

unacceptable. 

• Assess compliance with recordkeeping • Report this rating to the contractor along with 

requirements. recommendations to improve performance. 

• Assess the effectiveness of the contractor’s 

small business training program. 

Page 4 GAO-02-166R Subcontracting Data 
CONCLUSIONS AND RECOMMENDATIONS FOR EXECUTIVE ACTION 

While SBA and DCMA reviews of contractor-reported data look at a range of 

important factors, such as management support and controls and actual 

performance, SBA’s approach does not ensure that the highest risk contractors are 

adequately covered or that the officials responsible for monitoring contractor 

performance are aware of the results of reviews. Moreover, assessing the validity of 

subcontracting data governmentwide is difficult because SBA and DCMA do not 

readily summarize the results of their reviews in terms that would allow 

governmentwide assessments of contractor performance. At a minimum, both 

agencies could examine whether it is cost-effective to take additional steps that 

would enhance the validation and use of subcontracting data. 

We recommend, therefore, that the Administrator of SBA determine whether it is 

cost-effective to do the following and, if so, implement these steps. 

•	 Base SBA contractor reviews on compliance risks, such as size of the contract, 

date of the last review, and previous ratings, rather than time available to do the 

reviews and proximity of the contractors to the reviewer. 

•	 Send the results of the reviews to contracting officers, especially when the ratings 

are marginal. 

To promote governmentwide oversight, we also recommend that both the Director of 

DCMA and the Administrator of SBA develop reports that summarize their reviews; 

for example, in terms of the percentage of contractors meeting their goals and the 

progress being made over time. 

AGENCY COMMENTS AND OUR EVALUATION 

We received written comments on a draft of this letter from DOD and SBA. DOD 

concurred with our findings and recommendations and had no further comment. 

SBA also concurred with our recommendations but expressed three concerns. 

First, SBA suggested that we combine the number of desk reviews with the on-site 

reviews in our discussion of SBA’s compliance review effort. We noted in the report 

the number of desk reviews that SBA conducted in fiscal year 2000. However, 

because desk reviews do not validate contractor-provided data or rate how 

contractors are performing on their subcontracting plans, we believe that including 

such reviews with the more comprehensive on-site reviews would be misleading. 

Second, SBA notes that its guidance instructs reviewers to prioritize reviews 

according to compliance risks and that its staff may defer an on-site review of a 

contractor if the desk review indicates that the company is meeting the majority of its 

subcontracting goals. As we noted in the letter, SBA's guidance takes compliance 

risk into consideration. However, the SBA reviewers we interviewed said that they 

generally visit contractors based on the time available to do the reviews and the 

proximity of the contractors to the reviewer because of travel and staff limitations, 

rather than the compliance risks posed by the contractor. 

Page 5 GAO-02-166R Subcontracting Data 
-- -- -- --

Third, SBA noted that it has collected subcontracting data for over 10 years and that 

much of the information is summarized in a meaningful way. While SBA's database 

does provide some useful information, the data was not always complete and up-todate and did not readily provide information on trends regarding compliance with 

subcontracting plans. DOD's and SBA's comments appear in enclosures I and II. 

SCOPE AND METHODOLOGY 

To assess how agencies validate information provided by prime contractors on their 

subcontracting achievements, we analyzed pertinent legislation and agency 

documents and interviewed officials at SBA, DOD, the Department of Energy, and the 

National Aeronautics and Space Administration. In addition, we surveyed DCMA and 

SBA staff who reviewed prime contractors' subcontracting programs. We conducted 

our review from October 2000 to August 2001 in accordance with generally accepted 

auditing standards. 

As agreed with your office, unless you publicly announce the contents of this letter


earlier, we will not distribute this report until 30 days from its date. At that time, we


will send copies of this letter to the Chairman of the Senate Committee on Small


Business and Entrepreneurship, the Director of DCMA, and the Administrator of SBA.


We will also make copies available to others upon request.


If you have any questions concerning this letter, please call me at (617) 565-7555. Key


contributors to this review also included Catherine Baltzell, Thom Barger, David


Bennett, Deatra Brandon, Cristina Chaplain, Judith Collins, Sylvia Schatz, James


Smoak, and Hilary Sullivan.


Sincerely yours,


David E. Cooper


Director, Acquisition and Sourcing Management


Page 6 GAO-02-166R Subcontracting Data 
Enclosure I 

Comments From the U.S. Small Business Administration 

Page 7 GAO-02-166R Subcontracting Data 
Enclosure I 

Page 8 GAO-02-166R Subcontracting Data 
Enclosure II 

Comments From the Department of Defense 

Page 9 GAO-02-166R Subcontracting Data 
Enclosure II 

Page 10 GAO-02-166R Subcontracting Data 
Enclosure III 

ANSWERS TO QUESTIONS ON SUBSTUTION OF SUBCONTRACTORS AND 

EVALUATIONS OF PAST PERFORMANCE 

To what extent are defense contractors substituting subcontractors? 

Subcontracting plans may or may not specifically identify small, small disadvantaged, and 

women-owned small businesses. When they do, prime contractors should notify the 

administrative contracting officer of any substitution of firms that are not small, small 

8 disadvantaged or women-owned small businesses. However, DOD officials said that 

contracting officers do not typically require contractors to specifically identify businesses in 

subcontracting plans and they did not maintain data on how often substitution occurred. 

How are prime contractors’ past performance in meeting its small business 

subcontracting goals considered in awarding new contracts? 

Past performance information is one indicator of a prospective contractor’s ability to perform 

successfully. The currency and relevance of the information, source of the information, 

context of the data, and general trends in a contractor’s performance should be considered in 

making award decisions. The evaluation factors that may apply to an acquisition and their 

9 relative importance are within the broad discretion of agency acquisition officials. Among 

the factors that may be considered is a prospective contractor’s past performance in 

10 complying with subcontracting plan goals for small disadvantaged business concerns. 

However, NASA, DOE and DOD officials said that past performance evaluation factors 

varied from contract to contract and they did not have data on how past performance on 

subcontracting plan compliance was used in contract award decisions. 

(120003) 

8

 Defense Federal Acquisition Regulation Supplement 219.704–Subcontracting Plan Requirements. 9

 Federal Acquisition Regulation (FAR)15.3 04-Evaluation factors and significant subfactors 10 FAR 15.305-Proposal evaluation. 

Page 11 GAO-02-166R Subcontracting Data