Guidance for Review and Justification of Pass-through Contracts Is Incomplete and Oversight Processes Are Not Updated

USAID, State, and DOD varied in their implementation of Section 802. More recently, State issued a procurement bulletin  that restated Section 802 requirements, but has not taken further steps to  update tools to assist its contracting officers. For example,
USAID issued a policy directive and State issued a procurement  bulletin in June 2013 and July 2014, respectively, that each restate  the requirements of Section 802. Federal government internal control standards state that control activities,  such as policies and procedures, help to ensure that management  directives are carried out and actions are taken to address risks. Neither USAID nor State has provided its contracting officers additional  guidance to help them implement these new requirements. DOD, having  the highest level of obligations for contracts that may be potentially  subject to Section 802 requirements, has not taken any actions and is  waiting for the issuance of a final FAR rule before deciding what, if any,  revisions to its guidance are needed. Recommendations for Executive Action

We recommend that the Secretary of Defense, Secretary of State, and  Administrator of USAID take the following two actions to help ensure  contracting officers carry out the requirements of Section 802:  issue guidance to assist contracting officers by identifying approaches  for or examples of how to assess alternative contracting approaches  to include the feasibility of contracting directly with proposed  subcontractors, and documenting a determination that the approach  selected is in the best interests of the government; and  revise the processes and guidance governing management reviews of  procurements to ensure that such reviews assess whether contracting  officers are complying with the provisions of Section 802. GAO staff who made key contributions to this  report are listed in appendix V.

Appendix I: Scope and Methodology

Section 802 of the National Defense Authorization Act (NDAA) for Fiscal  Year 2013 directed the Secretary of Defense, Secretary of State, and the  Administrator of the United States Agency for International Development  (USAID) to issue guidance and regulations as may be necessary to  ensure that when an offeror notifies the contracting officer of its intent to  subcontract more than 70 percent of the total cost of the work to be  performed on certain contracts or orders, contracting officers consider  alternative contracting arrangements and make a written determination  that the contracting approach selected is in the best interest of the  government and document the basis for the determination. The  conference report that accompanied the act mandated GAO to report on  the implementation of this provision. We assessed the extent to which  the Department of Defense (DOD), Department of State (State), and  USAID revised their guidance and regulations to address pass-through  contracting issues consistent with Section 802. To conduct our work, we compared the provisions of Section 802 to  current DOD, State and USAID acquisition policies, guidance, and  regulations. To determine how agencies identify or monitor pass-through contracts,  we interviewed acquisition officials at DOD, State, and USAID and  reviewed guidance available to contracting officers and supporting  agencies, such as DCAA and DCMA. We used the government’s  procurement database—Federal Procurement Data System-Next  Generation (FPDS-NG)—to identify DOD, State, and USAID total  obligations for fiscal year 2013 on contracts that by type and value could  be subject to Section 802 requirements and reported having a plan to use  subcontractors.
Why GAO Did This Study

DOD, State, and USAID collectively spent approximately $322 billion on goods and services in fiscal year 2013. Nearly two-thirds of this dollar amount was awarded to prime contractors reportedly having a plan for using subcontractors. Concerns remain that the government could overpay contractors that provide no, or little, added value for work performed by lower-tier subcontractors. Section 802 of the NDAA for fiscal year 2013, mandated DOD, State, and USAID to issue guidance and regulations as necessary to ensure that contracting officers take additional steps prior to awarding pass-through contracts.
The accompanying conference report mandated that GAO evaluate the implementation of these requirements. This report assesses the extent to which DOD, State, and USAID issued guidance and regulations consistent with Section 802. GAO reviewed policies, guidance, and regulations at the three agencies and interviewed acquisition officials.

What GAO Found

Congress required the Department of Defense (DOD), the Department of State (State), and the United States Agency for International Development (USAID) to issue guidance and regulations as necessary to ensure that contracting officers complete additional analyses prior to awarding pass-through contracts—contracts meeting certain criteria and in which prime contractors plan to subcontract 70 percent or more of the total cost of work to be performed—by July 2013. (See figure.)
DOD, State, and USAID varied in their implementation of Section 802. Specifically, GAO's analysis of the agencies' policies and regulations found the following:
USAID issued a policy directive in June 2013 restating Section 802 requirements and is updating checklists used by contracting officers.
State issued a procurement bulletin in July 2014 that restated Section 802 requirements but has not taken further steps.
Neither USAID nor State has provided its contracting officers additional information to help them implement these new requirements, such as by identifying how to assess alternative contracting arrangements or how to document their decisions.
DOD has not taken any actions and is waiting for revisions to the Federal Acquisition Regulation—expected to be completed by March 2015—before deciding what, if any, changes to its guidance are needed.
As of November 2014, none of the agencies have updated their management review processes to reflect Section 802 requirements.
Federal government internal control standards state that control activities, such as policies and procedures, help to ensure that management directives are carried out and actions are taken to address risk. The lack of guidance and updated management review processes limits the agencies' ability to minimize the potential risk of paying excessive pass-through costs.

What GAO Recommends

To help ensure contracting officers carry out Section 802 requirements, GAO recommends that DOD, State, and USAID take two actions: issue guidance to help contracting officers perform the additional steps required, and revise management review processes and guidance to verify implementation. DOD and State agreed with GAO's recommendations but USAID did not, stating that additional guidance might limit its contracting officers' discretion. GAO maintains that both recommended actions are still warranted for USAID.