VA serves veterans of the U.S. armed forces and provides health, pension, burial, and other benefits. The department’s three operational administrations—VHA, Veterans Benefits Administration, and National Cemetery Administration—operate largely independently from one another. Each has its own contracting organization, though all three administrations also work with national contracting offices under the Office of Acquisition, Logistics, and Construction for certain types of purchases, such as medical equipment and information technology. VHA, which provides medical care to about 9 million veterans at 172 medical centers, is by far the largest of the three administrations and, as such, is the primary focus of our review. These VHA medical centers are organized into 18 VISNs, organizations that manage medical centers and associated clinics across a given geographic area. Each VISN is served by a corresponding Network Contracting Office, which awards contracts for goods and services needed by the VISN. VA’s Office of Procurement Policy and Warrant Management (referred to in this report as the Office of Procurement Policy), within the Office of Acquisition and Logistics, is responsible for all procurement policy matters at the VA. Figure 1 shows the organizational structure of the procurement function at VA. The 2006 Veterans Benefits, Health Care, and Information Technology Act established a requirement that VA contract competitions must be restricted to SDVOSBs and VOSBs if: 1) the contracting officer reasonably expects that at least two such businesses will submit offers, and 2) the award can be made at a fair and reasonable price that offers the best value to the government. (In this report, we refer to these two elements of the law as criteria.) This determination is known as the “VA Rule of Two.” The statute also establishes an order of priority for the contracting preferences, with the highest preference for SDVOSBs, followed by VOSBs. (In this report, we refer to these businesses collectively as SD/VOSBs.) There are a number of socio-economic programs implemented in the Federal Acquisition Regulation (FAR) that provide contracting preferences or special contracting authorities for specific groups. These include contracting preferences for small businesses overall as well as more targeted preferences such as SBA’s 8(a) Business Development Program, which assists disadvantaged small businesses. Unlike these other socioeconomic preference programs that generally apply to agencies across the federal government, the 2006 statute created a preference for SD/VOSBs that applies only to VA. In June 2016, the Supreme Court decision in Kingdomware Technologies, Inc. v. United States found that the manner in which VA had been applying the preference for SD/VOSBs was not consistent with the 2006 statute. This case arose because VA was not applying the statute’s preference in competitions for orders under the FSS, which VA uses to order medical supplies, among other things. The Supreme Court ruled that VA’s FSS orders are subject to the 2006 statute, and that the VA Rule of Two must be applied because the statute mandates its use before contracting under competitive procedures. Previously, VA considered FSS a mandatory source of supplies and services that must be used when possible, but did not require that contracting officers apply the Rule of Two when placing FSS orders. An example of a mandatory source used across the federal government is the AbilityOne procurement list. AbilityOne is a program to employ the blind and people with severe disabilities to provide supplies and services to federal customers. Federal agencies that need the specific products and services on AbilityOne’s procurement list are generally required to purchase them through the program. Contracting officers, who are authorized to commit the government to contracts, are ultimately responsible for awarding and administering contracts, including ensuring compliance with the VA Rule of Two. Within the VA contracting organizations we reviewed, the contracting officer typically designates a representative of the customer office—the organization that has requested the purchase of a good or service for its use—as the contracting officer’s representative. This individual assists with tasks that support the work of the contracting officer, such as market research, developing independent government cost estimates, and monitoring contractor performance. The 2006 statute also required VA to maintain a database of verified SD/VOSBs, and required that only firms appearing in the database may qualify for VA awards set aside for SD/VOSBs. VA’s Office of Small and Disadvantaged Business Utilization (OSDBU) maintains this database through its Center for Verification and Evaluation, which assesses whether small businesses meet the criteria for being veteran-owned and controlled by verifying self-certifications provided by the SD/VOSBs. A separate federal agency, SBA, is responsible for setting size standards (by revenue and employees) for what constitutes a small business; the threshold varies by industry. Certified SD/VOSBs—which VA has verified as owned and controlled by veterans—are listed in VA’s Vendor Information Pages (VIP). This is an online database accessible to VA’s contracting workforce and the public that includes basic information about each firm. Firms listed in this database select numerical codes based on the North American Industry Classification System to identify the types of goods and services they seek to provide to the VA; firms can do business under a variety of these codes. While SD/VOSBs that receive awards through set-asides may subcontract with firms that do not have small business status, the SD/VOSBs generally must perform a certain percentage of the work on a contract themselves. The SBA establishes regulations that govern these subcontracting limitations, which were most recently revised in May 2016. These regulations place limits on the percentage of the overall contract value that firms in particular socio-economic categories, including SD/VOSBs, may pay to subcontractors that do not belong to the same category. The purpose of the subcontracting limitations is to ensure that firms that receive awards on a set-aside basis perform a material portion of the contract themselves, rather than subcontracting a majority of the work to firms that would have been ineligible for the award. Under SBA’s revised regulations, subcontracted work performed by “similarly situated” entities—those in the same socio-economic category as the firm awarded the set-aside contract—does not count against the subcontracting limitation. Table 1 lists the maximum percentage a firm that is awarded a set-aside contract may subcontract to firms that are not in the same socio-economic category under SBA’s 2016 Subcontracting Limitations regulations. If a firm violates the subcontracting limitations, SBA’s subcontracting limitation regulation would allow the government to impose a penalty of $500,000 or, if it is greater, the dollar amount spent on subcontracted work in excess of the permitted level. Contracting officers are responsible for ensuring compliance with the terms of the contract, and, as discussed in more detail below, the terms of a contract may include a requirement to comply with SBA’s limitations on subcontracting regulation. In addition, we have reported that contracting officers were not clear who was responsible for the monitoring, and uncertain about how to conduct the monitoring. The VA’s Inspector General and SBA compliance reviews have reported similar findings. VA’s set-asides to SD/VOSBs increased following the 2016 Supreme Court decision, particularly among non-construction contract actions. The change in percentage of obligations made under set-aside contracts varied across VA contracting organizations, in part because of differences in the types of goods and services they bought. The number of SD/VOSBs certified by VA also increased, as did the number of those firms that received contract awards. VA obligations and awards for SD/VOSB set-asides increased in fiscal years 2016 and 2017, particularly fiscal year 2017, which was the first full fiscal year following the 2016 Supreme Court decision. VA obligations for SD/VOSB set-asides have increased as a percentage of total VA obligations over this period, while the percentage of obligations through other set-aside types—mostly non-veteran-owned small business set- asides—remained almost steady. VA obligated about $3.9 billion through SD/VOSB set-asides in fiscal year 2017, and VA’s overall obligations also increased. Figure 2 depicts this information. The number of individual awards—new contracts and orders—made by VA through SD/VOSB set-asides has also increased as a percentage of total VA awards from fiscal years 2014 through 2017, particularly in fiscal year 2017 following the Supreme Court decision, as shown in figure 3. VA has consistently set aside a much greater percentage of construction contracts and orders for SD/VOSBs than for other types of goods and services, according to our analysis of VA eCMS data from fiscal years 2014 through 2017. Construction accounted for about 51 percent of obligations under SD/VOSB set-asides, despite construction representing only about 15 percent of VA’s overall contract obligations during this period. VA contracting officials we spoke with stated that the market for firms performing construction services generally has a greater percentage of capable SD/VOSBs than the market for firms providing non- construction goods and services. VA contracting officers working on construction contracts told us that they experienced little effect from the policy changes related to the 2016 Supreme Court decision because they had already been setting aside most construction contract actions for SD/VOSBs. Nonetheless, there was an increase in the percentage of total obligations for construction set-asides to SD/VOSBs in fiscal year 2017, while total obligations for construction contracts declined. Figure 4 shows total and set-aside obligations for construction and non-construction contract actions in fiscal years 2014 through 2017. As depicted in figure 4, obligations for non-construction SD/VOSB set- asides increased in fiscal year 2017 both in total dollars and as a percentage of total obligations. Among obligations for non-construction SD/VOSB set-asides, the top five categories of goods and services by obligations across fiscal years 2014 through 2017 included: 1. Automatic data processing and telecommunications. 2. Information technology equipment, software, supplies, and support equipment. 3. Medical/dental equipment and supplies. 4. Professional services. 5. Housekeeping services. The percentage of obligations for SD/VOSB set-asides varied across VA contracting organizations. Among the contracting offices for VHA’s 18 VISNs—which together accounted for about 47 percent of total obligations—the percentage for SD/VOSB set-asides ranged from approximately 17 percent to 40 percent in fiscal year 2017, as shown in figure 5. Total obligations and SD/VOSB set-aside obligations also varied across VA’s three national contracting offices—the National Acquisition Center, Strategic Acquisition Center, and Technology Acquisition Center—in part because of differences in the types of goods and services they procure. The Technology Acquisition Center had a larger increase in SD/VOSB set-aside obligations than other contracting organizations in fiscal year 2017. This increase is consistent with our finding that IT-related categories were among the types of goods and services that had the highest increase in SD/VOSB obligations following the Supreme Court decision. The National Acquisition Center consistently had the lowest volume and percentage of obligations for SD/VOSB set-asides; officials noted that its areas of focus in pharmaceuticals and high tech medical equipment are markets that have little participation from small businesses and SD/VOSBs. Figure 6 shows obligations on set-aside and non-set- aside contracts and orders in these three national contracting offices over fiscal years 2014 through 2017. Data from VA’s OSDBU shows consistent increases over the last several years in the number of certified firms listed in its VIP database, with a noticeable spike following the Supreme Court decision. While the number of certified SD/VOSBs in VIP increased annually from fiscal years 2014 through 2017, the largest increase—from 8,925 to 11,926 firms— occurred in the last year of this time frame. The number of SD/VOSBs that received set-aside contracts or orders also increased over fiscal years 2015 through 2017. The largest year-to- year increase during this period was in the last year of this time frame, when the number increased from 1,174 to 1,663, as shown in figure 7. In response to the Supreme Court’s 2016 decision in the case of Kingdomware Technologies, Inc. v. United States, VA released a July 2016 policy for the Veterans First program, a revision to its 2007 policy. To develop this revised policy, officials from VA’s Office of Procurement Policy said they created an integrated project team that consisted of representatives from VA procurement leadership, the Office of General Counsel, OSDBU, and others. VA’s Office of Procurement Policy also subsequently issued a “class deviation” to the VA Acquisition Regulation to implement changes VA viewed as necessary for consistency with the Supreme Court’s decision. VA’s Deputy Senior Procurement Executive issues class deviations when necessary to allow VA’s contracting organizations to deviate from the FAR or VA Acquisition Regulation. According to VA officials, these deviations effectively replace existing policy. The Office of Procurement Policy also issued guidance to provide clarifications on certain issues. Among the guidance VA issued was a decision tree that summarized how to apply the VA Rule of Two under the new 2016 Veterans First policy. Figure 8 presents our analysis of VA’s process. VA’s Office of Acquisition and Logistics had issued an Information Letter in June 2007 that established procedures for the Veterans First program, to comply with the 2006 federal statute that directed VA to prioritize SD/VOSBs in their contracting decisions. While the basic principle of the VA Rule of Two was the same across the 2007 and 2016 policies, the 2007 policy did not provide contracting officers as many details for applying the VA Rule of Two. In contrast, the 2016 policy provides more detail on how contracting officers must implement set-asides for SD/VOSBs across different types of procurements and various steps in the contracting process, including market research and use of existing contract vehicles—such as FSS and agency-wide indefinite delivery contracts. These changes had implications for how VA contracting officers make contracting decisions and document their work. Table 2 summarizes key differences in emphasis between the 2007 and 2016 policies and the work that contracting officers must perform. VA has conducted training for its workforce on the 2016 Veterans First policy and subsequent updates and guidance. VA’s Office of Procurement Policy collaborated with the VA Acquisition Academy to provide several installments of online training to contracting officers. The academy offered initial training to contracting officers in July 2016, just after the policy was issued. Supplemental training was offered to supervisors in December 2016. In March 2018, the academy offered follow-up training for all contracting officers to provide further clarification on the Veterans First policy. These trainings focused on specific areas of frequent questions that the Office of Procurement Policy received from contracting officers, including market research, fair and reasonable price determinations, and limitations on subcontracting, among other things. These trainings were highly encouraged but not mandatory. Figure 9 details the training provided to contracting officers. VA’s Office of Procurement Policy addressed some aspects of the 2016 Veterans First policy that had caused confusion and concerns among contracting officers by providing additional guidance and policy. Contracting officers we met with told us of their initial uncertainty about whether they could use existing contract vehicles and whether they must apply the VA Rule of Two before using these vehicles under the Veterans First policy. In response to such concerns, the Office of Procurement Policy gathered frequently asked questions, and created guidance by posting answers on its website as another mechanism for providing clarification to contracting officers. VA also issued new policy and guidance to address contracting officers’ concerns about the additional work and delays associated with cases where they set-aside a solicitation for SD/VOSBs but did not receive any offers. Specifically, 28 of the contracting officers we interviewed individually and in roundtable discussions told us they sometimes had to cancel SD/VOSB solicitations for this reason and then reopen procurements without the SD/VOSB set-aside, resulting in delays in the contract award process. Other contracting officials we spoke with told us that since the implementation of the 2016 Veterans First policy, individual contract actions take longer to award on average due to the need to re- solicit in cases where they set aside solicitations for SD/VOSBs but do not receive acceptable offers, as well as due to expectations for increased documentation of the rationale for issuing a solicitation without an SD/VOSB set-aside restriction. For instance, a contracting officer at one of the VISN contracting offices we visited stated that a majority of his contract actions have involved multiple rounds of solicitations, which has increased his workload and procurement lead times. In response to such concerns, VA’s Office of Procurement Policy provided informal guidance in early 2017, followed by policy in February 2018 that contracting officers could use “tiered” or “cascading” solicitations. Under VA’s current policy, VA issues a solicitation that requests offers from multiple types of firms, or “tiers,” including SD/VOSBs, other small business types, and, potentially, large businesses. The solicitation establishes an order of preference among the different tiers. The contracting officer separates the offers based on the firms’ size or socioeconomic status, and then evaluates them in the order of preference established by the solicitation. If the award cannot be made at the first tier, the evaluation moves to the succeeding tier or tiers until an award can be made. Applying the 2016 Veterans First policy has presented challenges for contracting officers. First, the VA system that contracting officers are required to use for the initial step of market research was not designed for this purpose, and contracting officers we interviewed expressed dissatisfaction with it. Second, contracting officers we spoke with expressed confusion about conducting market research and applying the VA Rule of Two criteria—determining whether there is a reasonable expectation that two or more SD/VOSBs will submit offers and that award can be made at a fair and reasonable price that offers best value to the government. Further, contracting officers also expressed confusion on how to determine whether the prices offered by SD/VOSBs in response to a set-aside solicitation are fair and reasonable. Finally, continuing workload issues, real and perceived pressure to set aside contracts, and training not reaching all VA contracting officers are other factors that continue to contribute to the challenges. VA’s 2016 Veterans First policy requires contracting officers to use VIP as the first step in market research to identify SD/VOSBs capable of performing the work. While the use of VIP and documentation of its use had been required by the VA Acquisition Regulation since 2009, presenting it as the first step for all market research was a key change in how contracting officers use this system. Forty-one out of 60 contracting officers we interviewed individually and in roundtable discussions expressed dissatisfaction with VIP as the starting point for market research, citing difficulty in using it and lack of usefulness to conduct market research. Specifically, several of these contracting officers stated that while VIP can be used to determine whether firms are certified as SD/VOSBs, it does not contain much information to help them determine whether these SD/VOSBs will be capable of performing the contract. They also stated, and OSDBU officials confirmed, that each SD/VOSB self-selects the codes that indicate the types of goods and services it can provide, and many list a large number. As a result, a search can return hundreds of results. Twenty-six contracting officers we interviewed— either individually or in roundtable discussions—stated that they have had instances where they issued an SD/VOSB set-aside solicitation based on a VIP search returning a high number of SD/VOSB contractors that provide the desired goods or services, but no SD/VOSBs submitted offers. Many of these contracting officers stated that, because they feel they cannot rely on the VIP results, they have taken subsequent steps such as using public “sources sought” notices to gauge interest from SD/VOSBs. While this step requires additional time, they said they found it to be a better source of information for making a VA Rule of Two decision. VA OSDBU officials stated that they would like to provide contracting officers with enhanced utility for conducting and documenting market research. They acknowledged that VIP is not designed to be used as a market research tool and that the challenges contracting officers noted were not surprising. The director of OSDBU stated that VA is planning to make some improvements to its VIP database to provide better information on SD/VOSB capability, but, according to these officials, these improvements are not yet available for use. The 2016 Veterans First policy requires contracting officers to document their VIP searches in the contract file, but this requirement is being implemented inconsistently. Specifically, 29 of the 35 contract files we reviewed did not contain such documentation. The cognizant contracting officers for most of these contracts told us they conducted the VIP searches; some stated they forgot to print and attach the results to the contract file, while others stated they had difficulty printing the results. According to VA’s Veterans First policy, documenting the results of the VIP search is required to establish the contracting officer’s basis for the VA Rule of Two decision, regardless of whether the contract is set aside or not. Documenting this information in the case files, as required, provides VA with assurance that contracting officers have performed this search to support their overall market research efforts. There are a large number of certified SD/VOSBs offering various goods and services—about 12,000 as of fiscal year 2017, according to VIP data provided by the OSDBU. A number of contracting officers we met with stated that this can result in VIP searches that return a lengthy list of SD/VOSBs. As a result, the decision of whether to set aside a solicitation is often based on the second criterion of the VA Rule of Two—whether there is a reasonable expectation that the award can be made at a price that is fair and reasonable and offers the best value to VA. To meet this criterion, the contracting officer combines research and professional judgment to make a decision whether to set aside or not, according to VA officials. While these VA Rule of Two criteria have not changed since 2007, contracting officers told us that their perception of the rule’s application has changed following the Supreme Court decision and VA’s 2016 Veterans First policy. Several contracting officers we met with stated that sometimes, when they identified that there were two or more SD/VOSBs that they expected to submit offers, they set aside a solicitation without providing full consideration of this second criterion. These contracting officers told us it is difficult in some cases to make a prospective determination that they can reasonably expect to be able to make an award at a fair and reasonable price without any actual offers in-hand. Contracting officers told us that prior to the Supreme Court decision their understanding was that they had the option to set aside contract actions for SD/VOSBs when they expected that the price would be fair and reasonable. They stated that after the decision, management relayed an expectation that contracting officers must set aside contract actions to SD/VOSBs unless they can prove that they cannot reasonably expect to make an award at a fair and reasonable price. Contracting officers also told us of instances where they identified multiple SD/VOSBs likely to submit proposals, but, based on their market research, it was unlikely that an award could be made at a fair and reasonable price that offered best value to VA. Many of these contracting officers stated that, despite those findings, they focused only on the number of SD/VOSBs, in part because they felt pressure to do so from local or headquarters’ management, OSDBU, or feared protests from SD/VOSBs, which would delay the award. In two specific areas of contracting we found examples of differing approaches to addressing the challenges faced by contracting officers when applying the VA Rule of Two criteria. Prior to the Supreme Court decision, there was little use of SD/VOSB set-asides in real property leasing or for high-tech medical equipment, according to officials from contracting offices responsible for these procurements. After the decision, there was uncertainty about whether and how to apply the Veterans First policy to these areas of contracting. As illustrated in the examples below, real property officials continue to face challenges applying the VA Rule of Two to leasing, whereas high-tech medical equipment contracting officials addressed this challenge by preparing a business case and used it to apply the VA Rule of Two consistently across their contracts: Officials in VA’s headquarters Construction and Facilities Management office—responsible for planning, designing, and constructing VA facilities—told us that prior to the Supreme Court decision they did not apply the VA Rule of Two to its real property leases. These officials stated that they have found the Rule of Two to be difficult to apply. According to the officials, VHA facilities have requirements for specific size, space, and location, and there are few SD/VOSBs in this industry, so it is rare that an SD/VOSB can meet these requirements. These officials further told us that, since the Supreme Court decision, they have often set aside lease solicitations for SD/VOSBs as long as there were two firms available despite uncertainty that these firms could compete for the work at a fair and reasonable price at best value to the VA. According to these VA officials, based on guidance they received from OGC and others, they felt compelled to conduct the procurements as SD/VOSB set-asides even when they were unsure that the second criterion of the VA Rule of Two would be met. These officials stated they are often unable to make awards to those firms—either because their proposals were not acceptable, or the SD/VOSBs did not submit proposals at all. They expressed concern that the Veterans First program is being applied to leasing when, from their perspective, it is impractical to do so. They stated that these challenges in applying VA’s Rule of Two criteria have added an average of 3 to 6 months to the process of awarding a new lease, resulting in delays in developing new facilities. Similarly, officials responsible for awarding leases at one VISN contracting office we visited told us they set aside a solicitation to an SDVOSB even though only one SDVOSB responded to a sources sought notice. This action was taken, according to the contracting officials, because they were concerned that their decision would be challenged by OSDBU if they did not set it aside. They stated they had been without a broker—a firm that helps to negotiate leases—for more than a year due to challenges in applying the VA Rule of Two, making it difficult for them to move forward with any new leases. In both cases, VA officials stated that they decided to solicit on an SD/VOSB set-aside basis even though they lacked confidence that there was a reasonable expectation that two or more SD/VOSBs would submit offers and that award could be made at a fair and reasonable price that offered the best value to the government. Also, in both cases, VA had to reissue solicitations without the SD/VOSB set-aside restriction, which lengthened the time that VA procurement staff were required to spend on the acquisition and delayed the fulfillment of VA’s leasing requirements. In contrast, another VA contracting organization determined that SD/VOSB set-asides were not feasible because there was no reasonable expectation that two or more SD/VOSBs would submit offers and that award could be made at a fair and reasonable price. The National Acquisition Center’s program to procure high-tech medical equipment—such as magnetic resonance imaging and X-ray machines—historically had little participation from SD/VOSBs. Following the release of the 2016 Veterans First policy, contracting officials responsible for the program halted all non-emergency purchases for over a year while they conducted an analysis of how to apply the VA Rule of Two to purchases of high-tech medical equipment. These officials analyzed the marketplace and concluded that no SD/VOSBs manufacture such equipment, and that purchasing this equipment from SD/VOSB resellers would greatly increase costs and not present the best value to VA. The results of this analysis were summarized in an internal report that was used as documentation to support the contracting officers’ decision not to set-aside high-tech medical equipment purchases for SD/VOSBs. As a result, they continued to meet medical centers’ equipment needs through existing purchasing arrangements. The contracting officers told us they also periodically revisit their analysis to identify any opportunities to set aside specific solicitations for SD/VOSBs. Contracting officers must determine whether the price proposed by an SD/VOSB is fair and reasonable and offers the best value to VA before awarding the contract. The 2016 Veterans First policy did not change this requirement, and contracting officers are generally required to make this determination for every contract award. However, we found that many of the contracting officers we interviewed were uncertain how to balance the Veterans First preference with the determination of fair and reasonable price when lower prices were available on the open market. Twelve of the 30 contracting officers we interviewed for selected contract actions stated that it is difficult to assess whether the SD/VOSB’s offered price is fair and reasonable, and 8 stated that, in some cases, they lacked confidence in their determinations that prices were fair and reasonable. In many of these cases, contracting officers told us that they determined that a higher price was fair and reasonable in order to effectuate the Veterans First preference. For instance, a branch chief we interviewed provided five examples of purchases under $16,000 where, in recent, separate procurements, non-SD/VOSB small businesses had proposed prices for the same or substantially similar items that were about $400 to $3,000 less than those proposed by SD/VOSBs. These procurements were conducted as SD/VOSB set-asides, and awards were made to SD/VOSBs on the basis of the Veterans First preference. The FAR establishes that adequate price competition normally establishes a fair and reasonable price, and it provides methods for determining fair and reasonable pricing, such as comparing proposed prices to each other, previous prices paid for the same or similar items, published prices, or the independent government cost estimate. However, a few of these contracting officers told us that some of these comparison methods may not be reliable for offers received under SD/VOSB set-asides. They stated that they lacked the confidence that using these methods consistently provided robust and well-documented support for their decision to not award to an SD/VOSB. For example, they stated that in some instances, the independent government cost estimate is outdated, and the customer responsible for preparing it conducts limited market research. This issue is not unique to VA; in 2017, we reported on shortcomings in the usefulness and documentation of independent government cost estimates across several agencies. VA Procurement Policy officials emphasized that contracting officers must apply professional judgment and that no across-the-board standard exists—a higher price compared to non-SD/VOSBs might be appropriately found reasonable in some cases but not others, depending on many variables, including the degree of difference between the prices and the size and complexity of the requirement. However, in response to requests for clarification from contracting officers, VA officials provided conflicting informal guidance. For example, a contracting officer stated that, during a webinar training on the implementation of the Veterans First policy in late 2016, VHA’s Acting Chief Procurement and Logistics Officer said that, as a general rule, he would be hesitant to pay 5 percent more than any recent prices identified in contracting officers’ market research for the same or similar supplies or services from non-SD/VOSBs, a view he repeated when we interviewed him in spring of 2018. In contrast, the Executive Director for the Office of Acquisition and Logistics said he would not advocate paying any amount above recent prices identified in contracting officers’ market research for the same or similar goods or services from non-SD/VOSBs for any requirement. He stated that the Veterans First statute and policy did not authorize higher prices for goods and services from SD/VOSBs. According to a contracting officer we met with, he shared this view in a training session at a VA conference in March 2017, as well as when meeting with us in spring of 2018. A consistent message from senior management would provide VA greater assurance that its contracting officers have confidence when making fair and reasonable price determinations in set-aside acquisitions. In one of VA’s national contracting offices, the Strategic Acquisition Center, the Director told us that contracting officers were confused about how to implement the Veterans First policy in their work, particularly in making VA Rule of Two decisions and fair and reasonable price determinations. In order to address confusion and provide guidance to contracting officers, the Director stated that he provided a series of case studies to contracting officers that demonstrated effective application of these aspects of the Veterans First policy. Separately, other senior VA procurement officials stated that contracting office managers have a responsibility to address confusion and serve as a source of information for their contracting workforce. The judgments that VA contracting officers are asked to make—in conducting market research, making VA Rule of Two decisions, and determining whether proposed prices are fair and reasonable—can in some cases be inherently complex, and there are additional challenges that VA has faced in implementing Veterans First. There are several factors that contribute to these challenges. While VA provided training concurrently with the issuance of its 2016 Veterans First policy, the training did not reach all staff. According to VA Acquisition Academy officials, 81 percent of all VA contracting officers completed the initial training on the 2016 Veterans First policy in the summer of 2016. We reviewed academy training records for the 60 contracting officers we interviewed, and these records show that 14 of them did not take the initial training in 2016. In addition, only 52 percent of VA contacting officers completed the follow-up training on the Veterans First policy in the spring of 2018. According to the academy, the feedback provided by those that attended these training sessions was favorable, with ratings of 4.59 out of 5 and 4.75 out of 5, respectively. In communicating about the training to contracting officers, VA sent an announcement to all contracting officers, describing the training as “strongly encouraged” but not mandatory. According to VA Acquisition Academy and Office of Acquisition and Logistics officials, this is because neither of these organizations has the authority to designate training as mandatory—only VA’s Office of Human Resources and Administration has the ability to do so. GAO’s Standards for Internal Control in the Federal Government states that management should design control activities to achieve objectives and respond to risks. In doing so, management should ensure that training is aimed at developing and retaining employee knowledge, skills, and abilities to meet changing organizational needs—such as those that occurred after the 2016 Supreme Court decision. Based on our review of the training, it does not fully address the more challenging aspects of implementing the Veterans First policy, such as making fair and reasonable price determinations when acquisitions have been set aside. Establishing more targeted training on the Veterans First policy and providing this training to all contracting officers would provide the VA with greater assurance that contracting officers have the knowledge and skills necessary to implement the more challenging components of this policy. Further, without establishing the importance of training on the Veterans First policy by assessing whether to make its attendance mandatory, management is not fully communicating its importance, and contracting officers may lack the tools needed to implement this policy. As previously stated, contracting officers told us they were not always confident in applying the Veterans First policy, in part because of pressure—real or perceived—from others. Contracting officers cited perceived negative scrutiny from leadership, OSDBU, Office of General Counsel reviewers, or potential protests from SD/VOSBs as reasons for their reluctance to not set aside requirements for SD/VOSBs, or to deem prices proposed by SD/VOSBs not fair and reasonable. Contracting officers explained that objections raised from any of these parties would add time to the procurement process, and a decision to cancel a set- aside because the prices were found not fair and reasonable would require yet more time to start the solicitation process again. Some contracting officers stated that they could not risk delays in awarding contracts by pursuing an approach other than setting aside for SD/VOSBs. We noted that training slides from a 2016 conference for VA contracting officials included a statement that, “contracting officers may not know if they have properly applied the VA Rule of Two standard until a court rules on the facts of a given case.” VA’s Acting Chief Acquisition Officer stated that he is aware of these perceived pressures and stated that some of these pressures are long-standing. He stated that VA had an initial effort to communicate the Veterans First policy immediately after the 2016 Supreme Court decision, but he acknowledged that contracting officers’ confusion remains, especially regarding fair and reasonable price determinations. VHA contracting officers also noted that because their customers are hospitals, there is an inherent need to avoid delays in the procurement process to prevent an adverse effect on patient care. The effect of these pressures was exacerbated by a concern we noted among contracting officers of whether their management would fully support a decision not to set-aside a contract. The struggles that contracting officers are facing in making VA Rule of Two and fair and reasonable price determinations, as discussed above, are exacerbated by continuing workload stresses they have faced for years. In September 2016, we reported that managing workload is a challenge for VA’s contracting officers. For example, one medical center official stated that his local contracting office had at times turned away some purchase requests because it could not staff them. In November 2017, we also reported on contracting inefficiencies that affected contracting officers’ ability to provide goods and services in a timely manner and at best value to medical centers. Results from a recent survey of VA staff also illustrate existing workload stress within VA contracting. Specifically, in the Office of Personnel Management’s Federal Employee Viewpoint Survey, federal employees are asked if they believe their workload is reasonable; according to VA’s analysis of this data in 2017, 54.2 percent of the contracting officers at VA who responded said their workload was not reasonable. In many cases, clauses that require compliance with and enable monitoring of subcontracting limitations are not included in VA contracts and orders with SD/VOSBs. Contracting officers are generally aware of subcontracting limitations, but they told us they do not have sufficient time or knowledge to conduct oversight. VA conducts some audits of compliance through a separate program. While the scale of that effort has been limited, these audits have identified a number of violations. VA, however, has not shared subcontracting limitation compliance risks or practices to improve monitoring efforts. VA contracting officers are required to include two different clauses when issuing solicitations for SD/VOSB set-asides: One clause requires contractors to comply with SBA’s subcontracting limitations regulation. Another enables the VA to obtain access to the SD/VOSB prime contractor’s records to monitor compliance with subcontracting limitations. Under the first clause, an SD/VOSB must comply with the SBA regulation that limits the percentage of the amount paid by the government under the contract that may be subcontracted to firms that are not in the same socio-economic category—that is, firms that are not also SD/VOSBs. This is known as the subcontracting limitations requirement. For example, under a services contract set aside for SD/VOSB contractors, an SD/VOSB prime contractor may only subcontract to non-SD/VOSBs a maximum of 50 percent of the amount paid by the government under the contract. The purpose of the subcontracting limitations requirement is to ensure that the SD/VOSBs that are awarded set-aside contracts do not subcontract the work beyond prescribed levels, and ensure that the goal of Veterans First—to promote opportunities for veteran-owned small businesses—is not undermined. In July 2016, VA updated its standard SDVOSB and VOSB set-aside clauses to refer to SBA’s revised subcontracting limitations regulation. For example, the SD/VOSB clause defines the criteria that firms contracting with VA must meet to be eligible for SD/VOSB set-asides and requires SD/VOSBs to agree to comply with SBA’s subcontracting limitations regulation in the performance of set- aside contracts. VA’s acquisition regulations require contracting officers to include the clause in all SD/VOSB set-aside contracts. We selected 35 VHA contracts and orders for review, 29 of which were set-aside to SD/VOSBs, to determine whether they contained the July 2016 (current) version of the SD/VOSB set-aside clause. All of our selected contract actions occurred after the 2016 Veterans First policy was issued, and after VA adopted SBA’s 2016 update of its subcontracting limitation regulation, which made the prior clause obsolete. We found that 11 of the 29 contract actions did not contain the current version of the clause—it was either missing entirely or an outdated version of the clause was used (see figure 10). The contracts and orders that contained the outdated version of the clause did not reference the significantly changed version of the SBA limitations on subcontracting regulation that is currently in effect, and therefore did not reference the version of the regulation that includes the penalty provision establishing that contractors that do not comply with subcontracting limitations may be subject to a $500,000 fine. Contracting officials told us the contracting officers likely forgot to include the clause or included an outdated version of the clause by mistake. Without including the mandatory clause in the contract actions as required, VA lacks assurance that SD/VOSBs are aware of subcontracting limitations. For the second clause, establishing VA’s right to access information from SD/VOSBs to monitor their compliance with the subcontracting limitations requirement, we found that 22 of the 29 contracts and orders we reviewed did not contain this clause. VA contracting officials told us the clause was not included in the contract in some cases because the contracting officers were unaware of the requirement, which was established in a June 2011 Information Letter policy memorandum. The policy memorandum directed contracting officers to include the clause in solicitations, which the Division Chief at one VISN contracting office identified as the reason it was not included in the contracts. However, the clause would not be in effect if not contained in the contract, and a VA procurement policy official confirmed that the intent was for this clause to be included in both solicitations and contracts. Without this clause, VA could face challenges in attempting to obtain information needed from the SD/VOSBs to determine their compliance with subcontracting limitations. Omission of this clause also poses a risk to VA by hindering its ability to detect violations, enforce the subcontracting limitations requirement, and ensure that the goal of Veterans First—to promote opportunities for veteran-owned small businesses—is not undermined. In June 2018, the VA rescinded the 2011 policy memorandum and issued a class deviation to the VA Acquisition Regulation. The class deviation revised the second clause—limitations on subcontracting monitoring and compliance—and required the clause to be included in solicitations and contracts. This is an important step to communicate that this clause is required in the contract. However, as noted above, the first clause—VA’s notice of set-aside clause that requires compliance with SBA’s limitations on subcontracting regulation—is already required by a previous class deviation and was missing from 8 of 29 contracts we reviewed. Given this, it is uncertain whether this VA Acquisition Regulation update alone will ensure that the monitoring clause is included in all contracts. VA contracting officers conduct little oversight to ensure that SD/VOSBs comply with SBA’s subcontracting limitations regulations. According to the FAR, contracting officers are responsible for ensuring that the contractor complies with the terms of the contract, and, as discussed above, the terms of the contract may include subcontracting limitations. For the 29 SD/VOSB set-aside contracts and orders we reviewed, we found little evidence that contracting officers were monitoring compliance with SBA’s regulatory limitations on subcontracting requirements, which includes ensuring the VA clause that requires compliance with the subcontracting limitation is in the contract. Contracting officers we spoke with were aware of these responsibilities but cited several barriers to executing them, including high workload, a focus on awarding over administering contracts, and uncertainty of what steps to take. Senior VA procurement officials stated that monitoring the subcontracting limitations requirement has not been a high priority and that contracting officers have competing priorities and, thus, limited time available to conduct this monitoring. The VA’s limited oversight of subcontracting limitations has been a long- standing problem. In September 2016, SBA conducted a surveillance review of one of VA’s VISN contracting offices. In its review of 29 contract files, SBA found no evidence that the subcontracting limitations requirement was being monitored by contracting officers and recommended that VA take measures to ensure it conducts active monitoring. In July 2017, SBA followed up to determine what steps the VISN contracting office had taken to implement its recommendation to improve monitoring of the subcontracting limitations requirement. The SBA concluded that the VISN contracting office needed to take additional steps in order to close the recommendation. Some of the VA contracting officers we met with told us they rely on contracting officers’ representatives (COR) to monitor compliance with the subcontracting limitations and identify possible violations. CORs are generally at the location where the goods are being delivered or the services are performed to observe whether the SD/VOSB contractor is accomplishing the required work as specified in the contract. VA procurement officials told us that monitoring subcontracting limitations is the responsibility of contracting officers. In June 2011, VA’s Office of Acquisition and Logistics established the Subcontracting Compliance Review Program (SCRP) within the Risk Management and Compliance Service (RMCS) to assist contracting officers in conducting subcontracting limitations reviews. RMCS conducts its own reviews of compliance with subcontracting limitations, but the scale is limited. Specifically, RMCS conducted reviews of 95 SD/VOSB and other set-aside contracts out of thousands that were awarded since 2011, and the office is in the process of reviewing another 24 contract actions. The office selects a sample of contract actions awarded each fiscal year to review and may review other contract actions if contracting officers or other VA officials contact it with referrals of instances that warrant a review. RMCS officials told us they have received very few referrals to date. Many of the contracting officers we met with were unaware that SCRP existed, or that they could refer potential subcontracting limitations violations to it for review. However, VA’s manual describing the SCRP is housed on a portal accessible to contracting officers, and, in March 2018, VA’s Acquisition Academy training included information on the SCRP. RMCS’s subcontracting limitations reviews have identified a number of instances of non-compliance. Specifically, since 2011, the office has identified 25 instances of non-compliance with subcontracting limitations among the 95 reviews it has completed, or 26 percent of selected contract actions. For example, one review found that a VOSB contractor responsible for providing project management services paid more than the allowable percentage (50 percent) of the contract’s value to non- VOSB firms. In another example, the review found an SDVOSB contractor responsible for providing courier services paid more than 88 percent of the contract’s value to non-SDVOSB firms at about the halfway point in the contract’s period of performance. If VA’s mechanisms for monitoring and enforcing subcontracting limitations are not robust, the department exposes itself to increased risk of not detecting noncompliance. RMCS’s SCRP manual states that the evidence RMCS collects is to be provided to the contracting officer so that he or she can make a determination about whether the contractor is in compliance. The manual also outlines the various remedies available to contracting officers if an SD/VOSB is suspected of being or is found to be in noncompliance with the subcontracting limitations. A RMCS official told us that remedial actions taken with respect to noncompliant contractors are determined on a case-by-case basis and that contractors are generally provided an opportunity to correct the deficiency, if the contractor submits a viable plan. In several of the cases where the RMCS office identified non- compliance, contracting officers requested that SD/VOSBs develop a plan for becoming compliant with the subcontracting limitations requirement. For example, one plan specified additional oversight steps that the VOSB would take to ensure compliance with the subcontracting limitations, such as having the project manager provide a compliance plan to senior management for any instance of subcontracting with a non-VOSB that was anticipated to exceed a significant percentage of the total value of the contract award. RMCS officials said they had anticipated receiving additional resources to conduct the planned reviews when the SCRP was initially created but have yet to receive them. Officials stated they currently rely on three support contractor staff to conduct the reviews but are exploring the possibility of hiring additional staff to increase the number of reviews they can complete each year. In addition, the Acting Director also told us that the office has created a database that will ultimately allow contracting officers and CORs to identify contracts with which they have subcontracting limitations concerns. They have only implemented some of the database’s capabilities due to resource limitations. RMCS’s Acting Director stated she would like to grow the office and establish mechanisms to better facilitate communication between contracting officers and RMCS. She noted, however, that the lack of a permanent Director for RMCS, as well as competing funding priorities have made it difficult to establish these mechanisms. The Acting Director said she is the office’s sixth one in the past 2 and 1/2 years, and each person in this role has had other duties in addition to the position. Because VA has few mechanisms for monitoring subcontracting limitations and RMCS reviews are limited in scope, VA may not be able to detect the risk of fraud for the Veterans First program. Proactive fraud risk management is meant to facilitate a program’s mission and strategic goals by ensuring that taxpayer dollars and government services serve their intended purposes. To help agencies better address fraud, GAO’s 2015 report, A Framework for Managing Fraud Risks in Federal Programs (Fraud Risk Framework), includes a comprehensive set of leading practices that serve as a guide when developing or enhancing efforts to combat fraud in a strategic, risk-based manner. These practices include: Identifying and assessing risks. Collaborating and communicating with stakeholders—in this case, contracting officials— to share information on fraud risks. Applying lessons learned to improve the design and implementation of control mechanisms and communicating those changes to stakeholders. The Fraud Reduction and Data Analytics Act of 2015, and Office of Management and Budget guidance implementing its provisions, affirm that agencies should adhere to the leading practices identified in the Fraud Risk Framework. In our review of VA’s mechanisms for monitoring subcontracting limitations, we found that VA’s Office of Acquisition and Logistics as well as the RMCS perform some identification and assessment of risks, but that this assessment is not comprehensive. In addition, VA is not collaborating with and communicating these risks to stakeholders, as called for in GAO’s Fraud Risk Framework. By conducting a comprehensive assessment of fraud risk, VA would be better positioned to detect potential fraud related to subcontracting limitations for the Veterans First program. RMCS officials told us they were unable to comprehensively identify and assess the risks related to subcontracting limitations due to limited staff and resources. Nonetheless, they told us that they have identified certain situations—based on the reviews they have conducted to date and discussions with contracting officers—that may pose a higher risk of non- compliance with subcontracting limitations. These situations include: contracts for certain types of services, such as grounds maintenance, van transportation, and specialty trade construction; where a SD/VOSB has multiple contracts across several VISNs for the same services; and where a SD/VOSB does not have a business presence in the same geographical area where the services are being performed. They said these were higher risk situations because the SD/VOSBs have had difficulty completing the required work on their own, or the lack of a local business presence increases the likelihood that the SD/VOSB might rely on a local, non-SD/VOSB contractor to do more than the permissible portion of the work. According to RMCS officials, they have not shared information on subcontracting limitation risks with stakeholders, such as contracting officers and their management, but they agreed this could be a helpful step. By sharing information on higher risk situations, contracting officers would have a better understanding of when to refer cases to RMCS. Our prior work on subcontracting limitations, in the context of SBA’s 8(a) program, also identified situations presenting an increased risk that subcontracting limitations may be exceeded. These situations included instances when the 8(a) prime contractor proposed subcontractors that were the agency’s incumbent contractor or that had more experience in meeting the agency’s current requirement than the small business. It also included situations where the subcontractor, rather than the prime contractor, submitted documents to or corresponded directly with government officials. These situations highlight the importance of monitoring the extent of subcontracting. SBA has also identified risk factors to consider prior to contract award, such as the incumbent contractor working as a subcontractor or if the prime contractor lacks relevant experience and must rely upon its more experienced subcontractor to win the contract. In our review, contracting officers cited several contracts where subcontracting risk factors were present. In one case we reviewed, the contracting officer reported that a large business was the prime contractor on a previous water treatment services contract. After the 2016 Supreme Court decision, the contract was re-competed on a SDVOSB set-aside basis; a SDVOSB won the award and the incumbent contractor served as a subcontractor. According to the contracting officer, he suspected that the subcontractor was performing more than 50 percent of the work based on the SDVOSB’s limited capacity, but he said he did not have the authority to request information on payments from the SDVOSB prime contractor to the subcontractor. We found that neither the set-aside clause that limits subcontracting nor the monitoring clause were included in this contract, limiting the contracting officer’s ability to ensure the SDVOSB was meeting the appropriate subcontracting limitation requirement. The COR told us that the subcontractor performed most of the water treatment services work—the primary requirement under the contract—while the SDVOSB prime contractor sent invoices and conducted oversight. RMCS officials told us they have identified some helpful practices that could improve compliance with subcontracting limitations. They said they have encouraged some contracting officers to require SD/VOSBs to explain in their proposals how they planned to comply with the subcontracting limitations requirement and said that some contracting officers have also used a worksheet to collect data on the work the SD/VOSB planned to complete themselves versus subcontract. Other VA contracting officials we met with also told us about additional practices they had implemented to facilitate monitoring of compliance with subcontracting limitations. These practices included the following: require the SD/VOSB contractors to submit quarterly reports during contract performance that indicate the percentage of the work completed by the SD/VOSB contractor and any subcontractors; hold pre-award discussions between the contracting officer and the SD/VOSB about the need to comply with subcontracting limitations; and convene post-award conferences between the contracting officer and COR to discuss whether the SD/VOSB is in compliance or not. Standards for Internal Control in the Federal Government state that management should internally communicate the necessary quality information to achieve the entity’s objectives. Although RMCS provides information to contracting officers and their management through the SCRP manual and related training, RMCS officials told us that they have not included these monitoring practices among the information they have shared. Having this information could improve contracting officers’ ability to ensure compliance with subcontracting limitations. The basic premise of the Veterans First Contracting Program has not changed in the 12 years since its implementation began. However, the 2016 Supreme Court decision prompted VA to refocus and refine its policy, and implementing the refined policy and the associated VA Rule of Two across the entire enterprise of VA contracting has been challenging due to inherent complexities, perceived and real pressures to award contracts to SD/VOSBs, and inconsistent and sometimes conflicting management guidance. This environment created mixed messages and lessened some contracting officers’ confidence about how to appropriately apply the VA Rule of Two criteria, particularly in making a determination that there is a reasonable expectation that award could be made at fair and reasonable prices. Most of the contracting officers for the selected contracts we reviewed expressed dissatisfaction with VIP as the starting point for market research, citing difficulty in using it. While documentation of the VIP search results is required by the Veterans First policy, over three-quarters of the contract files we reviewed lacked such documentation. Such documentation, combined with support for overall market research efforts, provides VA with assurance that contracting officers have performed this search as part of the basis for their Rule of Two decision. These contracting officers also had some difficulty applying the VA Rule of Two, particularly in the more challenging component, determining whether they can reasonably expect prices offered by SD/VOSBs to be fair and reasonable—issues that could be mitigated by establishing more targeted training that would provide the VA with greater assurance that its contracting officers have the knowledge and skills necessary to implement this policy. Further, assessing whether training on the Veterans First policy should be designated as mandatory would provide VA with information necessary to determine if such training would be beneficial for all contracting officers. Monitoring of subcontracting limitations is an important oversight tool to ensure effective implementation of VA’s Veterans First program. Without ensuring that required contract clauses regarding subcontracting limitations are included in all SD/VOSB set-aside contracts, VA lacks assurance that SD/VOSBs are aware of subcontracting limitations. Additionally, VA’s Subcontracting Compliance Review Program has found subcontracting limitation violations and has identified some risk factors and practices for monitoring compliance with subcontracting limitations. Conducting a comprehensive assessment of fraud risk, using GAO’s Fraud Risk Framework, would help better position VA to detect potential fraud related to subcontracting limitations for the Veterans First program. Further, VA has not communicated identified risk factors and monitoring practices to stakeholders as called for in GAO’s Framework. We are making the following six recommendations to VA. The Secretary of Veterans Affairs should ensure that VA’s Director of the Office of Acquisition and Logistics, in consultation with OSDBU, takes measures to ensure that VA contracting staff adhere to the requirements for documenting the required Vendor Information Pages searches in contract files. (Recommendation 1) The Secretary of Veterans Affairs should ensure that the Director of VA’s Office of Acquisition and Logistics directs the VA Acquisition Academy to provide more targeted training for the more challenging components of implementing the Veterans First policy, such as making fair and reasonable price determinations. (Recommendation 2) The Secretary of Veterans Affairs should, in consultation with VA’s Office of Human Resources and Administration, and the Director of VA’s Office of Acquisition and Logistics, assess whether training on the Veterans First policy should be designated as mandatory and take appropriate action based on the assessment results. (Recommendation 3) The Secretary of Veterans Affairs should ensure that the Director of the Office of Acquisition and Logistics establishes a mechanism to ensure that mandatory clauses relating to subcontracting limitations are consistently incorporated in all contracts that are set aside for SD/VOSBs. (Recommendation 4) The Secretary of Veterans Affairs should ensure that the Director of the Office of Acquisition and Logistics conducts a fraud risk assessment for the Veterans First program. (Recommendation 5) The Secretary of Veterans Affairs should ensure that the Director of the Office of Acquisition and Logistics directs the Risk Management and Compliance Service to share, through guidance, training, or other methods, subcontracting limitation risks and monitoring practices with contracting officers and their management. (Recommendation 6) We provided a draft of this report to the Department of Veterans Affairs and the Small Business Administration for review and comment. VA provided written comments on the draft report. In its comments, which are reprinted in appendix II, VA concurred with all of our 6 recommendations. SBA provided technical comments, which were incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Veterans Affairs, the Administrator of the Small Business Administration, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or by email at oakleys@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. You requested that we examine changes to how the Department of Veterans Affairs (VA) implements the Veterans First program as a result of the Supreme Court’s decision. In June 2016, the Supreme Court’s decision in Kingdomware Technologies, Inc. v. United States clarified conflicting interpretations of the requirement for the preference, concluding that VA must restrict competition to veteran-owned small businesses if the contracting officer reasonably expects that at least two such businesses will submit offers and the award can be made at a fair and reasonable price that offers best value to the United States. This report assesses: (1) how VA procurement obligations to veteran-owned small businesses changed in the period from fiscal years 2014 through 2017; (2) what actions VA has taken to update Veterans First policies and regulations and provide training following the Supreme Court’s decision; (3) what challenges, if any, VA is encountering in applying Veterans First policies; and (4) the extent to which VA has mechanisms in place to monitor compliance with subcontracting limitations by veteran-owned small businesses, and the effectiveness of such mechanisms. To assess how VA procurement obligations to veteran-owned small businesses changed in the period from fiscal years 2014 through 2017, we obtained data from VA’s Electronic Contract Management System (eCMS) on all contracts from fiscal years 2014 through 2017, chosen to provide data before and after the Supreme Court decision. We chose to exclude orders reported in Express Reports—summaries of multiple orders placed on existing contracts—from our analysis. These actions were only consistently reported in eCMS starting in 2017; because they represent billions of dollars of obligations with relatively little set-asides to service-disabled veteran-owned small businesses and veteran-owned small businesses (SD/VOSB), including them would have distorted year- to-year comparisons of percentages set aside for SD/VOSBs. We analyzed these eCMS data to determine changes in the use of set-asides for SD/VOSBs relative to overall VA contracting obligations during this period. We used this analysis to determine the extent to which VA set- aside contract obligations to SD/VOSBs in the period after the Kingdomware decision compared to the period before the decision. We adjusted obligations for inflation to fiscal year 2017 dollars using the fiscal year gross domestic product price index. We also analyzed the data to identify patterns of set-asides as a percentage of obligations among different contracting activities and across VA contracting organizations. To determine the extent to which new businesses are obtaining SD/VOSB certification, we obtained Vendor Information Pages (VIP) data from VA’s Office of Small and Disadvantaged Business Utilization (OSDBU) for fiscal years 2014 through 2017. We used these data to identify the change in the total number of certified SD/VOSBs in VIP during this period. We also analyzed VA’s eCMS data to determine the number of unique, individual SD/VOSBs that received awards for set-asides during the same period. With these data from VIP and eCMS, we compared the number of certified SD/VOSBs to the number of businesses awarded set- asides for each year during this period. To assess reliability of these data, we also reviewed available eCMS documentation and interviewed officials responsible for maintaining eCMS data to gather information on processes, accuracy, and completeness of these data. We determined that these eCMS and VIP data were sufficiently reliable for the purpose of describing changes in VA’s use of SD/VOSB set-asides over this period. To assess what actions VA has taken to update Veterans First policies and regulations and provide training following the Supreme Court’s decision, we analyzed policies, regulations, guidance, and training materials related to the program, and compared these to what VA had in place prior to the decision. We obtained and analyzed the program’s initial Information Letter, policy memorandum, and revisions to VA’s Acquisition Regulations, which detailed the Department’s intention to comply with federal statute. We also obtained and reviewed additional program documentation, including briefings, presentations, and training provided to contracting officers. We met with leadership at VA’s national contracting organizations to discuss implementation of the Veterans First policy within their organizations, and interviewed senior officials in VA’s Office of Acquisition and Logistics—including Office of Procurement Policy and VA Acquisition Academy—OSDBU, Office of General Counsel, and the Veterans Health Administration’s (VHA) Procurement and Logistics Office to discuss policies, guidance and training regarding the Veterans First program. To assess what challenges, if any, VA is encountering in applying the Veterans First policy, we gathered documentation from six contracting organizations across the VA. We conducted reviews of eCMS data to determine VA’s use of set-asides and the increase in the use of set- asides for all VA contracting organizations. Based on our analysis of these data, we determined that VHA had the greatest use of set-asides in fiscal year 2017. As such, we conducted site visits at a non-generalizable selection of three VHA regional offices, known as Veterans Integrated Service Networks (VISN). The three VISNs we selected are as follows: VISN 8: St. Petersburg, Florida Network Contracting Office 8 Orlando, Florida VA Medical Center Tampa, Florida VA Medical Center VISN 12: Westchester, Illinois Network Contracting Office 12 Hines, Illinois VA Medical Center Milwaukee, Wisconsin VA Medical Center VISN 16: Ridgeland, Mississippi Network Contracting Office 16 Jackson, Mississippi VA Medical Center New Orleans, Louisiana VA Medical Center We focused our site visits on VHA, because it is the largest contracting organization in the Department. We selected these VISNs primarily based on changes in total contract obligations to SDVOSBs and VOSBs from fiscal year 2015 to fiscal year 2017—the first full fiscal years before and after the Supreme Court decision—selecting two with among the largest percentage changes, and one with the lowest. The first site visit to VISN 8 was chosen because it had a high change in the percent of obligations on SD/VOSB set-asides from fiscal years 2015 through 2017 and high total obligations in fiscal year 2017. After completing the first site visit, we decided to exclude obligations for construction-related contracts, as our analysis of VA’s eCMS data found that construction had not been affected much by the 2016 Veterans First policy because the majority of construction contracts have always been—and continue to be—awarded to SD/VOSBs. The second site visit to VISN 12 was chosen because it had a low change in the percent of non-construction obligations on SD/VOSB set-asides from fiscal years 2015 through 2017 with high total non-construction obligations in fiscal year 2017. The final site visit to VISN 16 was chosen because it had a high change in the percent of non- construction obligations on SD/VOSB set-asides from fiscal years 2015 to 2017 with high total non-construction obligations in fiscal year 2017. At each selected VISN, we interviewed the VISN Deputy Network Director. We also obtained documentation from and interviewed leadership at the National Acquisition Center, Strategic Acquisition Center, and the Technology Acquisition Center. At the selected VISNs, we interviewed leadership at their respective Network Contracting Offices, and selected a non-generalizable sample of 35 total contracts and orders—29 of which were set aside for SDVOSBs or VOSBs—selected based on high dollar value, and for procurements of construction, services, or supplies. For each of the selected contracts and orders, we reviewed the contract files and interviewed both the contracting officer and the customer—in most cases the contracting officer’s representative. We also held roundtable discussions of Veterans First implementation, training, and other matters with 8 to 11 contracting officers at each location, randomly selected from the construction, services, and supply teams. We selected a non-generalizable sample of 12 contract actions from VISN 8, 11 contract actions from VISN 12, and 12 contract actions from VISN 16. The selection was based primarily on: contracts and orders that were set-aside to SD/VOSBs; product and service codes for services and supplies; and awards with a total value above $1 million as well as those between $150,000 and $1 million. We obtained and reviewed the contract files for each of the selected contract actions, which are also stored in eCMS, including signed awards, solicitations, market research reports, fair and reasonable price determinations, independent government cost estimates, statements of work, and other documents. We visited each of the Network Contracting Offices and interviewed the contracting officer for each of the selected contract actions and discussed the set-aside determination and their experiences with the Veterans First policy; because some were responsible for more than one, we interviewed 30 contracting officers for the 35 selected contracts and orders. We interviewed leadership at each location, and held 5 roundtable discussions with contracting officers from various product lines—supplies, services, construction, and leasing— whose contracts were not included in our non-generalizable sample. We also interviewed the customer—in most cases the contracting officer’s representative or subject matter expert—for each of the selected contract actions. Finally, we met with leadership at VA’s national contracting organizations—including the National Acquisition Center, Strategic Acquisition Center, Technology Acquisition Center, and Construction and Facilities Management—to discuss the implementation of the 2016 Veterans First policy within their organizations. To assess the extent to which VA has mechanisms in place to monitor compliance with subcontracting limitations by veteran-owned small businesses and the effectiveness of such mechanisms, we analyzed VA and Small Business Administration (SBA) acquisition policies and regulations to identify the monitoring mechanisms in place to ensure compliance with subcontracting limitations. To assess the effectiveness of VA’s mechanisms, we leveraged our reviews of files for the 29 selected contracts that were set aside, and we assessed whether the required set- aside and monitoring clauses were included. In cases where we selected an order, we reviewed the overarching indefinite delivery contract if it was awarded by VA. We also assessed the extent to which the files reflected evidence of monitoring. We reviewed VA’s Information Letter that established the Risk Management and Compliance Service’s Subcontracting Compliance Review Program and the program’s manual for conducting subcontracting limitations compliance audits and analyzed the audit results. We also assessed the extent to which these mechanisms met GAO internal control and fraud framework criteria. We interviewed senior VA procurement officials responsible for developing and/or implementing these mechanisms and providing training to contracting officers and contracting officers’ representatives. We also reviewed our prior work and SBA and VA Inspector General reports on VA and other agencies’ compliance with subcontracting limitations. We conducted this performance audit from October 2017 to September 2018 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. In addition to the individual named above, Lisa Gardner, Assistant Director; Pete Anderson; Matthew T. Crosby; Susan Ditto; Jeff Hartnett; Alexandra Jeszeck; Teague Lyons; Lorraine Ettaro; Suellen Foth; Ashley Rawson; Eric Schwab; Roxanna Sun; and Alyssa Weir made key contributions to this report.

Summary: VA spends billions every year to procure goods and services and is required to give preference to veteran-owned small businesses when awarding contracts—a program known as Veterans First. In turn, those firms must comply with limitations on the use of subcontracting. A 2006 statute established Veterans First, and a 2016 Supreme Court decision clarified conflicting interpretations, resulting in changes to how VA must now implement the program. GAO was asked to review VA's implementation of Veterans First since the Supreme Court decision. Among other things, this report assesses the extent to which (1) changes occurred in procurement obligations to veteran-owned small businesses from fiscal years 2014 through 2017; (2) VA has encountered any challenges in implementing Veterans First policies; and (3) VA has mechanisms to oversee contractor compliance with subcontracting limitations. GAO analyzed VA regulations, policies, and contracting data; conducted three site visits; and reviewed a non-generalizable sample, selected based on factors such as high dollar value, of 35 contracts and orders, 29 of which VA awarded under Veterans First. GAO found that the percentage of Department of Veterans Affairs (VA) obligations set aside for veteran-owned small businesses under its Veterans First program was higher in 2017—the first full year following the 2016 Supreme Court decision—than in previous years. In its decision, the court clarified that VA contract competitions must be restricted to these businesses if they meet two criteria: (1) the contracting officer reasonably expects that at least two such businesses will submit offers, and (2) the award can be made at a fair and reasonable price and best value to the government. This has become known as the “VA Rule of Two.” VA created a new policy for implementing Veterans First following the 2016 decision. The percentage of obligations set aside for veteran-owned small businesses increased from fiscal years 2014 to 2017 (see figure). Contracting officers face challenges implementing aspects of Veterans First, some of which VA has addressed through policy and optional training. However, 12 of the 30 contracting officers GAO interviewed cited difficulty in assessing the second criterion of the VA Rule of Two when making a set-aside decision. Eight of them stated that they sometimes lacked confidence in their fair and reasonable price determinations. VA's training, however, does not fully address these more challenging aspects of implementing the Veterans First policy. More targeted training would provide VA with greater assurance that its contracting officers have the knowledge and skills necessary to implement the policy. Additionally, assessing whether training on this policy should be mandatory would allow VA to determine if it would be beneficial for all contracting officers. GAO found that VA conducts limited oversight of contractor compliance with limitations on subcontracting and has few mechanisms for ensuring compliance. For example, GAO found that the required clause for ensuring that veteran-owned small business contractors perform the required portion of work was either missing entirely or an outdated version was used in 11 of the 29 set-aside contract actions GAO reviewed. Without better oversight, VA is limited in its ability to detect violations and ensure that the goal of Veterans First—to promote opportunities for veteran-owned small businesses—is not undermined. GAO is making six recommendations, including that VA provide more targeted training for contracting officers, assess whether training should be mandatory, ensure required clauses are included in contracts, and improve oversight of compliance with subcontracting limitations. VA agreed with GAO's recommendations.