Defense Contracting: Improved Policies and Tools Could Help Increase Competition on DOD's National Security Exception Procurements
Published: 2012-01-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Competition is a critical tool for achieving the best return on the governments investment. Federal agencies are generally required to award contracts competitively, but they are permitted to use other than full and open competition in certain situations, such as when open competition would reveal information that would harm national security. GAO examined DODs use of this provision, known as the national security exception. It requires the use of competition to the greatest extent practicable. GAO assessed (1) the pattern of DODs use of the national security exception;
(2) DODs processes for using the exception; and (3) the extent to which DOD achieved competition under the exception. GAO analyzed federal procurement data; reviewed a selection of 27 contract files and justifications citing the exception from the Army, Navy, and Air Force, based on largest obligations, frequent users, and a range of procurement types, as well as five contracts from DOD intelligence agencies; and interviewed DOD contracting and program officials.
section_title: What GAO Found
paragraphs: DODs use of the national security exception is smallabout 2 percent of the dollar value of its total use of exceptions to full and open competition, but gaps in federal procurement data limit GAOs ability to determine the full extent of DODs use. DOD procures a range of goods and services under this exception, and according to federal procurement data, the Air Force accounted for about 74 percent of DODs use during fiscal years 2007 through 2010. However, DOD intelligence agencies and special access programs frequently use the exception, but are generally excluded from reporting procurement data. While an Office of the Secretary of Defense memorandum exempts three of the intelligence agencies from reporting such data, DOD policy on reporting sensitive procurements for other military department programs is not clear.
For most national security exception contract actions GAO reviewed, DOD used a single justification and approval document that applies to multiple contractsknown as a class justification. Among those reviewed, $3.3 billion of $3.4 billion was obligated under contracts that used class justifications, which reduce the steps required to proceed with individual contract actions that do not use full and open competition. According to contracting officials, the increased flexibility of national security exception class justifications helps meet mission needs. However, in the Air Force, concerns about the reduced management review of these contracts have led to changes in the process for approving individual contract actions using class justifications. Nevertheless, all of the justifications GAO reviewed met Federal Acquisition Regulation requirements.
GAOs analysis of federal procurement data on about 11,300 contract actions found that, from fiscal years 2007 through 2010, only 16 percent of all obligations under those actions by the military departments under the national security exception received more than one proposal. Contract files and contracting officials cited a limited pool of companies with the right capabilities, the difficulty of changing from an established vendor, and limited tools for soliciting competitive bids as reasons for their inability to obtain more competition. Twelve of the 27 military department contract files GAO reviewed did not include a record of market research, and others included few details on the results. Two intelligence agencies that reported using the national security exception for all contracting reported achieving comparatively high levels of competition. Both have systems that catalogue firms, capabilities, and solicitations that are used to facilitate security sensitive market research.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOD issue guidance clarifying when security sensitive contracting data must be reported, monitor the impact of new Air Force class justification processes, and consider using tools that facilitate market research in a secure environment. DOD concurred with two recommendations and partially concurred with the recommendation on clarifying guidance, citing pending revisions to regulations. GAO continues to believe that clarifying guidance is needed.

section_title: Letter
paragraphs: The Department of Defense (DOD) spent an average of $370 billion per  year buying goods and services during fiscal years 2007 through 2010.  The Federal Acquisition Regulation (FAR) requires, with limited  exceptions, that contracting officers promote and provide for full and open  competition in soliciting offers and awarding contracts. One exception— the national security exception—allows agencies to limit potential offerors  on a contract solicitation in instances when disclosure of the agency’s  needs would compromise national security, but still requires agencies to  request offers from as many potential sources as practicable. DOD’s  Better Buying Power initiative, launched in September 2010, recognized  that DOD has not taken full advantage of opportunities for competition to  achieve the best possible return on its investments.
The National Defense Authorization Act for Fiscal Year 2011 mandated  that we review DOD’s use of the national security exception. The  mandate required us to review (1) the pattern of usage of such exception  by acquisition organizations within the department to determine which  organizations are commonly using the exception and the frequency of  such usage; (2) the range of items or services being acquired through the  use of such exception; (3) the process for reviewing and approving  justifications involving such exception; (4) whether the justifications for  use of such exception typically meet the requirements of the FAR  applicable to the use of such exception; (5) issues associated with follow- on procurements for items or services acquired using such exception; and  (6) potential additional instances where such exception could be applied  and any authorities available to the department other than such exception  that could be applied in such instances. To answer the mandate, we (1)  identified the pattern of DOD’s use of the national security exception to  full and open competition, including the range of goods and services  acquired; (2) assessed DOD’s process for using this exception; and (3)  determined the extent to which DOD obtained competition on selected  contracts when using the national security exception. To determine  DOD’s pattern of use of the national security exception, we analyzed data  from the Federal Procurement Data System – Next Generation (FPDS- NG) for fiscal years 2007 through 2010, and obtained data on competition  and use of this exception from the DOD intelligence agencies. We  determined that the federal procurement data for these fiscal years were  sufficiently reliable to identify DOD’s use of the national security  exception, in part by verifying a non-generalizable random sample of the  data from the Army, Navy, and Air Force (referred to throughout this  report as the military departments). To determine DOD’s processes for  using this exception, we used federal procurement data to select a non- generalizable sample of 27 contract files at the military departments  based on largest obligations, frequent users, and a range of procurement  types. In addition, we reviewed five contracts provided by DOD intelligence agencies, for a total of 32 contracts across DOD as a whole.We did not include other DOD entities in our sample that reported little or  no use of the exception in federal procurement data. We analyzed the  documents the military departments and intelligence agencies used to  seek approval to limit competition on the selected contracts and  determined whether they met the requirements of the FAR. We  conducted legal research and interviewed DOD officials on other uses of  the exception and alternative authorities. Furthermore, we analyzed  policies and guidance, federal procurement data, and met with DOD  officials at the Office of the Secretary of Defense (OSD), the three military  departments, and four DOD intelligence agencies. To determine the  extent to which DOD obtained competition under the national security  exception, we reviewed the 32 selected military department and  intelligence agency contract files, and analyzed FPDS-NG data on the  number of proposals received for contracts awarded using this exception.  With military department and intelligence agency officials, we also  discussed efforts DOD makes to obtain competition when using the  national security exception as its authority to limit competition.
A more detailed description of our scope and methodology is presented in  appendix I. We conducted this performance audit from March 2011 to  January 2012 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: The FAR requires that contracting officers provide for full and open  competition in soliciting proposals and awarding government contracts.  However, the FAR also recognizes that full and open competition is not  always feasible, and authorizes contracting without full and open  competition under certain conditions. Situations for which the FAR  provides exceptions include only one responsible source and no other supplies or services will unusual and compelling urgency; industrial mobilization; engineering, developmental, or research  capability; or expert services;  international agreement; authorized or required by statute; national security; and public interest.
The national security exception allows agencies to limit competition for a  contract when the disclosure of the agency’s needs would compromise  national security—not merely because the acquisition is classified or  because access to classified materials is necessary. Further, the national  security exception requires that agencies request offers from as many  potential sources as practicable, although sole-source awards are  permitted. DOD is the largest user of the national security exception, and  a variety of entities within the department use the exception.
In September 2010, DOD launched its Better Buying Power initiative,  which among other goals, aims to promote effective competition in  government contracting. As a result, promoting competition is a focus at  DOD, according to a Defense Procurement and Acquisition Policy  (DPAP) official, the office within OSD responsible for tracking DOD-wide  procurement and competition metrics. As part of these efforts, DPAP  holds quarterly meetings with competition advocates, who are officials  designated to promote competition within DOD components.
Generally, noncompetitive contracts must be supported by written  justification and approval documents that contain sufficient facts and  rationale to justify the use of the specific exception to full and open  competition that is being applied to the procurement. These justifications  must include, at a minimum, 12 elements specified by the FAR, as shown  in table 1.
The level of the official who must approve a justification is determined by  the estimated total dollar value of the contract or contracts to which it will  apply, as outlined in the FAR. The approval levels range from the local  contracting officer for relatively small contract actions up to the  agencywide senior procurement executive for contracts worth more than  $85.5 million. The justifications can be made on an individual or class  basis; a class justification generally covers programs or sets of programs  and has a dollar limit and time period for all actions taken under the  authority. The approval levels for the class justification are the same as  those for an individual justification and are determined by the total  estimated value of the class. Approval of individual contract actions under  a class justification requires the contracting officer to ensure that each  action taken under it is within the scope of the class justification.
section_title: DOD’s Use of the National Security Exception Covers a Range of Goods and Services, but Gaps in Data Limit Ability to Determine Full Extent of Use
subsections: section_title: DOD Military Departments’ Use of the National Security Exception Is Small Relative to Other Competition Exceptions and Covers a Range of Goods and Services
paragraphs: Based on data from FPDS-NG, DOD dollar obligations under the national  security exception during fiscal years 2007 through 2010 were small  relative to other exceptions to full and open competition. Out of the nearly  $1.5 trillion that DOD obligated for all contracts during this period, 41  percent ($606.3 billion), were based on other than full and open  competition, primarily through the seven FAR exceptions. However, only  about $13 billion—or about 2 percent of DOD’s other than full and open  competition obligations—were obligated under the national security  exception. As figure 1 shows, the most common FAR exception used by  DOD is “only one responsible source,” while other exceptions are used  much less frequently.
The three military departments were the largest users of the national  security exception during fiscal years 2007 through 2010, according to the  data reported in FPDS-NG, obligating about $12.7 billion. The Air Force  made up 73.5 percent of all of DOD’s obligations under the exception,  despite only accounting for about 18 percent of DOD’s total contract  obligations during the same time period, as figure 2 illustrates. By  contrast, non-military-department components accounted for about 4  percent of DOD’s use under the exception.
During the same 4-year period, over 40 percent of DOD’s total obligations  under the national security exception were for services, 37 percent for  supplies and equipment, and about 22 percent for research and  development, as shown in figure 3.
Based on our analysis of FPDS-NG data, the military departments’ use of  the exception varied both in the extent of use and the types of goods and  services acquired. During fiscal years 2007 through 2010, the Air Force  obligated $9.7 billion using the national security exception, nearly all by  the Air Force Materiel Command. About half of the Air Force’s obligations  under the national security exception were for services, such as logistical  support and professional services, and the other half was primarily for  supplies and equipment, such as communication equipment and aircraft  components. The second largest user, the Army, obligated $2.5 billion,  mostly by the Army Materiel Command and the Space and Missile  Defense Command. More than 80 percent of the Army’s obligations under  the exception were for research and development, mainly in space and  missile systems and electronics and communication equipment. Finally,  the Navy obligated almost $0.5 billion over the 4 fiscal years under the  exception, mostly under Space and Naval Warfare Systems Command  contracts. More than half of the Navy’s obligations under the exception  were to procure services, such as transportation and repair services.  Figure 4 shows the percent of obligations represented by each category  of procurement within the military departments.
DOD intelligence agencies often use the national security exception when  contracting for supplies and services, but generally do not report  contracting data to the OSD or to FPDS-NG. Two of the four DOD  intelligence agencies—the National Reconnaissance Office (NRO) and  the National Security Agency (NSA)—report using the exception for all  their contracting activities. The other two intelligence agencies—the  National Geospatial-Intelligence Agency (NGA) and the Defense  Intelligence Agency (DIA)—reported using the exception for less than 10  percent of their total contracted obligations. Three of the intelligence  agencies, NGA, DIA, and NSA, are exempt from reporting to FPDS-NG  based on a memorandum from OSD. NRO is not covered by the  memorandum, but also does not appear in FPDS-NG data. However,  some of these agencies report overall competition statistics to OSD and  participate in DOD-wide competition advocate meetings.
In addition to the intelligence agencies, DOD Special Access Programs  (SAP) use the national security exception, but generally do not report  data to FPDS-NG. These are specially classified programs within the  military departments and other DOD components that limit information to  individuals with an explicit need to know. These programs impose  safeguarding and access measures beyond those typically taken for  information with the same classification level, such as secret and top  secret. Most officials told us that, in general, these programs do not report  data to FPDS-NG. Therefore, determining the extent to which these  entities use the national security exception is not feasible due to the  limited access these programs allow. However, like the DOD intelligence  agencies, officials at one military department told us that they report  overall competition statistics for SAP contracts to DOD. Specifically, Army  Contracting Command officials who oversee SAP programs reported that  they use the national security exception for nearly all contracting activity  and they provide overall obligation totals and competition data to OSD.
section_title: DOD Lacks Clear Policy on Reporting Sensitive Contracting Activity
paragraphs: Classified data on contracts, agreements, and orders are excluded from  being reported in FPDS-NG. However, DOD does not have a clear policy  for excluding sensitive contracting data from being reported in FPDS- NG. While the memorandum from OSD exempts three of DOD’s  intelligence agencies (NGA, DIA, and NSA) from reporting procurement  data to FPDS-NG because of the sensitive nature of their procurement  data, OSD and military department officials were not aware of a specific  policy basis for excluding sensitive programs outside of the intelligence  agencies. In addition to the exclusion of SAP procurement data, some  DOD officials told us that contracts outside of SAP do not appear in  FPDS-NG due to security concerns. Nevertheless, it appears based on  the contracts in our review that the information that is in FPDS-NG on  contracting activities using the national security exception is generally  from programs that are sensitive but not fully classified programs. Some  DOD officials, including at the OSD level, were unaware that some  individual contracts could be excluded from FPDS-NG. By contrast, other  officials expected all contracts using the national security exception to be  excluded from FPDS due to the sensitive nature of the procurements. As  a result, it is unclear the extent to which contracting information on SAPs  and other highly sensitive contracting activities in DOD are included in  FPDS-NG. Based on our review, it appears that most information on such  programs is excluded. Further, according to DOD officials, decisions are  made on a case-by-case basis to exclude individual contracts from  FPDS-NG, but they were unsure of the policy basis for these exclusions.
section_title: DOD Often Uses a Single Document to Justify Multiple Actions under the National Security Exception, and All Justifications Met Requirements
subsections: section_title: DOD Makes Extensive Use of Class Justifications for the National Security Exception
paragraphs: For most contracts we reviewed, DOD entities used a single justification  and approval document that applies to multiple contracts—referred to in  the FAR as a class justification—for national security exception contract  actions. Of the 27 contracts we reviewed at the military departments, all  18 Air Force contracts cited class justifications, as did 4 of the 6 Army  contracts. The 2 remaining Army contracts and all 3 Navy contracts we  reviewed cited individual justifications. Among the contracts we reviewed,  $3.3 billion in obligations during the period of fiscal years 2007 through  2010 used class justifications, while less than $0.1 billion was obligated  during that period under individual justifications. Figure 5 shows the  relationship between the individual contract files we reviewed and the  type of justification used to support the national security exception, as  well as the obligation amounts associated with each during this period.
The Air Force Materiel Command (AFMC) comprises the majority of the  Air Force’s use of the national security exception—about 72 percent of  DOD’s total contract obligations under the exception as reported in  FPDS-NG compared to 73.5 percent for the Air Force overall. Officials at  the two AFMC centers that make up the majority of the command’s  contracting under this exception reported that they cite class justifications  for the vast majority of their national security exception contracting. The  Air Force justifications we reviewed confirmed this, each covering  contracts related to multiple systems within a program office. For  example, one Air Force class justification had an obligation ceiling of  about $8.7 billion for a 7-year period. The Army’s class justifications also  covered multiple contracts, but were more focused on an individual  system within the program office, and two of the three we reviewed had  much lower obligation ceilings.
Some of the intelligence agencies also use class justifications for the  national security exception. NSA and NRO have class justifications that  cover all of their contracting activity. NGA and DIA, by contrast, reported  using individual justifications for contracts where they cite the national  security exception.
Class justifications reduce the steps required to proceed with individual  contract actions that are not fully competitive. Each justification, individual  or class, must be approved through the same process, with levels of  approval specified by the FAR based on dollar value. However, once a  class justification has been approved, the process for individual contract  actions changes—an individual contract within the scope of the class  justification can generally be approved for limited competition or sole- source award by the local procuring activity, as long as the amount is  within the obligation ceiling of the justification. For instance, the Air Force  obligated $915 million under an indefinite delivery/indefinite quantity  contract for support and modification services on an existing aircraft and  its related systems. Because this procurement was within the scope of a  national security exception class justification, under the processes  established in the FAR, the program office did not have to obtain approval  for this noncompetitive acquisition from the Air Force’s senior  procurement executive.
According to contracting officials at an Air Force program office that has a  class justification in place under the national security exception, the  increased flexibility of their national security exception class justification  helps them meet mission needs. In the absence of a class justification,  approval of an individual justification for a noncompetitive contract award  takes time; officials with one program office cited an instance of an  individual justification under a different FAR exception that was not yet  approved 7 months after it was initiated. Figure 6 illustrates the review  process for contract awards of $85.5 million or more under class and  individual justifications.
In some cases, the class justifications we reviewed included a list of firms  authorized to participate, as well as anticipated obligation amounts for  each firm over the applicable time period. For instance, one of the Air  Force class justifications we reviewed listed about 40 firms, each with  anticipated contract obligations of several million to several billion dollars  during the 7-year time frame of the class justification. Despite the number  of firms listed in the class justification, competition among them for a  given contract award was rare—the contracts we reviewed under this  justification typically stated that only one of the firms was capable of  meeting the government’s requirements. Officials at one Air Force center  said that amending their existing class justification to add new firms had  proved difficult in the past, and noted that this can reduce competition by  limiting ability to work with new entrants to the market.
Some Air Force officials also noted that concerns about the level of  review of individual contracts that are awarded without full and open  competition under class justifications have led to efforts to revise the  review process for activity under class justifications. The Air Force revised  its process in a recently approved national security class justification for  an intelligence, surveillance, and reconnaissance program office,  requiring individual contract actions over $85.5 million be submitted to the   According  Air Force senior procurement executive for expedited review.to an Air Force General Counsel official, the Air Force has not yet  determined what type of documentation will be required as part of that  review, but it believes the increased review may identify additional  opportunities for competition. This is the first Air Force class justification  to include this new process, and officials were not aware of any similar  processes at other DOD entities. According to Air Force officials, the new  class justification also includes a mechanism for adding new firms after  the initial approval of the justification. Officials in the affected program  office said that they anticipate an increase in competition rates as a result  of this new flexibility.
Regardless of whether the military departments used class or individual  justifications, all those we reviewed met FAR standards. We reviewed  justification and approval documents for the use of the exception for 27  different contracts awarded by the Army, Navy, and Air Force, and all met  the standards established in the Federal Acquisition Regulation for  approving the justification. In addition, we reviewed the justifications and  approval documents for one national security exception contract each at  NGA, NRO, and DIA, and two such contracts at NSA, and all generally  met the requirements of the FAR.
section_title: There Are No Alternative Authorities for National Security Sensitive Procurements, but Additional Exceptions May Be Cited in Some Cases
paragraphs: According to officials from all DOD components we met with, the national  security exception should be used in limited circumstances where full and  open competition would compromise national security. These officials  were not aware of other authorities that could be used in its place, nor  were they aware of any such proposed authorities. In some justifications  and approval documents, DOD components may cite other exceptions in  addition to the national security exception. For example, the entities that  reported using the national security exception for all or nearly all  contracting—NSA, NRO, and some Air Force SAPs—reported citing  additional exceptions when making sole-source contract awards.  According to policy documents and officials with these organizations, it is  standard practice to list more than one exception when applicable. For  example, one NSA contract for computer security equipment that we  reviewed cited the “only one responsible source and no other supplies or  services will satisfy agency requirements” FAR exception alongside the  national security exception, because contracting officials had determined  that only one firm was capable of meeting the government’s  requirements. Likewise, in awarding a satellite contract, NRO used the  “only one responsible source” exception in addition to the national  security exception. The military departments generally do not cite  additional exceptions when using the national security exception.
section_title: Level of Competition under the National Security Exception Varied Greatly Within DOD
subsections: section_title: Few Military Department Contracts Achieved Competition under National Security Exception
paragraphs: According to federal procurement data, the military departments typically  did not achieve competition on national security exception contracts. Of  the more than 11,300 DOD military department contract actions citing the  national security exception from fiscal years 2007 through 2010, DOD  received only one proposal for $10.6 billion of its obligations—about 84  percent of the total $12.7 billion in obligations under this exception.  About 4 percent of contract actions, which account for 16 percent of the  military departments’ obligations, received two or more proposals, as  shown in figure 7 below. By department, nearly 100 percent of Air Force  and 95 percent of Navy contract obligations received only one proposal,  whereas about 80 percent of Army obligations were made under  contracts that received more than one proposal.
DOD’s Better Buying Power Initiative includes a goal of decreasing  instances where only one proposal is received, which DOD has noted  fails to provide the full benefits of competition. We have previously  reported that about 13 percent of all contract obligations governmentwide  were made on contracts awarded with competitive procedures that only  received one proposal.
Contracts receiving only one proposal are considered competitively  awarded if the solicitation was open to multiple potential offerors, so  contracts reported in FPDS-NG that received only one proposal may have  been awarded using competitive procedures. While data on the extent  that national security exception contracts were awarded competitively  were not sufficiently reliable, the available data confirmed that competition  is infrequent—indicating that less than a quarter of military department  obligations under this exception were competitively awarded.  Furthermore, our data reliability assessment indicated that the errors in  these data tend to overstate the level of competition, so the actual level  may be lower.
Likewise, few of the military department national security exception  contracts we reviewed achieved competition. Of the 27 contracts we  reviewed for the Air Force, Army, and Navy, only one received multiple  proposals. For the remaining 26 contracts, only one proposal for each  was received.
Military department officials said that they make efforts to provide  competition to the greatest extent practicable, as required by the FAR.  However, they reported three obstacles to obtaining more competition in  contract awards:  the existence of a small number of firms able to meet the security  requirements for the goods and services being procured;  constraints on soliciting new vendors, including proprietary data and  reliance on incumbent contractor expertise; and not having tools to increase market research and solicit vendors in a  secure environment.
For example, Air Force contracting officials reported that restrictions on  time and expertise make it difficult for many new vendors to meet  requirements. A senior Air Force contracting official told us that not  having access to technical data—such as engineering drawings and other  information needed to have another vendor meet the eligibility  requirements—is a major barrier to competition. According to this official,  one vendor often controls the data as proprietary information, and buying  or recreating it would be cost-prohibitive for potential new vendors.
The military departments generally continue to use the same exception  for follow-on contract actions to national security exception contracts, as  well as the same vendor, based on our analysis of the contracts in our  sample. Contracting officials noted that these contracts must go through  the same approval process as the initial contract, requiring justification for  the national security exception. Of the 27 contracts in our sample, we  identified 14 follow-on contracts, 12 of which were awarded to the  incumbent contractor. Contracting officials confirmed that follow-on  contracts typically are not competed and are usually awarded to the same  vendor due to proprietary data rights and expertise of the incumbent  contractors, as well as the time required to initiate work with a new  vendor. We have previously reported that incumbent contractors have  important advantages in follow-on contract awards.
Contracting officials told us that the tools that are used to solicit  competition generally cannot be used in a security sensitive contracting  environment. FedBizOpps.com is the military departments’ primary tool  for soliciting potential offerors. unclassified solicitations for goods and services, but it cannot accept  classified material. Even though national security exception contract  documents are often unclassified, synopsizing the requirements may  pose a security risk. Instead, contracting officials identify potential  sources based on market research and provide the solicitations to those  firms directly.
The site allows agencies to upload  For the 27 contracts in our sample, the market research reflected in the  contract files frequently did not have adequate documentation on how it  was used to identify potential offerors. Specifically, no evidence of  market research was present in 12 of the 27 contract files we reviewed; it  was present in 15 of the files we reviewed. The market research in those  15 contracts often broadly outlined the means by which the contracting  office conducted the market research, but in some cases did not include  details and evidence to document the research. In some cases, the  contracting officials relied upon their own collective experience with, and  knowledge of, vendors capable of delivering goods and services in  accordance with sensitive contract requirements. Nevertheless, even in  cases in which market research identified multiple firms that could meet  requirements, it did not always result in multiple proposals on a given  contract.
The FAR requires contracting officers to synopsize proposed contract actions expected  to exceed $25,000 in the Government Point of Entry (GPE), FedBizOpps.com. FAR §  5.101(a)(1) The GPE may be accessed via the Internet at https://www.fbo.gov/. FAR §  5.201(d).
section_title: DOD Intelligence Agencies Reported High Levels of Competition by Conducting Market Research and Soliciting Proposals within a Secure Environment
paragraphs: NSA and NRO, which reported that they use the national security  exception for all or nearly all contracting, showed high levels of  competition compared to the DOD military departments. As illustrated in  figure 8 below, according to data provided by the agencies, annual  competition rates ranged from 27 percent to nearly 70 percent of total  obligations at NSA and NRO. Because data on contracting at intelligence  agencies are typically classified at highly restrictive levels, we did not  have sufficient access to independently validate the data provided.
NRO and NSA have both developed tools to help increase competition in  procuring sensitive goods and services and have made these tools  available for other intelligence agencies. These tools bring together a  large number of potential offerors and help the agencies solicit and  evaluate vendors, and competitively award the contract, while taking  measures to limit the risk to national security. The NRO Acquisition  Research Center, developed for intelligence community procurements,  limits potential contractors to about 1,200 registered firms that are already  cleared to perform in a secure environment and have a workforce with  security clearances. An NRO senior procurement official described this  system as a proprietary classified version of FedBizOpps. The NSA’s  Acquisition Resource Center is the NSA’s business registry database that  provides industry with a central source for acquisition information. This  system also serves as a market research tool for NSA personnel, as well  as a means for distribution of acquisition documents to its industry  partners. All companies that wish to do business with NSA must be  registered in the system. As of October 2010, the database included  about 9,300 companies.
An NSA Inspector General report found that this system improved the  agency’s ability to conduct market research and solicit competition. The  inspector general found that it improved competition by making the  process more systematic. The other two DOD intelligence agencies, DIA  and NGA, have made arrangements to use one or both of the NSA and  NRO systems. For example, our review of a DIA contract under the  national security exception showed that the agency solicited 11  companies and received five proposals by using NSA’s Acquisition  Resource Center. Additionally, NGA has a memorandum of agreement  with NRO to use its Acquisition Research Center. None of the 27 military  department contracts we reviewed used the NSA or NRO systems to  conduct market research. However, contracting officials at one Air Force  center said that they were aware of NRO’s system, and although they do  not currently have access, they would like the opportunity to use it for  their procurements.
section_title: Conclusions
paragraphs: DOD’s use of the national security exception is necessary in certain  situations when disclosing the government’s needs in a full and open  competition would reveal information that would harm national security.  The exception requires that agencies pursue limited competition by  requesting proposals from as many potential sources as is feasible. DOD  departments may not have a complete understanding of the extent of  competition, given that DOD lacks clear policy on when sensitive contract  actions should be excluded from the FPDS-NG, the database it uses to  track this information. However, the available data show that the military  departments have achieved relatively little competition in their national  security exception procurements. Obtaining competition on new  procurements is especially important, because our findings and previous  reports have shown that once a contractor receives an award, historically  that contractor is likely to receive any follow-on contract. There are  obstacles to competition in sensitive procurements, including a limited  number of firms that can meet security requirements. Because of these  obstacles, program offices may find it easier to forego competition when a  class justification is already in place. However, more competition is  possible. The recent changes that Air Force made to its process, which  introduced a new high-level review of contract actions under a class  justification, may help increase the extent of competition. Further, while  the military departments face challenges in conducting market research  for sensitive contracts, the DOD intelligence agencies, which face similar  challenges, have created tools to increase their ability to identify multiple  potential sources and obtain competition when using the national security  exception. The use of such tools could enhance the ability of the military  departments to obtain competition on their national security exception  procurements.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Defense take the following three  actions:  Issue guidance establishing the circumstances under which security  sensitive contracting data are required to be reported to OSD and in  FPDS-NG, including the decision authority for excluding a given  program or contract from the database.
Evaluate the effect of the Air Force’s new review process on  competition and management oversight of national security exception  actions under a class justification; if the changes are found to be  beneficial, consider implementing similar changes across DOD.
Assess the feasibility of providing contracting officials in military  department programs that routinely use the national security  exception with access to tools that facilitate market research and  competitive solicitation in a secure environment, either through  development of new tools or access to existing intelligence community  systems.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD. In written comments, DOD  concurred with the report’s last two recommendations and partially  concurred with the first recommendation. DOD also provided technical  comments, which we incorporated as appropriate. DOD’s comments are  reprinted in appendix II.
In commenting on the draft report, DOD agreed to evaluate the Air  Force’s new review process for national security exception actions under  class justifications and implement a similar process across the  department if it found it beneficial. DOD also agreed to explore deploying  existing intelligence community market research and solicitation tools to  organizations in the military departments that frequently use the national  security exception. DOD partially concurred with our recommendation to  clarify guidance on the exclusion of data from FPDS-NG citing a pending  revision to the FAR that will clarify that classified data should not be  reported to FPDS-NG. We did not encounter any ambiguity on this  point—contracting officials we met with were clear that classified data  should not be entered into the system. However, we found that DOD  policy was not clear on if and when sensitive, but unclassified, contract  data should be excluded from FPDS-NG. We continue to believe that  additional guidance is needed to clarify if and when any such data should  be excluded (outside the existing intelligence agency waiver), and if so,  outline the criteria and decision authority for doing so.
We are sending copies of this report to interested congressional  committees and the Secretary of Defense. This report will also be  available at no charge on GAO’s website at http://www.gao.gov.
If you or your staff have any questions about this report or need additional  information, please contact me at (202) 512-4841 or martinb@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report. Staff  acknowledgments are provided in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: Our mandate required us to review (1) the pattern of usage of the national  security exception by acquisition organizations within the Department of  Defense to determine which organizations are commonly using the  exception and the frequency of such usage; (2) the range of items or  services being acquired through the use of such exception; (3) the  process for reviewing and approving justifications involving such  exception; 4) whether the justifications for use of such exception typically  meet the requirements of the Federal Acquisition Regulation applicable to  the use of such exception; (5) issues associated with follow-on  procurements for items or services acquired using such exception; and  (6) potential additional instances where such exception could be applied  and any authorities available to DOD other than such exception that could  be applied in such instances. To respond to these objectives, this report  (1) identified the pattern of DOD’s use of the national security exception,  including the range of goods and services acquired; (2) assessed DOD’s  process for using this exception; and (3) determined the extent to which  DOD obtained competition on selected contracts using the national  security exception.
To conduct our work we met with DOD officials at the Office of the  Secretary of Defense (OSD), the three military departments, and DOD  intelligence agencies. Within OSD we met with Defense Procurement and  Acquisition Policy officials, including a Federal Procurement Data  System-Next Generation (FPDS-NG) subject-matter expert. We also met  with FPDS-NG experts in the three military departments. In addition,  across DOD we met with officials from the following offices:
Office of the Deputy Assistant Secretary for Contracting and Policy
Air Force Materiel Command, Special Programs Division
Air Force Materiel Command, Implementation Branch
General Counsel
Office of the Assistant Secretary of the Army for Acquisition, Logistics
Army Materiel Command
Army Contracting Command
Army Space and Missile Defense Command
General Counsel
Office of the Assistant Secretary of the Navy, Research, Development
Naval Sea Systems Command
Space and Naval Warfare Systems Command
General Counsel
Office of Contracting
Office of the Inspector General
General Counsel
Acquisition and Contracts Office
Office of the Inspector General
General Counsel
Acquisition Organization
Office of Contracting
Office of the Inspector General
General Counsel
Office of Contracting
Office of the Inspector General
General Counsel  Based on discussions with FPDS-NG subject-matter experts at OSD and  the three military departments, we determined that the data available prior  to fiscal year 2006 were not sufficiently reliable for our purposes.  Therefore, our review focused on the most current reliable data from  FPDS-NG, fiscal years 2007 through 2010. We conducted legal research  and interviewed DOD officials to identify other uses of the exception and  alternative authorities. To identify the DOD components to include in our  review, we used FPDS-NG data to determine those with the most  obligations under the national security exception during fiscal years 2007  through 2010. These included the three military departments—the Air  Force, Army, and Navy. Within the departments, we identified the  commands with the highest obligations under the exception—the Air  Force Materiel Command (AFMC), Army Materiel Command / Army  Contracting Command (AMC/ACC), Army Space and Missile Defense  Command (SMDC), and Navy’s Space and Naval Warfare Systems  Command (SPAWAR). For entities that do not report data to FPDS-NG  we relied on knowledgeable DOD officials to identify the frequent users of  the national security exception. These included the four DOD intelligence  agencies—the Defense Intelligence Agency (DIA), National Geospatial- Intelligence Agency (NGA), National Security Agency (NSA), and National  Reconnaissance Office (NRO), as well as Special Access Programs  within the DOD military departments. Due to the security limitations at the  intelligence agencies, we employed different methodological approaches  to assess the uses and processes at the intelligence agencies and the  military departments, as described below.
subsections: section_title: DOD Military Departments
paragraphs: To assess the pattern of use of the exception and the range of items or  services being acquired at the DOD military departments, we obtained  data from FPDS-NG. We included contracts and orders coded as using  the national security exception under the field “reason not competed” from  fiscal years 2007 through 2010. We analyzed obligations data and the  types of goods and services based on product code fields. To compare  use of the national security exception versus other FAR exceptions, we  conducted an analysis of the other values listed under the “reason not  competed” field.
Because the Air Force makes up 73.5 percent of all obligations under the  national security exception, we selected 18 contracts from the Air Force,  6 from the Army, and 3 from the Navy. We selected the individual  contracts based on several criteria. First, we selected high-dollar  contracts. Based on our analysis of commonly procured goods and  services from FPDS-NG data, we selected contracts with a mix of these  types of purchases. FPDS-NG data do not indicate whether a contract is  a follow-on procurement, therefore we selected both older and newer  contracts. DOD officials also identified contracts to select to capture  follow-on activities. However, based on other selection criteria, these  contracts had already been included. The 27 contracts we reviewed  represented about $3.4 billion—about 27 percent—of the $12.7 billion in  obligations under the national security exception across the military  departments in fiscal years 2007 through 2010.
We analyzed the justification and authorization documents for these  selected contracts and determined whether they met the requirements of  the FAR Sections 6.302-6 and 6.303-2. In addition, we reviewed pre- award documentation to determine the extent to which the services  obtained competition under the exception and to review market research  documents. Further, we reviewed the contract files to determine whether  the contract was a follow-on contract. We met with officials to discuss  efforts the military departments make to obtain competition when using  the national security exception to limit competition.
We conducted assessments of both the completeness and the reliability  of the FPDS-NG data. To assess how complete the FPDS-NG data are,  we interviewed agency officials at OSD and the three military  departments to identify instances when individual contracts or entire  programs are excluded from FPDS-NG to protect classification or security  sensitive information. OSD officials provided us with the directive from the  Director of National Intelligence that exempts all DOD intelligence  agencies from FPDS-NG. We met with officials who oversee Special  Access Programs in the Army and Air Force to discuss any policies and  procedures related to the inclusion or exclusion of contract information  from FPDS-NG.
Our assessment of the reliability of FPDS-NG data involved several  stages. First, we interviewed FPDS-NG subject-matter experts at OSD  and the three military departments. We discussed issues with miscoding  and results of any anomaly reports. After identifying the sample for our file  review, we asked officials at the contracting offices to verify if the  contracts did use the national security exception as they were coded in  the “Reason not Competed” field in FPDS-NG. After identifying coding  errors in that field for five of the contracts, we compared the “Extent  Competed” and “Number of Bids” (proposals) fields with the  documentation in the contract files for the 27 contracts in our review. We  found four errors in the “Extent Competed” field and one error in the  numbers of proposals. We also drew upon prior GAO findings regarding  FPDS-NG data reliability.
Based on this initial data reliability assessment, we selected a second  random, non-generalizable stratified sample of 36 contracts to assess the  same three fields in FPDS-NG. We stratified based on the military  department (Air Force, Army, and Navy); whether it was identified as an  indefinite delivery, indefinite quantity contract in FPDS-NG; and whether it  was listed as not competed or competed after exclusion of sources in  FPDS-NG. We asked DOD officials to review contract files to determine  1) if the contract cited the national security exception, 2) whether the  contract was competed, and 3) how many proposals the contract  received. In addition, in discussions with the Navy, they identified  contracts that were incorrectly coded as using the national security  exception. After three Air Force contracts fell out of our sample due to  nonresponse, we found errors in the “Extent Competed” field for about a  third of the contracts. However, we found only two of the contracts (6  percent) had errors in the “Reason not Competed” field and only one  contract (3 percent) with an error in the number of proposals. These data  reliability assessments indicate that the “Reason not Competed” and  “Number of Offers” fields in FPDS-NG are sufficiently reliable for our  analyses.
section_title: DOD Intelligence Agencies and Special Access Programs
paragraphs: To assess the extent of DOD intelligence agencies’ use of the national  security exception, we obtained data from the four agencies, as these  agencies do not report data to FPDS-NG. Specifically, we obtained data  on the percentage of total obligations under the national security  exception and the percentage of total obligations competed at the four  agencies.
We reviewed five contract files at four DOD intelligence agencies. We  analyzed the justification and authorization documents for these selected  contracts and determined whether they met the requirements of the FAR  Sections 6.302-6 and 6.303-2. Because we did not have a list of contract  numbers from which to choose, we relied on the agencies to select the  contracts for review. In addition, we reviewed pre-award documentation to  determine the extent to which the agencies obtained competition under  the exception and to review market research documents. Further, we  reviewed the contract files to determine whether the contract was a  follow-on contract. We met with officials to discuss efforts the intelligence  agencies make to obtain competition when using the national security  exception to limit competition.
DOD entities for which little or no use of the exception appeared in federal  procurement data were not included in our file review. To assess the use  of the exception at these entities, we met with officials at OSD, as well as  officials knowledgeable about Special Access Programs at the Army, Air  Force, and Navy. We obtained information from an Air Force official on  the extent of use and competition within the Air Force Materiel  Command’s Special Programs Division.
To assess the reliability of data received from the DOD intelligence  agencies, we solicited information from officials on the data. Specifically,  we asked cognizant officials about the type of database systems used to  track contracting activity; how these systems are used; what procedures  are in place to ensure consistency and accuracy; if there have been  issues with the system that may compromise data; what limitations exist  in tracking CICA exceptions; and what data reliability assessments have  been conducted on these systems.
We conducted this performance audit from March 2011 to January 2012  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: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, John Neumann, Assistant  Director; Laura Greifner; Julia M. Kennon; John A. Krump; Caryn E.  Kuebler; Teague Lyons; Jean McSween; Kenneth Patton; Roxanna T.  Sun; Sonya Vartivarian; and C. Patrick Washington made key  contributions to this report.