Small Business: Monitoring of Subcontracting to Small Disadvantaged
Businesses (Letter Report, 09/22/95, GAO/RCED-95-271).
Pursuant to a congressional request, GAO reviewed the efforts of the
Defense Logistics Agency (DLA), the National Aeronautics and Space
Administration (NASA), the Department of Energy (DOE), and the General
Services Administration (GSA) in providing maximum subcontracting
opportunities for small disadvantaged businesses.
GAO found that the four agencies: (1) have established procedures to
monitor contractors, which include reports from the contractors on their
subcontracting activities, as well as on-site reviews of contractors'
subcontracting programs; (2) have met or exceeded their annual
subcontracting goals to small disadvantaged businesses since fiscal year
1988; and (3) do not closely review contractor-submitted reports on
subcontracting activities, and they do not verify subcontracting data
reported by the contractors to ensure data accuracy. In addition, GAO
found that: (1) some agency officials question the need for additional
monitoring procedures, since they rely on contractors to self-certify
their progress; (2) some contracting staff believe that the threat of
assessed liquidated damages encourages compliance with subcontracting
goals, while others believe that the definition of good faith effort is
vague and they question whether an assessment of liquidated damages
could be upheld in court; and (3) various initiatives are under way that
may affect the agencies' monitoring process, including streamlined
reports, contractorwide subcontracting plans, and electronic data
reporting.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-95-271
TITLE: Small Business: Monitoring of Subcontracting to Small
Disadvantaged Businesses
DATE: 09/22/95
SUBJECT: Small business assistance
Subcontractors
Contract monitoring
Small business contractors
Disadvantaged persons
Compliance
Federal agencies
Federal procurement policies
Minority contractors
IDENTIFIER: DOE Contractor Purchasing System Review Program
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Cover
================================================================ COVER
Report to the Honorable
Kweisi Mfume,
House of Representatives
September 1995
SMALL BUSINESS - MONITORING OF
SUBCONTRACTING TO SMALL
DISADVANTAGED BUSINESSES
GAO/RCED-95-271
Monitoring Federal Subcontracting
(385457)
Abbreviations
=============================================================== ABBREV
ACO - administrative contracting officer
CPSR - Contractors' Purchasing Systems Reviews
DOD - Department of Defense
DOE - Department of Energy
DLA - Defense Logistics Agency
FASA - Federal Acquisition Streamlining Act
GSA - General Services Administration
NASA - National Aeronautics and Space Administration
OFPP - Office of Federal Procurement Policy
OMB - Office of Management and Budget
OSDBU - Office of Small and Disadvantaged Business Utilization
SBA - Small Business Administration
SDB - small disadvantaged business
Letter
=============================================================== LETTER
B-265826
September 22, 1995
The Honorable Kweisi Mfume
House of Representatives
Dear Mr. Mfume:
This report responds to your request that we review federal efforts
to monitor the progress made by federal agencies' contractors in
providing maximum subcontracting opportunities for small businesses
owned and controlled by socially and economically disadvantaged
individuals. As requested by your office, our review included the
Defense Logistics Agency (DLA), the National Aeronautics and Space
Administration (NASA), the Department of Energy (DOE), and the
General Services Administration (GSA). Specifically, we determined
(1) how these agencies monitor contractors' progress in
subcontracting to small disadvantaged businesses (SDB); (2) whether
agencies have assessed monetary damages, known as liquidated
damages,\1 against contractors who did not make a good faith effort
to subcontract to SDBs; and (3) what initiatives are being considered
to change the monitoring process.
--------------------
\1 Liquidated damages, authorized by the Business Opportunity
Development Reform Act of 1988, may be assessed when the contractor
fails to make a good faith effort to comply with the subcontracting
program's requirements. The amount of liquidated damages is the
dollar amount by which the contractor failed to achieve its
subcontracting goals.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Each of the four agencies has established procedures to monitor
contractors, including (1) reports from contractors on their
subcontracting activities and, at some offices, (2) on-site reviews
of contractors' subcontracting programs. Many officials told us that
this monitoring has increased the subcontracting dollars awarded to
small disadvantaged businesses. On the basis of contractors'
reports, the agencies have generally met or exceeded annual
subcontracting goals to small disadvantaged businesses since fiscal
year 1988. DOD, however, met its subcontracting goal for the first
time in fiscal year 1994. Despite these achievements, we found
certain shortcomings in the monitoring processes. For example, the
agencies often do not closely review or act on contractor-submitted
reports on subcontracting activities, and they do not verify
subcontracting data reported by the contractors to ensure the
information's accuracy. Some officials questioned the need for
additional monitoring procedures because, as in other small business
programs, they rely on contractors to self-certify their progress.
Contracting staff we spoke with knew of no instances in which their
agencies had assessed liquidated damages against contractors.
Nevertheless, some staff believe that the threat of such action
encourages compliance with subcontracting goals. Others disagree
that liquidated damages is a deterrent, believing that the
regulation's definition of a lack of good faith effort is vague and
questioning whether an assessment of liquidated damages would be
upheld in court.
Various initiatives are under way or planned that may affect the
agencies' monitoring process. These include streamlined reports,
contractorwide subcontracting plans, and electronic data reporting.
Certain of these initiatives have grown out of efforts to reform and
streamline the federal procurement process. These initiatives would
reduce the amount of data collected and, therefore, the amount of
information available for monitoring.
BACKGROUND
------------------------------------------------------------ Letter :2
In 1978, the Congress revised the Small Business Act, requiring that
large businesses prepare subcontracting plans for federal contract
actions in excess of $500,000 ($1 million for construction
contracts). These plans must document the actions that contractors
plan to take to provide small businesses and SDBs with the maximum
practicable opportunity to participate in subcontracting and must
contain specific goals for subcontracting to both groups.
In 1988, the Congress again amended the Small Business Act to
authorize agencies to assess liquidated damages against contractors
that did not make good faith efforts to meet subcontracting goals.
The Congress also established an annual, governmentwide goal of
targeting 5 percent of total federal subcontracting funds to SDBs.\2
To help achieve this goal, the Small Business Administration (SBA)
negotiates annual goals with individual federal agencies, which may
be above or below the 5-percent mark. The Department of Defense
(DOD), however, has a 5-percent goal.
Since 1988, the agencies included in our review have reported
generally upward trends in their percentages of subcontracting
dollars going to SDBs. NASA, DOE, and GSA generally met or exceeded
the goals negotiated with SBA. DOD met its mandated goal for the
first time in fiscal year 1994, reporting that 5 percent of its
subcontracting dollars went to SDBs. That same fiscal year, NASA
reported SDB subcontracting at 9.7 percent, and DOE reported 8.7
percent. GSA reported falling back from 5.6 percent in fiscal year
1993 to 3.8 percent in fiscal year 1994, citing delays in
construction contracts and delinquent contractor reports as causes.
(App. I contains more information on the SDB subcontracting program,
including the agencies' goals and the results of subcontracting to
SDBs in fiscal years 1990-94.)
--------------------
\2 The law requires a 5-percent SDB goal for prime contracts and
subcontracts. The Office of Federal Procurement Policy, which
provides governmentwide procurement policy, has interpreted this
provision to require two 5-percent goals for SDBs--one for prime
contracts and one for subcontracts.
HOW AGENCIES MONITOR THE SDB
SUBCONTRACTING PROGRAM
------------------------------------------------------------ Letter :3
Agency staff rely primarily on (1) periodic reports from contractors
on their subcontracting activities and (2) agencies' reviews of
contractors' subcontracting programs to monitor contractors' progress
in subcontracting to SDBs. However, we found shortcomings in the
agencies' monitoring processes.
Regulations require contractors to periodically submit information on
their subcontracting activities. The Form 294 report--required every
6 months for each contract that has a subcontracting plan--provides
information such as the contract amount, subcontracting goals for
small businesses and SDBs, and actual subcontracting dollars awarded
to both groups. The Form 295 report--required annually (quarterly
for DOD contracts)--summarizes information for all of the
contractors' federal contracts, including the total amounts
subcontracted to small businesses and SDBs. Only one Form 295 report
is provided to each agency, no matter how many federal contracts a
contractor may have with the agency.
In addition to the Form 294 and 295 reports, the agencies assess
contractors' subcontracting programs through reviews conducted at
contractors' facilities. DLA small business specialists perform
annual compliance reviews of subcontracting programs at contractors'
facilities. GSA initiated a program in 1993 for small business
specialists to conduct similar reviews. While NASA and DOE staff do
not perform such reviews, staff at both agencies pointed out that the
Contractors' Purchasing Systems Reviews (CPSR) include a section on
the subcontracting program. CPSRs are to be conducted every 3 years
for contractors with annual federal sales of at least $10 million.
SBA also periodically reviews contractors' subcontracting programs;
however, limited resources permit such reviews primarily for the
largest contractors. According to SBA officials, the frequency of
reviews varies, and some contractors have never been reviewed. (App.
II contains a more detailed discussion of how the agencies monitor
contractors' subcontracting programs.)
SHORTCOMINGS IN THE
MONITORING PROCESS
---------------------------------------------------------- Letter :3.1
Agencies do not always closely monitor subcontracting reports and
therefore do not always identify missing or erroneous reports. Of
the 378 Form 294 reports that were due during fiscal years 1993 and
1994 for the contracts we reviewed, about 14 percent were not
received or were missing from files. Although many agency staff told
us that they review the subcontracting reports, about 83 percent of
the Form 294 reports that were received showed no documentation of a
review. About one-third of the reports received contained errors,
some minor and some significant, that suggested a lack of attention
to the reports by both the contractor and agency staffs. Finally,
about 6 percent of the Form 294 reports were on obsolete forms or
were substitute reports that did not provide all of the required
information.
The reviews that the agencies perform to assess subcontracting
programs at contractors' facilities do not routinely verify the
subcontracting data reported by contractors. Rather, the reviews
emphasize processes and procedures, such as ensuring that contractors
have procedures in place for contacting SDBs about potential
subcontracting opportunities and for documenting that firms qualify
as SDBs. Furthermore, the reviews do not cover all contractors or
their subcontracting plans.
Despite these monitoring shortcomings, many officials told us that in
the absence of monitoring, fewer subcontracting dollars would be
awarded to SDBs. Some officials question the need for additional
monitoring procedures because in this program, like other small
business programs, agencies rely on contractors to self-certify their
progress. Furthermore, they indicated that the current process, when
combined with other activities of the agencies' small business
specialists--such as counseling small businesses, helping large firms
to locate small business subcontractors, and participating in
conferences and trade shows--generally encourages contractors to make
the most of subcontracting opportunities for SDBs and comply with SDB
subcontracting requirements. (App. III discusses in detail the
shortcomings in the agencies' current subcontracting processes.)
LIQUIDATED DAMAGES NOT ASSESSED
------------------------------------------------------------ Letter :4
No staff we spoke to were able to identify any instance in which
their agency had assessed liquidated damages against a contractor.
However, some staff believed that the threat of being required to pay
liquidated damages is enough to secure compliance because the
consequences to contractors of being assessed damages, such as delays
in being awarded future contracts, are so severe. Other staff
disagreed that the law is effective in securing compliance.
While contractors are required to make good faith efforts to provide
maximum practicable subcontracting opportunities for small businesses
and SDBs, the failure to achieve subcontracting goals does not in
itself constitute a failure to make a good faith effort. Regulations
state that the failure to take certain actions, such as not
maintaining records to support compliance with the program, are
indications of failure to make a good faith effort.
Some of the agencies' contracting staff believe the definition of a
lack of good faith effort is vague and question whether an assessment
of liquidated damages would be upheld in court. They believe that
the government would have to prove that the contractor had
intentionally excluded SDBs from subcontracting opportunities and
that to avoid damages, the contractor would only have to show
evidence that it had contacted such firms or awarded even a small
contract. (App. IV contains further details on liquidated damages.)
INITIATIVES MAY CHANGE PROGRAM
MONITORING
------------------------------------------------------------ Letter :5
Various initiatives are under way or planned that could affect the
agencies' processes for monitoring subcontracting. These include
streamlining Forms 294 and 295 reports to reduce the amount of
subcontracting information reported by contractors; requiring
contractorwide subcontracting plans, thereby eliminating the Form 294
report; and allowing contractors to electronically report
subcontracting data.
The Federal Acquisition Streamlining Act's (FASA) small business task
force has proposed changes to Forms 294 and 295. In preparing
regulations to implement FASA, the small business task force proposed
to revise Forms 294 and 295 to include information about contractors'
subcontracting to women-owned businesses. In response to comments
received on these changes and in conjunction with changes being
considered by DOD, the task force has proposed changes that would
significantly reduce the type of information on subcontracting
reports. The Form 294 would include only the current subcontracting
goal and the cumulative subcontracting amount for the contract. The
report would no longer include information on the contract amount and
period, original estimates of revised subcontracting amounts and
goals, or separate subcontracting data for the 6-month reporting
period. Similarly, the Form 295 would include only cumulative
subcontracting data for the year. The task force also has proposed
reducing to twice a year the frequency of the Form 295s for DOD
contracts. While DOD and SBA officials told us that the information
being omitted is not useful for monitoring, small business program
officials at NASA, DOE, and GSA disagreed and preferred to keep the
information on the current forms.
A DOD test has allowed a small number of large contractors to use a
contractorwide plan rather than provide a plan for each contract.
This test, which was mandated by the Congress in 1989, sets
contractorwide or divisionwide goals, eliminating the need for
individual plans for each contract and Form 294 reports. The initial
results reported by DOD in 1994 were favorable, as both agency and
contractor staffs noted that their administrative burdens were
reduced and resources were available for other small business
activities. However, DOD was not confident of the results because of
several factors that affected the test, such as the small number of
contractors involved and the declining amount of DOD contract
dollars. The test has been extended to 1998.
In fiscal year 1993, DLA began developing electronic reporting by
contractors of the information on Form 294 and Form 295 reports.
Testing of electronic reporting of the Form 295 report is being done
at several contracting offices in DLA's Western District. DLA plans
that all of its offices will allow contractors to electronically
report Form 295 data in 1996, and the Western District's associate
director for small business estimates that the computer application
will cost each contractor about $50. DOD officials are considering a
similar, compatible system for electronically reporting Form 294
data. Five DLA offices are also testing an electronic database of
Form 294 data.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6
To develop information on the agencies' monitoring processes, we
interviewed procurement and other officials at DLA, NASA, DOE, and
GSA headquarters and field office locations. At 15 field office
locations for the four agencies, we reviewed in detail contract files
for 105 judgmentally selected contracts that had active
subcontracting plans as of September 1994 to determine how the
agencies carried out their monitoring tasks. In addition, we
discussed the agencies' use of liquidated damages and its deterrent
effects with procurement officials at each of the four agencies.
Finally, for information on initiatives under way or on planned
changes to the agencies' monitoring processes, we interviewed DOD and
GSA officials and reviewed pertinent documents, including proposed
changes to the Federal Acquisition Regulations.
Because our sample of plans was small and not statistically
representative, our review does not generalize to all plans at either
an agency or an office we visited. However, agency staff generally
agreed that the shortcomings in the monitoring processes that we
observed were not limited to the contracts we reviewed. (App. V
contains further details of our scope and methodology.)
AGENCY COMMENTS
------------------------------------------------------------ Letter :7
We provided DOD, NASA, DOE, GSA, and SBA with a draft of this report.
We met with officials of DOD, including the Deputy Director, Office
of Small and Disadvantaged Business Utilization, Office of the
Secretary of Defense; officials of NASA, including the program
analyst, Contract Management Division, Office of Procurement;
officials of DOE, including the Director, Office of Special Projects
and Management Systems, Office of the Deputy Assistant Secretary for
Procurement and Assistance Management; and officials of GSA,
including the Deputy Director, Small and Disadvantaged Business
Utilization.
These officials generally agreed with the facts presented in the
report, but they expressed concern about the overall tone. DOD and
DOE officials, in particular, said that the shortcomings we have
cited are less significant than the increases made in SDB
subcontracting during the past several years. We believe the
shortcomings are of concern because they could have an impact on the
levels of subcontracting performance reported by the agencies.
However, we agree that the increases in subcontracting to SDBs are
noteworthy, and we have included information on these achievements in
the report. The officials also provided technical clarifications and
updated information, which we have incorporated into the report as
appropriate.
Although we did not meet with SBA officials, we received a copy of an
internal memorandum on the draft report from SBA's Manager for the
Subcontracting Assistance Program. Among other comments, the
memorandum stated that SBA staff perform some degree of verification
on every compliance review. We agree that SBA staff review samples
of contractors' purchase orders, and as we have noted in appendix II,
the SBA reports and guidance that we saw appeared to have more depth
and documentation than those of other agencies. However, SBA's
review guidance does not require verifying reported data back to
contractors' source documents. Instead, it directs reviewers to
study the contractors' methodologies in preparing the reports and to
compare reported data to contractors' summary reports. We have
incorporated other comments from SBA's memorandum into the report as
appropriate.
---------------------------------------------------------- Letter :7.1
We are sending copies of this report to appropriate congressional
committees; the Secretary of Defense; the Secretary of Energy; the
Administrator of NASA; the Administrator of GSA; and the
Administrator of SBA. We will also make copies available to others
on request.
Please call me at (202) 512-7631 if you or your staff have any
questions about this report. Major contributors to this report are
listed in appendix VI.
Sincerely yours,
Judy A. England-Joseph
Director, Housing and Community
Development Issues
HISTORY OF THE SMALL DISADVANTAGED
BUSINESS SUBCONTRACTING PROGRAM
=========================================================== Appendix I
The federal subcontracting program was established in 1961 by an
amendment to the Small Business Act. The amendment mandated the
Department of Defense (DOD), the General Services Administration
(GSA), and the Small Business Administration (SBA) to develop a
federal program to ensure that federal contractors consider small
businesses when awarding subcontracts. The amendment required that
large businesses with federal contracts of $1 million or more
establish and conduct their own subcontracting programs to assist
small businesses. Contractors did not have to set goals for
subcontracting to small businesses, but agencies were required to
periodically review contractors' programs.
Despite the program, in 1978 the Senate Committee on Small Business
found that the level of subcontracting to small businesses still
depended "solely upon the voluntary 'good effort' of Federal prime
contractors." At the same time, the House Committee on Small Business
found that small and, in particular, small disadvantaged businesses
(SDB)\1 had not been fairly considered as subcontractors. SDBs were
not addressed in the 1961 legislation, and DOD reported that
subcontracting to SDBs was less than 1 percent in the mid-1970s.
In October 1978, the Congress enacted P.L. 95-507, an amendment to
the Small Business Act. The amendment required that large businesses
develop subcontracting plans for each federal contract action of
$500,000 or more ($1 million for construction contracts), including
goals for both small businesses and SDBs.The plans must document what
actions contractors will take to provide both small businesses and
SDBs with the maximum practicable opportunities to participate in
subcontracting.
According to regulations, the plans must include goals for (1)
estimated dollar amounts that will be subcontracted to small
businesses and SDBs and (2) the percentage of these amounts in
relation to the contractor's total estimated subcontracting dollars.
In addition, federal regulations require that plans include such
information as (1) the contractor official who will oversee the
program, (2) the type of work to be subcontracted, (3) a description
of efforts the contractor will make to subcontract to small
businesses and SDBs, (4) the types of records the contractor will
maintain to demonstrate compliance with the program, and (5) an
agreement to submit prescribed subcontracting activity reports.
The law permits contractors with more than one subcontracting plan to
obtain approval from an agency to use a master subcontracting plan.
When the contractor receives a new contract, only information that
will vary from contract to contract needs to be added, such as goals
and the types of goods or services to be subcontracted.
Ten years after Congress mandated subcontracting plans,
subcontracting to SDBs remained relatively low--1.9 percent for DOD
contracts and 2.8 percent for GSA's. In 1988, we reported that no
punitive or remedial action had been taken against a contractor that
failed to meet a subcontracting goal and that had not demonstrated a
good faith effort to do so.\2 As a result, the Business Opportunity
Development Reform Act of 1988 (P.L. 100-656) was enacted in 1988.
In this law, the Congress attempted to strengthen the program by
allowing agencies to assess liquidated damages against any contractor
that did not make a good faith effort to carry out its subcontracting
plan and to comply with subcontracting program regulations. The law
also included a governmentwide goal of 5 percent of total
subcontracting dollars to SDBs.\3
--------------------
\1 A small disadvantaged business is a small business, as defined in
SBA's size standards, that is at least 51 percent owned and
controlled by one or more individuals who are socially and
economically disadvantaged. Certain individuals, such as Black
Americans, Hispanic Americans, and Asian-Pacific Americans, are
presumed to be socially and economically disadvantaged. The
economically disadvantaged are socially disadvantaged individuals
whose ability to compete in the free enterprise system has been
impaired because of diminished capital and credit opportunities, as
compared to others in the same or similar line of business.
\2 Compliance with Subcontracting Requirements at GSA, Energy, and
Navy (GAO/GGD-88-83, May 1988).
\3 The law states that there will be a 5-percent goal for prime
contracts and subcontracts. The Office of Federal Procurement Policy
has interpreted this to mean that there are two 5-percent goals, one
for prime contracts and one for subcontracts.
AGENCIES SET SDB SUBCONTRACTING
GOALS ANNUALLY
--------------------------------------------------------- Appendix I:1
The 5-percent SDB subcontracting goal is a governmentwide goal and
does not apply individually to each agency. SBA annually negotiates
several socio-economic procurement goals with federal agencies, one
of which is for subcontracting to SDBs. If agency and SBA officials
cannot agree on a goal, the Office of Federal Procurement Policy
(OFPP) mediates the differences. Table I.1 shows the goals
associated with subcontracting to SDBs for each agency included in
our review, as well as the combined governmentwide goal.
Table I.1
Goals for Subcontracting to SDBs, Fiscal
Years 1990-94
(Dollars in millions)
1990 1991 1992 1993 1994
-------------------- -------- -------- -------- -------- --------
All agencies $3,453 $3,232 $2,957 $2,864 $2,907
4.9% 5.2% 5.1% 5.2% 5.7%
DOD $2,897 $2,601 $2,393 $2,283 $2,020
5.0% 5.0% 5.0% 5.0% 5.0%
NASA $110 $300 $266 $223 $436
2.2% 6.2% 5.9% 7.2% 12.5%
DOE $275 $20\a $20 $43 $43
5.5% 5.0% 5.0% 5.0% 8.6%
GSA $50 $130 $100 $104 $165
4.9% 5.2% 5.0% 5.2% 5.5%
----------------------------------------------------------------------
\a The decline in DOE dollars is due to a change in reporting. (See
section on DOE in this appendix.)
Note: Dollar amounts are rounded. The percentages are the amount of
subcontracting to SDBs compared to total subcontracting.
Source: The State of Small Business: A Report of the President
(fiscal years 1990-93 data), and SBA's Office of Government
Contracting (fiscal year 1994 data).
SUBCONTRACTING TO SDBS HAS
GROWN OVER THE PAST SEVERAL
YEARS
--------------------------------------------------------- Appendix I:2
Since fiscal year 1988, the agencies included in our review have
reported generally upward trends in percentages of subcontracting
dollars going to SDBs. The National Aeronautics and Space
Administration (NASA), the Department of Energy (DOE), and GSA have
generally met or exceeded the goals set by SBA. However, DOD first
met its goal in fiscal year 1994, reporting that 5 percent of
subcontracting dollars went to SDBs in that year. For that same
fiscal year, NASA reported SDB subcontracting at 9.7 percent, and DOE
reported 8.7 percent. GSA's SDB subcontracting declined from 5.6
percent in fiscal year 1993 to 3.8 percent in fiscal year 1994; the
agency cited delays in construction contracts and delinquent
contractor reports as causes. Table I.2 shows the reported
subcontracting to SDBs for each agency.
Table I.2
Agencies' Reported Subcontracting to
SDBs, Fiscal Years 1990-94
(Dollars in millions)
1990 1991 1992 1993 1994\a
-------------------- -------- -------- -------- -------- --------
All agencies $2,448 $2,167 $2,502 $2,757 $3,155
3.6% 3.2% 4.3% 4.9% 5.5%
DOD $1,575 $1,549 $1,777 $1,914 $2,253
2.9% 2.7% 3.8% 4.3% 5.0%
NASA $286 $267 $341 $373 $417
6.6% 5.8% 6.7% 8.3% 9.7%
DOE $364 $41\b $23 $40 $77
6.4% 5.0% 4.8% 5.0% 8.7%
GSA $109 $115 $146 $130 $107
6.0% 5.6% 6.2% 5.6% 3.8%
----------------------------------------------------------------------
\a Unpublished SBA figures as of August 1995.
\b The decline in DOE dollars is due to a change in reporting. (See
section on DOE in this appendix.)
Note: Dollar amounts are rounded. The percentages are the amounts
of subcontracting to SDBs compared to total subcontracting.
Source: The State of Small Business: A Report of the President
(fiscal years 1990-93 data), and SBA's Office of Government
Contracting (fiscal year 1994 data).
DOD'S GOALS AND REPORTED
PERFORMANCE
------------------------------------------------------- Appendix I:2.1
DOD's goal has been 5 percent since fiscal year 1988, but it attained
that goal for the first time in fiscal year 1994 when DOD reported
that about $2.25 billion worth of subcontracts went to SDBs. This
amount included about $1.9 billion from contracts administered by the
Defense Logistics Agency (DLA), which represented about 4.7 percent
of all subcontracting dollars awarded by those contracts. The
remainder of subcontract dollars is from contracts that were
administered by other military services. Overall, DOD reached its
5-percent goal because these other military services reported that
they met or exceeded the DOD goal: Air Force, 10.5 percent; Army,
8.7 percent; and Navy, 5 percent. DOD officials said that the DLA
figure does not reflect a poor performance by DLA. They pointed out
that the DLA staff do not approve the subcontracting goals for the
contracts they administer and that they handle the largest and most
complex military contracts, such as large weapons systems, for which
contractors have difficulty in finding SDBs that can take on
significant amounts of subcontracting. Figure I.1 shows DOD's goals
and reported performance.
Figure I.1: DOD's SDB
Subcontracting Goals and
Reported Performance, Fiscal
Years 1990-94
(See figure in printed
edition.)
NASA'S GOALS AND REPORTED
PERFORMANCE
------------------------------------------------------- Appendix I:2.2
Since fiscal year 1990, NASA has generally reported that it met or
exceeded its goals, always above the governmentwide goal of 5
percent. Notably, NASA's goals and achievements have risen gradually
during the past several years. Although NASA did not reach its
12.5-percent goal in fiscal year 1994, NASA's Associate
Administrator, Office of Small and Disadvantaged Business Utilization
(OSDBU), stated that NASA officials erroneously included all
women-owned businesses when negotiating the SDB goal with SBA. In
addition to NASA's SDB subcontracting goal, the Congress has mandated
that a separate 8-percent goal of all NASA contract dollars be
contracted or subcontracted to SDBs and women-owned businesses; NASA
reported meeting this goal for fiscal year 1993. Procurement staff
at NASA offices we visited attributed much of NASA's success in
subcontracting to SDBs to the emphasis placed on the program by the
current NASA Administrator. Figure I.2 shows NASA's goals and
reported performance.
Figure I.2: NASA's SDB
Subcontracting Goals and
Reported Performance, Fiscal
Years 1990-94
(See figure in printed
edition.)
DOE'S GOALS AND REPORTED
PERFORMANCE
------------------------------------------------------- Appendix I:2.3
DOE has generally reported that it met or exceeded its goals for each
fiscal year except 1992. Notably, DOE's goals and achievements
jumped more than 70 percent for fiscal year 1994. Figure I.3 shows
DOE goals and reported performance.
The decline in DOE's subcontracting dollars between fiscal years 1990
and 1991 (see table I.2) was caused by a change in reporting. OFPP
ruled that subcontracts awarded by prime contractors that operate and
maintain large DOE facilities should be categorized by DOE as prime
contracts and not subcontracts. According to DOE officials, these
contractors account for a substantial amount of the agencies'
contract dollars--76 percent in fiscal year 1994. According to SBA,
DOE is the only agency following this procedure.
Figure I.3: DOE's SDB
Subcontracting Goals and
Reported Performance, Fiscal
Years 1990-94
(See figure in printed
edition.)
GSA'S GOALS AND REPORTED
PERFORMANCE
------------------------------------------------------- Appendix I:2.4
For fiscal years 1990 through 1993, GSA reported that it met or
exceeded its goals and the governmentwide goal of 5 percent.
However, for fiscal year 1994, GSA reported that its SDB
subcontracting was 3.8 percent, as compared to a 5.5-percent goal for
the year. The GSA subcontracting program manager told us that the
agency missed its fiscal year 1994 goal because of delays in
construction contracts, which historically have high participation by
SDBs, and a high rate of delinquent reports from contractors. She
stated that the delays were due to reviews requested by the Congress
of planned construction projects. Figure I.4 shows GSA's goals and
reported performance.
Figure I.4: GSA's SDB
Subcontracting Goals and
Reported Performance, Fiscal
Years 1990-94
(See figure in printed
edition.)
PRIMARY MONITORING METHODS OF DLA
AND CIVILIAN AGENCIES
========================================================== Appendix II
Each agency we reviewed has established some type of procedures for
monitoring contractors' progress in subcontracting to small
disadvantaged businesses (SDB). Federal regulations require
administrative contracting officers (ACO) to monitor contractors'
performance under the subcontracting program. Each agency has
assigned small business specialists at or near its major contracting
offices to help ACOs carry out monitoring tasks. Agency staff rely
primarily on contractors' periodic reports and review of contractor
subcontracting programs to carry out the agencies' monitoring
responsibilities.
AGENCIES' PROGRAM REGULATIONS
AND GUIDANCE VARY
-------------------------------------------------------- Appendix II:1
Federal regulations do not include specific monitoring procedures but
instead state that ACOs are responsible for "monitoring, evaluating,
and documenting" contractors' performances relating to their
subcontracting plans. GSA has provided more specific procedural
guidance for its small business specialists in a draft supplement to
the regulations, and DLA has issued a manual for small business
specialists that includes procedures for monitoring contractors'
subcontracting. NASA and DOE have not provided similar consolidated
agencywide guidance, but both agencies have provided guidance in
documents such as position descriptions, local procedural guidance,
and agencies' newsletters. Also, both NASA and DOE have developed
automated systems to record and summarize subcontracting data
reported by contractors on a contract-by-contract basis.
In addition, regulations require SBA to assist agencies in monitoring
the program. An SBA manual on its subcontracting assistance program
describes how SBA staff are to support the agencies and requires
periodic visits to contractors' facilities to review their
subcontracting programs.
ACOS AND SMALL BUSINESS
SPECIALISTS SHARE MONITORING
DUTIES
-------------------------------------------------------- Appendix II:2
DLA has delegated virtually all monitoring tasks to small business
specialists at its 33 contract administration offices. These offices
report to DLA's three district offices, where associate directors for
small business provide overall guidance and summarize reported
subcontracting activity. At five of the six DLA offices at which we
performed detailed work, small business specialists told us they
spend most of their time on duties related to the subcontracting
program. Staff at the remaining office estimated that they spent
about one-third of their time on such duties.
At the DOE, GSA, and NASA offices that we visited, ACOs and their
staff have retained most subcontract monitoring functions, and small
business specialists assist with such duties as reviewing proposed
subcontracting plans and tracking and summarizing contractors'
reports of subcontracting activities. These specialists are located
in contracting offices at NASA's 12 centers and at 24 DOE sites. At
GSA, these specialists are located at each of the agency's 11
regional business service centers and at each of the three major
procurement services at headquarters. Most small business
specialists at the offices we visited estimated that they spend 15 or
20 percent of their time on the subcontracting program.
AGENCIES' STAFF RELY ON
CONTRACTORS' REPORTS OF
SUBCONTRACTING ACTIVITIES
-------------------------------------------------------- Appendix II:3
Regulations require that contractors periodically submit information
on their subcontracting activities for each contract that has a
subcontracting plan. Two one-page forms are used to collect and
report information on subcontracting activities--Form 294 and Form
295.
Subcontracting activities on each contract are to be submitted every
6 months on Standard Form 294, which shows such information as
contract amount, performance period, subcontracting goals, and actual
subcontracting achievements. Some contractors have one hundred or
more contracts and are required to submit a separate report for each
contract. In some instances, offices have required this reporting
more often. The Office of Management and Budget (OMB) has estimated
that it takes a contractor about 5.7 hours to complete a Form 294.
Regulations also require contractors to submit summarized information
for all of their federal contracts quarterly for DOD contracts and
once a year for other agencies' contracts.\1 This information is
submitted on Standard Form 295, which shows total subcontracting
achievements for all contracts, including amounts subcontracted to
small businesses and SDBs. The report also includes summary
information on contracts that have subcontracting plans. No matter
how many federal contracts a contractor may have, it is required to
submit only one 295 report to each agency with which it contracts.
OMB has estimated that it takes a contractor about 16.2 hours to
complete a Form 295.
Each of the four agencies we reviewed has created an automated system
to record and summarize information from the contractors' Form 295
reports. Information in these systems is used by the agencies to
report to SBA on the extent to which the agencies are achieving their
SDB subcontracting goals and the other procurement goals that the
agencies negotiated with SBA.
--------------------
\1 To help monitor the congressionally mandated subcontracting goal
of 8 percent for SBDs and women-owned businesses, NASA has required
contractors to submit Form 295 reports quarterly since fiscal year
1993. Officials plan to reduce the reporting frequency to
semi-annually in fiscal year 1996.
AGENCIES PERFORM VARIOUS
REVIEWS OF CONTRACTORS'
SUBCONTRACTING PROGRAMS
-------------------------------------------------------- Appendix II:4
Agencies perform several types of reviews that assess contractors'
subcontracting programs. These include reviews by the agencies and
SBA that are directed solely at the subcontracting program and
broader reviews that assess contractors' overall purchasing systems.
DLA's procedures require small business specialists to annually
review each contractor's subcontracting program. Of the 60 contracts
we reviewed at DLA, small business specialists had reviewed 33
contractors in both fiscal years 1993 and 1994 and another 23
contractors in 1 of the 2 fiscal years. These reviews sometimes last
a day or less, but specialists told us they can take up to 4 days for
the largest contractors. DLA's review guidance includes a series of
questions that are related largely to compliance issues, such as
whether the business has a written policy to support the program,
trains its buyers on contracting with SDBs, and maintains evidence
that it has made efforts to reach out to SDBs. GSA's Office of Small
and Disadvantaged Business Utilization established a program in 1993
for the agency's small business specialists to conduct such reviews.
Although the program has not been fully implemented by all GSA
offices, specialists at GSA in fiscal year 1993 or 1994 reviewed 4 of
the 15 contractors included in our review.
Although NASA and DOE have no review programs and generally do not
perform such reviews, several staff pointed out to us that the
Contractors' Purchasing Systems Reviews (CPSR) include a section on
subcontracting plan activities. Federal regulations require that
CPSRs be conducted every 3 years at businesses with annual government
sales of $10 million or more. More limited interim reviews may be
performed. The guidance that we observed for these reviews is
significantly less detailed than that for the DLA reviews.
DLA staff have performed many of these reviews, both for military
contracts and for contracts awarded by other agencies, including
NASA. Several DLA staff informed us that CPSRs do not sufficiently
assess a contractor's subcontracting program. They said that reports
by DLA often reiterate results of the small business specialists'
compliance reviews and summarize data from contractors' Form 295
reports.
In addition to the agencies' reviews, SBA performs periodic
compliance reviews of contractors' subcontracting programs.
According to SBA officials, SBA conducted more than 300 of these
reviews in fiscal year 1994. Unlike reviews by other agencies, SBA
assesses activity under all of a contractor's federal subcontracting
plans, rather than just those related to one agency. SBA's guidance
is more detailed and requires more in-depth and documented work than
DLA's.
According to SBA officials, because SBA has only 17 full-time staff
to do these reviews, SBA has been able to review primarily only the
largest contractors. In addition, the frequency of the reviews can
vary significantly from one SBA region to another; contractors in one
SBA district we visited are reviewed only every 3 or 4 years. Some
contractors have never been reviewed. During fiscal years 1993 and
1994, SBA conducted reviews of contractors for 27 of the 105
contracts that we reviewed.
NASA and DOE staff also pointed out that performance evaluations may
assess contractors' subcontracting programs for award fee contracts.
Despite these various types of reviews, agencies did not review
contractors' subcontracting programs during fiscal years 1993 and
1994 for 21 of the 105 contracts that we reviewed.
SMALL BUSINESS SPECIALISTS
PERFORM RELATED TASKS THAT MAY
INCREASE SDB SUBCONTRACTING
-------------------------------------------------------- Appendix II:5
At all of the offices we visited, small business specialists said
that they are involved in many other activities that may increase SDB
subcontracting. These activities are performed under the guidance of
each agency's Office of Small and Disadvantaged Business Utilization
(OSDBU). They included
counseling small business owners seeking federal contracts or
subcontracts,
assisting large businesses attempting to find small business
subcontractors,
participating in conferences and trade shows,
training contractors' small business staff and agencies'
contracting officers,
reviewing contract solicitations to ensure that agencies are
providing opportunities to small businesses,
developing offices' small business goals, and
determining nonmonetary awards to agency or contractor staff that
have performed exceptionally well in assisting small businesses
to obtain federal contracts or subcontracts.
Certain of these activities assist the agencies in monitoring
subcontracting and helping to provide the maximum amount of
subcontracting to SDBs. GSA officials specifically cited recent
enhancements in these activities directed at SDB subcontracting.
These changes include (1) intensified outreach for major construction
and telecommunication projects and (2) a computerized training
program for contracting staff and small business specialists. GSA
sponsors conferences prior to awarding contracts for major projects,
allowing SDBs to meet with agency staff and large contractors.
In addition, NASA's Associate Administrator, OSDBU, told us that his
office has frequent contacts with the larger SDBs and that such
contacts would undoubtedly disclose any problems that the SDBs may
have with subcontracts on NASA contracts. Several other small
business and procurement staff we spoke with expressed similar
opinions.
SHORTCOMINGS OF THE CURRENT
MONITORING PROCESSES
========================================================= Appendix III
We observed some shortcomings with the monitoring process. Agencies
often do not closely review and act on Form 294 reports upon receipt,
and subcontracting data reported by contractors are not verified by
the agencies.
AGENCIES DO NOT ALWAYS CLOSELY
MONITOR FORM 294 REPORTS
------------------------------------------------------- Appendix III:1
In our review of 105 contracts, we noted that agencies did not always
closely monitor the Form 294 reports that are submitted by
contractors. For the 105 contracts, a total of 378 Form 294 reports
were due from the contractors during fiscal years 1993 and 1994.
REPORTS WERE MISSING FROM
FILES
----------------------------------------------------- Appendix III:1.1
In some cases, reports were missing from the agencies' files--they
either had been lost or were never received. Of the 378 Form 294
reports that were due, 52--about 14 percent--were not in either the
administrative contracting officers' or small business specialists'
files. We rarely found any indication that staff had followed up to
obtain missing reports. Staff at one DLA office we visited had
recently reviewed a contractor with over 500 active subcontracting
plans as of September 1994 and reported that DLA had not received 68
of the Form 294 reports due in 1994.
REVIEWS LACKED DOCUMENTATION
----------------------------------------------------- Appendix III:1.2
While many staff said they reviewed reports, most reports we reviewed
had no indication that anyone had reviewed them. Of the 326 Form 294
reports received by agencies for the 105 contracts we reviewed, 269,
or about 83 percent, had no documentation of a review. For those
that had evidence of documentation, some offices had created a form
to assist in reviewing the reports; staff at other offices had
documented their review on the report itself. Small business
specialists at some DLA offices informed us that they have too many
subcontracting plans to review all reports. One office we visited
had about 725 subcontracting plans, but only one specialist was
assigned to monitor the plans at the time of our visit. Staff at
several DLA offices said that they check reports when they conduct
annual compliance reviews, but we rarely found documented evidence to
support this.
REPORTS OFTEN INCLUDE ERRORS
WITH NO DOCUMENTED FOLLOW-UP
----------------------------------------------------- Appendix III:1.3
Many reports we reviewed included obvious errors with no documented
follow-up. In reviewing the 326 Form 294 reports received, we noted
that about one-third had errors that suggested a lack of attention to
the reports by both the contractor and agency staffs. For example,
we found reports that omitted contract amounts or performance
periods, included cumulative amounts that did not agree with prior
reports, and reported obviously incorrect dollars or percentages.
Some errors were more significant. For example, after reporting a
cumulative total of $20.85 million in subcontracting for a contract
as of March 1993, one contractor reported that subcontracting had
increased to $266.8 million 6 months later. In September 1994, the
contractor reduced the figure to $20.76 million. The reports did not
explain the differences, and agency staff noted only that they were
aware of discrepancies in the contractor's reports. Moreover, SDB
goals on about one-third of the reports we reviewed did not agree
with the subcontracting plans in the agencies' files.
While we did not review Form 295 reports, a DLA district associate
director for small business told us that about half of the Form 295
reports received include erroneous or missing information that must
be corrected before her staff can record data in DOD's automated
database.
AGENCIES ACCEPTED OBSOLETE
FORMS OR INCOMPLETE
SUBSTITUTES
----------------------------------------------------- Appendix III:1.4
In a few cases, we found that agencies accepted obsolete forms or
substitute reports with incomplete information. For 20 of the 326
reports we reviewed--about 6 percent--agency staff had allowed some
contractors to use old versions of the Form 294 and computer reports
that did not include all of the information required on the current
Form 294. For example, some computer reports showed only cumulative
subcontracting activity, without separate data on activities that had
occurred during the reporting period.
SDB SUBCONTRACTING DATA
REPORTED BY CONTRACTORS
GENERALLY ARE NOT VERIFIED
------------------------------------------------------- Appendix III:2
While agency staff pointed out various types of reviews that assess
contractors' efforts in the subcontracting program, these reviews do
not emphasize verification of reported data. Instead, guidance
directs reviewers to assess contractors' overall subcontracting
programs, concentrating on administrative and compliance issues. For
example, guidance directs reviewers to determine if the contractor
has established necessary procedures, provided training to its
employees, maintained necessary records, and used appropriate methods
of making the most of subcontracting opportunities for SDBs.
The reports and written support for reviews that we analyzed included
little documentation that agency staff had verified data. Rather,
reports commonly noted how the contractor obtained its data or stated
that a sample of purchase orders was reviewed. We found little
information on such samples, and where we did, they were usually used
to determine whether contractors' files included evidence that SDBs
had been solicited for subcontracts and certifications required to
confirm the status of subcontractors identified as small businesses
and SDBs.
Although agencies do not routinely verify reported data, we did not
visit contractors to determine whether the data are accurate and have
no basis to assess their accuracy. DLA staff in Twin Cities,
Minnesota, verified data in 1995 for an $801,000 incentive fee\1
claimed by a contractor and found no significant errors. The staff
said that the amount of the fee was unusually high. They believed
that because this was a multiyear contract, the contracting officer
should have periodically adjusted the fee to take into consideration
the contractor's subcontracting accomplishments on the contract. On
the other hand, a December 1994 audit report by the DOE Office of
Inspector General found that data reported by three of five large
contractors were either incorrect or unsupported and that one
contractor underreported SDB contracting by about $23 million.\2
DLA's Western District is currently planning to test verification at
eight large contractors, but several staff we spoke with are
concerned about the resources that such an effort may require.
--------------------
\1 Contracts sometimes include provisions to pay incentive fees to
contractors who exceed their small business or SDB subcontracting
goals.
\2 Audit of Administration of the Department of Energy's Small
Disadvantaged Business Program (DOE/IG-0364, Dec. 1994).
AGENCIES' PROGRAM STAFFS'
PERCEPTIONS DIFFER ON EFFICACY OF
LIQUIDATED DAMAGES TO ENFORCE
COMPLIANCE
========================================================== Appendix IV
The Small Business Act authorizes the assessment of liquidated
damages as the primary means for the government to act against
contractors that do not make appropriate efforts to subcontract to
SDBs. No staff we spoke to were able to identify any instance in
which liquidated damages had been assessed against a contractor.
Most, however, believed that the law is at least somewhat effective.
Federal Acquisition Regulations require contractors to make good
faith efforts to provide maximum practicable subcontracting
opportunities for small businesses and SDBs. The regulations state
that the failure to make a good faith effort means a willful or
intentional (1) failure to perform in accordance with the
subcontracting plan or (2) action to frustrate the plan. The
regulations also state that the indications of failure to make a good
faith effort include not assigning an official to administer the
program, not identifying or contacting small businesses or SDBs, not
maintaining records to support compliance with the program, or
adopting policies or procedures that prevent the program from
succeeding. A failure to achieve goals does not in itself constitute
a failure to make a good faith effort because various factors may
prevent a contractor from reaching a goal. In commenting on our
draft report, the Manager, SBA's Subcontracting Assistance Program,
stated that agencies other than DLA, NASA, DOE, and GSA have assessed
liquidated damages.
Although agency staff were unable to identify any instance in which
their agency has assessed liquidated damages, staff at most of the
offices we visited viewed the law as at least somewhat effective in
increasing SDB subcontracting. Some believe that the threat of
liquidated damages is enough to secure compliance because the
consequences to prime contractors of being assessed damages, such as
delays in being awarded future contracts, are so severe. As a
result, they said, contractors generally demonstrate enough of a good
faith effort to protect themselves from such agency actions.
Some staff disagreed that the law is effective. They believe the
definition of good faith effort is vague and "lacks teeth," and
several questioned whether assessment of liquidated damages would be
upheld in court. They believed that the government would have to
prove that the contractor had willfully and intentionally excluded
SDBs from subcontracting opportunities and that to avoid the
assessment of damages, the contractor would only have to show
evidence that it had contacted such firms or awarded even a small
contract to an SDB. Some also said that contractors know the
government will not use the law and that some contractors are unaware
of the law. In explaining the difficulty in using liquidated
damages, a small business specialist at DLA cited a list of actions
that he feels are necessary to lead up to assessing damages: an
unsatisfactory mark on a compliance review, disapproval of the
contractor's purchasing system, direct contact with the contractor by
the contracting office's commander, and placement on DOD's contractor
alert list.
GSA small business specialists believed that the term "liquidated
damages" brings the law into question, because the term usually
indicates there has been damage to the federal government. It is
doubtful, they said, that insufficient efforts to subcontract to SDBs
would damage the government.
OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix V
As requested, our work focused on efforts of the Defense Logistics
Agency, the Department of Energy, the General Services
Administration, and the National Aeronautics and Space Administration
to monitor the progress made by the agencies' contractors in
providing maximum subcontracting opportunities for SDBs and achieving
the SDB program's goals in subcontracting plans. Specifically, we
determined (1) how these agencies monitor contractors' progress in
subcontracting to small disadvantaged businesses, (2) whether
agencies have assessed monetary damages, known as liquidated damages,
against contractors who did not make a good faith effort to
subcontract to SDBs, and (3) what initiatives are being considered to
change the monitoring process. We conducted our review from January
through August 1995 in accordance with generally accepted auditing
standards.
In performing our work, we interviewed procurement and other
officials at headquarters and field office locations for each of the
four agencies. We discussed how the agencies have implemented their
monitoring processes, the staff involved in the monitoring processes,
and the specific monitoring tasks the staff perform. We also
discussed the agencies' use of liquidated damages against contractors
that failed to achieve their goals, the deterrent effects of this
assessment, and the agencies' use of other penalties or incentives to
encourage subcontracting with SDBs. Finally, we discussed what
initiatives the individual agencies or the federal government has
under way or planned to change monitoring processes. We also
reviewed guidance issued by the agencies on subcontract monitoring
and documents describing proposed or planned changes to the
monitoring processes, including a change to the Federal Acquisition
Regulations that would, among other things, reduce the information
required on subcontracting reports submitted by contractors.
To determine how the agencies actually carried out monitoring tasks,
whether the monitoring processes help to ensure that contractors
comply with their plans and accurately report subcontracting result,
and whether the agencies had assessed liquidated damages, we reviewed
agencies' files for 105 contracts at the following 15 field office
locations.
DLA: Atlanta, Georgia; Boston, Massachusetts; Dallas, Texas;
Philadelphia, Pennsylvania; St. Louis, Missouri;\1
and Van Nays, California.
NASA: Greenbelt, Maryland; Huntsville, Alabama; and Houston,
Texas.
DOE: Albuquerque, New Mexico; Chicago, Illinois; and Oak Ridge,
Tennessee.
GSA: Chicago, Illinois; District of Columbia; San Francisco,
California.
The contracts, representing 99 contractors, were selected on a
judgmental basis from contracts with active subcontracting plans as
of September 1994.
--------------------
\1 Because of the high concentration of contracts with one contractor
at the St. Louis office, we reviewed only 7 contracts at this
location. We completed our sample of 105 contracts by reviewing 3
contracts at the DLA office in Baltimore, Maryland.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION
Alice Feldesman
Stanley P. Ritchick
LOS ANGELES OFFICE
Marco Gomez
Eric Johns
James D. Moses