Specialty Metals: DOD Dissemination of National Security Waiver Information Could Enhance Awareness and Compliance with Restrictions
Released: 2014-10-16T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Specialty metals—such as titanium, certain steel alloys, and samarium-cobalt alloy magnets—are essential to DOD weapon systems due to their unique properties, such as being highly durable. Federal statute requires specialty metals used in weapon systems to be procured from domestic sources or qualifying countries. However, the law allows DOD to waive this requirement in the interest of national security. GAO was mandated by a House report accompanying a bill for the National Defense Authorization Act (NDAA) for Fiscal Year 2014 to review DOD's compliance with specialty metals requirements.

This report assesses (1) how DOD meets its needs for specialty metals parts and ensures compliance with restrictions, and (2) DOD's process for providing national security waivers for specialty metal procurements and the extent to which it disseminates waiver information throughout the department. GAO reviewed contracts, laws, regulations and DOD guidance, and analyzed a non-generalizable sample of five weapon systems as case studies based on their total 2013 acquisition costs, among other things. GAO also reviewed national security waivers DOD granted since 2009 and interviewed DOD and contractor officials.

section_title: What GAO Found
paragraphs: The Department of Defense (DOD) typically relies on its prime contractors to plan for the procurement of specialty metals and ensure compliance with specialty metals' restrictions for the five weapon systems programs that GAO reviewed. For these programs, GAO found that DOD plays a limited role—primarily monitoring the availability of specialty metals and conducting periodic reviews of prime contractor quality assurance processes. GAO also reviewed contracts for these five programs and found they contained clauses that require prime contractors to procure specialty metals in compliance with domestic source restrictions, ensure that delivered items meet contract requirements as part of quality assurance, and maintain processes for future material needs. In turn, these prime contractors told GAO that they pass down the contract requirements—including those pertaining to specialty metals—to their subcontractors and defense suppliers, and require them to follow industry standards for quality management. These standards include, among other things, testing subcontractor processes to determine if they meet contractual specifications; reviewing required supplier certifications for items delivered under the contract to confirm compliance with all identified requirements; and rating subcontractors using performance metrics. Prime contractors for these programs also told GAO they use a risk-based approach to oversee subcontractors, including those suppliers at lower tiers.

DOD recently improved its national security waiver process; but its dissemination of information contained in those waivers is limited. Since 2009—when specialty metals restrictions were changed and the exception for national security was added—DOD has granted six national security waivers to five different weapon system programs known to have procured noncompliant specialty metals. Five of the six waivers were for samarium-cobalt magnets, which were noncompliant largely due to a change in a previously allowed exception for these magnets. During its review, GAO identified weaknesses in DOD's waiver process such as not having defined procedures for requesting waivers; and in June 2014, DOD developed written guidance for program offices to follow when requesting these waivers. However, GAO also found that DOD does not have a mechanism to share information on national security waivers granted for noncompliant specialty metals. Standards for Internal Control in the Federal Government call for information to be recorded and communicated to management and others, including external parties who need it, such as program offices and suppliers, to help the agency achieve its goals. Disseminating non-sensitive information—including the names of programs that received waivers, sources of the noncompliant specialty metals, and corrective actions—to key stakeholders, such as DOD weapon system program offices and their defense suppliers, could help raise awareness of and compliance with the specialty metals restrictions. Moreover, greater awareness of supplier-base problems and broader dissemination of national security waiver information could assist DOD in better discovering potential vulnerabilities, such as systemic supply chain risks that could impact national security objectives.

section_title: What GAO Recommends
paragraphs: GAO recommends that DOD disseminate non-sensitive information within the department and its supplier-base on the waivers it has granted for specialty metals. DOD concurred with the recommendation and plans to publish non-sensitive information.

section_title: Letter
paragraphs: Specialty metals are essential to the manufacture and performance  capabilities of certain Department of Defense (DOD) weapon system  parts, due to their unique properties, such as being highly magnetic,  lightweight, corrosion resistant, or having high durability. Among these  metals are samarium-cobalt alloy magnets used to make radar systems,  as well as titanium and certain steel alloys used to make aircraft,  submarines, and tactical ground vehicles. There are few, if any,  substitutes for some of these metals. Specialty metals domestic source  restrictions have been established to ensure that the United States has a  vigorous domestic metals supply chain capable of meeting defense  needs. These restrictions require that such metals for DOD weapon  systems and certain items or components be procured from domestic  sources or certain qualifying countries unless an exception applies.  Exceptions include those for domestic nonavailability, and in situations  where acceptance of an end item is necessary to national security. For  example, if a weapon program is using noncompliant specialty metals, the  Secretary of Defense may issue a waiver for that program, if the  Secretary determines that the acceptance of end items made with  noncompliant metals are in the interest of national security.

Recent instances of DOD’s noncompliance with specialty metals  restrictions and the number of requests for national security waivers have  raised questions about DOD’s oversight of its weapon systems  contractors. GAO was mandated by a committee report accompanying a  bill for the National Defense Authorization Act (NDAA) for Fiscal Year  2014 to review DOD’s compliance with specialty metals’ requirements  and its use of waivers for national security interests (national security  waivers). In this report, we assessed: (1) how DOD meets its needs for specialty metals parts and ensures compliance with the specialty metals  restrictions, and (2) DOD’s process for providing national security waivers  for specialty metal procurements and the extent to which it disseminates  waiver information throughout the department.

To do our work, we examined laws and regulations regarding domestic  source restrictions, including the Defense Federal Acquisition Regulation  Supplement (DFARS), as well as reviewed DOD guidance relating to  planning for and compliance with specialty metals and related  requirements of the Federal Acquisition Regulation (FAR). We also  selected a non-generalizable sample of five weapon systems as case  studies on the basis of their total acquisition cost, and phase in the  acquisition process as of November 2013; as well as to include  representation of at least one program from each of the military services:  the Joint Strike Fighter, KC-46 Tanker, DDG-51 Arleigh Burke Class  Destroyer, Virginia Class Submarine, and Family of Medium Tactical  Vehicles. We reviewed contracts for these programs to see if they  included the specialty metals restrictions and documentation provided by  contractor and DOD quality assurance staff on specialty metals planning  efforts and parts management planning to understand how contractors  ensure parts availability and mitigate risk. We identified the extent to  which DOD depends on contractors to perform these activities. Our  findings from these five programs cannot be generalized to all programs,  but they provide useful insights into how DOD officials and contractors  work to address requirements associated with specialty metal restrictions.  We also interviewed officials from DOD, including the Office of the Under  Secretary of Defense for Acquisition, Technology, and Logistics (USD  AT&L), the Defense Contract Management Agency (DCMA), and selected  weapon system programs, as well as their prime contractors, two  selected subcontractors, and specialty metals company representatives.  We ascertained their roles in determining the needs for specialty metals  parts and monitoring compliance with specialty metals restrictions and  related requirements of the FAR and the DFARS. We also reviewed  DOD’s process for providing waivers for national security interests for  weapon programs that procured noncompliant specialty metals, and  assessed the extent to which DOD disseminates information on national  security waivers it has granted against criteria in Standards for Internal  Control in the Federal Government. We identified and reviewed the  national security waivers for specialty metal procurements granted by  DOD since 2009, when specialty metals restrictions were changed and  the exception for national security was added. For instances where  noncompliance was reported and a national security waiver was  requested, we reviewed corresponding DOD determinations of whether  the contractor’s or subcontractor’s noncompliance was knowing or willful.  We also reviewed legislative history for DOD’s authority to grant waivers.  We interviewed officials representing USD AT&L to identify other relevant  background, rationale, or circumstances not stated in the waiver  documentation. We did not assess whether other exceptions were  available under the facts and circumstances present for these waivers.  Appendix I provides a more detailed description of our scope and  methodology.

We performed our review from December 2013 to October 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: In 1941, Congress enacted the Berry Amendment, which required that  certain items procured for defense purposes be grown or produced in the  United States. Specialty metals were added to the Berry Amendment in  the early 1970s. The term “specialty metals” is defined to mean any of the  following:

Steel with a maximum alloy content exceeding one or more of the  following limits: manganese, 1.65 percent; silicon, 0.60 percent; or  copper, 0.60 percent; or containing more than 0.25 percent of any of  the following elements: aluminum, chromium, cobalt, columbium,  molybdenum, nickel, titanium, tungsten, or vanadium.

Metal alloys consisting of nickel, iron-nickel, and cobalt base alloys  containing a total of other alloying metals (except iron) in excess of 10  percent.

Titanium and titanium alloys.

Zirconium and zirconium base alloys.

Specialty metals and their potential applications in DOD weapon systems  include: steel alloys such as those used for ship hulls; metal alloys  consisting of nickel and iron-nickel; certain cobalt base alloys such as  samarium-cobalt alloy magnets used in radars; titanium and titanium alloy  used in aircraft engine parts; and zirconium and zirconium base alloys  used in gas turbine engines. In 2006, Congress passed the Fiscal Year  2007 NDAA which established specialty metals restrictions separate from  the Berry Amendment. The provision generally requires DOD and its  contractors to procure specialty metals produced or melted in the United  States unless an exception applies which then permits the specialty  metals to be obtained from foreign countries.

Table 1 shows the federal regulations and DOD guidance that govern the  elements of planning, compliance, and domestic source restrictions when  procuring specialty metals for major weapon systems.

DOD also has other exceptions available under the specialty metals  restrictions, but they were beyond the scope of our review. As mandated,  our review focused on national security waivers. Appendix II provides a  list of the allowable exceptions to the specialty metals restrictions. Some  of these exceptions include:

National Security Waivers: When the use of noncompliant specialty  metals in a weapon system is identified after it has been fabricated,  the Secretary of Defense may determine in writing that acceptance of  such an end item is necessary to the national security interests of the  United States. The Secretary is allowed by statute to delegate this  authority to the USD AT&L. DOD generally must notify Congress in  advance of making these written determinations except in the case of  an urgent national security requirement.

Domestic Non-Availability: A domestic non-availability exception  may apply if USD AT&L or the Secretary of the military service  determines that compliant specialty metal of satisfactory quality,  sufficient quantity, and in the required form, cannot be procured when  needed at a fair and reasonable price.

Qualifying Countries: This exception waives the requirement for  procuring specialty metals produced in the United States if the  acquisition relates to certain agreements with foreign governments,  known as “qualifying countries.” Under the qualifying country  exception, manufacturers in these countries have greater flexibility  when procuring specialty metals for DOD procurements than U.S.  manufacturers. Specifically, they can procure specialty metals from  any source—including non-qualifying countries—while a component  manufacturer in the United States must procure specialty metals from  a source in the United States or a qualifying country.

To implement the specialty metals restrictions, DOD established a clause  in the DFARS. Generally DOD must include this clause in weapon system  solicitations and contracts to require that contractors deliver items  incorporating specialty metals in compliance with statute and regulation.  Contractors are required to insert this clause, known as flow down, in  their subcontracts that include items containing specialty metals, to the  extent necessary to ensure compliance. In fiscal year 2009, changes  were made to the specialty metals restrictions statute by the Fiscal Year  2008 NDAA, which eliminated an exception used to procure electronic  components containing high performance magnets, with noncompliant  metals from non-domestic sources. It also established a national security  waiver exception—permitting the Secretary of Defense to accept delivery  of an end item containing non-domestic specialty metals when the  Secretary certifies that it is in the interests of national security.

section_title: DOD Primarily Relies on Contractors to Determine Needs for Specialty Metals and Verify Compliance with Restrictions
paragraphs: The Department of Defense (DOD) monitors the availability of specialty  metals and conducts periodic quality assurance reviews; but played a  limited role in planning for the procurement of specialty metals and  ensuring compliance with specialty metals’ restrictions for the five  programs we reviewed. Officials representing the weapon system  programs that we reviewed typically rely on their prime contractors to plan  for the procurement of specialty metals and to ensure compliance with  these restrictions. We reviewed selected prime contracts for these  programs and found they contained clauses requiring prime contractors to  procure specialty metals in compliance with domestic source restrictions,  ensure that delivered items meet contract technical requirements as part  of quality assurance, and maintain processes for meeting future material  needs. In turn, these prime contractors told us that they flow down the  contract requirements—including those pertaining to specialty metals—to  their suppliers, and require them to follow industry standards for quality  management. Further, prime contractors for these programs told us they  use a risk-based approach to oversee subcontractors, including those at  lower tiers. DOD quality assurance staff also conduct periodic quality  assurance reviews, primarily at the prime contractor level.
subsections: section_title: DOD Relies on Weapon System Contractors and Subcontractors to Plan for Specialty Metal Needs
paragraphs: DOD played a limited role in planning for specialty metals’ needs for the  five programs we reviewed, and does so primarily through reports and  assessments of availability of supply. Specifically, the Defense Logistics  Agency conducts periodic assessments of strategic and critical materials  for DOD, which help inform the department’s decisions to undertake risk  mitigations such as stockpiling materials subject to potential shortfalls. In  addition, the U.S. Geological Survey provides information to DOD on a  variety of mineral commodities, which DOD uses in its analysis of  materials availability; it also produces publicly available data on  production and trends for some specialty metals and alloys used in  specialty metals, including titanium. Specifically, the U.S. Geological  Survey reported the price of titanium ingot increased by 250 percent  between 2003 and 2006, before dropping to its average price range in the  following 4 years.

Due in part to the limits of worldwide production capacity, some specialty  metals require a long lead time to produce, and specific grades of  titanium procured for weapon system production may also require  qualification and testing periods. Growing tensions in countries that the  United States depends on for these metals, such as Russia, could  potentially lead to additional availability risks. For example, a specialty  metals industry official told us that samarium cobalt magnets are uniquely  developed for DOD weapon systems and must undergo lengthy  qualification and testing periods before their use in a weapon system.  Further, in DOD’s most recent annual assessment of industrial  capabilities, it stated that the industrial base upon which DOD relies has  steadily become more global and diverse, and DOD does not control the  supply chain that supports production.

DOD MIL-STD-3018, Standard Practice for Parts Management (Oct. 27, 2011) and SD- 19, Parts Management Guide (December 2013). management guidance, and the prime contractor told us that this planning  includes specialty metals.

While neither the material management contract requirement for the  programs in our review or the Family of Medium Tactical Vehicles  program’s parts management contract requirement specifically discuss  specialty metals, they both require contractors to do advance planning for  the materials needed in future production, which would include specialty  metals or parts containing them. The six prime contractors for the  programs we reviewed reported that they conduct various activities to  ensure future specialty metals parts for production will be available,  including forecasts of specialty metals needed for future production and  initiating advance purchasing agreements with specialty metals  producers. Four of the prime contractors indicated they have had no  difficulties in obtaining specialty metals needed for production from  domestic sources or qualifying countries, but two reported encountering  availability issues for some specialty metals, including titanium pipe,  stainless steel, and some engine parts metals. Table 2 summarizes the  six prime contractors’ planning activities for procuring specialty metals  and the extent to which they have incurred availability issues.

section_title: DOD Relies on Weapon System Contractors and Suppliers to Ensure Compliance with the Specialty Metals Restrictions, but Periodically Reviews Prime Contractor Quality Assurance Processes
paragraphs: DOD officials for the five weapon systems programs we selected for  review reported that they contractually require their prime contractors to  comply with the specialty metals restrictions. Five of the six prime  contractors, in turn, reported that they rely on their subcontractors for  compliance by including the specialty metals restrictions in their  subcontracts and purchase orders to the extent necessary to ensure  compliance of the end products delivered to the government. The other  prime contractor, responsible for the development of the KC-46 Tanker,  said it directly procures specialty metals for this military aircraft, rather  than relying on subcontractors, largely based on the existing design for its  commercially available aircraft.

In addition, we found that the prime contracts for four of the five DOD  weapon system programs we selected for review require the prime  contractor to adopt and use industry standards for quality management.  For the remaining contract, although it is not specifically stated in the  contract, the prime contractor indicated to us that they interpret their  contract to require them to adopt and use industry standards for quality  management. These prime contractors indicated they also require their  subcontractors and suppliers to use these industry standards. These  standards apply to the procurement of all parts, including specialty  metals, and include: (1) evaluating potential subcontractors for inclusion  on the contractor’s approved suppliers list; (2) reviewing required  independent certifications or subcontractor certificates of conformance for  items delivered under contract; (3) testing subcontractor parts and  processes to determine if they meet contractual specifications; and (4)  rating subcontractors on a routine basis using performance metrics such  as product quality and on-time deliveries.

Five of the six prime contractors that we spoke with reported that these  industry standards for quality management were included in their  contracts. For example, the prime contractor for the Family of Medium  Tactical Vehicles reported that it performs systematic quality reviews of its  subcontractors every 6 months to 2 years. As part of its review, it requires  suppliers to provide certificates of conformance for parts procured and  reviews material certifications from all first tier suppliers and some second  tier suppliers to ensure industry quality standards are met. On the other  hand, the prime contractor for the KC-46 Tanker reported that it directly  handles procurement of specialty metals, rather than relying on  subcontractors to ensure compliance, although it also requires its  suppliers to adhere to industry quality standards. In addition, each of the  six prime contractors in our review reported that they use a risk-based  approach—based on factors such as product complexity and the  subcontractor’s past performance—to determine the extent to which they  conduct subcontractor oversight.

DOD also oversees prime contractors’ purchasing processes and quality  assurance activities, which can include reviews of whether prime  contractors are complying with the specialty metals restrictions. These  oversight activities are carried out by staff from DCMA—for the Army and  Air Force—and from the staff of the U.S. Navy Supervisors of  Shipbuilding, Conversion, and Repair (Navy) organizations. The FAR  requires DOD contracting officers to determine whether contractor  purchasing system reviews are needed, and if so, to conduct a review  with the objective of evaluating the efficiency and effectiveness with which  the contractor spends government funds and compliance with  government policy when subcontracting. The DFARS also requires  contracting officers to evaluate whether the contractor’s purchasing  system is capable of ensuring that all applicable contractor purchase  orders and subcontracts contain all terms, conditions, DFARS clauses— including the flow down of the specialty metals’ restriction—and any other   This  clauses needed to carry out the requirements of the prime contract.review provides a basis for granting, withholding, or withdrawing approval  of the contractor’s purchasing system. After an initial review, contracting  officers are to determine, at least every 3 years, whether subsequent  reviews are required.

According to DCMA guidance on supplier risk management, DCMA is to  identify risk levels for DOD suppliers, and to use these ratings in  developing government contract quality surveillance plans and allocating  resources to perform them. This guidance also provides that government  oversight of sub-tier suppliers may occur if warranted. DCMA receives its  direction and expectations for contract oversight from the DOD program  office, which can include access to subcontractor invoices at any tier, if  the program deems this necessary. In addition, the FAR provides that, for  major system acquisitions, the contracting officer may designate certain  high risk or critical subsystems or components for special surveillance.

DOD and the prime contractor can also arrange for access in the event  that noncompliance issues are identified to help ensure corrective actions  are taken.

Moreover, the FAR allows contracting officers to accept a contractor’s  certification that the delivered items meet requirements rather than  performing an inspection of these items. However, if any delivered items  are noncompliant, the FAR generally provides that any defect in items  provided under a fixed-price contract is to be replaced, corrected, or  repaired by the contractor, potentially at their own expense.reviewed the six prime contracts for the programs in our review and each  contract contained clauses related to the correction of deficiencies in  items delivered by the contractor.

section_title: DOD Has Defined Procedures for Requesting Specialty Metals Waivers, but Dissemination of Its Waiver Information is Limited
paragraphs: The specialty metals restrictions allow the Secretary of Defense or certain  delegated officials to grant national security waivers, among other things,  for the use of noncompliant specialty metals. Since 2009, we found DOD  has granted six national security waivers permitting the use of  noncompliant specialty metals on five different weapon system programs,  including the Joint Strike Fighter. During our review and, in part, in  response to our discussions with USD AT&L officials, DOD developed  written guidance for program offices to follow when requesting national  security waivers. However, DOD lacks a mechanism to share information  contained in these waivers with key stakeholders, within the department  and to its supplier-base, on national security waivers granted for  noncompliance with the specialty metals restrictions. Without this  information, DOD and its contractors and suppliers could be limited in  their awareness of, and actions to mitigate, similar supply chain issues.
subsections: section_title: DOD Has Granted National Security Waivers Since 2009 and Recently Defined Procedures for Requesting Waivers
paragraphs: The specialty metals’ restrictions provide authority to the Secretary of  Defense or certain delegated officials, including USD AT&L, to waive  compliance with the specialty metals restrictions. To do so, the Secretary  or delegated official must determine, in writing, that acceptance of  noncompliant specialty metals is necessary to the national security  interests of the United States. Waivers in the interest of national security  can be only be granted after noncompliance issues are identified, and  only allow the department to accept the delivery of noncompliant end  items that have already been procured, rather than in advance of their  procurement.

Since 2009, DOD granted six national security waivers for the use of  noncompliant specialty metals on five different weapon system  programs—five of which were granted after contractor disclosure that  noncompliant specialty metals were, in some cases, contained in the end  items delivered to DOD. The remaining waiver (for the Standard Missile-3  Block II-A program) was granted as a result of an international agreement  that did not address specialty metal restrictions. Table 3 shows the six  national security waivers approved for five weapon system programs  since 2009 when the DFARS was revised to remove a previous  exemption for high performing magnets, as provided by the National  Defense Authorization Act for Fiscal Year 2008.

Specifically, in 2009, DOD eliminated an exception in the DFARS that  allowed electronic components containing noncompliant high  performance (samarium-cobalt) magnets to be procured from non- domestic sources. However, the companies we spoke with that were  involved in requesting the national security waivers indicated they had not  updated their purchasing processes to reflect this DFARS change,  resulting in noncompliance with specialty metals restrictions. As a result,  five of the six national security waivers were granted due to noncompliant  samarium-cobalt magnets procured by three companies. For each of the  five programs that procured noncompliant samarium-cobalt magnets,  their national security waivers stated that these magnets met the  necessary performance capability requirements for the weapon systems  for which they were procured. The time frame for the contractor’s  discovery of noncompliant specialty metals to when the waiver was  approved by DOD, ranged from two months for the Joint Strike Fighter  parts for positioning external doors and nose and main landing gear, to 10  months for the Ground/Air Task Oriented Radar program. According to  the specialty metal statute, weapon system contractors and  subcontractors that are noncompliant with the specialty metals restrictions  and receive a national security waiver must develop and implement an  effective plan to ensure future compliance, also known as a corrective  action plan. The prime contractor for the Joint Strike Fighter program told  us that it has, as well as its subcontractors, submitted corrective action  plans. In addition, the prime contractors for the F-16 Block 52 aircraft and  the B-1 Bomber Reliability and Maintainability Improvement Program  have also submitted a corrective action plan. There is no plan for the  Ground/Air Task Oriented Radar, as a result of the prime contractor  correcting the noncompliance before the program accepted delivery of the  radar systems regarding the need for the waiver. DOD did not also  require a corrective action plan for the Standard Missile-3 Block II-A,  because the noncompliant components were provided under the terms of  a bilateral agreement and were not procured by a U.S. prime contractor.  The waiver stated that the specialty metals restrictions still apply because  the specialty metals’ components are to be integrated with U.S.-acquired  missile components.

In addition, in our review of national security waivers approved by DOD,  we found that these waivers contained the elements required by the  specialty metals restrictions. Specifically, these included (1) written  determinations stating that accepting delivery of an end item containing  noncompliant materials is necessary to U.S. national security interests;  (2) approval by the USD AT&L or a higher-ranking official; and (3)  statement indicating the quantity of end items and the time period to  which the waiver applies. However, we found that DOD’s process for  granting national security waivers for specialty metals had some  weaknesses. For example, a DOD program office that was in the final  steps of submitting a national security waiver told us they had difficulty in  determining what documentation to include with their waiver request. We  also found that the DFARS guidance at the time that the existing waivers  were submitted did not specify the types of documents required from the  requesting program office to support a waiver request. In June 2014, USD  AT&L developed written guidance for program offices to include how and  when the noncompliance was discovered, a complete description of all of  the items or systems containing noncompliant specialty metals, the  manufacturer and country of origin of the noncompliant material—if  known, and estimated cost and schedule estimates to replace the  noncompliant parts if a national security waiver is not granted. This DOD  guidance also requires the disclosure of whether the specialty metals  DFARS clause was flowed down to subcontractors and whether safety  and operational implications exist. In addition, to prevent  misinterpretation of the current flow down requirement, DOD recently  proposed amending the specialty metals DFARS clause to clarify the  current requirement that the specialty metals restrictions be flowed down  in subcontracts. The comment date for this proposed change to the  DFARS ended in August 2014, and if finalized, the clause would apply to  DOD contractors.

Further, DOD has been directed by a House report accompanying H.R.  4435, the Howard P. “Buck” McKeon National Defense Authorization Act  for Fiscal Year 2015, to report on the department’s use of national  security waivers, including documentation for all of the waivers issued  since 2008 and information regarding the procedures used to issue these  waivers, by December 1, 2014. This report directs the Secretary of  Defense to report on DOD’s procedures to determine whether (1) to issue  a national security waiver; (2) a supply deficiency is best addressed  through the national security waiver or through the availability exception;  (3) noncompliance by contractors and subcontractors is “knowing or  willful,” and (4) further action by DOD is necessary to prevent the  recurrence of the supply chain issue that led to noncompliance and the  subsequent issuance of a national security waiver. The report also  directed the Secretary of Defense to report on the procedures used by  DOD to monitor contractor compliance. According to a senior USD AT&L  official, DOD has begun work to fulfill this reporting requirement.

section_title: DOD Lacks a Mechanism to Disseminate Information on National Security Waivers Granted
paragraphs: In our review of the six national security waivers granted by DOD, we  found that these waivers include details, such as the company’s plan for  procuring specialty metals that comply with the restrictions, the production  units that will be compliant in the future, and estimated time frames to re- qualify suppliers and retest equipment. DOD may also require the prime  contractor to pay associated costs for noncompliance with the specialty  metals restrictions related to delivered items. When this occurs, the  program office’s contracting officer determines the amount that is  appropriate to be paid based on the nature and scope of the  noncompliance. Further, for the B-1 Bomber Reliability and Maintainability  Improvement Program and the F-16 Block 52 Program, the waivers  specify that all costs associated with non-compliance are unallowable,  including any directly associated costs incurred by their contractors.  Specifically, the waivers approved by USD AT&L required the contractors  for these two programs to provide consideration to the Air Force for the  costs that may include the design, testing, and installation of compliant  components to remediate the noncompliant items and any additional  costs incurred to obtain compliance for the aircraft radar systems  affected. For the remaining waivers, USD AT&L’s decision on whether to  request contractor consideration is pending.

The specialty metals restrictions require that DOD make a determination  of whether the noncompliance by the contractor or subcontractor was  knowing or willful. Specifically, DOD has ordered investigations of four  of the six national security waivers to determine whether the  noncompliance was knowing or willful, and the results of these  investigations are pending. For the other two waivers, DOD did not  conduct an investigation, but nonetheless determined that the  noncompliance was not knowing or willful. According to officials at USD  AT&L, it is in the Under Secretary’s discretion to request an investigation  to assist in making their determination, if the facts surrounding the  noncompliance warrant it. Further, DOD can consider suspending or  debarring a contractor or subcontractor whose noncompliance has been  determined to be knowing or willful, until the issues that led to  noncompliance have been effectively addressed. DOD has not taken this  action for any of the contractors in our review. Table 4 summarizes the  status of the programs’ corrective action plans for their national security  waivers and DOD’s determination of whether the noncompliance with the  specialty metals restrictions was knowing or willful.

The specialty metals restrictions further require DOD to provide advance  congressional notification in the form of a written determination to the  defense committees before executing a national security waiver  determination.waivers and provided little advance notice for another program.  Specifically, we found that DOD did not notify Congress for the Standard  Missile-3 Block II-A program waiver and the B-1 Bomber Reliability and   However, DOD did not notify Congress for one of the six  Maintainability Improvement Program notified Congress on the same day  the waiver was signed. According to USD AT&L officials, the delays in  notifying Congress of the approved national security waivers, in these  instances, were due to the lack of a central focal point for the waivers. As  a result, USD AT&L has recently centralized the processing of all waiver  requests within DOD.

Standards for Internal Control in the Federal Government call for  information and communications to be recorded and communicated to  others, such as stakeholders who need it, to help the agency achieve its  goals. However, we found that DOD lacks a mechanism to share  information with key stakeholders, within the department and to its  supplier base, on national security waivers granted for noncompliance  with the specialty metals restrictions. Sharing information on specialty  metal waivers with these key stakeholders could heighten the awareness  of other programs and their suppliers who are not directly involved with  the waiver of the risks as well as the consequences, and to look for  similar issues in their own programs. Moreover, other program offices that  work with the same supplier-base could benefit from this information. For  example, in the case of the Joint Strike Fighter program’s noncompliant  samarium cobalt, DCMA created a notification report in February 2013.  According to a deputy director within DCMA’s Industrial Analysis Center,  reports such as this were possibly disseminated throughout DCMA, and  he stated DCMA staff may have shared these reports with the program  offices to which they were assigned. In November 2013, DOD  discontinued these reports. Continued disseminations of this type of  information and sharing them among the DOD weapon system programs  and their supplier-base could heighten awareness, potentially averting  future noncompliance with the specialty metals’ restriction. Further,  GAO’s prior work in October 2008 concluded that DOD often becomes  aware of supplier base problems through informal channels, and greater  visibility of supply chain issues or vulnerabilities could contribute to more  formal mechanisms for addressing supply chain risks. We  recommended that DOD create and disseminate written requirements for  reporting potential concerns about supplier-base gaps. DOD addressed  this recommendation, and in its most recent instruction on Defense  Industrial Base Assessments, dated July 2014, it states that if an  industrial capability is identified as endangered, DOD components must,  among other things, validate whether the industrial capability is relevant  to a satisfaction of a national security requirement. This instruction also  states that to facilitate efficient and effective sharing, a repository of  reports, information, and data will be established by DOD and will contain  a searchable index of reports. Moreover, DOD’s 2014 Chief Freedom of  Information Act Officer’s Report to the Department of Justice states that  the department continues to implement open government principles as  defined by an Office of Management and Budget memorandum, which  encourages greater transparency, participation and collaboration by  publishing non-sensitive government information online for public  review. Establishing a mechanism to disseminate non-sensitive  information—including the names of programs that received waivers,  sources of the noncompliant specialty metals, and corrective actions—to  key stakeholders, such as DOD weapon system program offices and their  defense suppliers—could help raise awareness of and greater  compliance with the specialty metals restrictions.

section_title: Conclusions
paragraphs: DOD relies on its prime contractors and subcontractors to plan for and  ensure that specialty metals procured for weapon systems meet the  requirements of the specialty metal statutory provisions and contractor  self-disclosure is the primary way that DOD becomes aware of  noncompliance with this statutory provision. Some recent breaches of  domestic source restrictions have led contractors to notify the government  of noncompliance issues and since these instances occurred, DOD has  granted national security waivers for the affected programs. DOD has  recently defined procedures for requesting national security waivers for  weapon systems programs. However, DOD’s lack of a mechanism to  disseminate information to its key stakeholders within the department’s  weapon system program offices and their supplier-base on national  security waivers granted makes it difficult for others not directly involved  with the waiver request to have awareness of the risks as well as the  consequences. Further, greater awareness of supplier-base problems  and broader dissemination of information could assist DOD in better  discovering vulnerabilities, such as systemic supply chain risks that affect  national security objectives.

section_title: Recommendation for Executive Action
paragraphs: To provide greater awareness of and compliance with the specialty metal  restrictions among DOD weapon system programs and their defense  supplier-base, we recommend that the Secretary of Defense establish a  mechanism for sharing and distributing non-sensitive information about  national security waivers throughout the department and the defense  supplier-base.

section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided us with written comments on a draft of this report, which  are reprinted in appendix III. In its comments, DOD concurred with our  recommendation to provide greater awareness of and compliance with  the specialty metal restrictions, stating that it will post non-sensitive  specialty metals national security waiver information on the Defense  Procurement and Acquisition Policy website. This publicly available  information would include the number of national security waivers  approved by DOD since 2009; the names of DOD weapon system  programs receiving them; guidance on how to request a national security  waiver, as well as guidance for applying specialty metals’ restrictions to  high performance samarium-cobalt magnets. We believe that this is a  positive step towards enhancing the public transparency of future national  security waivers for non-compliant specialty metals. DOD is considering  resuming the issuance of notification reports when a specialty metals’  noncompliance has occurred. We believe that disseminating this  information across DOD could help officials working on other DOD  programs assess whether similar non-compliance issues may affect  them. We also received technical comments from the Department of the  Interior and the DOD prime contractors included in our review, which we  incorporated into this report as appropriate.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretary of the Interior, and  other interested parties.

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 this report. GAO staff who made key contributions to this report  are listed in appendix IV.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report focuses on planning, compliance, and national security  waivers for specialty metals used in Department of Defense (DOD)  weapon systems. Specifically, we assessed (1) how DOD meets its  needs for specialty metals parts and ensures compliance with the  specialty metals restrictions, and (2) DOD’s process for providing national  security waivers for specialty metal procurements and the extent to which  it disseminates waiver information throughout the department.

To assess how DOD officials meet their needs for specialty metals used  in DOD weapon systems and ensure compliance with specialty metals  restrictions, we examined laws and regulations regarding specialty metals  domestic source restrictions, including the Defense Federal Acquisition  Regulation Supplement (DFARS) and DOD guidance relating to planning  for and compliance with specialty metals and related requirements of the  Federal Acquisition Regulation (FAR). We reviewed DOD guidance on  planning for weapon systems procurements and manufacturing; guidance  on purchasing system reviews and quality assurance from the Defense  Contract Management Agency and U.S. Navy Supervisors of  Shipbuilding, Conversion and Repair; Defense Logistics Agency’s reports  on strategic and critical materials that identified materials with projected  availability risks; and U.S. Geological Survey’s price information for  titanium to identify historical fluctuations in pricing and availability for  specialty metals. We also interviewed officials from DOD, including the  Office of the Under Secretary of Defense for Acquisition, Technology, and  Logistics (USD AT&L), the Defense Contract Management Agency  (DCMA), and selected weapon system programs, as well as their prime  contractors, two selected subcontractors, and specialty metals company  representatives. We ascertained their roles in determining the needs for  specialty metals parts and monitoring compliance with specialty metals  restrictions and related requirements of the FAR and the DFARS. We  also interviewed and obtained written responses to questions on specialty  metals planning from six prime contractors responsible for five major  DOD weapon systems programs,. The programs we selected were: the F- 35 Joint Strike Fighter (Joint Strike Fighter), KC-46 Tanker, DDG-51  Destroyer, Virginia Class Submarine, and Family of Medium Tactical  Vehicles, to identify how these programs plan for specialty metals needs  and ensure contract requirements are met. We selected a non- generalizable sample consisting of these five DOD weapon system  programs, based on their greatest total acquisition cost estimates as of  November 2013. Our selection process also ensured that at least one  program was selected from among each of the military services and from  the following four acquisition lifecycle phases: (1) between development  start and production start (e.g., the U.S. Air Force’s KC-46 Tanker); (2)  between production start and initial capability (e.g., DOD’s Joint Strike  Fighter); (3) in production and passed initial capability (e.g., the U.S.  Navy’s DDG-51 Destroyer and Virginia Class Submarine); and (4) nearing  the end of production (e.g., the U.S. Army’s Family of Medium Tactical  Vehicles). We interviewed and obtained written responses to questions  and related contractor documents from these prime contractors regarding  specialty metals availability, planning activities on these programs, and  the methods they use to ensure quality assurance and oversee  subcontractors and suppliers. Our findings from these five programs  cannot be generalized to all programs, but they provide useful insights  into how DOD officials and contractors work to address requirements  associated with specialty metal restrictions.

In reviewing these programs, we also obtained answers to written  questions regarding specialty metals planning and quality assurance from  DOD quality assurance staff overseeing these programs, including the  Defense Contract Management Agency (DCMA) and the Navy. We  reviewed the results of DOD’s purchasing system reviews for the six  prime contractors in our review to determine whether specialty metals  requirements were flowed down to subcontractors consistent with  DFARS. We also reviewed written responses to questions regarding how  these agencies oversee the prime contractors to help ensure compliance  with their government contracts, including specialty metals domestic  source restrictions. Further, we reviewed the contracts to determine what  requirements related to specialty metals planning and quality assurance  were included, as well as the exceptions to domestic source restrictions  applicable to some of these programs, such as the KC-46 Tanker’s  commercial derivative military article exception. We obtained updated  information regarding these methods from the prime contractors included  in our review.

We reviewed and analyzed the six national security waivers that the USD  AT&L approved from fiscal years 2009 through 2014. These six national  security waivers included the B-1 Bomber Reliability and Maintainability  Improvement Program, F-16 Block 52 Aircraft, Ground/Air Task Oriented  Radar, Joint Strike Fighter radar and target assemblies parts for  positioning external doors, nose and main landing gear, and Standard  Missile-3 Block II-A All Up Rounds. We also assessed whether these  waivers contained required elements, including whether Congress was  provided advance notifications of the national security waiver  determinations before they were executed as required in accordance with  the statue and regulation. In addition, we obtained documents and  interviewed officials from DOD’s Defense Procurement and Acquisition  Policy office to review their process for granting national security waivers,  including how they make determinations to grant the six waivers for  national security and the extent to which DOD disseminates this  information throughout the department. We assessed the extent to which  DOD disseminates information on national security waivers it has granted  consistent with criteria in Standards for Internal Control in the Federal  Government. We reviewed prime contractor and subcontractor corrective  action plans that were submitted to DCMA regarding noncompliant  specialty metals and also examined the congressional notification letters  relating to national security waivers that DOD provided to congressional  defense committees. We met with officials at the C-130 program office at  Wright-Patterson Air Force Base, in Dayton, Ohio to discuss possible  plans to request a national security waiver and to discuss their experience  in requesting a national security waiver. We did not assess whether other  exceptions to the specialty metals restrictions were available under the  facts and circumstances present for these waivers we reviewed.

We conducted this performance audit from December 2013 to October  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  based on our audit objectives.

section_title: Appendix II: Exceptions to the Specialty Metals Restriction Requirements and Qualifying Country Exception
paragraphs: The specialty metals domestic source restrictions (10 U.S.C. § 2533b),  summarized below, provide exceptions for:

Waiver for national security interests;

Compliant specialty metals are not available in satisfactory quality and  sufficient quantity, in the required form, and cannot be procured when  needed;

Acquisitions made outside of the United States in support of combat

The use of other than competitive procedures, in accordance with the  Competition in Contracting Act (10 U.S.C. 2304(c)(2) for  circumstances of unusual and compelling urgency of need;

Compliance with agreements with foreign governments;

Commissaries, exchanges, and other non-appropriated fund

Small purchases (below the simplified acquisition threshold);

Acquisition of some commercial items;

Acquisition of certain commercial-off-the-shelf items;

Acquisition of components if there is less than 2 percent of  noncompliant metal (called the “de minimis” exception);

Acquisition of certain commercially derivative defense articles; and

Acquisition of certain noncompliant materials if the Secretary of  Defense certifies in writing that acceptance of such materials is  required for reasons of national security, including certain conditions  and requirements.

In addition, the specialty metals clause (DFARS 225.252.7009) requires  that specialty metals procured for Department of Defense articles must be  melted or produced in the United States, its outlying areas, or a qualifying  country. There are 23 qualifying countries, as shown in the table below.

section_title: Appendix III: Comments from the Department of Defense

section_title: Appendix IV: 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, Lisa Gardner, Assistant Director;  Keith Hudson; Jean McSween; Sean Seales; Robert Swierczek; Marie  Ahearn; Kenneth Patton; and Hai Tran made key contributions to this  report.


Question-summary annotations: questions: question: What does the Department of Defense typically rely on?
answer: The Department of Defense (DOD) typically relies on its prime contractors to plan for the procurement of specialty metals and ensure compliance with specialty metals' restrictions for the five weapon systems programs that GAO reviewed.

question: What did GAO find about the five weapon systems programs?
answer: For these programs, GAO found that DOD plays a limited role—primarily monitoring the availability of specialty metals and conducting periodic reviews of prime contractor quality assurance processes.
child_questions: question: What did GAO find about the contracts of these programs?
answer: GAO also reviewed contracts for these five programs and found they contained clauses that require prime contractors to procure specialty metals in compliance with domestic source restrictions, ensure that delivered items meet contract requirements as part of quality assurance, and maintain processes for future material needs.

question: What standards do contractors require subcontractors and defense suppliers to follow?
answer: These standards include, among other things, testing subcontractor processes to determine if they meet contractual specifications; reviewing required supplier certifications for items delivered under the contract to confirm compliance with all identified requirements; and rating subcontractors using performance metrics.

questions: question: Why did DOD grant six national security waivers to five different weapon system programs?
answer: Since 2009—when specialty metals restrictions were changed and the exception for national security was added—DOD has granted six national security waivers to five different weapon system programs known to have procured noncompliant specialty metals.
child_questions: question: Why were some of these waivers noncompliant?
answer: Five of the six waivers were for samarium-cobalt magnets, which were noncompliant largely due to a change in a previously allowed exception for these magnets.

question: What weaknesses did GAO find with DOD's waiver process?
answer: During its review, GAO identified weaknesses in DOD's waiver process such as not having defined procedures for requesting waivers; and in June 2014, DOD developed written guidance for program offices to follow when requesting these waivers. However, GAO also found that DOD does not have a mechanism to share information on national security waivers granted for noncompliant specialty metals.

question: How could DOD better discover potential vulnerabilities?
answer: Disseminating non-sensitive information—including the names of programs that received waivers, sources of the noncompliant specialty metals, and corrective actions—to key stakeholders, such as DOD weapon system program offices and their defense suppliers, could help raise awareness of and compliance with the specialty metals restrictions. Moreover, greater awareness of supplier-base problems and broader dissemination of national security waiver information could assist DOD in better discovering potential vulnerabilities, such as systemic supply chain risks that could impact national security objectives.

questions: question: Why are specialty metals essential to DOD weapon systems?
answer: Specialty metals—such as titanium, certain steel alloys, and samarium-cobalt alloy magnets—are essential to DOD weapon systems due to their unique properties, such as being highly durable.
child_questions: question: What does federal statute require with regards to these specialty metals?
answer: Federal statute requires specialty metals used in weapon systems to be procured from domestic sources or qualifying countries.
child_questions: question: Why can DOD waive this federal statute?
answer: However, the law allows DOD to waive this requirement in the interest of national security.

question: What was GAO mandated to review?
answer: GAO was mandated by a House report accompanying a bill for the National Defense Authorization Act (NDAA) for Fiscal Year 2014 to review DOD's compliance with specialty metals requirements.

questions: question: What does this report assess?
answer: This report assesses (1) how DOD meets its needs for specialty metals parts and ensures compliance with restrictions, and (2) DOD's process for providing national security waivers for specialty metal procurements and the extent to which it disseminates waiver information throughout the department.

question: How did GAO collect information for this report?
answer: GAO reviewed contracts, laws, regulations and DOD guidance, and analyzed a non-generalizable sample of five weapon systems as case studies based on their total 2013 acquisition costs, among other things.
child_questions: question: How else did GAO collect DOD-specific information?
answer: GAO also reviewed national security waivers DOD granted since 2009 and interviewed DOD and contractor officials.