Recovery Act: Contracting Approaches and Oversight Used by Selected Federal Agencies and States
Released: 2010-07-15T00:00:00

Letter

Background

The Recovery Act was enacted on February 17, 2009, to help stimulate the United States economy by creating new jobs, as well as saving existing ones, and investing in projects that will provide long-term economic benefits. The Recovery Act requires that the President and heads of the federal agencies manage and expend Recovery Act funds to achieve the act’s purposes as quickly as possible and consistent with prudent management. In addition, the Recovery Act requires contracts funded under the act to be awarded as fixed-price contracts through the use of competitive procedures to the maximum extent possible. The Office of Management and Budget (OMB) issued guidance for implementing the Recovery Act and meeting “crucial accountability objectives” of the act, including, for example: timely awarding of Recovery Act funds; reporting on the use and public benefit of those funds; and ensuring that those funds are used for authorized purposes while mitigating the potential for fraud, waste, error, and abuse.

In addition to these objectives, OMB supplemental guidance also provides other goals that agencies are to consider when using Recovery Act funds. Among those goals are investing in efforts that will provide jobs and have long-term public benefits, promoting local hiring, providing maximum practicable opportunities for small businesses, and supporting disadvantaged businesses. The guidance also identifies activities agencies should consider to mitigate risks, including determining what contract award methods will allow recipients to commence expenditures and activities as quickly as possible; providing oversight for non-fixed-price contracts that may be riskier to the government; and reviewing internal procurement rules to promote competition to the maximum extent practicable.

Federal agencies using Recovery Act funds on contracts must take a number of new steps related to the solicitation of offers and award of contracts. For instance, to enhance the transparency to the public, the Federal Acquisition Regulation (FAR) was amended to require federal agencies to publicize on www.fedbizopps.gov contract actions that will be funded by the Recovery Act. The description on the Web site of the supplies and services should be clear and unambiguous to support public understanding of the procurement. After awarding a contract using other than fixed-price or competitive approaches, federal agencies are also required to publicize the rationale for doing so on the Web site. In addition, federal agencies should use specific codes when entering Recovery Act contract actions into FPDS-NG to indicate that Recovery Act funds are being used, in whole or in part. The FAR was also amended to implement the Recovery Act requirements that: only American-produced iron, steel, and manufactured goods be used in Recovery Act construction projects; access be provided for Comptroller General and IG audits and reviews of Recovery Act contracts and subcontracts; and whistleblower protections be provided. The act also requires the payment of at least locally prevailing wages to contractor employees working on Recovery Act projects, in accordance with the Davis-Bacon Act.

Federal agencies are generally required to obtain full and open competition through competitive procedures when awarding government contracts, unless an exception to competition applies. Some authorized exceptions include when the supplies or services needed by the agency are available from only one responsible source and no other supplies or services will satisfy the agency’s needs; the agency’s need for the supplies or services is of such an unusual and compelling urgency that there would be serious injury if the agency were not permitted to limit the number of sources; or a statute expressly authorizes that the acquisition be made through another agency or from a specified source, such as SBA’s 8(a) program.

In most cases, the use of noncompetitive contracting procedures must be properly justified in writing and certified by the appropriate agency official. The competition requirements that apply to federal agencies do not apply to the states, each of which has its own contract competition requirements.

Additionally, purchases of supplies or services that are under certain dollar thresholds (usually from $3,000 to $100,000) may be acquired through the use of simplified acquisition procedures. These procedures provide a streamlined approach to procurements as a way to promote efficiency and economy in contracting. While full and open competition procedures do not apply to simplified acquisitions, federal agencies are still required to promote competition to the maximum extent practicable. When using simplified acquisition procedures, federal agencies can solicit from one source if they determine that only one source is reasonably available.

Section 8(a) of the Small Business Act authorizes SBA to create a business development program to help small, socially and economically disadvantaged businesses compete in the American economy, including gaining access to the federal procurement market. This program, known as the 8(a) program, authorizes contracting by using procedures other than full and open competition, such as awarding sole-source contracts. Under the 8(a) program, when the anticipated value of a contract is below the “competitive threshold”—$5.5 million for acquisitions involving manufacturing and $3.5 million for all other acquisitions—the contract should be awarded on a sole-source basis to an eligible 8(a) business. Contracts above the competitive thresholds can be awarded based on competition limited only to 8(a) businesses when there is a reasonable expectation that at least two 8(a) businesses will submit offers. Sole- source contracts of any value may be awarded to businesses owned by an eligible Indian tribe or an Alaska Native Corporation. Federal agencies are not required to provide written justification for sole-source contracts awarded under the 8(a) program, but regulations specify percentages of the work that must be performed by the 8(a) business with its own resources. The OMB Recovery Act implementing guidance encourages federal agencies to take advantage of authorized small business contracting programs, which may include the use of noncompetitive contracts, to create opportunities for small businesses.

The Recovery Act provided an unprecedented level of funding for programs to be administered within the states at various levels. Recovery Act funds are being distributed to states, local entities, and individuals through a combination of formula and competitive grants and direct assistance. Nearly half of the approximately $580 billion associated with Recovery Act spending programs will flow to states and localities through about 50 state formula and discretionary grant programs as well as about 15 entitlement and other programs. Some of the funds are passed from the federal agencies through state governments to local governments, while other funds are provided directly to local governments or individuals by the federal agencies.

As we previously reported, states are taking various approaches to ensure that internal controls are in place to manage risk up front, rather than after problems develop and deficiencies are identified. States have different capacities to manage and oversee the use of Recovery Act funds. Many of these differences result from the underlying differences in approaches to governance, organizational structures, and related systems and processes that are unique to each jurisdiction. To provide state-level oversight of the use of Recovery Act funds, many states appointed an individual or team, often in the governor’s office, to provide overarching guidance and monitoring for the state’s Recovery Act efforts. Since many of the programs and the processes and procedures used to implement them existed before the Recovery Act funds were provided, much of the focus of the state-level oversight efforts has been on the new aspects of the Recovery Act, such as the new recipient reporting requirements and state fiscal stabilization funds.

Federal Agencies Largely Used Existing Contracts and Awarded Most New Recovery Act Contracts Competitively

More than two-thirds of the $26 billion that had been obligated on federal contracts through May 2010 was obligated on contracts that were already in place before the Recovery Act. Agencies used mechanisms such as task orders for services, delivery orders for supplies, and contract modifications to add work or funds to existing contracts. For these orders and modifications on existing contracts, the decisions to compete or not compete the underlying contracts predated the Recovery Act. About 89 percent of the Recovery Act funds obligated on pre-existing contracts were coded in FPDS-NG as being competed.

Approximately one-third of Recovery Act federal contract obligations through May 2010 was obligated on new contracts. For these contracts, the decisions on whether to compete the contracts were made after the Recovery Act was enacted. As shown in figure 1, most Recovery Act dollars obligated on new federal contracts were on contracts that were competed. The new contracts that were not competed consisted of contracts awarded under the SBA’s 8(a) program, contracts awarded using simplified acquisition procedures, and other contracts that were awarded under authorized exceptions to competition, such as only one source was available or the requirement was urgently needed. Almost 80 percent of the approximately $875 million obligated to noncompetitive new contracts went to businesses under SBA’s 8(a) program.

32% New

Between both existing and new contracts, almost 90 percent of the $26 billion in Recovery Act contracting dollars through May 2010 were obligated on competitive contract actions. See appendix I for detailed data on the obligations placed on Recovery Act contract actions by all federal agencies.

Selected Federal Agencies Focused On Expediency When Choosing Contracting Approaches for Recovery Act Programs

Officials at the five federal agencies we reviewed told us that they chose their contracting approaches to meet their primary goals of obligating Recovery Act funds quickly and to high-priority projects, which sometimes led to using noncompetitive contract actions. The act and guidance from OMB and agency officials directed agencies to obligate Recovery Act funds quickly, creating a sense of urgency on the part of contracting staff. As a result, program and contracting staff identified programs, projects, and contract vehicles that would allow them to obligate funds within short time frames. Contracting officials at some of the agencies we visited told us that they considered both the relative risks of using noncompetitive contracting approaches and the benefits of obligating funds faster than had they awarded new contracts using full and open competition. For example, the U.S. Army Corps of Engineers (USACE) chose construction projects that could be executed quickly by issuing task orders under previously awarded contracts with businesses under SBA’s 8(a) program. Further, contracting officials at USACE also noted that new sole-source contracts to 8(a) businesses typically take about 4 months to award, while a new competitive contract could take 12 to 14 months using full and open competition procedures. As shown in figure 2, most of the Recovery Act funds were obligated within the first two full fiscal quarters in which rs in which the funds were available for obligation. the funds were available for obligation.

Officials at several of the selected federal agencies explained that the use of existing contracts allowed them to obligate funds quickly. Whether an existing contract had been competed originally did not influence decisions about which of these contracts to use since the level of competition had already been established prior to the availability of Recovery Act funds. According to agency officials, programmatic priorities and the availability of contracts with the capacity to absorb and effectively use additional funding were the predominant factors in choosing which existing contracts received Recovery Act funds. Use of the 8(a) program to award new contracts allowed agencies to quickly obligate funds without competition as sole-source awards. For certain 8(a) contracts, such as those below $3.5 million, sole-source is the default contracting approach under federal regulations. Contracting officials at each of the federal agencies told us that the 8(a) program allowed them to quickly obligate funds on both new and existing contracts under $3.5 million and that the noncompetitive nature of the contracts was viewed as a trade-off for expediency and the ability to provide opportunities to small businesses.

While speed was the primary driver agencies cited for using noncompetitive contracting approaches, noncompetitive awards were also used in a small number of new contracts that we reviewed when there was only one source available for specialized equipment or a specific service. For example, several National Institutes of Health (NIH) contract actions we reviewed were sole-source contracts for specialized medical equipment. In these cases, there was only one manufacturer that could meet the requirements of the contract according to the documentation in the contract files.

At the five selected agencies, we found that all of the new noncompetitive Recovery Act contracts that required documented justification and approval for using other than full and open competition had such documentation. For most new noncompetitive Recovery Act contracts, specific documentation to justify the noncompetitive award was not required. However, we found that 21 of the new contracts awarded as of February 2010 at the five agencies we visited required documented justifications. For these 21 contracts, the contract files included the required justification and approval documentation for not using full and open competition. Almost all of the justifications we reviewed authorized a sole-source contract because there was only one responsible source and no other type of supplies of services would satisfy the agency’s requirements. Among these, about half were for purchases of proprietary parts or technology, and most of the others were contracts for utility services.

Federal Agencies Provided Varying Degrees of Additional Contract Oversight, While IGs Focused On Higher-Risk Areas

The selected agencies added additional review processes, internal reporting, and coordination steps in response to the Recovery Act. While the measures implemented vary at each of the selected agencies, all have created additional processes to increase management oversight beyond their normal practices. IGs used a risk-based approach to target their initial oversight efforts, and did not specifically target noncompetitive contract actions because IGs did not view them as high risk. At most of the selected agencies, IGs chose to focus on areas and programs they judged to be higher risk, such as grant programs, which accounted for the majority of Recovery Act funding. Alongside IG’s individual efforts, the Recovery Act also established the Recovery Accountability and Transparency Board to coordinate among the IGs and provide additional oversight.

Selected Federal Agencies Implemented Varying Degrees of Additional Oversight for Contracts Awarded under the Recovery Act

The selected agencies used existing processes to award and administer Recovery Act contracts, but they also implemented a number of additional measures intended to provide enhanced oversight. This added oversight was in response to the specific requirements of the Recovery Act and implementing guidance from OMB for greater transparency, speedy execution of projects, maximizing competition in contracting, and other priorities. According to agency officials, additional oversight measures were put in place at the agencywide level, as well as within the agency components that we reviewed.

All five of the selected agencies created working groups, committees, or other internal entities with the mission of coordinating each of the agency’s Recovery Act work. Most of these groups deal with a wide range of Recovery Act-related implementation issues and included oversight of contracting as one element of their work. Generally, officials said that they meet on a regular basis—such as monthly or weekly—and provide a venue for officials from across the agencies to provide management visibility into Recovery Act programs, discuss problems that may have arisen, and coordinate approaches by issuing formal or informal guidance. For example, DOD created the Recovery Act Working Group to coordinate implementation across the department. At weekly meetings, representatives from the Office of the Secretary of Defense and the military services provide updates on the status of Recovery Act obligations, projects in progress, relevant IG findings, and other issues. Further, similar Recovery Act coordinating groups are in place within each of the military services.

In addition to their primary Recovery Act coordination groups, some agencies also created additional subgroups to coordinate specific aspects of implementation and oversight, such as contracting. For example, HHS established an Office of Recovery Act Coordination to work across the entire agency. As part of that function, HHS established a Recovery Act Coordinators group to hold weekly meetings of key personnel from the various agency operating divisions, allowing centralized collection and distribution of management information.

Most agencies reported that they also identified a single individual to take managerial responsibility for implementation and oversight of Recovery Act programs. For example, NASA created the Recovery Act Implementation Executive position responsible for coordinating activities throughout the agency related to the administration of Recovery Act programs. Likewise, at DOD, the Principal Deputy Under Secretary of Defense in the Comptroller’s office leads the Recovery Act Working Group and is responsible for ensuring that the military services are properly administering their Recovery Act-funded programs.

Although the selected agencies reported that they awarded Recovery Act contracts through their standard contracting processes, one agency implemented additional pre-award reviews of contract actions. According to NIH officials, NIH implemented an increased review of contracts awarded noncompetitively, which allowed greater visibility into Recovery Act contracts. Typically, NIH management reviews any noncompetitive contract award over $550,000, but NIH procedures for the Recovery Act require management review of all proposed noncompetitive contracts prior to award. Across the five federal agencies, some provided additional review in other ways, such as reviews of selected projects prior to the contract award process. See appendix II for additional details on each agency.

Agencies increased the amount of internal reporting of Recovery Act activities, including contracting. In combination with the coordination groups discussed above, this internal reporting was intended to create greater visibility for Recovery Act programs. Agencies increased the amount of data provided directly to agency leadership on contract awards, as well as the frequency at which these data are updated. For example, DOE expanded an existing data system to provide more frequent reporting and performance information to a larger number of users as part of its approach to Recovery Act oversight. The system includes regularly updated financial, earned value management, performance, risk, and job creation data on DOE projects, which are available to agency officials directly and through daily summary reports. Within DOD, USACE established a weekly report to agency leadership on Recovery Act contracting activity, showing obligations, project status, and other information.

The additional oversight processes and increased volume of funding under the Recovery Act have put added demands on agency contracting staff, which agency officials said was having some impact on their ability to carry out their missions. The Recovery Accountability and Transparency Board coordinated a survey administered by IGs of contracting and grant officials at 29 agencies regarding the adequacy of contracting and grant staffing levels. Some survey respondents said that staffing was inadequate, while about half of respondents said that staffing was adequate to meet Recovery Act needs but affected non-Recovery Act work. Contracting officials at several agencies whom we met with in our site reviews also reported that there had been an impact on their staff. Officials said that staff had put in extra hours to meet Recovery Act demands, and in one case said that attention to Recovery Act contracts had led to delays on non-Recovery Act contract awards.

Most IGs for the Selected Agencies Did Not Focus on Contracts Because Other Areas Were Deemed Higher Risk

The Recovery Act provided supplemental funding to IGs to support their oversight of their agencies’ spending under the act. Table 1 shows the funding provided to the IGs for the five selected agencies.

IGs for the selected agencies reported that they used assessments of the relative risks, specific to their agencies and programs, of different Recovery Act activities to target their oversight efforts. At three of the five IG offices, these assessments did not result in a focus on contracting. The IGs for all five agencies reported that they used a risk-based approach to structuring their Recovery Act oversight work, but each considered different factors in assessing risk. They all said that the amount of Recovery Act funding received by their agency was a main factor in their focusing on program areas or projects receiving the greatest funding. Most Recovery Act spending was through grants not contracts. Other risk factors used by some of the IGs included problems identified in previous audit work, the level of experience of grant recipients, and contract characteristics such as the level of competition and whether the contract was new or existing. At three of the IG offices, the assessment results showed that Recovery Act contracting was an area of lower risk relative to Recovery Act spending through grants and loans. These offices devoted only a small portion of their Recovery Act audit work toward it. For example, HHS IG officials said that they focused on the agency’s grant programs, in large part because the amount of Recovery Act funding to be spent by HHS through grants was much greater than the amount to be spent through contracts. In addition, the HHS IG’s prior findings showed grants to be a higher-risk area. The officials said that they also took into account the risks posed by increased funding under the Recovery Act. For example, an HHS IG official said that they anticipated that some grant recipients would have little prior experience with federal funds. As a result of this risk assessment, the HHS IG conducted only limited work on contracts. This work involved two reviews that looked at administrative approvals and funding for a selection of contracts at NIH, and concluded that no further reviews were needed. The IGs review their Recovery Act audit plans periodically, generally on a semiannual basis, and revise them as warranted.

Contracting under the 8(a) program was not a focus for four of the five IGs, who did not use the 8(a) status of a business as a factor in their selection of contracts for review, and did not review 8(a) compliance issues, such as 8(a) eligibility or limits on the amount of work that can be subcontracted. The DOE IG and HHS IG did not review issues related to 8(a) contracts as a result of their risk assessments, because they did not identify contracting as a high-risk area. DOD IG and NASA IG officials said that they did not focus on issues related to 8(a) contracts beyond the 8(a) contracts they encountered in performing their programmatic reviews, and did not review 8(a) business compliance and eligibility. The eligibility determination is an issue that is within the sole purview of SBA. The SBA IG did review some 8(a) contracts and looked into the reasons specific businesses were chosen. In one of the SBA IG reviews, the resulting report did address the eligibility of two 8(a) businesses and determined that one of the two businesses was not eligible for the contract award under the 8(a) program rules.

We recently reviewed the process SBA uses to ensure that 8(a) businesses remain eligible to continue participating in the program, and found inconsistencies and weaknesses in the required annual review procedures. For example, we estimated that SBA staff at five district offices failed to complete the required review for 55 percent of 8(a) businesses. In a separate review, we recently found that $325 million in set-aside and sole-source contracts were awarded to businesses that were not eligible to participate in the program. We also have identified issues with respect to the use of 8(a) businesses that qualify as Alaska Native Corporations. Specifically, we have found that agencies have not always complied with requirements to notify SBA when 8(a) contracts with Alaska Native Corporations are modified, or to ensure that the businesses comply with limits on subcontracting.

In contrast to the other three IGs, the DOD IG and NASA IG included reviews of individual contracts as a central part of their oversight. According to DOD IG officials, they chose their approach as a result of their risk analysis. The majority of the department’s Recovery Act spending is through contracts for building construction and renovation. DOD IG officials analyzed data on the services’ planned projects and decided which ones to review based primarily on the size, location, and type of project. The DOD IG with the assistance of the military services’ audit agencies—the Army Audit Agency, the Air Force Audit Agency, and the Naval Audit Service—conducted coordinated reviews of the projects identified through the initial risk analysis. As part of those reviews, auditors gathered additional information on contract actions for the selected projects, including whether they were issued as orders or modifications under existing contracts, whether the contracts were competitively awarded, and whether a surveillance plan was in place. In addition, the DOD IG and military services’ audit agencies collected information on whether contracts for the projects they reviewed were awarded to 8(a) businesses, but the officials said that they did not assess business eligibility because this falls under the jurisdiction of the office within SBA that administers the 8(a) program. However, DOD IG officials told us that if they suspect that a business is not eligible for the 8(a) program, they refer the matter to SBA for review. The only audit work that directly focused on 8(a) businesses, other than the work of the SBA IG noted above, is a review currently being conducted by the Air Force Audit Agency, which is reviewing the eligibility of 8(a) contractors at 10 Air Force installations. As of June 2010, the Air Force Audit Agency had not yet issued its report.

As of June 2010, 141 reports had been posted on www.Recovery.gov by the IGs for the five agencies we reviewed. In 43 of the reports, the IGs touched on contracting issues. Of these, 27 were reviews of projects at individual DOD facilities issued by the DOD IG or by the military services’ audit agencies. Most of the IG reports that dealt with contracting did not identify systematic shortcomings in agency processes or Recovery Act contracts. Rather, contracting-related findings ranged from clauses omitted from individual contracts to observations on the completeness of contracting data reported by the agencies. For instance, the Air Force Audit Agency reported in its audit of Elmendorf Air Force Base that while the base’s Recovery Act contracts met several requirements, such as expediting the award process and fostering competition, they had not fully met transparency requirements because the contracting office did not provide sufficient information on the work to be completed for one project on www.fedbizopps.gov. According to Office of the Secretary of Defense and Air Force officials, Elmendorf Air Force Base subsequently reposted the project on www.fedbizopps.gov to more accurately reflect the work accomplished.

One IG report, however, noted significant shortcomings in agency contracting workforce capacity. The SBA IG determined that staffing levels in the agency’s contracting office were insufficient. The SBA IG found that because of vacant positions, contracting office staff declined from 13 to 7 personnel from June 2009 to February 2010, at a time when the office’s workload increased as a result of Recovery Act implementation. The report concluded that the current staffing of the contracting office was insufficient to award, administer, and oversee Recovery Act and other contracts, and that as a result, the risk of fraud, waste, and abuse had increased. In our discussions with SBA on the report’s findings, a senior procurement official stated that the agency has experienced further attrition in its acquisition workforce since this report was released. To address this, the agency awarded a contract to provide acquisition services for four contracting positions and plans to contract for services for six more.

For further information on how the IGs at each of the selected agencies are conducting Recovery Act oversight, see appendix II.

Selected States Vary In Their Level of Insight into Noncompetitive Recovery Act Contracts

At the state level, we were not able to determine the full extent of the use of noncompetitive contracting. The states we visited collect some aggregate data on contracts awarded by state agencies, but did not maintain data on contracting at the local level where a portion of the contracting activity occurs. These states rely on their pre-Recovery Act contracting policies and procedures, which generally require competition. With respect to oversight, each state has supplemented its state-level guidance with some additional Recovery Act-specific policies and procedures. However, the states do not routinely provide state-level oversight of contracts awarded at the local level, where a portion of the Recovery Act contracting occurs. Representatives of the five state audit organizations said they could address Recovery Act contracting issues through the internal control work performed during the state’s annual Single Audit or during other reviews of programs that involve Recovery Act funds, if contracting is identified as an area of risk.

Selected States Vary on Information Identifying Noncompetitive Recovery Act Contracts

State-level information on the type and amount of data routinely collected on noncompetitive Recovery Act contracts varied in the five states we visited—California, Colorado, Florida, New York, and Texas. Officials in some states said they are collecting or could collect data on noncompetitive contracts awarded by the state agencies. Some of the states we visited currently have some level of statewide information on noncompetitive contracts awarded by their state agencies, but with limitations. Specifically, officials in the states we visited told us the following: California’s statewide contract database does not include contracts awarded by all of its state agencies.

Colorado’s statewide contract database does not identify which contracts are funded under the Recovery Act, but noncompetitive Recovery Act contracts are manually reported to the state level.

New York’s statewide contract database includes contracts awarded by state agencies, but does not include data on contracts awarded by state authorities, such as the New York State Energy Research and Development Authority.

Florida has a statewide contract database, but it is voluntary and not routinely used by all state agencies.

Texas’ statewide contract database does not identify which contracts are funded under the Recovery Act.

Officials in California, Colorado, and Florida said that some of their state agencies have awarded noncompetitive Recovery Act contracts, while officials in New York said none have been awarded by their state agencies and officials in Texas said they were not aware of any having been awarded.

At the state agency level, we discussed the weatherization and education programs with the respective agencies responsible for managing these programs. In all five states, officials from these agencies said that they have some data on Recovery Act contracts awarded by their agencies. Moreover, state officials in all five states explained that they are not required to provide direct oversight of contracts awarded below the state agency level. As a result, they do not collect data on contracts awarded at the local levels by local governments or agencies where a portion of the Recovery Act contracting occurs. The limitations on available contract data, therefore, precluded us from performing an analysis on noncompetitive Recovery Act contracts awarded in the selected states.

Selected States Require Competitive Contracting but Their Oversight Practices Vary

According to procurement officials in the selected states, the use of competition is generally required when awarding contracts, although exemptions are permitted. Each of the selected states permits exemptions to competition when contracts are awarded to another government entity, and most also permit exemptions when responding to emergencies and when only one provider is available. In the selected states in which state- level officials were aware of the award of noncompetitive Recovery Act contracts, officials said those awards were made between government agencies or to sole-source providers. For example, an agency in one state contracted with a university to provide training, and an agency in another state contracted with businesses that were the sole providers of proprietary scientific equipment.

Each of the five states provides oversight of the award of Recovery Act contracts to varying degrees. According to officials, each state uses a combination of policies and procedures that existed prior to the Recovery Act and some additional measures to oversee these awards. Each state supplemented its existing contracting procedures with new guidance and had state agencies that realigned or hired staff to implement Recovery Act requirements. State officials explained that under existing state procedures, agencies are required to prepare justification documentation and obtain approval before they award noncompetitive contracts. In addition, state officials told us that generally state agencies are responsible for oversight of contracts their agencies award, while local entities have oversight responsibilities for contracts awarded at the local level. For example, Colorado officials approve local agencies’ procurement processes, but the local agencies acquire weatherization materials on their own using a competitive bid process.

Most Recovery Act funds to local governments flow through existing federal grant programs, while some of the funds are provided directly to local governments by federal agencies and others are passed from the federal agencies through state governments to local governments. Therefore, state officials have limited insight into contracts awarded at the local level. In California, for example, state education officials said the size of the state and its more than 1,600 local education entities made it impractical to track local contracts. Nonetheless, officials in the selected states can perform postaward reviews related to contract competition on an as-needed basis.

Officials in some of the states we visited said that they did not receive additional resources to provide oversight of Recovery Act funds. To provide additional oversight, they sometimes shifted resources to handle Recovery Act work, which at times entailed shifting resources from non- Recovery Act to Recovery Act work.

State Audit Organizations Might Address Recovery Act Contracting through Annual Single Audits or Program Reviews

Representatives of the five states’ audit organizations said that their organizations could provide additional oversight of the states’ use of Recovery Act contracting funds through the internal control work performed as part of the states’ Single Audits, and some explained that this could also be done through separate programmatic reviews if contracting is identified as an area of risk. Although contract competition is not the singular focus of the Single Audit, it nevertheless may be included as part of the internal control testing for a given program. For example, funding for weatherization programs, which increased from the pre-Recovery Act level in the selected states, falls under the Single Audit requirements. According to Florida state officials, their weatherization program funding increased from about $1.3 million before the Recovery Act to an average of $58.7 million per year over a period of 3 years. With respect to noncompetitive contracts, the audit organizations for some of the states we visited had not identified noncompetitive contracts as a risk area and did not plan any audits specifically targeted at this contracting method. Audit organization representatives in each of the five states we visited said that they were in the process of conducting reviews of some Recovery Act programs but the focus of these audits is not on noncompetitive contracts; however, they also noted that these audits could address procurement and contracting issues should they surface during the course of the audits.

At the state level—unlike the federal level—Recovery Act funds were not specifically set aside for state audit organizations to provide oversight of the use of Recovery Act funds. To focus their resources, some state audit organizations have performed risk assessments of state agencies and are planning additional programmatic reviews. These state audit organizations used risk assessments to identify programs for potential review and, in some states, to maximize the use of limited auditing resources. State audit officials told us that the factors considered in their risk assessments included dollar values of programs, previous audit findings, internal control weaknesses identified as a result of the Single Audits, whether the program was new, or whether a program received large increases in funding. As we previously reported, recent budgeting challenges for state governments have reduced staffing levels and audit organizations have not been spared from budget reductions that could limit their capacity to perform audits involving Recovery Act funds.

Conclusions

At the federal level, available data were sufficient for us to determine the extent to which agencies used competition for Recovery Act contracting, the reasons selected agencies chose not to use competition, and their approaches to contract oversight. In general, congressional and administration direction to obligate Recovery Act funds quickly led agencies across the government to rely heavily on existing contract vehicles to get work under contract. Most of these existing contracts, as well as most new contract actions, were competitive. Federal agencies have added additional oversight procedures, internal reporting, and coordination in response to Recovery Act requirements.

Federal agency IGs focused their initial oversight efforts on areas they determined to be higher risk and did not target spending under contracts, including noncompetitive contracts. While this approach may have been justified initially given competing priorities and the relatively small percentage of obligations spent on noncompetitive contract actions, the result is relatively little audit coverage of Recovery Act contract actions under SBA’s 8(a) program. This is significant for two reasons. First, the 8(a) program accounts for the overwhelming majority of noncompetitive contract obligations under the Recovery Act. Second, our prior work, some of which is quite recent and was not available to the IGs when they prepared their audit plans, has shown that safeguards designed to ensure that the program operates as intended—requiring checks on participant eligibility and limits on subcontracting—are not always implemented effectively. While we recognize that the Recovery Act guidance encourages contracting with small businesses, there is an opportunity for the IGs to reassess whether they need to focus additional audit resources on contracting under the 8(a) program, which accounts for nearly 80 percent of the new noncompetitive contract actions under the Recovery Act.

At the state level, we were not able to determine the full extent of the use of noncompetitive contracting. The five states we visited collected some aggregate data on contracts awarded by state agencies, but did not maintain data on contracting at the local level where a portion of the contracting activity occurs. As a result, we could not analyze the extent of noncompetitive Recovery Act contracting within these states. With respect to oversight, each state has supplemented its state-level guidance with some additional Recovery Act-specific policies and procedures but does not routinely provide state-level oversight of contracts awarded at the local level. State audit organizations for the selected states are focusing their audit resources on programmatic reviews rather than focusing on the use of noncompetitive Recovery Act contracts, consistent with their assessments of relative risk.

Recommendation for Executive Action

As the IGs of the five agencies we reviewed periodically revisit and revise their Recovery Act audit plans, they should assess the need for allocating an appropriate level of audit resources, as determined using their risk- based analyses, to the noncompetitive contracts awarded under SBA’s 8(a) program.

Agency and State Comments and Our Evaluation

We provided a draft of this report to DOD, DOE, HHS, NASA, SBA, and their respective IGs for comment. We received e-mail comments from DOD, HHS, and NASA, as well as the DOE IG and SBA IG, in which the agencies all generally agreed with the report’s findings and recommendation or had no comments. In some cases, the agencies provided technical comments or clarifying information, which we incorporated into the report as appropriate. We received written comments from SBA as well as the DOD IG, DOE IG, and NASA IG. The DOD IG provided the department’s official comments and agreed with the draft report and its recommendation. The DOE IG noted that DOE is one of the most contractor-dependent agencies in the government and that the DOE IG routinely considers 8(a) program contracts in its audit work. We consider the DOE IG’s audit approach to be consistent with the intent of our recommendation. The NASA IG agreed with the draft report and its recommendation and noted that it is planning work on a number of Recovery Act contracts involving 8(a) program businesses.

In its written comments, SBA noted its concern about our findings and recommendation regarding the 8(a) program. Specifically, SBA was concerned about what it viewed as our draft report’s attempt to link the legitimate use of the 8(a) program with the results of a previous GAO report that found ineligible businesses receiving contracts under the program. SBA was also concerned that our report might be suggesting that use of the 8(a) program was either inappropriate or a risky procurement choice. We did not intend to suggest that there was anything improper with agencies deciding to use the 8(a) program in implementing the Recovery Act. In fact, our report points out that OMB’s Recovery Act guidance specifically lists providing opportunities for small businesses to the maximum extent practicable and supporting disadvantaged businesses as goals for agencies using Recovery Act funds. We mentioned our prior findings regarding 8(a) eligibility only to illustrate that there may be issues that merit consideration by agency IGs as part of their overall approach to audits related to Recovery Act contracts that were not apparent when they developed their Recovery Act audit plans.

We also provided a draft of this report to representatives within the states of California, Colorado, Florida, New York, and Texas for comment. We received e-mail comments from various officials within the states of California, Colorado, Florida, and New York, including some of the state audit organizations, in which they generally agreed with the report’s findings or had no comments. Some state officials provided technical comments or clarifying information in their e-mails, which we incorporated into the report as appropriate. We received written comments from the states of Florida and Texas. Florida generally agreed with the report’s findings. Texas provided a proposed factual addition and a technical comment, which we incorporated as appropriate. Texas also made an observation that Congress had not provided funds for state oversight of Recovery Act funds. Although the Recovery Act did not provide such funds, as noted in footnote 28 there is guidance from OMB that could permit reimbursement of such state expenses under specified circumstances.

The written comments are reprinted in appendixes IV through IX.

We are sending copies of this report to interested congressional committees, as well as the Secretaries of the Departments of Defense, Energy, and Health and Human Services; the Administrators of the National Aeronautics and Space Administration and the Small Business Administration; and the Inspectors General of these five agencies. In addition, we are sending the report to officials in the five states covered in our review. The report also is available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-4841. 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 major contributions to this report are listed in appendix X.

Appendix I: Federal Agencies’ Obligations on Competitive and Noncompetitive Recovery Act Contract Actions as of May 2010

National Aeronautics and Space Administration

uisition Regulation (FAR), including, for example, sole-source contracts awarded under SBA’s (a) program as well as contracts awarded without competition under simplified acuisition procedures.

Totals exclude 456 Recovery Act contract actions for which the extent of competition was not recorded in FPDS-NG. These actions represent a total of $324,304,140 in Recovery Act obligations.

Appendix II: Key Recovery Act Programs, Spending, Contract File Review Observations, and Oversight for Selected Agencies

Department of Defense

DOD’s mission is to provide the military forces needed to deter war and to protect the security of our country. The mission of USACE, one of DOD’s construction agents, is to provide vital public engineering services in peace and war to strengthen our nation's security, energize the economy, and reduce risks from disasters.

Key Recovery Act Programs

DOD received approximately $7.4 billion in defense-related appropriations under the Recovery Act, with an additional $4.6 billion appropriated to USACE for its Civil Works Program. According to DOD’s Recovery Act plan, about 88 percent of its non-USACE Recovery Act funding is for facilities infrastructure. This includes DOD’s Facilities Sustainment, Restoration, and Modernization program, the Military Construction program, and the Energy Conservation Investment Program. The remaining funds are for the expansion of the Homeowners Assistance Program providing assistance to military and civilian families and the Near Term Energy-Efficient Technologies program. Recovery Act funds for USACE are allocated to various business programs under the Civil Works Program including emergency management, environment and environmental stewardship, flood risk management, hydropower, navigation, recreation, regulatory, and water storage for water supply. DOD program areas receiving Recovery Act funding are listed in table 2.

Recovery Act Spending

As of May 2010, DOD (including USACE) obligated more than $7.5 billion of Recovery Act funds on contracts. DOD obligated about two-thirds of its Recovery Act funds in the last two quarters of fiscal year 2009, from April through September 2009. Figure 3 shows DOD obligations of Recovery Act funds through contracts by fiscal quarter.

Most of the funds that DOD obligated under Recovery Act contract actions were on existing contracts, as shown in figure 4. Of those funds obligated on new contracts, most were obligated to competitively awarded contracts. Approximately 17 percent of obligations on new contracts were obligated to noncompetitively awarded contracts, most of which were awarded to 8(a) program small businesses.

38% New

We selected 67 noncompetitive contracts, task orders, or modifications for review at the USACE Sacramento District. Most of these actions were placed under existing indefinite delivery/indefinite quantity (IDIQ) contracts that had been awarded to 8(a) program businesses. Sacramento District contracting officials told us that they typically award IDIQ contracts to 8(a) program businesses for smaller-dollar projects as part of their regular business processes. These contract vehicles can then be used to quickly place orders for individual projects within the scope of the contract until the total value of the contract approaches the $3.5 million threshold for noncompetitive 8(a) program awards.

About half the dollars obligated under the Recovery Act by the Sacramento District—over $53 million—were used to accelerate funding of an existing project to relocate train tracks in Napa, California as part of a flood control project. This action is considered noncompetitive because the original contract was awarded sole-source to an Alaska Native Corporation in 2008, prior to the enactment of the Recovery Act; the contract was modified in 2009 to add Recovery Act funds. According to USACE officials, the Recovery Act funding accelerated the completion of the flood control project, which also decreased the total cost of the project.

Some of the Recovery Act orders at Sacramento District were administered by USACE on behalf of other DOD components, such as the Army and Air Force. For instance, USACE placed an order on an existing IDIQ contract with an 8(a) program business for work on ventilation controls in buildings at Beale Air Force Base in Roseville, California.

Table 3 provides additional details on some noncompetitive contract actions we reviewed at USACE Sacramento District. These examples illustrate the variety of services and supplies being acquired, the amount of Recovery Act funding used, and the reason a contract action was not competed.

Agency Contracts Requiring Justifications for Noncompetitive Awards

Using FPDS-NG data as of February 19, 2010, we identified 16 DOD contracts that required documented justification and approval for using other than full and open competition. Our review of these justification documents found that they included information to support the stated reason for a noncompetitive award. The most common reason, cited in 15 of the contract files, was that only one source was able to provide the product or service. Within this group, about half were contracts for utilities such as water service, while most of the others within this group were for proprietary equipment or technology that could only be provided by one business. For instance, one contract was for the purchase of replacement parts for a hydraulic system at a USACE dam. The justification stated that the contract was awarded without competition because the original manufacturer of the equipment is the only available source of replacement parts.

Agency Contract Oversight DOD efforts to provide oversight and transparency for Recovery Act activities include internal coordination, increased reporting to management, and recipient reporting.

Coordination: The Office of the Secretary of Defense (OSD) assigned the Principal Deputy Under Secretary of Defense within its Comptroller’s office responsibility for Recovery Act oversight and coordination at the department level. OSD also established the Recovery Act Defense Department Working Group, which holds a weekly meeting that includes representatives from each of the services; the IG’s office; the small business coordinator; the Acquisition, Technology and Logistics office; and other entities within DOD. According to officials, the working group’s discussions cover a variety of Recovery Act issues at a high level, some of which are specifically contracting-related, such as contract obligations and updates on specific programs.

Reporting: At the OSD level, information on Recovery Act activities, including contracting, is gathered from the individual services and FPDS- NG and compiled in the Business Enterprise Information System, which enables management to oversee DOD’s Recovery Act programs across all three services. For instance, the system includes data on contract obligations and estimated completion dates for DOD Recovery Act projects, and is updated continually. Individual DOD components have also implemented additional management reporting—for instance, USACE generates a weekly report for its leadership on the progress of Recovery Act projects.

Additional review: DOD did not create any additional levels of pre-award approval at the department level; contracting is administered by the individual services. USACE did not implement any additional levels of pre- award approval for Recovery Act contracts.

Issues: OSD officials said that no schedule or cost overrun issues have come to their attention. The only contract-related problem that they have had to address at the department level has been with recipient reporting and ensuring that recipient reports are filed by the contractors and are accurate.

IG Contract Oversight

Risk assessment: When designing its Recovery Act audit approach, DOD IG used data on individual DOD projects to assess risk and focus its efforts. The risk assessment ranked individual projects, incorporating the dollar value of the contracts, project type, location, and contract characteristics, such as the level of competition, as risk factors. DOD IG initially selected the 83 highest-risk projects based on these criteria. Once on-site reviews began, the information gathered was used to further refine the risk assessment criteria and select some additional projects.

Audit Approach: The DOD IG established a three-phase review of Recovery Act-related activities.

Phase 1, review of DOD and program-specific Recovery Act implementation plans, has been completed. These reviews found that the DOD and program plans met Office of Management and Budget (OMB) standards, although the DOD IG called for additional detail regarding how the agency arrived at its projections of the proportion of contracts that would be awarded competitively.

Phase 2 is a review of the implementation of the Recovery Act programs, focusing on the projects based on the results of the risk assessment. DOD IG identified sites to visit for the Facilities Sustainment, Restoration, and Modernization and Military Construction programs. The DOD IG’s reviews within each military service are being conducted in cooperation with the respective military service audit agencies. As part of this work, DOD IG and audit agency staff review the extent of competition and the related documentation for selected contracts. The Air Force Audit Agency is also conducting some additional Recovery Act reviews beyond those it is conducting on behalf of the DOD IG. This work is ongoing. In Phase 3, which is not yet underway, the DOD IG will provide oversight of the construction of the projects, ensure that all required reporting is taking place, and review the results of the projects.

Findings: As of June 9, 2010, the DOD IG and military service audit agencies had posted reports on about 27 individual site reviews on www.Recovery.gov. These reports have found management of Recovery Act contracting to be generally good, although they suggest areas for improvement at some specific installations, such as ensuring that all Recovery Act-related clauses are included in every contract, or developing a plan to manage recipient reporting.

Department of Energy

DOE works to advance the national, economic, and energy security of the United States; to promote scientific and technological innovation in support of that mission; and to ensure the environmental cleanup of the national nuclear weapons complex.

Key Recovery Act Programs

DOE received approximately $36.7 billion in funding under the Recovery Act. Of this, $32.7 billion was for the award of grants and contracts. However, many programs involved comparatively little contracting by DOE—for instance, the Weatherization Assistance Program ($5 billion) provided grants to states. By contrast, funding for cleanup of nuclear sites ($6 billion) is spent primarily through contracts. DOE program areas receiving Recovery Act funding are listed in table 4.

Recovery Act Spending

As of May 2010, DOE had obligated more than $7.1 billion of Recovery Act funds through contracts. Most of the DOE Recovery Act contracting funds to date were obligated within the last two quarters of fiscal year 2009, from April through September 2009. Figure 5 shows DOE obligations of Recovery Act funds through contracts by fiscal quarter.

Nearly all—almost 100 percent—of the funds that DOE obligated under Recovery Act contract actions were on existing contracts, as shown in figure 6. About 97 percent of all Recovery Act funds at DOE were on contract actions coded in FPDS-NG as awarded competitively. However, among the small amount of funds obligated through new contracts, 92 percent were obligated on noncompetitively awarded contracts.

Contract obligations

Observations from the Site Review at the Environmental Management Consolidated Business Center

Of the 16 contract actions we reviewed at DOE’s Environmental Management Consolidated Business Center, all were orders or modifications on existing noncompetitive contracts. Several added funding to existing remediation projects for sites with radioactive contamination. For example, $1.9 million in Recovery Act funds were obligated on a contract for environmental remediation for the Uranium Mill Tailings Remediation Action in Moab, Utah. Other contracts were for administrative support and involved smaller amounts of Recovery Act funds. For instance, DOE issued an order on an existing contract for monitoring and reporting support.

Table 5 provides additional details on some noncompetitive contract actions we reviewed at the Environmental Management Consolidated Business Center. These examples illustrate the variety of services and supplies being acquired, the amount of Recovery Act funding used, and the reason a contract action was not competed.

Agency Contracts Requiring Justifications for Noncompetitive Awards

In a review of FPDS data as of February 19, 2010, we did not identify any new noncompetitive DOE contracts requiring a documented justification and approval for being awarded noncompetitively.

Agency Contract Oversight

DOE efforts to provide oversight and transparency for Recovery Act activities include internal coordination, increased reporting to management, and recipient reporting.

Coordination: DOE created the Senior Advisor position in the Office of the Secretary of Energy charged with overseeing Recovery Act implementation. This official leads the Office of the Recovery Act, which holds regular meetings with key officials from each of the agency’s program and functional divisions. These meetings were held daily in the first months of Recovery Act implementation and are now held weekly. According to agency officials, a primary goal of these coordination meetings is to create strong links between the work of program offices and that of the functional offices, such as contracting, that support the programs. Topics of discussion at these meetings include the status of ongoing projects, areas of Recovery Act implementation identified as lagging, and other issues raised through review of agency data or by meeting participants. Officials said that Recovery Act coordination teams have also been established within individual DOE functional offices.

Reporting: DOE increased the amount of internal reporting as part of its Recovery Act oversight. An internal system, iPortal, reports detailed financial, earned value management, performance, risk, and job creation data on DOE projects. This system had already been in place, but was expanded for the Recovery Act to support more frequent reporting, performance dashboard displays, and an increased number of users from across the agency. The iPortal system generates automated daily and weekly reports to agency officials on key aspects of Recovery Act implementation; officials also use it to browse data on individual programs and projects. In addition, officials said that each program participates in a quarterly review of Recovery Act performance.

Additional review: According to DOE officials, all projects receiving Recovery Act funding had to be approved by the program office, the Office of the Recovery Act, the Under Secretary, and the Secretary. The projects were also reviewed and approved by OMB before contract performance could begin. After these projects completed this review process, DOE did not impose any additional levels of pre-award contract review beyond its normal processes, according to officials.

Issues: Agency officials said that they had not encountered any notable problems in implementing Recovery Act contracts.

IG Contract Oversight

Risk assessment: According to DOE IG officials, the DOE IG’s Office of Audit Services conducts an annual risk assessment, and in response to the Recovery Act, the office incorporated its programs into the existing process. Officials said that this assessment includes collective judgment of risks and vulnerabilities from the DOE IG’s previous audit work, and combines these risks with other factors such as the level of funding. DOE IG officials said that they were familiar with existing remediation contracts through their prior work, and determined that adding additional funding to them was not high risk.

Audit approach: DOE IG created a tiered approach to oversight of Recovery Act funds. Because the areas identified in the risk assessment do not emphasize contracting, only portions of the audit approach include contracting.

Tier 1: Review the department’s internal control structure and management of the most significant programs (those exceeding $500 million) under the Recovery Act.

Tier 2: Examine the efficiency and effectiveness of the department’s distribution of funds to primary recipients such as state and local governments.

Tier 3: Examine the use of funds by contract and grant recipients through transaction testing. Because grants represent a larger share of DOE Recovery Act funds, DOE IG officials said that grant programs have been the focus of the majority of their reviews.

Findings: DOE IG has released seven Recovery Act-related reports that address contracting issues. Most of these are not direct reviews of the agency’s Recovery Act spending, but rather address previously identified management issues that the DOE IG determined could have an impact on the agency’s Recovery Act programs. For example, the DOE IG issued a report on the agency’s management of contract fines, penalties and legal costs, and noted the potential impact on Recovery Act implementation.

Department of Health and Human Services

HHS’s mission is to enhance the health and well-being of Americans by providing for effective health and human services and by fostering strong, sustained advances in the sciences, underlying medicine, public health, and social services.

Key Recovery Act Programs

The Recovery Act provided over $145 billion to HHS of which the agency has allocated over $90 billion (63 percent) to improving and preserving health care. Over $25 billion or 18 percent will be used for health information technology. Spending on children and family services and scientific research and facilities make up most of the remaining funds. As of June 30, 2010 HHS has obligated over $87 billion of its Recovery Act funds, including nearly $1.3 billion in contracts and orders. HHS program areas receiving Recovery Act funding are listed in table 6.

Recovery Act Spending

Recovery Act contract obligations peaked in the fourth quarter of fiscal year 2009 at $752 million. These obligations have been below $300 million in each subsequent quarter. Figure 7 shows HHS obligations of Recovery Act funds through contracts by fiscal quarter.

Most of the funds that HHS obligated under Recovery Act contract actions, about 83 percent, were obligated on existing contracts as shown in figure 8. Of the funds used for new contract actions, 76 percent were obligated on contracts that were competed. Of the obligations on noncompetitive new contract actions, 58 percent were on actions awarded noncompetitively because of the urgency of the agency’s need, 22 percent were on actions for which only one source was available, 9 percent were on actions awarded noncompetitively under SBA’s 8(a) program, and 2 percent were on actions noncompetitively awarded under simplified acquisition procedures.

Observations from the Site Review at NIH

We selected NIH for our contract file review as it had the largest amount of noncompetitive Recovery Act actions in numbers and dollars.

The most common reason for not competing the award of a contract was that there was only one source available. This occurred on contracts for new medical and laboratory equipment for which only one business could meet the requirements of the contract. Only one source available was listed on contracts for equipment and software upgrades. In these cases, the program and contracting offices decided that it was more practical to upgrade the existing equipment than it was to purchase new equipment. These upgrades were only available through the manufacturer of the equipment and were therefore not competed. The contract files included market research that did not identify alternative sources or comparable price quotes for similar items.

Table 7 provides additional details on some noncompetitive contract actions we reviewed at NIH. These examples illustrate the variety of services and supplies being acquired, the amount of Recovery Act funding used, and the reason a contract action was not competed.

Agency Contracts Requiring Justifications for Noncompetitive Awards

Using FPDS-NG data as of February 19, 2010, we identified four contracts at HHS—three awarded at the Centers for Disease Control and Prevention and one at NIH—that required a documented justification and approval for using other than full and open competition. In each case, the contractor was selected on a noncompetitive basis because there was only one source available that could fully meet project requirements. For example, on an NIH contract for the upgrade of a system that stores pictures generated by medical imaging devices, it was determined that the incumbent contractor was the only source capable of meeting the contract requirements as it had important institutional knowledge and access to a proprietary system, and no other sources could be found. While one other source offered a competing proposal, it was to replace the system rather than upgrading the existing system, a less-cost efficient and time- consuming alternative, according to agency officials.

Agency Contract Oversight HHS efforts to provide oversight and transparency for Recovery Act activities include internal coordination, increased reporting to management, and recipient reporting.

Coordination: HHS has established an Office of Recovery Act Coordination (ORAC) which coordinates with relevant business management functions, such as public affairs, grants and contract management, financial management, budget, planning and evaluation, information technology, and the Office of the General Counsel. It also coordinates with the offices that manage appropriated funds and programs authorized under the Recovery Act. In addition to acting as the central repository for data, policies, and procedures related to the Recovery Act, ORAC prepares executive-level reports that portray the overall status of Recovery Act implementation based on individual project and activity plans. ORAC also identifies the key tasks, milestones, and activities for each project plan that require coordination with HHS program and business functions.

Additional review: NIH has established a process early in the acquisition planning stage for contracts using Recovery Act funds whereby a summary of the requirement, including any justifications for noncompetitive acquisitions, is reviewed and approved by various senior representatives to ensure that the requirement meets the intent of the Recovery Act and that the justification is supported. This document is called a Proposed Recovery Act Contract Action Approval Form. NIH contracting staff use a checklist in each contract to ensure that the files are complete and comply with Recovery Act requirements. NIH also developed detailed guidance that complements and expands guidance issued by OMB. All contract actions at NIH funded in whole or in part by the Recovery Act are subject to this guidance. Included in this guidance are additional oversight mechanisms and measures related to use of noncompetitive acquisitions.

IG Contract Oversight

The Recovery Act provided the HHS IG with $17 million in funding for oversight and review and an additional $31,250,000 for ensuring the proper expenditure of funds under Medicaid. As of May 2010, the HHS IG has used $4.8 million of these funds.

According to the HHS IG, internal risk assessments determined that the areas of greatest risk were the grant awards of the Administration for Children and Families (which is administering grant funds for expanded Head Start programs, among other programs) and the Health Resources and Services Administration, particularly those related to community health center grants. Accordingly, HHS IG officials are focusing their oversight efforts on these agencies.

By contrast, HHS IG officials determined that contracting activities, such as those we reviewed at NIH, are of comparatively lower risk. Efforts are presently focused on the identified high-risk departments and programs. While the HHS IG plans to review Recovery Act spending at colleges and universities in fiscal year 2011, these reviews will focus on compliance with grant terms.

National Aeronautics and Space Administration

NASA’s mission is to pioneer the future in space exploration, scientific discovery and aeronautics research.

Key Recovery Act Programs

NASA received approximately $1 billion in Recovery Act funds, 80 percent of which were used for Science and Exploration programs, 15 percent for Aeronautics programs, and 5 percent for cross-agency support programs which include restoration of NASA-owned facilities damaged by hurricanes and other natural disasters that occurred during calendar year 2008. NASA program areas receiving Recovery Act funding are listed in table 8.

Recovery Act Spending

Nearly half of NASA’s Recovery Act contracting funds were obligated in the fourth quarter of fiscal year 2009. Figure 9 shows NASA obligations of Recovery Act funds through contracts by fiscal quarter.

Most of the funds that NASA obligated under Recovery Act contract actions, about 89 percent, were obligated on existing contracts as shown in figure 10. Of the funds obligated for new actions, over 79 percent were obligated on contracts that were competed. For the noncompetitive new contract obligations, 64 percent were on actions awarded noncompetitively under SBA’s 8(a) program, 33 percent were on actions awarded noncompetitively because there was only one source available, and 3 percent were on actions noncompetitively awarded under simplified acquisition procedures.

Observations from the Site Review at NASA Johnson Space Center

We reviewed 10 noncompetitive Recovery Act contract actions awarded by the NASA Johnson Space Center (JSC). The largest single obligation of Recovery Act funds that we reviewed at NASA was a $15 million modification (change order) to an existing noncompetitive contract in support of Common Docking Adapter development for the International Space Station. Six contract actions in our sample were new contracts to 8(a) program businesses to provide a variety of construction services, repair services, or both at JSC. NASA cited the Recovery Act guidance directing agencies to take advantage of any authorized small business contracting program as its reason for selecting these businesses. Prior to selecting these businesses, the agency performed market research and coordinated with SBA to identify a potential pool of 8(a) program businesses. NASA then held capability briefings with those businesses from which award selections were made. Finally, there were three orders using an existing, originally noncompetitive contract to an 8(a) program business for construction oversight administration services at JSC.

Table 9 provides additional details on some noncompetitive contract actions we reviewed at JSC. These examples illustrate the variety of services and supplies being acquired, the amount of Recovery Act funding used, and the reason a contract action was not competed.

Agency Contracts Requiring Justifications for Noncompetitive Awards

In a review of FPDS data as of February 19, 2010, we identified one new NASA contract that required a documented justification and approval for use of a noncompetitive award. According to the justification for this contract, only one source was available for specific electronic systems because only one business had developed a spaceflight-appropriate version of the technology.

Agency Contract Oversight NASA efforts to provide oversight and transparency of Recovery Act- funded efforts include internal coordination, issuing guidance to the procurement community on the implementation of the Recovery Act, a prohibition on commingling of funds, greater reporting to senior management, and recipient reporting. There are weekly meetings of NASA oversight and contracting officials to coordinate Recovery Act efforts. In addition, the agency developed an internal online file management system that stores Recovery Act-related contract files and can be accessed by agency officials.

NASA issued Procurement Information Circular 09-06E to provide guidance to the procurement community on the implementation of the Recovery Act. The guidance provides instruction on a range of Recovery Act contracting topics including requisition requirements for initiating procurement actions, pre-award considerations and contracting officer responsibilities, posting and reporting requirements for contract actions, inclusion of new FAR clauses, instructions specific to construction contracts, and contractor invoicing procedures, among others. The circular also includes NASA’s process for reviewing contactor reporting under the Recovery Act.

IG Contract Oversight

According to officials, the NASA IG is reviewing Recovery Act contract actions at selected NASA centers as appropriate; this will include two types of audits, one of the administration and implementation of the contract award and another of the performance of the contractor. Officials reported that the initial administrative audits of Recovery Act contract actions through November 2009 are complete at a number of the centers including Johnson, Goddard, Langley, and Ames. As of June 2010, one contractor performance audit had been conducted. On July 1, 2010, the NASA IG issued a draft report on the combined administrative audits for NASA management’s review and comment. The NASA IG is releasing staggered performance reports and may issue a capping report, as necessary.

The NASA IG conducted an initial review of the final NASA Agency-Wide Recovery Act Plan and identified several compliance issues with respect to fulfilling requirements of the OMB guidance. According to the NASA IG memorandum, NASA’s Agency-Wide Recovery Act Plan provided insufficient detail about the agency’s broad Recovery Act goals in terms of outputs, outcomes, and expected efficiencies. In addition, the plan did not include a projection of the expected rate of competition nor a rationale for those numbers, as required by OMB guidance. Lastly, the plan did not address the use of fixed-price contracts as a percentage of all dollars spent or describe the steps planned to maximize the use of fixed-price contracts where practicable for Recovery Act-funded contracts. The memorandum was submitted to NASA on December 17, 2009. In NASA management’s response, received January 5, 2010, the Recovery Act Implementation Executive stated the agency concurred with the observations noted in this memorandum. According to NASA management’s response, at the time that the Agency-Wide Recovery Act Plan was due for submission to OMB, Congress had not concurred with NASA’s proposed activities. NASA indicated in its plan that it would provide this additional information with plan updates.

Small Business Administration

SBA’s mission is to maintain and strengthen the nation’s economy by aiding, counseling, assisting, and protecting the interests of small businesses.

Key Recovery Act Programs

The Recovery Act provides $730 million to SBA that the agency is using to expand its lending and investment programs so that they can reach more small businesses that need help. While most of SBA’s Recovery Act funds are used for loan programs, contracts are being awarded for equipment and services to support these programs. Specifically, SBA has allocated $20 million for improving technology. Most of the contract dollars are being spent in this area. SBA program areas receiving Recovery Act funding are listed in table 10.

Recovery Act Spending

Through May 2010, SBA has obligated approximately $11 million of its Recovery Act funds on contracts. SBA’s quarterly obligations have fluctuated. According to an SBA procurement official, this was generally because of the award of large, individual contracts. Figure 11 shows SBA obligations of Recovery Act funds through contracts by fiscal quarter.

SBA’s use of existing and competed contracts was very different from the other agencies we reviewed. Most of the funds that SBA obligated under Recovery Act contract actions, about 76 percent, were obligated on new contracts, as shown in figure 12 below. For the noncompetitive new contract obligations, 76 percent were on actions awarded noncompetitively under SBA’s 8(a) program, 3 percent were on actions awarded noncompetitively under simplified acquisition procedures, and 3 percent were on actions awarded noncompetitively because there was only one source available. Two percent of new contracts were awarded competitively. $6.

Observations from the Site Review at SBA

SBA is primarily using Recovery Act contracts to train, supply, and equip staff to support other Recovery Act-related activities. Most of SBA’s Recovery Act contract dollars were obligated on contracts to 8(a) program businesses.

Consistent with the fact that agencies are not required to justify in writing the use of noncompetitive contracting procedures for 8(a) program contracts, these contract files were not required to contain a justification document related to awarding a noncompetitive contract. However, the files contained documentation that described the use of the 8(a) program and included competitors’ quotes to establish price reasonableness.

Table 11 provides additional details on some noncompetitive contract actions we reviewed at the SBA. These examples illustrate the variety of services and supplies being acquired, the amount of Recovery Act funding used, and the reason a contract action was not competed.

Agency Contracts Requiring Justifications for Noncompetitive Awards

In a review of FPDS data as of February 19, 2010, we did not identify any new, noncompetitive SBA contracts requiring a documented justification and approval for being awarded noncompetitively.

Agency Contract Oversight SBA efforts to provide oversight and transparency for Recovery Act activities include increased legal review of contract awards and recipient reporting.

SBA has experienced a significant decrease in its acquisition workforce and has contracted out for contract specialists.

SBA includes a legal review for all Recovery Act contract awards. This review is not required for every non-Recovery Act award.

Inspector General Contract Oversight

The SBA IG has received $10 million in Recovery Act funds for oversight. The SBA IG’s Recovery Act Oversight Plan highlighted numerous efforts related to SBA’s contract administration practices, and oversight of Recovery Act loans and grants. In the contracting area, the SBA IG’s focus was on examining the award and administration of $20 million in information technology contracts, and evaluating the adequacy of SBA’s acquisition workforce, expenditure controls, and reporting of contract actions. In October 2009, the SBA IG added three staff members to its contract audit group to provide additional audit coverage of the procurement function.

The SBA IG has issued a memorandum to SBA’s acquisition office regarding their dramatic shortages in acquisition staff noting that the staff decreased from 13 to 5 staff members in a short period of time, straining the acquisition office’s ability to issue and provide oversight of Recovery Act contracts.

The SBA IG issued a report noting that there are numerous discrepancies in the way that actions are being recorded in the FPDS-NG. The SBA IG also issued another report that identified problems with acquisition planning and eligibility for 8(a) program businesses associated with two contracts for the Customer Relationship Management suite of applications (see table 11).

Appendix III: Objectives, Scope, and Methodology

Objectives

GAO was asked to examine noncompetitive contract awards under the American Recovery and Reinvestment Act of 2009 (Recovery Act). In response, we conducted a review to determine: the extent to which Recovery Act funding was spent using contracts, and to what extent these contract actions were awarded noncompetitively; the reasons selected federal agencies awarded noncompetitive Recovery Act contracts; the extent of oversight of Recovery Act contract actions at selected federal agencies; and state officials’ level of insight into the use of noncompetitive Recovery Act contracts within selected states.

Scope and Methodology

We analyzed Federal Procurement Data System—Next Generation (FPDS- NG) data to determine the extent to which Recovery Act funding was obligated through contract actions across the federal government. We determined that the FPDS-NG data were sufficiently reliable for the purposes of this review by comparing the information for selected agencies with information from other sources, including agency contract data and information in contract files at selected locations. As part of this analysis, we determined the amount of Recovery Act obligations under new and existing contract vehicles, as reported in FPDS-NG. Actions on the same underlying contract were grouped together; orders and modifications to contracts awarded after enactment of the Recovery Act were counted as occurring under new contracts, while orders and modifications to contracts that predated the Recovery Act were counted as existing contracts.

For our second and third objectives, we used FPDS-NG data to select five agencies for more extensive review: Department of Defense (DOD) Department of Energy (DOE) Department of Health and Human Services (HHS) National Aeronautics and Space Administration (NASA) Small Business Administration (SBA)

These agencies were identified on the basis of the volume, dollar value, and percentage of noncompetitive contract actions on which they obligated Recovery Act funds, according to data drawn from FPDS-NG on February 19, 2010. The size of the agencies was also considered.

Within each of the five agencies, we selected one contracting office at which we reviewed contract files for noncompetitive Recovery Act contract actions. As with the agencies, we chose these locations based on the volume, dollar value, and percentage of noncompetitive Recovery Act contract actions. The types of contract awards made at each location were also considered. The five contracting offices selected were the U.S. Army Corps of Engineers (USACE) Sacramento District at DOD, the Office of Environmental Management Consolidated Business Center at DOE, the National Institutes of Health (NIH) at HHS, the Johnson Space Center at NASA, and the Office of Business Operations at SBA.

At each contracting office, we reviewed all noncompetitive contract actions awarded or issued using Recovery Act funds, about 150 actions in total. Because GAO and others have previously identified shortcomings in FPDS-NG, we also asked agency officials to verify the accuracy and completeness of our lists of noncompetitive contract actions before our site visits. For each contract file, we reviewed basic information on the contract award, such as the obligation amount, as well as information on the award process, such as the reason the contract was awarded noncompetitively. These reviews were conducted on-site, except for that of NASA’s Johnson Space Center, for which we reviewed electronic versions of the contract files. We also interviewed agency contracting officials at each location regarding issues related to the contract files included in our review as well as contracting under the Recovery Act as a whole.

In addition, using FPDS-NG data, we identified all new Recovery Act contracts at the selected agencies that required documented justifications and approvals authorizing the use of a noncompetitive contracting approach, as of February 19, 2010. We limited our search to new contracts with an award type of “Definitive Contract” in FPDS-NG, and selected for review all those where the amount obligated exceeded typical thresholds for requiring a documented justification—$3.5 million for contracts with 8(a) program businesses, and $100,000 in most other cases. For each of the contracts, we obtained and reviewed materials from the contract files related to the justification for the noncompetitive award.

For each of the five selected federal agencies, we gathered information on Recovery Act contracting oversight from interviews with relevant officials, and reviews of relevant policies, reports, and other documents. We obtained similar information from the agencies’ inspectors general (IG), including their audit plans related to Recovery Act contracting. We also reviewed and analyzed applicable findings the IGs have made regarding management and oversight of Recovery Act contracting.

To determine the level of insight that state officials have into the use of noncompetitive Recovery Act contracts, we selected five states— California, Colorado, Florida, New York, and Texas—based on the amount of Recovery Act funds reported as being awarded via contracts on www.Recovery.gov and our goal of providing information on a variety of geographic locations. These states account for more than half of the Recovery Act funds awarded by contract at the state level for the 16 states that we are monitoring as part of our mandatory reporting on Recovery Act issues. For each state, we discussed with the appropriate state officials—including representatives from the governors offices, state procurement offices, and audit organizations—the extent to which the states have awarded noncompetitive Recovery Act contracts, the reasons why they did not use competition, and the level of oversight the states provide for these contracts. Additionally, we discussed these issues with representatives of the state agencies that manage the education and weatherization programs to obtain further understanding of how state agencies award and oversee contracts. It is important to note that states are not required to follow federal acquisition regulations, including those covering the award of noncompetitive contracts.

We conducted this performance audit from February 2010 to July 2010, 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.

Appendix V: Comments from the Department of Energy Inspector General

Appendix V: Comments from the Department of Energy Inspector General Mr. James Fuquay Assistant Director Government Accountability Office Via email: (fuquayj@gao.gov).

Subject: Comments on the Draft Government Accountability Office Report: RECOVERY ACT: Contracting Approaches and Oversight at Selected Federal Agencies and States (GAO-10-809)

The Office of Inspector General appreciates the opportunity to comment on the subject report. As we explained during our meetings with GAO officials and as recognized in your draft report, the Office of Inspector General employs a risk-based approach in determining how to best use taxpayer furnished resources. For the Recovery Act, as with all funds appropriated to the U.S. Department of Energy, we consider a number of factors in determining where to apply our scarce audit resources, not the least of which is the form and substance of the contracting vehicle employed.

The U.S. Department of Energy is one of the most contractor dependent agencies in the government. As a result, we incorporate the examination of applicable contract instruments into each of our audits. Regarding our Recovery Act strategy, we considered the subject area during the completion of our risk assessment. However, as your report states, we did not identify contracting as a Recovery Act high risk area. One of the primary reasons was that the Department used a significant portion of its Recovery Act funds to award grants, with virtually all of the remainder dedicated to accelerating approved scopes of work on existing contracts. As GAO notes in the Appendix to its draft, less than one percent of funding was devoted to newly awarded contracts, including those awarded to 8(a) firms. By virtually every reasonable test, such amount is immaterial to the more than $38 billion in Recovery Act funding received by the Department.

With respect to use of Recovery Act funding, the GAO is correct in stating that OIG spending has not reached anticipated levels. However, the draft report fails to recognize that this was directly tied to delays in the Department’s program start/scale-up. As we have identified in recently issued and several in-progress reviews, significant spending by the Department on a number of major Recovery Act projects/activities had only recently begun. As of June 30, 2010, however, we had obligated about $6.2 million and expended over $1.7 million of the $15 million we were provided in Recovery Act funds. We anticipate that our spending rate will significantly increase in the near term as the OIG is currently using contract independent public accountants and Federal Recovery Act specific employees to provide support for a significant number of audits at the state and local level.

Finally, the report recommends that as we revisit and revise our Recovery Act audit plans, that we should assess the need for allocating an appropriate level of audit resources, as determined using our risk-based analysis, to non-competitive contracts awarded under the 8(a) program. We do not disagree with the fundamental premise of the recommendation; however, we do not believe that the facts in this case provide a basis for it. As a matter of practice, we routinely consider contracts of this nature and have completed a number of audits in this area in the past. In fact, our Fiscal Year 2011 plan includes an audit start in this very area.

Should you have questions or desire to discuss the contents of our response, please contact me at 202-586-1949.

Appendix VII: Comments from the Small Business Administration

Appendix IX: Comments from the State of Texas

Appendix X: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

In addition to the contact named above, William T. Woods, Director; James Fuquay, Assistant Director; Shea Bader; Noah Bleicher; M. Greg Campbell; MacKenzie Cooper; Alexandra Dew; R. Eli DeVan; Kevin Heinz; W. Keith Hudson; Julia Kennon; Jean K. Lee; Teague Lyons; Jean McSween; Norm Rabkin; Morgan Delaney Ramaker; and Russ Reiter all made contributions to this report.