Contract Management: DOD Needs Measures for Small Business Subcontracting Program and Better Data on Foreign Subcontracts
Published: 2004-04-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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 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 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. 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.
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, 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.
subsections: section_title: Background
paragraphs: 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. As  shown in table 1, total subcontract dollars awarded by DOD contractors  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.
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.
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). 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. 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.
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. 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. DOD’s Office of Program  Acquisition and International Contracting reports to the Director of  Defense Procurement and Acquisition Policy.
section_title: DOD Has Yet to Assess the Overall Outcome of Its Test Program
paragraphs: 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.
subsections: section_title: Past Assessment of the Test Program Was Preliminary
paragraphs: 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    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.
section_title: DOD Lacks Test Program Measurements to Assess Overall Effectiveness
paragraphs: 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. 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.
section_title: Views Varied on Merits of the Test Program
paragraphs: 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.
section_title: DOD Contractors Have Mixed Success in Reaching Small Business Goals
paragraphs: 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.
subsections: section_title: Contractors Have Met Some Small Business Goals, but Results Are Inconsistent
paragraphs: 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.
section_title: Changing Contracting Environment May Affect Contractors’ Ability to Meet Small Business Goals
paragraphs: 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. 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. 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.
section_title: DCMA Is Taking Steps to Improve Oversight of the Subcontracting Program
paragraphs: 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.
subsections: section_title: DCMA Role Encompassed a Broad Range of Responsibilities
paragraphs: 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.
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. In general, DCMA reviews the DOD contractors it is  responsible for monitoring on an annual basis. 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 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.
section_title: DCMA Has Increased Focus on Oversight
paragraphs: 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, already provide these  services.
section_title: Extent of Subcontracting Activity with Firms Performing Outside U.S. Is Unknown, and Reasons for Subcontracting Varied
paragraphs: 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.
subsections: section_title: Concerns Remain about Reliability of Data on Subcontracts Performed Outside U.S.
paragraphs: 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. 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.
section_title: Contractors Report Awarding a Small Percentage of Subcontract Dollars to Firms Performing Outside the U.S.
paragraphs: 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. 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.
section_title: Subcontracts Awarded for Various Reasons
paragraphs: 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—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.  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.
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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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
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. 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.
section_title: Appendix II: Small Business Concern Categories
paragraphs: Appendix II: Small Business Concern  Categories  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.
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).
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.
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.
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.
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.
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.
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).
section_title: Appendix III: Comments from the Department of Defense
section_title: Related GAO Products
paragraphs: 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.