8(a) Subcontracting Limitations: Continued Noncompliance with Monitoring Requirements Signals Need for Regulatory Change
Published: 2014-09-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: SBA's 8(a) program is one of the federal government's primary means for developing small businesses owned by socially and economically disadvantaged individuals. To ensure that 8(a) firms do not pass along the benefits of their contracts to their subcontractors, regulations limit the amount of work that can be performed by subcontractors. In 2013, the Small Business Act was amended to make several changes related to these subcontracting limitations. GAO was asked to review how federal agencies and small businesses monitor the amount of subcontracted work under 8(a) contracts and the potential effects of the changes to the Small Business Act.
This report examines (1) the extent to which contracting officers and firms monitor compliance with 8(a) subcontracting limits and (2) the implementation status of changes to the Small Business Act and potential effects. GAO reviewed a nongeneralizable sample of 10 8(a) contracts at the three agencies with highest 8(a) obligations in fiscal years 2011 and 2012. GAO selected a small sample to delve more deeply into the circumstances of the contracts. GAO also examined the amendments to the Small Business Act.
section_title: What GAO Found
paragraphs: Similar to prior GAO findings from April 2006 and January 2012, contracting officers are generally not collecting information on the amount of subcontracted work performed under the 8(a) contracts reviewed, as required. The amount of work prime contractors must perform differs according to what is being procured. For example, the subcontractor's personnel costs are not to exceed 50 percent of the total work under service contracts. Two of the contracting officers associated with the 10 contracts GAO reviewed had monitored and ensured that the subcontracting limitations were not exceeded. In these cases the contractors had been asked to provide necessary information. In the other cases, however, contracting officers did not monitor and were not fully aware of what they were required to do, in part because their responsibilities are not set forth in the Federal Acquisition Regulation (FAR), the primary source for federal procurement policies, to which they regularly turn for guidance. Instead, these responsibilities are outlined in agency agreements with the Small Business Administration (SBA).
All 10 contractors GAO met with stated that they maintain and are willing to provide information to demonstrate compliance with subcontracting limitations, if required. While all 8(a) contracts GAO reviewed must comply with the limitations, 5 of the 10 contracts had an increased risk of exceeding these limits. These situations, which underscore the need to monitor, included cases where a subcontractor had been the prime contractor under a prior contract for the same or similar work.
In January 2014, SBA took an initial step in the federal rule making process by announcing that it was drafting a rule to implement the amendments to the Small Business Act. It will take more actions and could take years, however, to incorporate any changes into the FAR, which is maintained by a council chaired by the Administrator of the Office of Federal Procurement Policy (OFPP). Contracting officers and contractors stated that pending changes could make it easier to determine compliance with subcontracting limitations. At the same time, however, contractors had some concerns that it could be more challenging to comply because previously excluded subcontracted costs, such as materials, will be considered as subcontracted work. Contractors said that new monetary penalties—a minimum of $500,000—for violating subcontracting limitations are high but would encourage firms to perform the required amount of work.
section_title: What GAO Recommends
paragraphs: GAO recommends that the OFPP Administrator take the appropriate steps to amend the FAR to reflect contracting officers' responsibilities for monitoring 8(a) subcontracting limits and require 8(a) contractors to regularly report on the amount of subcontracted work. OFPP agreed with GAO's recommendations.

section_title: Letter
paragraphs: Government agencies obligated about $14.5 billion to firms participating  in the Small Business Administration’s (SBA) 8(a) Business Development  program in fiscal year 2013. As one of the federal government’s primary  means for developing small businesses owned by socially and  economically disadvantaged individuals, this program sets aside federal  contract awards solely for 8(a) firms. To participate in the program, a firm  must be certified by SBA as meeting several criteria. For example, the  firm must be a small business as defined by SBA and be unconditionally  owned and controlled by one or more socially and economically  disadvantaged individuals. Upon certification, for a 9-year period, 8(a)  firms can obtain federal contracts through sole source awards or by  competing against other 8(a) firms rather than large businesses for the  work. The Federal Acquisition Regulation (FAR) limits the percentage of  work that may be subcontracted under 8(a) contracts, in part, to ensure  that small businesses do not pass along the benefits of their contracts to  their subcontractors. For example, under the current regulations for  service contracts, the 8(a) prime contractor must expend at least 50  percent of the total labor costs associated with the contract on its own  employees. Contracting officers are responsible for ensuring compliance  with this requirement. Our prior work dating back to 2006, however, has  found that contracting officers generally did not do so.
The National Defense Authorization Act (NDAA) for Fiscal Year 2013  amended the Small Business Act to change what costs are considered to  be subcontracted work under contracts set aside for small businesses,  including 8(a) contracts. It also required SBA to, among other things, take  such actions as are necessary to ensure that an existing federal  subcontracting reporting database is modified to notify key individuals  when contractors violate subcontracting limitations. The act also  established penalties for such violations. You asked us to review how  federal agencies monitor the work performed by subcontractors under  8(a) contracts and the potential effects from these changes in the Small  Business Act. This report examines (1) the extent to which contracting  officers and small businesses monitor compliance with subcontracting  limitations under 8(a) contracts and the reasons they may not and (2) the  status of federal agency efforts to implement the revisions to the Small  Business Act and the potential effects of these revisions as reported by  contracting officers and small businesses.
To determine the extent to which contracting officers and small  businesses monitor compliance with subcontracting limitations, we used  the government’s procurement database—the Federal Procurement Data  System-Next Generation—to identify the departments with the highest    total obligations under 8(a) contracts in fiscal years 2011 and 2012. Those were the Departments of Defense (DOD), Health and Human  Services (HHS), and Homeland Security (DHS). Obligations to 8(a)  contracts awarded by these three departments represented  approximately 75 percent of all federal agencies’ total obligations under  8(a) contracts across the two fiscal years. We selected a sample of 10  8(a) contracts with subcontracting awarded by the Departments of the  Army, Navy, Air Force, HHS, and DHS. Findings from our prior work in  April 2006 and January 2012 established that subcontracting limitations  were not monitored by contracting officers.because this approach allowed us to obtain more in-depth information for  each contract. For each of these departments, we selected one stand-  We selected a small sample  alone contract, completed in fiscal year 2012, because contractors are  required to comply with subcontracting limitations by the end of the  performance period. In addition, for each department, we selected one  active IDIQ contract awarded in fiscal year 2011 or 2012 because  contractors were required to demonstrate compliance with subcontracting  limitations every 6 months during the performance period for IDIQ  contracts. To select the contracts for review, we used several criteria,  including total value, total obligations to date, the type of service provided,  and contracting office location. For each contract, we validated that each  was awarded through the 8(a) program and was either a stand-alone or  IDIQ contract as reflected in the Federal Procurement Data System-Next  Generation. We reviewed documentation in the contract files, such as  solicitations, contractor proposals, and invoices, to determine how, if at  all, the contracting officer or contracting officer’s representative (COR)  monitored compliance with subcontracting limitations. We also used this  documentation to help identify situations that could indicate the potential  to exceed these limits. We interviewed the contracting officer and COR,  when available, for each contract to determine whether and how  subcontracted work was monitored and, if it was not monitored, the  reasons why. In addition, we met with representatives from the 8(a)  contractors associated with the 10 contracts in our sample to discuss their  approaches to monitoring compliance with subcontracting limitations and  the extent to which federal agencies requested information on the amount  of subcontracted work. The results of our contract analysis are not  generalizable to the population of 8(a) contracts but, when coupled with  the results of our interviews and past work, provide useful insight into the  extent to which subcontracting limitations are monitored and situations  that present an increased risk that subcontracting limitations may be  exceeded.
To determine the status of federal agency efforts to implement revisions  in the Small Business Act, we compared the subcontracting limitation  requirements for 8(a) contracts prior to and after the Small Business Act  was amended. We also reviewed an SBA announcement of current and  projected rules to amend small business regulations. We interviewed  SBA, General Services Administration, and Office of Federal  Procurement Policy (OFPP) officials. The Administrator of OFPP serves  as the chair of the Federal Acquisition Regulatory Council, which  oversees the development and maintenance of the FAR. We also  interviewed contracting officers, CORs, and representatives from the 8(a)  contractors, when available, associated with the 10 contracts in our  sample to obtain their insights into potential effects of these provisions.
We conducted this performance audit from September 2013 to  September 2014 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Subcontractors can perform work under 8(a) contracts, but certain  limitations apply regarding the percentage of personnel costs that these  firms may incur under service, supply, and construction contracts. For  example, for service contracts, the 8(a) prime contractor must incur at  least 50 percent of the personnel costs with its own employees. In other  words, the total personnel costs associated with the employees of the  8(a) prime contractor must be equal to or greater than the total personnel  costs associated with the employees of all subcontractors performing  work under the service contract. Table 1 identifies how much work the  firm awarded the 8(a) contract must perform according to the  requirements in the subcontracting limitation clause currently in the FAR  and applicable to the contracts reviewed for this report.
Procuring agency contracting officers are responsible for monitoring  whether 8(a) contractors are in compliance with subcontracting  limitations. For all of the agencies in our review, SBA has delegated  responsibility for contract administration to the procuring agencies  through partnership agreements. Partnership agreements between the  agencies and SBA outline the responsibilities of both parties in the 8(a)  contracting process. These agreements delegate SBA’s contract  administration responsibilities, such as overseeing the contractor’s  performance, to the procuring agencies after SBA has accepted the  procurement into the 8(a) program. The partnership agreements explicitly  address subcontracting limitations in a few ways by requiring the  agencies to at the time of the contract award, conduct and document an  assessment of the 8(a) firm’s ability to comply with the subcontracting  limitations;  include monitoring and oversight provisions in all 8(a) contracts to  ensure that the contractors comply with the subcontracting limitations;  and ensure that 8(a) contractors comply with the subcontracting  limitations.
SBA, DOD, DHS, and HHS officials responsible for administering the 8(a)  program stated that contracting officers are responsible for implementing  these requirements. Our past work and the work of others, however, have  found that contracting officers generally do not do so. In our April 2006  report, we reviewed 16 contracts awarded to 8(a) firms owned by Alaska  Native Corporations and found almost no evidence that agencies were  monitoring compliance with subcontracting limitations. Contracting  officers we spoke with were generally confused about whose  responsibility it was to monitor compliance or were unclear about how to  monitor the subcontracting limitation requirements under IDIQ contracts.  We recommended that SBA take steps to clearly assign accountability for  monitoring compliance. SBA did not state if it agreed or disagreed with  our recommendations but, in response, the agency provided training to  procurement officials and revised the 8(a) partnership agreements to  more clearly delineate responsibility to the procuring agency for the  monitoring. SBA also provided training to procuring agencies on the  contents of the partnership agreements.
Nevertheless, about 6 years later, we reported that of 71 8(a) contracts  confirmed to have subcontracting, we found no evidence of regular and  systematic monitoring of the subcontracting limitations. Contracting  officers were still unclear who was responsible for the monitoring and  uncertain about how to conduct the monitoring. In this January 2012  report, we noted that the FAR requires contracting officers to include the  subcontracting limitations clause in 8(a) contracts but does not state who  is accountable for monitoring compliance with the required percentages.  In addition, many contracting officials told us that they did not know how  to monitor the percentage of work that is subcontracted, in part, because  they did not have visibility into subcontractor costs. Lastly, we found no  evidence that the contracting officers were enforcing requirements that  8(a) contractors semi-annually demonstrate compliance with  subcontracting limitations under IDIQ contracts, in part, because these  requirements were not referenced in the FAR. We recommended that  OFPP, in consultation with SBA, take a number of actions, such as  amending the FAR to direct contracting officers to document in the  contract file the steps they had taken to ensure compliance and to clarify  the percentage of work required by an 8(a) participant under IDIQ  contracts. OFPP agreed with our recommendations and some actions  have been taken to address them. For example, SBA amended its  regulations regarding subcontracting limitations under IDIQ contracts,  issuing a final rule on October 2, 2013. Prior to this change, the 8(a)  participant was to demonstrate semi-annually that it had performed the  required amount of work for the combined total of all task or delivery  orders at the end of each 6-month period under an IDIQ contract. The  amended regulations require the 8(a) firm to demonstrate compliance  with the subcontracting limitations after each performance period—e.g.,  for the base period and any option period thereafter. OFPP and SBA  stated that they would address the other recommendations as they  developed regulations to comply with the most recent amendments to the  Small Business Act.
SBA has also found that contracting officers are generally not monitoring  compliance with the subcontracting limitations. To address FAR  requirements, SBA conducts surveillance reviews each fiscal year at  various contracting offices to monitor their compliance with small  business policies, statutory requirements, and applicable regulations. As  part of these reviews, SBA examines a sample of small business  contracts to determine whether the contract files contain evidence that the  contracting officer monitored compliance with the subcontracting  limitations. According to SBA officials, these reviews generally find that  the contracting officers are not taking steps to ensure such compliance.  For example, through these reviews, SBA has found that contracting  officers were either not including the FAR subcontracting limitations  clause in contracts or were not monitoring compliance. SBA has made  recommendations to these contracting offices to provide training or issue  guidance on the requirement so contracting officers better understand  their responsibilities to monitor subcontracting limitations.
section_title: Responsibilities for Ensuring Compliance with Subcontracting Limitations Still Not Fully Met or Understood
subsections: section_title: Contracting Officers Are Generally Not Ensuring Compliance with Subcontracting Limitations
paragraphs: With two exceptions, the contracting officers we met with generally do not  monitor the amount of subcontracted work to ensure 8(a) contractors  comply with subcontracting limitations, which is consistent with our past  findings. Table 2 shows that contracting officers rarely performed all  subcontracting limitations-related responsibilities in their agency’s 8(a)  partnership agreements with SBA.
As noted in the table, only four contracting officers documented and  assessed if the offeror could comply with the subcontracting limitations  prior to contract award. These assessments varied from questioning the  offeror on how it would comply with the subcontracting limitations to using  award evaluation criteria that required the offeror to identify the steps it  would take to ensure it was in compliance. As required by the FAR, all of  the contracts included the subcontracting limitations clause, which  requires the contractor to perform a certain percentage of the work.
None of the contracts, however, included a monitoring and oversight  provision to require the contractor to demonstrate the percentage of work  it performed.
Subcontracting limitations were monitored for an HHS and a Navy  contract we reviewed. In addition to assessing if these contractors would  be able to comply, these two contracting officers required the contractor  to regularly provide information on the extent to which work was  subcontracted. The contracting officers told us that it was their standard  practice to monitor subcontracting for this purpose. We did not find  evidence that these limitations were monitored in the other eight  contracts. In reviewing these eight contracts, we also did not find  sufficient evidence in the contract files to independently determine the  extent of work subcontractors completed. The other contracting officers  we spoke with stated that they do not monitor the extent of subcontracted  work to ensure contractors comply with subcontracting limitations.
Contracting officers cited many reasons for not ensuring 8(a) contractors  complied with subcontracting limitations. We often found that contracting  officers, even one of the two who monitored subcontracting limitations,  were not fully aware of what they were required to do under the  partnership agreements or were unclear on how to ensure compliance  (see table 3).
Generally, contracting officers understood that they had some  responsibility to monitor compliance with subcontracting limitations, but  told us that this responsibility was also shared with CORs, in part,  because contracting officers are not always onsite to oversee contractor  performance as CORs generally are. CORs associated with the 10  contracts we reviewed, however, stated that contracting officers have not  delegated this responsibility to them and they do not take steps to monitor  the amount of subcontracted work.
In addition, some contracting officers stated that the contractor was  responsible for ensuring compliance with subcontracting limitations, in  part, because the contract included the limitation on subcontracting FAR  clause. For example, one HHS contracting officer stated that the 8(a)  contractors he works with understand the amount of work they must  perform, should be monitoring the amount of subcontracted work, and  should inform the government if subcontractors perform more work than  allowed. This contracting officer, however, was not aware if the contractor  had performed the required amount of work on the contract we reviewed,  and contractor representatives for this contract told us that they were not  in compliance with the subcontracting limitations at the time we spoke  with them.
In several interviews during this review and in prior work, contracting  officers told us that they primarily rely on the FAR and their agencies’  policies and guidance to understand what their responsibilities are and  how to implement them. While agencies’ policies and guidance may  supplement parts of the FAR, the purpose of the FAR is to provide  uniform policies and procedures for federal acquisitions, and most  agencies must follow these regulations. The FAR requires contracting  officers to include the subcontracting limitations clause in any solicitation  and contract awarded under the 8(a) program, but it does not address the  contracting officers’ responsibilities as outlined in the 8(a) partnership  agreements. Three contracting officers told us they were fully aware of  the contents of the 8(a) partnership agreements, but had not fully  implemented those responsibilities, and only one had taken steps to  ensure the contractor was in compliance with subcontracting limitations.  Four contracting officers were aware of the partnership agreement  generally but were not aware that it required them to include, among  other things, a monitoring and oversight provision in the contract. Another  contracting officer was completely unaware of the partnership  agreement. DHS, DOD, and HHS procurement and small business  contracting officials we met with stated that their agencies have not  developed any specific policies or guidance for contracting officers to  reinforce or re-state these responsibilities. When contracting officers are  not aware of or do not implement their responsibilities to monitor 8(a)  subcontracting limitations, there is an increased risk that contractors are  not in compliance.
Further, six contracting officers also expressed confusion about their  ability to monitor subcontracted work performed under 8(a) contracts,  stating that they did not have access to the costs of the subcontracted  work. These contracting officers generally stated it was their  understanding that only large businesses could be compelled to report on  subcontracted work. Large businesses awarded contracts that are  expected to exceed a certain amount are required to develop a plan  detailing the extent to which they will subcontract work to small  businesses, which is evaluated by contracting officers prior to awarding a  contract. These businesses are then required to report on the amount of  work subcontracted to those small businesses on a federal government  website. While the FAR exempts small businesses from the requirement  to submit a subcontracting plan, it does not prohibit contracting officers  from requiring that small businesses report on subcontracting for the  purposes of demonstrating compliance with the subcontracting  limitations.
Six contracting officers also generally thought that the government does  not have access to the costs of subcontracted work under firm, fixed  priced contracts but would under cost-reimbursement contracts.  Contracting officers are not prohibited from requesting information on the  amount of subcontracted work under firm, fixed priced contracts. In fact,  we found that contracting officers were able to request and collect  information on the amount of subcontracted work, regardless of the  contract type. The two contracting officers that monitored subcontracting  did so by requiring contractors to submit information on the amount of  subcontracted work for both a cost-reimbursement contract and a fixed- priced contract. For example, prior to approving new work on a cost- reimbursement contract for conference logistics and planning services, an  HHS contracting officer required the 8(a) contractor to propose how it  would comply with subcontracting limitations. As work was performed,  this contracting officer calculated how much work was completed by  subcontractors using subcontractor invoices provided by the contractor. In  the other instance, a fixed-priced contract for facility support services, a  Navy contracting officer included evaluation criterion in the solicitation to  ensure that any offeror would be able to perform the required amount of  work. Even though this was a fixed-price contract, the contracting officer  required the contractor to semi-annually report on the amount of  subcontracted work from the start of the period of performance. These  two contracting officers stated that 8(a) contractors they work with  generally have no problem providing data or information required to  demonstrate compliance with subcontracting limitations, regardless of the  contract type.
section_title: 8(a) Contractors Are Willing and Able to Provide Subcontracting Data If Required
paragraphs: All of the 10 8(a) contractors we met with said they are willing and able to  provide information to demonstrate compliance with subcontracting  limitations, but generally would only do so if required. They stated that  contracting officers rarely ask for or require this information. All contractor  representatives stated that they maintain information on the costs of their  subcontracted work, but most do not track if they are in compliance with  subcontracting limitations. They said, however, that they likely could  demonstrate compliance if required. In some cases, construction  contractors noted that they might need to obtain more information on the  personnel costs associated with subcontracted work, in part, because  some subcontractors invoice for total costs rather than providing details  on all of their costs. Three contractor representatives explained that they  monitor compliance as a regular practice by manually calculating the  percentage of subcontracted work using subcontractors’ invoices or  generating automated reports through the firm’s financial accounting  system.
Contractor representatives stated that providing information to  demonstrate compliance with subcontracting limitations would not burden  them if such a requirement was put in place prior to or at the time of  contract award. They said that the earlier such information is required or  requested, the easier it is to determine and demonstrate compliance.  Some contractor representatives added that they would be hesitant to  provide details on costs they considered to be proprietary information  under fixed priced contracts, but would provide information on the  percentage of subcontracted work.
section_title: Observed Situations That Underscore the Need to Monitor Subcontracting
paragraphs: In the course of our review, we observed situations presenting an  increased risk that subcontracting limitations may be exceeded. While all  8(a) contracts must comply with subcontracting limitations, these  situations highlight the importance of monitoring the extent of  subcontracting. Our observations included situations when the 8(a) prime  contractor proposed subcontractors that were the agency’s prior  incumbent contractor or that had more experience in meeting the  agency’s current requirement than the prime contractor. Figure 1 shows  that 5 of the 10 contracts in our sample exhibited one or more of these  situations.
While we could not independently verify the amount of work  subcontracted, of the five contracts we found to be at increased risk of not  complying with the subcontracting limitations, contractor representatives  from two of these firms stated that they were not in compliance at the time  of our review. In both of these instances, the contracting officer did not  monitor the amount of subcontracted work. In one of these cases, the  contractor initially proposed that none of the work for general construction  services on a U.S. Air Force base would be subcontracted. The Air Force  program office, however, delayed the start of the project multiple times  which required the firm to redirect its employees to perform work on other  construction projects. This shift resulted in the firm hiring subcontractors  to perform the contracted work. In reviewing the contract file, we found  evidence to suggest that subcontractor employees performed significant  roles on the project, which the contractor representatives confirmed.  Some of these roles, however, should have been performed by the 8(a)  prime contractor, according to the contracting officials. For example, a  subcontractor employee emailed program officials to request facility  access for employees from other subcontractor firms. In another instance,  the same subcontractor employee signed a material request form where  the prime contractor would generally sign, identifying his title as the “PM”  or project manager. Contractor representatives stated that while this  subcontractor prepared these documents, an employee of the prime  contractor served as the project manager. They noted, however, that the  8(a) firm did not collect specific data on the cost of its subcontracted labor  to determine what percentage of work subcontractors performed.
In a DHS contract, for file scanning and destruction services, the prime  contractor representative estimated that the firm was meeting the  subcontracting limitations but could not confirm this. This representative,  whose firm’s expertise was information technology services, told us that  the firm did not have any experience providing the services required  under the contract. Therefore, the firm had teamed with a subcontractor— recently graduated from the 8(a) program—who had been the incumbent  contractor for the file scanning and destruction requirement. In its  proposal, the 8(a) firm stated that its subcontractor would perform 49  percent of the work, nearly the maximum allowed under the  subcontracting limitation requirements. DHS paid the prime contractor a  fixed price for each scanned page and for each box of documents  destroyed. The prime contractor had a similar pricing arrangement with its  subcontractor and did not obtain the personnel costs associated with the  subcontracted work, which are needed to demonstrate compliance with  the subcontracting limitations. Instead, the firm maintained documentation  on how many documents were scanned and boxes destroyed.  Representatives from the firm stated that had the contracting officer  included a monitoring provision in the contract or requested such  information, the firm would have collected the information needed to  determine the amount of work completed by its subcontractor.
For a Navy contract, the contracting officer found that for the first year,  the 8(a) contractor was not in compliance with the subcontracting  limitations. The contract was for facility support services, which included  janitorial services and vehicle or equipment support. A representative  from the 8(a) prime contractor told us that while the firm was experienced  with providing janitorial services, it did not have any experience providing  vehicle and equipment support. The 8(a) firm teamed with a  subcontractor who had been the incumbent contractor for the same  requirement but had graduated from the 8(a) program and needed a  partner to continue performing the work. The firm’s proposal identified  that the incumbent contractor would be a significant subcontractor but  that the 8(a) firm would be able to perform at least 50 percent of the work.  Contractor representatives explained, however, that the initial task orders  awarded under the IDIQ contract were for vehicle and equipment support,  which were generally completed by the subcontractor. During this time,  the Navy contracting officer required the contractor to submit a report  every 6 months on the amount of subcontracted work. The 8(a) firm  eventually complied with the subcontracting limitations after it was  awarded a high-dollar task order for janitorial and other services. The  firm’s representative said that reporting on the amount of subcontracted  work every 6 months was an easy requirement to meet and helped the  firm understand the steps it needed to take to be in compliance.
section_title: Initial Step Taken but Statutory Changes to Subcontracting Limitations Could Take Years to Implement and Would Reportedly Have Mixed Effects
paragraphs: While SBA has taken an initial step to implement the statutory changes to  subcontracting limitations by announcing that it is drafting a proposed  rule, it could take years to reflect these changes in regulation. Many  actions are needed to revise small business regulations, which in this  case will lead to revisions in the FAR. Contracting officers and contractors  reported that these pending changes could have mixed effects on  monitoring compliance.
subsections: section_title: Changes to How Subcontracted Work Is Determined
paragraphs: The NDAA for Fiscal Year 2013 amended the Small Business Act to  change what costs are considered to be subcontracted work under 8(a)  contracts, in part, to make it easier for contractors to determine if they are  in compliance. Because these changes are not yet implemented in the  FAR, agency procurement officials told us that contracting officers are to  enforce the current subcontracting limitations, that is, those that were in  effect before this amendment. Table 4 compares the subcontracting  limitations in the FAR, as implemented today, to those in the amended  Small Business Act.
The NDAA amendments to the Small Business Act were enacted on  January 2, 2013, and it could take years to incorporate these changes  into the FAR. For example, we recently reported on a small business  regulation change that took 3 years to complete, a time frame that agency  officials told us is typical. In January 2014, SBA announced that it was  drafting a proposed rule to implement these changes into federal  regulations through the public rulemaking process, which is generally an  initial step in the federal rulemaking process needed to amend the small  business regulations as well as the FAR. According to SBA officials, the  proposed rule will include the prescribed changes in the Small Business  Act for service and supply contracts and revised subcontracting  limitations for construction contracts. SBA officials stated that the agency  had drafted the proposed rule in June 2014 and that it is currently in the  review process. The officials stated that SBA will submit the final rule to  the FAR Council, chaired by the Administrator of OFPP, which will then  solicit comments from other interested parties and take steps to  incorporate any changes into the FAR.
Some contracting officers and nearly all contractor representatives told us  that they would need additional guidance on how to implement these  changes but offered some varied perspectives on potential effects.  Contracting officers said these changes could simplify the information  needed to determine the amount of subcontracted work allowed under  8(a) service contracts, which was the intent of these amendments.  Instead of needing information on both the 8(a) firm’s and its  subcontractors’ total personnel costs, only the amount paid to  subcontractors would be needed to determine the amount of  subcontracted work. Contractor representatives stated that these  changes could have mixed effects on their ability to perform the required  amount of work. Several acknowledged that not counting work performed  by other 8(a) firms as subcontracted work could make it easier to comply  with the limitations and would encourage subcontracting to these firms.  Yet almost all of the contractor representatives we met with noted that if  the new subcontracting limitations do not exclude certain costs, such as  costs for materials and travel, then it could make it more difficult to  comply.
section_title: Establishment of Monetary Penalties for Violating Subcontracting Limitations
paragraphs: The NDAA for Fiscal Year 2013 also amended the Small Business Act to  impose a monetary penalty on contractors that violate the subcontracting  limitations. The minimum penalty is $500,000, and a contractor would be  required to pay up to the difference between the amount of subcontracted  work allowed and the actual amount expended on subcontracted work— whichever is greater. For example, if only $5 million of work was allowed  to be subcontracted out but the actual amount of subcontracted work was  valued at $6 million, the penalty could be up to $1 million. Prior to this  change, no such monetary penalty existed. SBA officials stated that the  June 2014 draft proposed rule addresses this penalty.
According to a January 2014 semi-annual announcement of current and  projected rules, SBA plans to incorporate the penalty into federal  regulations and to provide protection to small businesses that, despite  good faith efforts, exceed the subcontracting limitations. SBA officials  noted that the penalty could currently be enforced by the Attorney  General, but were not aware of any such actions. Most of the contractor  representatives told us that the monetary penalty for violating the  subcontracting limitations would bankrupt or put an 8(a) firm out of  business if enforced, which they noted creates a significant incentive for  prime contractors to complete the required amount of work. Contractor  representatives were particularly concerned because while they intend to  complete the required amount of work, they may not always be able to for  reasons outside of their control. For example, half of the representatives  pointed to situations when the work performed under a contract differed  from the work they expected to perform based on the government’s  solicitation. In such situations, they had to use subcontractors to perform  work they were not able to complete.
section_title: Modifications to Existing Subcontracting Reporting System
paragraphs: These key individuals consist of the contracting officer, Director of the Office of Small  and Disadvantaged Business Utilization, and SBA Administrator. See 15 U.S.C. §  645(g)(2). contractors exceed the subcontracting limitations or notifies key  individuals when those situations occur. Contractors currently report  subcontracting data for federal contract awards into two systems: (1) the  electronic Subcontracting Reporting System (eSRS) and (2) the Federal  Funding Accountability and Transparency Act Subcontracting Reporting  System (FSRS). The Small Business Act did not specify which system to  modify. In February 2014, SBA notified the General Services  Administration that FSRS would need to be modified to address the act’s  requirement. SBA officials told us the agency would draft a separate  proposed rule to implement the requirement in its regulations, which  would also be implemented in the FAR, but noted that this process would  take years to complete. General Services Administration officials told us  that they had not determined which system, eSRS or FSRS, would be  modified, but that any system changes would not occur until after the  public rulemaking process is complete and any necessary changes are  made to the FAR.
Both eSRS and FSRS would require changes to fully address the  requirement to modify an existing federal subcontracting reporting  system. ESRS, for example, is used to monitor large businesses’  progress in meeting small business subcontracting goals. Small  businesses, however, are not required to report subcontracting  information into eSRS. FSRS, on the other hand, provides the public with  transparency into the extent of subcontracting performed under federal  awards. Both large and small businesses report certain subcontract  award information into the system, including the subcontractor’s name  and total dollar value of sub-award. FSRS, however, does not capture  all subcontract awards or the level of detail needed to identify instances  when subcontracting limitations are exceeded. For example, the system  includes subcontracting data only on prime contract and subcontract  awards that are at least $25,000; and  includes only the total value of the subcontract awards and does not  break out the costs for labor and materials needed to identify  violations under the current and revised subcontracting limitations.
section_title: Conclusions
paragraphs: When contracting officers do not take steps to ensure 8(a) contractors  can and do comply with subcontracting limitations, there is an increased  risk that an improper amount of the work may be completed by  subcontractors rather than the 8(a) firm awarded the contract. We  previously reported on this issue in 2006, and to date, little has improved.  Our prior recommendations that OFPP and SBA clarify how contracting  officers are to monitor and document compliance with subcontracting  limitations still need to be fully addressed. In general, contracting officers  are unaware of their responsibilities in the 8(a) partnership agreements  and are not taking appropriate steps to ensure that 8(a) contractors are in  compliance. These findings are even more troubling when there are  situations with an increased risk that a contractor may not be able to  complete the required amount of work, such as when the prior contractor  becomes a major subcontractor for the same requirement. As we found,  however, monitoring can be done—as demonstrated by the two  contracting officers who were diligent in carrying out most of their  responsibilities in this regard. Additionally, when asked, 8(a) contractors  have provided the necessary information. Further, once again we have  found that although some guidance was in the partnership agreements  and small business regulations, contracting officers turn to the FAR for  guidance and, as of this date, their responsibilities for monitoring  subcontracting limitations are not clearly set forth in procurement  regulation. Until the FAR reflects these responsibilities, the 2013 statutory  changes are likely to have muted effects. As the process of developing  the new rules unfolds, OFPP has an opportunity to incorporate  contracting officers’ responsibilities into the FAR, including outlining steps  that can be taken to monitor subcontracting throughout the period of  contract performance.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Administrator of OFPP take appropriate steps to  amend the FAR to include the following three requirements:
At the time of the contract award, contracting officers shall conduct  and document an assessment of the 8(a) firm’s ability to comply with  the subcontracting limitations;
Contracting officers shall include monitoring and oversight provisions  in all 8(a) contracts to ensure that the contractors comply with the  subcontracting limitations; and
Prime 8(a) contractors shall periodically report to the contracting  officer on the percentage of subcontracted work being performed.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to OFPP, SBA, DOD, DHS, and HHS  for review and comment. We also provided selected portions of the  report, dealing with the subcontracting system issues, to GSA.  We  received an email response from OFPP and technical comments from  GSA. DOD, DHS, HHS, and SBA did not have any comments on the draft  report.
In its email response, a senior OFPP official stated that OFPP generally  agreed with our recommendations to strengthen the monitoring and  oversight of the required performance percentages for 8(a) contractors,  as well as for all small businesses that receive set-aside awards. OFPP  intends to ask the FAR Council to take steps to revise the FAR to address  this issue to encompass the recommendations from this report, along with  recommendations from our January 2012 report, and the changes to the  subcontracting limitations enacted in the NDAA for Fiscal Year 2013. The  official noted that OFPP will begin the process of revising the FAR when  SBA finalizes its implementing regulations addressing limitations on  subcontracting, adding that SBA’s associated proposed rule is currently  under review.
In providing technical comments, a senior GSA official stated that GSA  would determine what electronic subcontracting reporting system  changes are necessary once SBA issues implementing guidance for  subcontracting limitations, and after any applicable FAR changes are  made. The official added that GSA would ensure SBA’s approval before  implementation of the changes and would engage with federal agencies  so they are aware of any pending changes and can take any necessary  actions to prepare.
We are also sending copies of this report to other interested committees;  the Director of the Office of Management and Budget; the Secretaries of  Defense, Homeland Security, and Health and Human Services; and the  Administrators of the Small Business Administration and General  Services Administration. The report also is available at no charge on the  GAO website at http://www.gao.gov.
If you or your staff have questions regarding this report, please contact  me at (202) 512-4841 or MackinM@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on   the last page of this report. GAO staff who made key contributions to this  report are listed in appendix I.
section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above Tatiana Winger, Assistant  Director; Justin Jaynes, Analyst in Charge; Jenny Chanley; Dani Greene;  Julia Kennon; Sylvia Schatz; Jared Sippel; and Ozzy Trevino made key  contributions to this report.