Small Business Subcontracting Report Validation Can Be Improved
(13-DEC-01, GAO-02-166R).
GAO assessed agencies' validation of data submitted by prime
contractors on their subcontracting achievements. Of $77 billion
in subcontracting reported in fiscal year 2000, $31 billion went
to small businesses, such as women-owned, and small disadvantaged
businesses, as well as those located in historically
underutilized business zones. Both civilian and defense agencies
follow a similar process to validate subcontracting data--one
that involves visiting contractors, assessing compliance with
subcontracting plans, and evaluating accounting systems as well
as management support of the subcontracting program. GAO found
that most contractors reviewed are making good faith efforts to
comply with their subcontracting plans. However, these reviews
could be improved to enhance the validation and use of
subcontracting data, and GAO has identified actions that can be
taken to bring these improvements.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-166R
ACCNO: A02581
TITLE: Small Business Subcontracting Report Validation Can Be
Improved
DATE: 12/13/2001
SUBJECT: Prime contractors
Small business
Subcontractors
Women-owned businesses
Small disadvantaged business contractors
Small business assistance
SBA HUBZone Empowerment Contracting
Program
Small Business Subcontracting Program
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Testimony. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-02-166R
United States General Accounting Office Washington, DC 20548
December 13, 2001
The Honorable Christopher S. Bond
Ranking Minority Member
Committee on Small Business and Entrepreneurship
United States Senate
Subject: Small Business Subcontracting Report Validation Can Be Improved
Dear Senator Bond:
This letter responds to your request that we assess how agencies validate
data submitted by prime contractors on their subcontracting achievements.
Subcontracting is an important avenue for enabling small businesses to
participate in large dollar federal contracts. Of a total of $77 billion
reported subcontracted dollars in fiscal year 2000, $31 billion went to
various types of small businesses, such as women-owned, and small
disadvantaged businesses, as well as those located in historically
underutilized business zones called HUBZones.
You also requested that we answer two specific questions on subcontracting
substitution and evaluations of contractor past performance. Our responses
are provided in enclosure III.
RESULTS IN BRIEF
Civilian and defense agencies follow a similar process to validate their
subcontracting data-one that involves visiting contractors, assessing their
compliance with their subcontracting plans, and evaluating accounting
systems as well as management support of the subcontracting program. These
assessments have found that most contractors that were reviewed are making
good faith efforts to comply with their subcontracting plans. However, there
are some areas where these reviews could be improved in order to enhance the
validation and use of subcontracting data, and we have identified actions
that can be taken to bring about these improvements. We received written
comments on a draft of this letter from the Department of Defense (DOD) and
the Small Business Administration (SBA). DOD concurred with our findings and
recommendations and had no further comment. SBA also concurred with our
recommendations but expressed concerns about how we characterized SBA's
compliance efforts. DOD's and SBA's written comments are provided in
enclosures I and II.
BACKGROUND
Under the Small Business Subcontracting Program,1 a contractor is not
required to subcontract with small businesses, but in receiving a contract
for more than $100,000, the contractor must agree in the contract that
various types of small businesses will have the "maximum practical
opportunity" to participate in contract performance. A prospective
contractor is required to submit a subcontracting plan for each solicitation
or contract modification that individually is $500,000 or more ($1 million
for construction contracts) and that has subcontracting possibilities.2 DOD
accounts for about $55 billion, or 71 percent, of the reported
subcontracting dollars, and the civilian agencies account for about $22
billion, or 29 percent.
The plan must document what actions the prospective contractor will take to
provide the various types of small businesses with the maximum practical
opportunities to participate in subcontracting. Specifically, it must
include, among other things:
* the percentage goals that will be subcontracted to specific types of small
businesses,
* the total dollars planned to be subcontracted and the contractor's total
subcontracting dollars to these businesses,
* the type of work to be subcontracted and the types planned for
subcontracting to these businesses, and
* the efforts the contractor will make to ensure subcontracting
opportunities to these businesses.3
After contracts are awarded, the contractor must periodically submit to the
government a subcontracting report for each individual contract that
contains a subcontracting plan, which includes the subcontracting goals and
dollars awarded to
4
the various types of small businesses. The contractor must also submit a
summary subcontracting report that encompasses all its contracts with a
particular agency within a fiscal year, including the total dollars
subcontracted to various types of small businesses.
1 Federal Acquisition Regulation (FAR) 19.7.
2 FAR 19.702. However, subcontracting plans are not required (1) from small
businesses; (2) for personal services contracts; (3) for contracts or
contract modifications performed outside a state, territory, or possession
of the United States, the District of Columbia, and the Commonwealth of
Puerto Rico; or (4) for modifications of contracts within the general scope
of the contract that do not contain the clause at FAR 52.219-8, Utilization
of Small Business Concerns.
3 FAR 19.704(a) (1) (2) (3) (8).
4 Contractors under DOD's Comprehensive Subcontracting Plan Test Program
would not report on individual contracts. Instead, the test program
authorizes the negotiation, administration, and reporting of subcontracting
plans on a plant, division, or companywide basis as appropriate. At the time
of our review, DOD had 20 active plans with contractors under this test
program.
AGENCIES USE DCMA AND SBA TO VALIDATE DATA
Civilian agencies rely on SBA and DOD relies on the Defense Contract
Management Agency (DCMA) to validate information provided by contractors or
otherwise measure contractor compliance with their subcontracting plans.
Both SBA and DCMA take similar approaches to validating compliance through
on-site reviews of contractors-visiting and interviewing contractors,
reviewing a sample of subcontracting plans and the contractors' policies and
procedures for implementing
5
their small business program, and rating contractors based on their
assessments. Both agencies found that most contractors that were reviewed
were making good faith efforts to achieve their subcontracting goals.
Specifically, for fiscal year 2000, SBA reported that only 3 percent of the
contractors it reviewed were performing in a less than acceptable manner,
while DCMA found that 8 percent were performing in a less than an acceptable
manner. Both DCMA and SBA work with contractors who have unacceptable
ratings to bring them into compliance.
DIFFERENCES IN APPROACHES
There are differences between the DCMA and SBA reviews of contractors'
subcontracting programs. DCMA reviews more contractors with subcontracting
plans than SBA. Specifically, the small business specialists that carry out
DCMA reviews reported that they performed on-site reviews of about 93
percent of their portfolio of 1,010 contractors with subcontracting plans in
fiscal year 2000. SBA reviewers, by contrast, reported that they performed
on-site reviews of about 15
6
percent of their portfolio of 1,780 contractors with subcontracting plans.
Both SBA and DCMA have guidance that instructs reviewers to prioritize
reviews according to compliance risks such as the date of last review and
the number of contracts not meeting established goals. Unlike DCMA, SBA
on-site reviews are not always done according to the compliance risks posed
by the contractor. Instead, they are done based on the time available to do
the reviews and the proximity of the contractor to the reviewer because of
travel and staff limitations, according to SBA officials. This approach does
not ensure that the highest risk contracts are adequately covered.
In addition, DCMA consistently submits its findings to responsible
contracting officers. SBA does not consistently do this--even in cases when
the contractors received marginal ratings. This is important since the
contracting officer is
7
responsible for monitoring the contractor's performance.
5 SBA and DCMA have an agreement that ensures that both agencies' compliance
review process and ratings are similar.
6 SBA officials said they conducted 894 desk reviews in fiscal year 2000 of
contractors' performance in addition to the on-site reviews of contractors'
subcontracting programs. Desk reviews, also called "performance reviews,"
are used to identify contractors not meeting their subcontracting goals.
However, these desk reviews do not assess the validity of the provided data
or rate how well contractors are performing on their subcontracting plans.
7 FAR 19.706.
Neither SBA nor DCMA summarizes the results of their reviews in ways that
would facilitate assessments of subcontracting data governmentwide (e.g., in
terms of what percentage of contractors are meeting their goals for a given
year and what progress contractors are making over time in terms of dollars
awarded, goals achieved, or ratings). SBA maintains a database containing
contractor ratings, but it is not complete and up-to-date and it does not
readily provide information on trends regarding compliance with
subcontracting plans. DCMA has two districts, which collect information on
their reviews, but the agency does not maintain a centralized agencywide
database. Both SBA and DCMA are aware of the limitations of their data
collection and reporting systems and are working to develop databases that
would address some of these issues. SBA plans to have a new subcontracting
database operating by December 2001, and DCMA plans to have a new agencywide
subcontracting database in 6 to 9 months.
Further details on how DCMA and SBA conduct their reviews are provided in
table 1.
Table 1: Steps Generally Taken to Review Compliance with Subcontracting
Plans
CONCLUSIONS
AND
RECOMMENDATIONS
FOR
EXECUTIVE
ACTION
While
SBA
and
DCMA
reviews
of
contractor-reported
data
look
at
a
range
of
important
factors,
such
as
management
support
and
controls
and
actual
performance,
SBA's
approach
does
not
ensure
that
the
highest
risk
contractors
are adequately covered or that the officials responsible for monitoring
contractor performance are aware of the results of reviews. Moreover,
assessing the validity of subcontracting data governmentwide is difficult
because SBA and DCMA do not readily summarize the results of their reviews
in terms that would allow governmentwide assessments of contractor
performance. At a minimum, both agencies could examine whether it is
cost-effective to take additional steps that would enhance the validation
and use of subcontracting data.
We recommend, therefore, that the Administrator of SBA determine whether it
is cost-effective to do the following and, if so, implement these steps.
* Base SBA contractor reviews on compliance risks, such as size of the
contract, date of the last review, and previous ratings, rather than time
available to do the reviews and proximity of the contractors to the
reviewer.
* Send the results of the reviews to contracting officers, especially when
the ratings are marginal.
To promote governmentwide oversight, we also recommend that both the
Director of DCMA and the Administrator of SBA develop reports that summarize
their reviews; for example, in terms of the percentage of contractors
meeting their goals and the progress being made over time.
AGENCY COMMENTS AND OUR EVALUATION
We received written comments on a draft of this letter from DOD and SBA. DOD
concurred with our findings and recommendations and had no further comment.
SBA also concurred with our recommendations but expressed three concerns.
First, SBA suggested that we combine the number of desk reviews with the
on-site reviews in our discussion of SBA's compliance review effort. We
noted in the report the number of desk reviews that SBA conducted in fiscal
year 2000. However, because desk reviews do not validate contractor-provided
data or rate how contractors are performing on their subcontracting plans,
we believe that including such reviews with the more comprehensive on-site
reviews would be misleading.
Second, SBA notes that its guidance instructs reviewers to prioritize
reviews according to compliance risks and that its staff may defer an
on-site review of a contractor if the desk review indicates that the company
is meeting the majority of its subcontracting goals. As we noted in the
letter, SBA's guidance takes compliance risk into consideration. However,
the SBA reviewers we interviewed said that they generally visit contractors
based on the time available to do the reviews and the proximity of the
contractors to the reviewer because of travel and staff limitations, rather
than the compliance risks posed by the contractor.
Third, SBA noted that it has collected subcontracting data for over 10 years
and that much of the information is summarized in a meaningful way. While
SBA's database does provide some useful information, the data was not always
complete and up-to-date and did not readily provide information on trends
regarding compliance with subcontracting plans. DOD's and SBA's comments
appear in enclosures I and II.
SCOPE AND METHODOLOGY
To assess how agencies validate information provided by prime contractors on
their subcontracting achievements, we analyzed pertinent legislation and
agency documents and interviewed officials at SBA, DOD, the Department of
Energy, and the National Aeronautics and Space Administration. In addition,
we surveyed DCMA and SBA staff who reviewed prime contractors'
subcontracting programs. We conducted our review from October 2000 to August
2001 in accordance with generally accepted auditing standards.
As agreed with your office, unless you publicly announce the contents of
this letter
earlier, we will not distribute this report until 30 days from its date. At
that time, we
will send copies of this letter to the Chairman of the Senate Committee on
Small
Business and Entrepreneurship, the Director of DCMA, and the Administrator
of SBA.
We will also make copies available to others upon request.
If you have any questions concerning this letter, please call me at (617)
565-7555. Key
contributors to this review also included Catherine Baltzell, Thom Barger,
David
Bennett, Deatra Brandon, Cristina Chaplain, Judith Collins, Sylvia Schatz,
James
Smoak, and Hilary Sullivan.
Sincerely yours,
David E. Cooper
Director, Acquisition and Sourcing Management
Enclosure I Comments From the U.S. Small Business Administration Enclosure I
Enclosure II Comments From the Department of Defense
Enclosure III
ANSWERS TO QUESTIONS ON SUBSTUTION OF SUBCONTRACTORS AND OF PAST PERFORMANCE
To what extent are defense contractors substituting subcontractors?
Subcontracting plans may or may not specifically identify small, small
disadvantaged, and women-owned small businesses. When they do, prime
contractors should notify the administrative contracting officer of any
substitution of firms that are not small, small
8
disadvantaged or women-owned small businesses. However, DOD officials said
that contracting officers do not typically require contractors to
specifically identify businesses in subcontracting plans and they did not
maintain data on how often substitution occurred.
How are prime contractors' past performance in meeting its small business
subcontracting goals considered in awarding new contracts?
Past performance information is one indicator of a prospective contractor's
ability to perform successfully. The currency and relevance of the
information, source of the information, context of the data, and general
trends in a contractor's performance should be considered in making award
decisions. The evaluation factors that may apply to an acquisition and their
9
relative importance are within the broad discretion of agency acquisition
officials. Among the factors that may be considered is a prospective
contractor's past performance in
10
complying with subcontracting plan goals for small disadvantaged business
concerns. However, NASA, DOE and DOD officials said that past performance
evaluation factors varied from contract to contract and they did not have
data on how past performance on subcontracting plan compliance was used in
contract award decisions.
(120003)
8 Defense Federal Acquisition Regulation Supplement 219.704-Subcontracting
Plan Requirements. 9 Federal Acquisition Regulation (FAR)15.3 04-Evaluation
factors and significant subfactors 10 FAR 15.305-Proposal evaluation.
*** End of document. ***