In order to foster the participation of small businesses in subcontracting,  the Federal Acquisition Regulation (FAR) requires DOD contractors to  have subcontracting plans for most contracts of more than $500,000   ($1 million for construction contracts). DOD Has Yet to Assess the Overall Outcome of Its Test Program

Although the Test Program has been in existence since fiscal year 1991,  DOD does not know if it is achieving its intended objectives to provide  more small business subcontracting opportunities and to reduce  administrative burden for contractors. The Office of the Under Secretary  of Defense, Office of Small and Disadvantage Business Utilization, which  is to report the results of the Test Program in December 2005, shortly after  the program is set to expire, commissioned a preliminary study of the  program in 2002. Contractors Have Met Some Small Business Goals, but Results Are Inconsistent

In the past 5 years, the 15 DOD contractors participating in the Test  Program had varying success in meeting their small business goals  established in their subcontracting plans. Changing Contracting Environment May Affect Contractors’ Ability to Meet Small Business Goals

DOD and contractor officials noted that a changing acquisition  environment has added to the challenge in meeting their small business  goals. Changes included (1) the increased breadth, scope, and complexity  of DOD prime contracts that require, among other things, teaming  arrangements with other, typically large contractors and (2) prime  contractors’ strategic sourcing decisions to leverage their purchasing  power by reducing the number of their suppliers including small  businesses. Test Program plan reviews—annually assess each contractor participating  in the Test Program. In July 2003, DCMA published an updated policy for monitoring  contractors’ small business subcontracting programs. Concerns Remain about Reliability of Data on Subcontracts Performed Outside U.S.

We could not assess the full extent that defense contractors’ subcontract  with firms performing outside the U.S. In October 2003, during our review, the Director of Defense Procurement  and Acquisition Policy—through the Office of Program Acquisition and  International Contracting—began to take the following actions to address  contractor compliance    sent letters to the top 100 parent companies of DOD contractors to remind  them about DOD reporting requirements for subcontracts to firms  performing outside the U.S. and requested they ensure all their  subsidiaries also comply with this reporting requirement,    sent a memorandum to the Senior Acquisition Executives of the Military  Department and the Defense Agencies requesting they remind their  contracting officers of the reporting requirement,    engaged in outreach efforts with government and industry personnel to  help ensure this effort to improve contractor compliance was fully  communicated,    sent a memorandum to DCMA requesting its assistance in periodically  verifying that contractors are complying with the reporting requirements,  and    clarified reporting requirements for subcontracts to firms performing  outside the U.S. Conclusions

Because of its large contracting operations, DOD is critical to the success  of federal programs designed to provide opportunities for small  businesses. DOD has recognized the importance of its role in federal  contracting; has taken limited steps to help improve opportunities for  small businesses, such as the Test Program; and has revised DCMA  guidance to hold contractors more accountable for their small business  goals. As a result, there is no systematic way  of determining whether the program is meeting its intended objectives and  whether further changes need to be made. Without  accurate and complete information on subcontracts to firms performing  outside the U.S., DOD cannot make informed decisions on industrial base  issues. Also, to ensure DOD has the information it needs to accurately determine  the number and dollar amount of subcontracts to firms performing outside  the U.S., we recommend the Secretary of Defense direct DOD’s Office of  Program Acquisition and International Contracting to establish procedures  to improve the quality of the information in its database of subcontracts  performed outside the U.S.

	Agency Comments and Our Evaluation

DOD provided us with written comments on a draft of this report. To determine the performance of contractors participating in the Test  Program, we collected data on the 15 DOD contractors (i.e., parent  companies or their subsidiaries) participating in the Test Program.
Why GAO Did This Study

More small businesses are turning to subcontracting as a way to participate in the federal government's $250 billion procurement program. DOD, accounting for about two-thirds of federal procurements, has a critical role in providing opportunities to small businesses through subcontracting programs such as the Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans (Test Program). In addition, Congress raised concerns about the potential for small businesses to lose opportunities to firms performing work outside of the United States. GAO was asked to review (1) DOD's assessment of the Test Program's effectiveness, (2) the performance of contractors participating in the Test Program, (3) the Defense Contract Management Agency's (DCMA) oversight of contractors' small business subcontracting efforts, and (4) the extent and reasons contractors are subcontracting with businesses performing outside the U.S.

What GAO Found

In order to foster small business participation in subcontracting, government contractors with larger dollar value contracts are required to have subcontracting plans that establish goals for contractors to award small businesses a percentage of subcontract dollars. DOD created the Test Program to provide more small business opportunities and reduce the administrative burden for contractors in managing their subcontracting programs. Many of DOD's largest contractors participate in the program. A lthough the Test Program was started more than 12 years ago, DOD has yet to establish metrics to evaluate the program's results and effectiveness. As a result, there is no systematic way of determining whether the program is meeting its intended objectives and whether further changes need to be made. DOD contracted for an assessment of the Test Program in 2002, but the results of the assessment are considered preliminary and, therefore, have not been reported. DOD is required to report the results of the Test Program in 2005, when the program is set to expire. DOD contractors participating in the Test Program have experienced mixed success in meeting their various small business subcontracting goals. DOD and contractor officials noted that a changing acquisition environment has added to their challenge in meeting small business goals. Two of the major challenges they identified include (1) the increased breadth, scope, and complexity of DOD prime contracts that require, among other things, teaming arrangements with other, typically large contractors and (2) prime contractors' strategic sourcing decisions to leverage their purchasing power by reducing the number of their suppliers including small businesses. DCMA plays a key role in overseeing the performance of contractors in the Test Program and has made significant changes to its policy and guidance. The revised approach is designed to better monitor contractors' efforts, provide more consistency in assessing contractor performance, and hold contractors accountable for achieving their subcontracting goals. DCMA is still in the process of revamping its oversight activities. GAO could not assess the full extent contractors used firms performing outside the U.S. because of data reliability concerns. Contractors in GAO's review reported several reasons for awarding subcontracts to firms performing outside the U.S., such as fulfilling commitments included in offset agreements or executing teaming arrangements for major defense programs. Without accurate and complete information on subcontracts to firms performing outside the U.S., DOD cannot make informed decisions on industrial base issues.