DOD Primarily Relies on Contractors to Determine Needs for Specialty Metals and Verify Compliance with Restrictions

The Department of Defense (DOD) monitors the availability of specialty  metals and conducts periodic quality assurance reviews; but played a  limited role in planning for the procurement of specialty metals and  ensuring compliance with specialty metals’ restrictions for the five  programs we reviewed. We reviewed selected prime contracts for these  programs and found they contained clauses requiring prime contractors to  procure specialty metals in compliance with domestic source restrictions,  ensure that delivered items meet contract technical requirements as part  of quality assurance, and maintain processes for meeting future material  needs. In turn, these prime contractors told us that they flow down the  contract requirements—including those pertaining to specialty metals—to  their suppliers, and require them to follow industry standards for quality  management. Further, prime contractors for these programs told us they  use a risk-based approach to oversee subcontractors, including those at  lower tiers. management guidance, and the prime contractor told us that this planning  includes specialty metals. These prime contractors indicated they also require their  subcontractors and suppliers to use these industry standards. DOD Has Defined Procedures for Requesting Specialty Metals Waivers, but Dissemination of Its Waiver Information is Limited

The specialty metals restrictions allow the Secretary of Defense or certain  delegated officials to grant national security waivers, among other things,  for the use of noncompliant specialty metals. During our review and, in part, in  response to our discussions with USD AT&L officials, DOD developed  written guidance for program offices to follow when requesting national  security waivers. Since 2009, DOD granted six national security waivers for the use of  noncompliant specialty metals on five different weapon system  programs—five of which were granted after contractor disclosure that  noncompliant specialty metals were, in some cases, contained in the end  items delivered to DOD. Table 3 shows the six  national security waivers approved for five weapon system programs  since 2009 when the DFARS was revised to remove a previous  exemption for high performing magnets, as provided by the National  Defense Authorization Act for Fiscal Year 2008. Specifically, in 2009, DOD eliminated an exception in the DFARS that  allowed electronic components containing noncompliant high  performance (samarium-cobalt) magnets to be procured from non- domestic sources. However, we found that DOD’s process for  granting national security waivers for specialty metals had some  weaknesses. Further, DOD has been directed by a House report accompanying H.R. Standards for Internal Control in the Federal Government call for  information and communications to be recorded and communicated to  others, such as stakeholders who need it, to help the agency achieve its  goals. Establishing a mechanism to disseminate non-sensitive  information—including the names of programs that received waivers,  sources of the noncompliant specialty metals, and corrective actions—to  key stakeholders, such as DOD weapon system program offices and their  defense suppliers—could help raise awareness of and greater  compliance with the specialty metals restrictions. However, DOD’s lack of a mechanism to  disseminate information to its key stakeholders within the department’s  weapon system program offices and their supplier-base on national  security waivers granted makes it difficult for others not directly involved  with the waiver request to have awareness of the risks as well as the  consequences. Further, greater awareness of supplier-base problems  and broader dissemination of information could assist DOD in better  discovering vulnerabilities, such as systemic supply chain risks that affect  national security objectives. Specifically, we assessed (1) how DOD meets its  needs for specialty metals parts and ensures compliance with the  specialty metals restrictions, and (2) DOD’s process for providing national  security waivers for specialty metal procurements and the extent to which  it disseminates waiver information throughout the department. We selected a non- generalizable sample consisting of these five DOD weapon system  programs, based on their greatest total acquisition cost estimates as of  November 2013.
Why GAO Did This Study

Specialty metals—such as titanium, certain steel alloys, and samarium-cobalt alloy magnets—are essential to DOD weapon systems due to their unique properties, such as being highly durable. Federal statute requires specialty metals used in weapon systems to be procured from domestic sources or qualifying countries. However, the law allows DOD to waive this requirement in the interest of national security. GAO was mandated by a House report accompanying a bill for the National Defense Authorization Act (NDAA) for Fiscal Year 2014 to review DOD's compliance with specialty metals requirements.
This report assesses (1) how DOD meets its needs for specialty metals parts and ensures compliance with restrictions, and (2) DOD's process for providing national security waivers for specialty metal procurements and the extent to which it disseminates waiver information throughout the department. GAO reviewed contracts, laws, regulations and DOD guidance, and analyzed a non-generalizable sample of five weapon systems as case studies based on their total 2013 acquisition costs, among other things. GAO also reviewed national security waivers DOD granted since 2009 and interviewed DOD and contractor officials.

What GAO Found

The Department of Defense (DOD) typically relies on its prime contractors to plan for the procurement of specialty metals and ensure compliance with specialty metals' restrictions for the five weapon systems programs that GAO reviewed. For these programs, GAO found that DOD plays a limited role—primarily monitoring the availability of specialty metals and conducting periodic reviews of prime contractor quality assurance processes. GAO also reviewed contracts for these five programs and found they contained clauses that require prime contractors to procure specialty metals in compliance with domestic source restrictions, ensure that delivered items meet contract requirements as part of quality assurance, and maintain processes for future material needs. In turn, these prime contractors told GAO that they pass down the contract requirements—including those pertaining to specialty metals—to their subcontractors and defense suppliers, and require them to follow industry standards for quality management. These standards include, among other things, testing subcontractor processes to determine if they meet contractual specifications; reviewing required supplier certifications for items delivered under the contract to confirm compliance with all identified requirements; and rating subcontractors using performance metrics. Prime contractors for these programs also told GAO they use a risk-based approach to oversee subcontractors, including those suppliers at lower tiers.
DOD recently improved its national security waiver process; but its dissemination of information contained in those waivers is limited. Since 2009—when specialty metals restrictions were changed and the exception for national security was added—DOD has granted six national security waivers to five different weapon system programs known to have procured noncompliant specialty metals. Five of the six waivers were for samarium-cobalt magnets, which were noncompliant largely due to a change in a previously allowed exception for these magnets. During its review, GAO identified weaknesses in DOD's waiver process such as not having defined procedures for requesting waivers; and in June 2014, DOD developed written guidance for program offices to follow when requesting these waivers. However, GAO also found that DOD does not have a mechanism to share information on national security waivers granted for noncompliant specialty metals. Standards for Internal Control in the Federal Government call for information to be recorded and communicated to management and others, including external parties who need it, such as program offices and suppliers, to help the agency achieve its goals. Disseminating non-sensitive information—including the names of programs that received waivers, sources of the noncompliant specialty metals, and corrective actions—to key stakeholders, such as DOD weapon system program offices and their defense suppliers, could help raise awareness of and compliance with the specialty metals restrictions. Moreover, greater awareness of supplier-base problems and broader dissemination of national security waiver information could assist DOD in better discovering potential vulnerabilities, such as systemic supply chain risks that could impact national security objectives.

What GAO Recommends

GAO recommends that DOD disseminate non-sensitive information within the department and its supplier-base on the waivers it has granted for specialty metals. DOD concurred with the recommendation and plans to publish non-sensitive information.