Federal Construction Subcontracting: Insight into Subcontractor Selection Is Limited, but Agencies Use Oversight Tools to Monitor Performance
Published: 2015-01-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In fiscal year 2014, the federal government obligated almost $32 billion for construction projects using primarily competitive, fixed-price contracts. In these contracts, the government holds the prime contractor fully responsible for project delivery at the agreed-to price and schedule. Once a construction contract is awarded, the prime contractor must manage subcontractors that typically perform 60 to 90 percent of the work on a construction project. Bid shopping—whereby a prime contractor uses one subcontractor's price in its proposal but negotiates a lower price with a subcontractor after the contract award for the purpose of retaining the difference for its benefit—is considered an unethical business practice by the construction industry. Subcontractors have alleged that bid shopping leads to poor quality construction.
GAO was asked to review the government's insight into subcontractor selection and oversight of subcontractor performance on federal construction contracts. This report covers (1) what is known about the prevalence of bid shopping on federal construction projects and (2) what tools the federal government has to monitor and address contractor performance.
GAO judgmentally selected and reviewed construction contracts from three of the four federal agencies that obligated the most funds for construction contracts in fiscal year 2013. GAO also interviewed agency and state contracting officials and construction industry representatives. GAO is not making recommendations in this report. The agencies in this review did not provide comments on this report.
section_title: What GAO Found
paragraphs: GAO was not able to determine if bid shopping occurs or does not occur when prime contractors select subcontractors on federal construction projects, but found that the selection process could lead to subcontractors' perceptions of bid shopping. GAO's review of selected contract files did not reveal evidence of bid shopping. Further, officials at the agencies GAO reviewed stated they were not aware of bid shopping occurring on their contracts. Many of the construction contractors that GAO spoke with said that bid shopping occurs, but could not furnish evidence of specific instances. Negotiation procedures between prime contractors and subcontractors may create the impression of bid shopping among subcontractors that submit bids. Specifically, prime contractors explained that they receive multiple subcontractor bids for each trade (e.g., electrical, plumbing) up to minutes before their proposal is submitted to the government; and they typically do not use a specific subcontractor's price in their proposal, but a price informed by the subcontractors' bids. After award, the prime contractor negotiates and selects a subcontractor for each trade during the “buyout process,” as shown below.
To hold the prime contractor accountable for a project's work quality and progress, selected agencies use oversight tools such as
agency representatives deployed on site,
daily progress reports, and
When performance is unsatisfactory, agencies use a number of methods to address or correct deficiencies. For example, agencies can withhold progress payments to the prime contractor or report poor contractor performance in government databases. Further, the government can be protected from poor quality construction if it appropriately uses the oversight tools at its disposal. To address bid shopping, some states are using bid listing, which requires the prime contractor to name certain subcontractors in its proposal to the state government. But the benefit of requiring bid listing in the proposal solely for the prevention of bid shopping is not certain, as past analyses of its use in the federal government have found it adversely affects the timeliness and cost of contract performance, and increases the government's administrative expenses.

section_title: Letter
paragraphs: In fiscal year 2014, the federal government obligated almost $32 billion  for construction projects with 82 percent being awarded through  competitive, fixed-price contracts. In these contracts, the federal  government holds the prime contractor (also known as the general  contractor in construction projects) fully responsible for project delivery.  This means the prime contractor assumes the risk of meeting contract  requirements, including quality assurance, at the committed price and  completion date, regardless of whether the contractor’s actual total cost  falls short or exceeds the contract price. Once a construction contract is  awarded, the prime contractor is responsible for managing its  subcontractors. According to government officials and construction  industry representatives, typically 60 to 90 percent of the work on a  construction project is subcontracted to other companies with building  expertise in specific trades (e.g. plumbing, electrical, mechanical). We  have found in past work on major defense weapon systems that  government contracting officers are hesitant to seek information on what  work is subcontracted and to monitor and manage subcontractors  because the government’s contractual relationship is with the prime  contractor.
Bid shopping—a business practice considered by certain construction  associations to be unethical—has been a long-standing, recurrent  complaint by construction subcontractors against prime contractors.
Generally, in both the federal and commercial construction industry, a  prime contractor is considered to be bid shopping when it solicits bids  from prospective subcontractors as a basis for its proposal on a  construction project, wins the contract, and subsequently solicits  subcontractors to seek lower prices for the purpose of retaining the  difference for its benefit. Subcontractors have suspected use of bid  shopping for years and point to its potential negative effects, including  poor subcontractor performance, which leads to cost overruns and  schedule delays. We were asked to review the government’s insight into  subcontractor selection and oversight of subcontractor performance on  federal construction contracts. This report covers (1) what is known about  the prevalence of bid shopping on federal construction projects and (2)  what tools the federal government has to monitor and ensure quality of  subcontractor performance on federal construction contracts and, if  necessary, take action to address unsatisfactory performance.
subsections: section_title: Scope and Methodology
paragraphs: To conduct this work, we first identified the top four federal construction  agencies based on the amount of funds obligated during fiscal year 2013  using data from USASpending.gov. We selected three of the top four  agencies for further review. These agencies were the Departments of  Defense—specifically the Departments of the Army (Army) and the Navy  (Navy)—and Veterans Affairs (VA), and the General Services  Administration (GSA). The Army, Navy, VA and GSA accounted for  almost 75 percent of the total $28 billion obligated for construction  contracts in fiscal year 2013.
To identify what is known about the prevalence of bid shopping on federal  construction projects, we interviewed agency contracting officials, prime  contractor and subcontractor trade associations, prime contractors and  subcontractors; and reviewed GAO reports, articles, academic literature,  and congressional testimonies addressing bid shopping. To identify  possible cases of bid shopping, we used the Contractor Performance  Assessment Reports System (CPARS)construction contracts where the prime contractors received low  performance rating in subcontractor management. From these contracts,  we judgmentally selected two contracts from each of the selected  agencies for in-depth review, based on contract award amount, type of  contract, and project location. At the Department of Defense, we selected  two contracts awarded by the U.S. Army Corps of Engineers (USACE)  and two awarded by the Naval Facilities Engineering Command  (NAVFAC). The contracts were awarded between fiscal years 2009 and  2011, and in total were valued at about $760 million. We also performed a  high-level review of two additional GSA contracts during our design phase  to get a sense of what contract documentation (e.g. subcontracting plan)  to request that may identify subcontractors on a construction project.
To address how the federal government monitors subcontractor  performance under federal construction contracts and if necessary, takes  action to address unsatisfactory performance, we reviewed the FAR,  which identifies tools available to the agencies to monitor and take  actions to address or correct deficiencies. We also obtained and reviewed  pertinent agency guidance and supplements to the FAR, Small Business  Administration (SBA) regulations, and the Office of Management and  Budget-Office of Federal Procurement Policy guide to best practices for  contract administration. To determine if the federal agencies use these  tools on construction contracts where there were subcontracting issues,  we obtained information from the same eight construction contracts  identified above to determine how agencies monitor prime contractor and  subcontractor contract performance and address unsatisfactory  performance. We reviewed documentation in the contract files such as  the solicitation, proposals (including the technical evaluation), inspection  reports, contractor performance reports, and other key documents for  identification, monitoring and compliance purposes. We reviewed  selected change orders for the contracts in our review to identify some of  the reasons for cost increases and schedule delays. We also interviewed  agency contracting officials, prime contractors and subcontractors about  their experience in the contracting process. We contacted all eight prime  contractors associated with the contracts in our sample to obtain  information on their process to select subcontractors; three responded to  our request. We also contacted 67 subcontractors for those eight  contracts and received responses from eight. Our results from the  analysis of these construction contracts are not generalizable agency- or  government-wide. For the agencies and contracts we reviewed, our  approach provided greater depth and insight into subcontractor selection.  However, we did not determine whether agencies’ construction contract  oversight was effective.
Further, to address this objective, through interviews and literature  searches, we identified 12 states that took actions through regulation that  could mitigate bid shopping. We contacted these states and from the five  responses received, we obtained information from officials responsible for  construction contracting on bid shopping and the actions taken to mitigate  its use. In addition, we spoke with officials from SBA about its  requirement that for contracts over certain dollar thresholds, a large prime  construction contractor notify the contracting officer in writing if it does not  subcontract to a small business subcontractor that was used in preparing  its proposal. We also spoke with officials at the Smithsonian Institution  about its practices to require the listing of subcontractors to ensure that  those selected can adequately perform the work.
We conducted this performance audit from February 2014 to January  2015 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.
section_title: Background
paragraphs: After a prime contractor is awarded a construction contract, it negotiates  with subcontractors on the scope of work and price before awarding  subcontracts. This period is known as the buyout process—if a prime  contractor were to practice bid shopping, it would shop the original  subcontractor’s bid to other subcontractors at this point. See figure 1 for  a general description of the process to obtain federal construction  services. For the purposes of this report, we refer to the prime  contractor’s offer to the government as a proposal; we refer to the  subcontractor’s offer to the prime contractor as a bid. We reported on the  topic of bid shopping in 1971 and again in 1981. In those reviews,  although bid shopping was generally acknowledged by government  contracting personnel, state officials, and individuals in the construction  industry to be a prevalent practice and recognized as a longstanding  recurrent complaint by subcontractors, we were not furnished evidence of  any specific cases of bid shopping having occurred.
subsections: section_title: Post-award Contract Administration
paragraphs: Contract administration is the management of all actions after award  through the closing of the contract to assure that contractors comply with  contract terms. Contract administration includes all dealings between  parties to a contract from the time one is awarded until the work has been  completed and accepted or the contract terminated, payment has been  made, and disputes have been resolved. After a construction contract is  awarded, the federal government is represented in the contracting  process by a contracting officer, who has authority to modify or terminate  contracts on behalf of the government. The contracting officer receives  support from his/her onsite representative—the contracting officer’s  representative (COR) who is the liaison between the government and the  prime contractor. The responsibilities of the COR may include contract  administration tasks and directing daily operations within the scope of the  contract, and monitoring contractor and subcontractor performance to  help ensure that requirements meet the terms of the contract.
section_title: No Conclusive Evidence Exists on the Use of Bid Shopping on Federal Construction Projects
paragraphs: We were not able to determine if bid shopping occurs or does not occur  on federal construction projects, and thus were not able to determine the  prevalence of bid shopping. Officials at the selected agencies we  reviewed were not aware of instances of bid shopping on their  construction projects, and we could not find evidence of bid shopping in  the contract files we reviewed. However, many contractors in the  construction industry that we spoke with told us that bid shopping does, in  fact, occur. Our discussions with prime contractors as well as  subcontractors indicated that some subcontractors may have a  perception of bid shopping during the buyout process between prime  contractors and its subcontractors.
subsections: section_title: Only Evidence of Bid Shopping Is Testimonial and Inconclusive
paragraphs: We found no conclusive evidence of bid shopping in our reviews of  contract files, and government officials furnished no evidence of bid  shopping. Government officials at the agencies we reviewed stated that  they were not aware of bid shopping occurring on their construction  projects. These officials also stated that the government in most cases  does not have insight into how the prime contractors select their  subcontractors, and if bid shopping were to occur, a contracting officer  would not be aware of it unless a subcontractor filed a complaint. The  selected contracts that we reviewed all showed evidence of prime  contractors’ performance issues with the management of  subcontractors—such as untimely replacement of defective work—yet  none presented evidence or complaints of bid shopping.
Although none of the prime contractors, subcontractors, and construction  industry associations we spoke with were able to provide current  evidence of bid shopping on federal projects, they all told us that, based  on their knowledge of the industry, it does in fact occur. Most of the  subcontractors stated that they had not experienced it for themselves.  The industry associations we spoke with were not in agreement on the  prevalence of bid shopping—one thought it was very prevalent, while the  others thought it was happening in only selected circumstances or was  not sure how often it was occurring. Almost all of the prime contractors  and subcontractors we spoke with told us that a prime contractor that  practiced bid shopping would alienate subcontractors, and a few added  that prime contractors would eventually not be able to find subcontractors  willing to work with them.
section_title: Subcontractor Buyout Process May Create Impression of Bid Shopping
paragraphs: In our discussions with prime contractors, we found that the process used  to develop a proposal and the subsequent selection of subcontractors  may lead to a perception of bid shopping by subcontractors. Prime  contractors told us that in preparing their proposals, they try to obtain  multiple subcontractor bids from each trade (e.g., electrical, plumbing,  mechanical). They then use the multiple subcontractors’ bids to prepare  their own estimates to include in their proposal to the government. The  prime contractors we spoke with stated that they generally do not use a  specific price bid by one subcontractor, but use the bids to benchmark  their own estimates. One prime contractor representative we spoke with  stated that the company tries to obtain three bids for each trade when  developing a proposal to get a better sense of a reasonable estimate to  include in its proposal.
We also found that the process the prime contractor goes through to  submit a proposal can be chaotic. According to both prime and  subcontractors we interviewed, subcontractors, to remain competitive,  often wait to submit their bids to the prime contractor until just minutes  before the prime contractor is required to submit its proposal to the  agency, which allows minimal time for the prime contractor to ensure that  the bids are reasonable and cover the required scope of work. Four of the  subcontractors we spoke with told us that this is one method to help  prevent their bids being shopped prior to contract award. For a large  project, the subcontractors’ bids can number in the hundreds. In fact, one  prime contractor estimated that for one large project it may review  approximately 500 bids to prepare its proposal. Further, according to  prime contractors, it can be uncertain at the time their proposals are  submitted to the government that subcontractors bids include the full  scope of work, so they must do their best to quickly assess the accuracy  and completeness of the various bids they review for one trade. In  addition, a prime contractor told us that he may submit a low proposal  price depending on who he is competing against, and then hope to  negotiate further with the subcontractors during the buyout process.
We were told by the prime contractors that not until after the government  awards the contract do they negotiate the specific tasks and prices with  subcontractors during the buyout process. The prime contractor will verify  that each subcontractor has a complete scope of work for the project, and  then select and award a contract to a subcontractor to do the work. The  subcontractors stated that it is common practice for prime contractors to  negotiate with them on the scope and price of its proposed subcontract  after contract award. Several of the subcontractors we interviewed also  stated that a subcontractor may erroneously believe that its bid is being  bid shopped, when in fact negotiation is part of the normal buyout  process. Further, most of the subcontractors we interviewed told us that if  they have not done business with and are unfamiliar with a specific prime  contractor’s negotiation procedures or if a prime contractor is known to  shop bids, they may propose an inflated price under the assumption that  the prime contractor will negotiate that price down during the buyout  process. In contrast, if they are bidding to a prime contractor they know,  they are more likely to provide the best price in the first bid. Accordingly, it  is difficult to sort out whether the prime contractor’s selection of  subcontractors results from bid shopping or from the chaotic and  challenging process of bidding and buying out a federal construction  project.
section_title: Agencies Have a Variety of Tools to Monitor Project Quality and Methods to Address or Correct Unsatisfactory Contractor Performance
paragraphs: Subcontractors have suggested that bid shopping leads to poor quality  construction, however we found that the selected agencies have existing  tools to hold the prime contractor accountable for a project’s work quality  and progress and, when performance is unsatisfactory, have methods to  address or correct deficiencies. The government can be protected from  poor quality construction if it appropriately uses the various tools at its  disposal to manage and address deficiencies. Examples of oversight  tools include onsite agency representatives, daily construction progress  reports and periodic inspection reports. These tools can help agencies  catch instances of poor quality construction for immediate remedy. If  problems persist, agencies have methods for addressing or correcting  unsatisfactory performance including withholding of payments to the  prime contractor and potential government-wide reporting of poor  contractor performance. Further, one tool that is used by some states to  prevent the poor quality construction allegedly caused by bid shopping is  bid listing—whereby the prime contractor must name the subcontractors  in its proposal to the state government. Bid listing may provide insight into  subcontractor substitution after award. However, as past analyses of the  use of bid listing in the federal government have found, the benefit of  requiring it for the prevention of bid shopping is questionable in part  because of the administrative burden.
subsections: section_title: Agencies Use Onsite Representatives and Other Tools to Assess Prime Contractor and Subcontractors’ Work Quality and Progress
paragraphs: When contracting for construction services, the federal government’s  direct contractual relationship is with the prime contractor and not with the  subcontractor, a doctrine of contract law known as privity of contract. In  general, this means that the government cannot direct subcontractors to  perform tasks under the contract, and the prime contractor retains legal  and management responsibility for overall contract performance.  Agency officials also said that due to privity of contract, they hold the  prime contractor fully accountable for the subcontractors’ work quality. In  our review of selected contracts, we found that agencies use a variety of  tools to monitor and assess work quality and progress on a project.  Specifically, the tools agencies use include onsite representatives,  inspection reports, and a host of reporting requirements to monitor and  assess work quality and progress. Further, the FAR generally provides  that each contract shall include quality control requirements which the  prime contractor must meet in the performance of the construction  contract. Agencies must use these quality control requirements to  assess the prime contractor and their subcontractors to ensure they meet  these standards for materials, workmanship and timeliness. Some of the  tools agencies in our review used include the following:
Onsite representatives. We found that agency construction projects  had an onsite representative (e.g. resident engineer for construction  or COR). The agency onsite representative is the agency’s “eyes and  ears” during construction and observes the work of the prime  contractor and its subcontractors on a daily basis to ensure their work  and materials conforms to contract requirements. It is this person’s  responsibility to assess the project’s work quality, timeliness and  performance of equipment and systems to help ensure that the  federal government receives the services it contracts for.
Daily construction reports. The contracts in our review generally  require the prime contractor to furnish a report each day summarizing  the daily activities onsite. At the VA, for example, the reports must  show the number of trade workers, foremen/forewomen, and pieces of  heavy equipment used by the prime contractor and its subcontractors  on the prior day. The reports must also give a breakdown of  employees by craft, location where employed, and the work  performed for the day, and a list of materials delivered to the  construction site on the date covered by the report. Examples of  reports we reviewed for a NAVFAC project included the name of the  firm and its trade (e.g. carpenters and electricians), and the type of  work that they performed such as plumbing, and installing switches  and doors.
Periodic onsite progress meetings. Some of the contracts in our  review identify what types of meetings should be held, who is to  attend, and how often the meetings should be held. But depending on  the type and complexity of the project, government contracting  personnel can require more frequent meetings with prime contractors  to monitor progress of the construction work. For example, USACE  provided us examples of minutes from biweekly coordination meetings  with the prime contractor; and biweekly meetings with the prime  contractor and certain subcontractors for the purpose of testing the  performance of certain systems, such as heating and ventilation  systems. For one VA contract, the government’s representatives  required weekly meetings with the prime contractor and  subcontractors to discuss project progress and to identify problems  and solutions to those problems.
Inspection reports. Inspections are performed at various stages of  the project to ensure that the execution of the contract by the prime  contractor (and its subcontractors) meets contract specifications.  Our review of examples of inspection reports from a couple of the  contract files showed inspections of work quality and in some cases  testing of systems, such as mechanical, fire and electrical systems,  throughout the project. The contracts may also require the prime  contractor to notify the onsite representative when inspections and  tests are to be conducted so that he or she may choose to be present  to observe.
Deficiency reports. If the agency identifies prime contractor or  subcontractor nonconformance with contract material or workmanship  requirements, we found that a report is prepared to notify the prime  contractor of the deficiencies. The report notes who is responsible for  taking corrective action, and tracks the status of corrective actions  taken. In examples of the deficiency reports we reviewed, if the listed  deficiency in material or workmanship was not corrected, then the  deficiency stayed on the reports until it was corrected to contracting  officer’s satisfaction. In the final stages of a project, a list of tasks that  need to be completed or corrected before the agency will accept the  building for occupancy is developed, called a punch list. We found  examples of punch lists in the contract files we reviewed identifying  tasks to be resolved prior to final acceptance.
Monthly progress payment reports. The FAR provides that  agencies may make monthly progress payments to prime contractors  as the work progresses. To achieve this, agency contracting  personnel and the prime contractor agree to a schedule of tasks that  need to be performed and their value. At the conclusion of each  month, the prime contractor submits a payment request to the  contracting officer that identifies the materials delivered and the  percentage of work performed for each task. Since a single payment  can be for millions of dollars, it is important that the project’s  contracting personnel adequately review the contractors’ payment  requests to ensure that work is billed accurately, reflects the materials  used, and the work has been performed. If any discrepancies are  noticed they must be resolved before any payment is made. The  progress payment reports we reviewed from one GSA project  summarized the status of cost and schedule information to inform how  much of the contractor’s monthly payment request should be  approved.
Submission of weekly certified payrolls. The prime contractors  also submitted weekly certified payrolls, which includes information on  subcontractors, so that the government can check for accuracy of  wages including overtime and categorization for a particular trade  (e.g., tile setter and electrician). Examples from contract files we  reviewed at GSA and NAVFAC showed that the payrolls included  information such as the name of subcontractor, name of employee  and trade title, days and hours worked for the week.
Liquidated damages. To protect itself from construction delays, an  agency can include the liquidated damages clause in a prime  contract, meaning that if the prime contractor fails to complete the  work within the time specified in the contract, the contractor pays the  government a daily fixed amount for each day of delay until the work  is completed or accepted. Liquidated damages can result from a delay  caused by the prime contractor or one of its subcontractors. They are  not to serve as a penalty but to represent an assessment of probable  damage costs that would be incurred by the agency if delay causes  the work to extend beyond the contractual completion date. The  liquidated damages daily rate for failure to timely complete the work is  included in the prime contract. These costs can vary depending on the  project. For example, for one VA contract the daily rate is $2,800 per  calendar day of delay and for one USACE contract the daily rate is  $16,500 per calendar day.
section_title: Agencies Use a Number of Methods to Address or Correct Deficiencies from Unsatisfactory Performance
paragraphs: While oversight can help agencies identify instances of poor quality  construction, we found that the selected agencies use a number of  methods to prompt the prime contractor to address or correct deficiencies  identified during oversight activities if problems persist. In all cases, the  government held the prime contractor solely responsible for correcting all  deficiencies, whether or not the deficient work was performed by a  subcontractor or the prime contractor.
subsections: section_title: Withhold a Portion of Progress Payments to Prime Contractors
paragraphs: Retaining or withholding a certain percentage of each monthly progress  payment owed by the government to prime contractors is a powerful  motivator to encourage prime contractor and subcontractor performance.  The FAR allows agencies to withhold up to 10 percent of each monthly  progress payment to prime contractors in accordance with the contract  until completion of all contract requirements. According to GSA officials,  prime contractors can in turn withhold a similar percentage amount from  each subcontractor’s monthly progress payments until satisfactory  completion of the work. Progress payments may be withheld on the  contracts we reviewed to account for materials and workmanship  deficiencies or lack of progress on the project by prime contractors or  subcontractors. For one USACE contract, the agency retained $850,000  in payment for flooring and carpet damage and metal panel problems,  among other things.
section_title: Evaluations of Contractor Performance
paragraphs: Some agency officials we interviewed stated that prime contractors take  their performance evaluations on a current contract very seriously  because a negative performance report can work against them in trying to  win future federal construction contracts. The FAR generally requires  agencies to evaluate and document contractor performance on contracts  that exceed certain dollar thresholds at least annually and at the time the  work is completed, and to make that information available to other  agencies through PPIRS, a shared government-wide database.completing past performance evaluations, the assessing officials rate the  contractor on various elements such as quality of the product or service,  schedule, and cost control. In addition, for each element, a narrative is  provided to support the rating assigned. When assessing a contractor’s  past performance for a potential contract award, contracting officials may  consider the evaluations in PPIRS.
In  For all of the eight contracts we reviewed, the contracting officer provided  or approved performance evaluations for the prime contractors on the  projects. For example, one rating for a GSA contract was marked  marginal because the concrete subcontractor did not place the concrete  correctly, and the prime contractor was given a poor performance rating  based on this subcontractor’s performance.
section_title: Cure Notice and Show Cause Notice
paragraphs: A contracting officer can issue a cure notice informing the prime  contractor of its failure to perform, which endangers meeting contractual  requirements. A cure notice provides at least 10 days for the prime  contractor to correct the issues identified in the notice or otherwise fulfill  the requirements. A show cause notice goes a step further, advising the  prime contractor that a termination for default is being considered and  calls the contractor’s attention to the contractual liabilities if the contract is  terminated for default. At this point the prime contractor must show that  its failure to perform arose from causes beyond its control and without  fault or negligence on its part. In one example from our contract file  review, a VA contracting officer issued a cure notice to the prime  contractor citing, among other factors, failure to maintain an adequate  quality control program to correct work deficiencies. According to the  show cause notice, the prime contractor provided a response that did not  address the deficiencies highlighted in the cure notice and subsequently  the contracting officer issued a show cause notice. Even though the show  cause notice was issued, the VA contracting officer did not terminate the  contract in part because the prime contractor started to take corrective  action.
With the host of oversight mechanisms in place, the government can be  protected from poor quality construction if it appropriately uses the  various tools and methods at its disposal to manage and correct  deficiencies.
section_title: Agencies’ Use of Bid Listing May Provide Insight into Potential Instances of Bid Shopping, However Benefit Is Questionable
paragraphs: Bid listing is a practice whereby the potential prime contractors are  required to identify certain subcontractors in their proposals that it will use  if awarded the contract, which moves their selection and initial  negotiations with subcontractors to earlier in the contracting process than  if bid listing was not used. Bid listing may provide contracting officers with  some insight as to when a subcontractor is substituted after contract  award because if a proposed listed subcontractor is not used, the prime  contractor must notify and justify to the contracting officer the reason for  the substitution and obtain the contracting officer’s approval. Congress  has on multiple occasions proposed—but never passed—mandatory bid  listing requirements to prevent the poor quality construction allegedly  caused by bid shopping.
Even though the FAR does not currently include a bid listing provision, it  does provide the contracting officer authority to ask for identification of  prospective subcontractors for the purpose of determining responsibility.
We found instances in our review where prime contractors had to list their  subcontractors within their proposals for the purpose of ensuring that a  critical subcontractor is responsible and can meet specific requirements.  For example, a Smithsonian solicitation we reviewed required the listing  of subcontractors. Officials at the Smithsonian told us that this is a regular  practice they use to ensure that the selected subcontractors can  adequately perform the work. This requirement provides similar insights  into subcontractor substitution as bid listing, as the prime contractor must  notify the contracting officer of a substitution, and show that the new  subcontractor is also responsible.
More recently, the Small Business Administration, in response to the  Small Business Job Act of 2010, implemented regulations effective in  August 2013 that require a prime contractor to notify the contracting  officer in writing whenever it does not subcontract to a small business  subcontractor during contract performance that was used in preparing its  proposal. This explanation must be submitted to the contracting officer  prior to the submission of the invoice for final payment and contract close-  However, during the public comment period prior to the approval of  out.the regulations, some commenters expressed concerns on the proposed  regulations that the notification requirement would be a disincentive for  prime contractors from involving small businesses in the development of  their proposal, which may potentially limit small businesses’ ability to gain  valuable insight into how prime contractors approach proposal  development in general.
Past federal research and efforts to mitigate bid shopping through  subcontractor bid listing have shown that the benefits of doing so are  questionable, in part because of the added administrative burden. In its  1972 report to improve federal procurement practices, the Commission on  Government Procurement researched the issue of bid shopping and  determined that it would not be materially improved by the adoption of  mandatory bid listing requirements and that the cost of implementing  requirements would likely outweigh the benefits. As a result, the  Commission took a position against a mandatory government-wide  requirement for subcontract listing in federal construction. Department of the Interior and GSA previously required subcontractor bid  listing but stopped the practice in 1975 and 1983, respectively. GSA  testified in 2000 that bid listing would create more harm than benefit and  strongly opposed bid-listing requirements for a number of reasons, such  as adverse affect on the timeliness and cost of contract performance and  increase in the government’s administrative expenses.
Congress in the late 1960s created the Commission on Government Procurement to  devise fundamental improvements to federal procurement practices. The Commission  developed 149 recommendations to both Congress and the executive branch.  Commission on Government Procurement, Report of the Commission on Government  Procurement, (Washington D.C.: Dec. 31, 1972). subcontractors at the time of contract award. For example, one state  reviews bids from subcontractors, and then tells the prime contractor  which subcontractors to include in its proposal to the state, rather than the  prime contractor selecting its own subcontractors. We found that bid  shopping for some of these states was the factor for establishing  procedures to identify subcontractors prior to contract award. In  discussion with officials from some of these states, the requirement to list  subcontractors in the prime contractor’s proposal has been required for  many years. Officials from one state told us that they are reconsidering  the requirement for bid listing because of the administrative burden it is  causing for state contracting officials, specifically an increase in bid  protests. According to these officials, unsuccessful contractors are using  this requirement to protest contract awards because of administrative  mistakes in contractors listing their subcontractors. This is similar to the  issue that GSA raised in the early 1980s when it stopped the requirement  to list subcontractors. However, according to officials from the other  states that we contacted that require bid listing, they have had no  complaints from prime contractors in complying with this requirement.
Moreover, in the instances from the contracts we reviewed where cost  growth or schedule delays occurred as the result of government-driven  changes after award or unforeseen conditions, bid listing, if required,  would not have prevented these types of changes. The FAR and  agencies’ acquisition regulations provide for changes to fixed-price  construction contracts, known as change orders. When the change is  driven by the government, the government generally bears the additional  cost. We found that most of the construction projects we reviewed  experienced increased costs and schedule delays as a result of  government-driven changes or unforeseen conditions. For example, on  one NAVFAC contract the government decided to incorporate furniture,  furnishings, and audiovisual equipment into the construction project,  resulting in a cost increase of $1.9 million for an $11.6 million contract.  On a GSA contract, after construction began, the government found a  different site condition than expected and added soil remediation costs of  approximately $400,000 and provided an extension of 52 days.
section_title: Concluding Observations
paragraphs: Bid shopping is widely considered an unethical business practice, but the  prevalence of the practice is unknown. It is difficult to determine, for a  particular contract, whether the prime contractor’s selection of  subcontractors was truly a result of bid shopping or appears so due to the  chaotic nature of bidding for and buying out a federal construction project.  Specifically attributing poor performance to bid shopping is therefore also  challenging. Though considered an administrative burden, bid listing is an  optional practice available to contracting officers who determine it is  necessary to ensure that the prime contractor’s proposal identifies  qualified responsible subcontractors.
Nonetheless, in evaluating a prime contractor’s proposal, the federal  government must determine that the price is fair and reasonable. After the  prime contractor is awarded a fixed-price contract, it must manage the  subcontractors to complete the job within the established contract price  and schedule. The government has additional tools available to provide  oversight to manage or correct identified deficiencies during a project’s  duration. As the prevalence of bid shopping on federal construction  contracts is unknown, and bid listing requirements to prevent it have been  discontinued by federal agencies in part due to administrative burden, we  are making no recommendations.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Departments of Defense and  Veterans Affairs, and the General Services Administration for their review  and comment. None provided comments on this report.
We are sending copies of this report to the Secretaries of Defense and  Veterans Affairs, and the Administrator for the General Services  Administration as well as interested congressional committees and other  interested parties. This report will also be available at no charge on the  GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-4841 or makm@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of our 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:
paragraphs: Marie A. Mak, (202) 512-4841 or makm@gao.gov.
section_title: Staff Acknowledgments:
paragraphs: In addition to the contact named above, Tatiana Winger, Assistant  Director; Marie Ahearn; Pete Anderson; Virginia Chanley, George  Depaoli, Joe Hunter; Julia Kennon, Kenneth Patton, Russell Reiter and  Ozzy Trevino made key contributions to this report.