Requirements for DOE’s Oversight of Contractors’ Subcontract Management

DOE’s oversight of contractors’ subcontract management generally falls  into three broad categories: (1) reviewing subcontract costs, including  conducting certain subcontract audits, to ensure that subcontract costs  are appropriately charged to prime contracts; (2) reviewing and approving  contractor business systems, including contractor accounting and  purchasing systems, to ensure validity of data and sufficiency of  subcontract oversight policies and procedures; and (3) performing  subcontract consent reviews to consider, among other things, whether the  contractor is complying with contract provisions and assuring against  conflicts of interest, such as close working relationships or ownership  affiliations between the contractor and subcontractor, which may preclude  free competition or result in higher prices. It can be difficult to track changes in the ownership of entities that are  parties to the prime contracts to understand the entities’ relationships, if  any. Contractors subcontracted more than $6.9 billion, an amount  equivalent to nearly 30 percent of DOE’s obligations to its prime contracts  in fiscal year 2016. Specifically, these 24 entities held nearly 3,000  subcontracts with fiscal year 2016 subcontract obligations totaling about  $927 million. Of the 43 incurred cost assessment and audit reports we reviewed, 21  reports indicated that contractors had not audited more than $3.4 billion in  costs incurred by subcontractors over the 10-year period covered by the  reports. The Contract  Disputes Act of 1978 imposes a 6-year statute of limitations for the  government to seek recovery of unallowable costs that could be identified  through subcontract audits, so it is important for audits to be completed in  a timely manner. Nevertheless, according to officials from DOE’s local offices, because  DOE is not a party to the subcontracts, agency officials generally do not  maintain or request subcontractor ownership information beyond the  information that contractors provide during consent reviews. By  requiring contracting officers to independently review subcontractor  ownership information as part of consent reviews and assess potential  conflicts of interest, DOE would have better assurance that contractors  are adequately identifying and mitigating organizational conflicts of  interest. DOE’s headquarters and local offices have taken some steps to  ensure that contractors comply with their subcontracting requirements. Additionally, DOE’s local offices did not always ensure that  contractors audited their subcontractors’ incurred costs for cost- reimbursement and time-and-materials subcontracts as required because  DOE headquarters has not issued documented procedures or guidance  that requires local offices to monitor contractors’ progress in completing  the required subcontract audits in a timely manner. Without such  procedures or guidance, unallowable costs may go unidentified beyond  the 6-year limitation period of the Contract Disputes Act, preventing DOE  from recovering those costs. (Recommendation 1)
The Director of the DOE Office of Acquisition Management should  develop documented procedures or guidance that requires DOE’s local  offices to monitor the contractors’ progress in completing required  subcontract audits in a manner that ensures unallowable costs can be  recovered within the 6-year limitation period in the Contract Disputes Act. DOE did not concur with our fourth recommendation to require local  officials to independently review subcontract ownership information as  part of DOE consent reviews and assess potential conflicts of interest to  ensure contractors are mitigating them. To identify the entities that participated in DOE’s largest prime contracts,  the extent to which they subcontracted their work, and the entities that  participated in those subcontracts during fiscal year 2016, we reviewed a  list of all DOE prime contracts active in that year provided by DOE  headquarters officials. We conducted a content analysis of DOE  and contractor officials’ responses provided through the structured  interview process and on the data and documentation we received, and  we summarized the extent to which DOE ensures that contractors were  auditing subcontractors’ incurred costs and meeting other requirements  for subcontract oversight. Appendix II: The Department of Energy’s 24 Largest Prime Contracts in Fiscal Year 2016

Table 4 provides information on the Department of Energy’s (DOE) 24  largest prime contracts in fiscal year 2016, including the name of the site  or project, the name of the contractor, entities that were party to the prime  contract, and the amount obligated on the contract in fiscal year 2016.
Why GAO Did This Study

DOE, including NNSA, is the largest federal civilian contracting agency, spending about 90 percent of its appropriations on contracts with companies, universities, and others for federal research and development, engineering, and production. DOE headquarters and local offices oversee contractors’ activities, including their management of subcontracts.
GAO was asked to review contracting at DOE, including the use of subcontractors. This report examines, for fiscal year 2016, (1) the parties that participated in DOE’s largest prime contracts and the extent to which they subcontracted their work; (2) the extent to which DOE ensured that those contractors audited subcontractors’ costs, as required; and (3) the extent to which DOE ensured that contractors met other subcontract oversight requirements. GAO reviewed DOE’s fiscal year 2016 data and documents, analyzed regulations, and interviewed federal officials and contractor representatives for DOE’s 24 largest fiscal year 2016 prime contracts.

What GAO Found

In fiscal year 2016, 28 entities participated in the Department of Energy’s (DOE) and its National Nuclear Security Administration’s (NNSA) 24 largest prime contracts, which totaled $23.6 billion of DOE’s fiscal year 2016 obligations. The contractors awarded about $6.9 billion (nearly 30 percent) of those obligations to thousands of subcontractors. Further, multiple companies, universities, and other entities can join together to bid on a contract (i.e., become a “party to” a contract). GAO’s review of data about these contracts and subcontracts identified complex ownership relationships among the contractors and subcontractors. For example, GAO found that almost all of the 28 parties to the prime contracts in its review were also subcontractors to some prime contracts, holding a total of nearly 3,000 subcontracts with fiscal year 2016 obligations totaling about $927 million (see figure). GAO found that it can be difficult to track changes in the ownership of parties to the contracts and to understand the relationships between parties.
DOE and NNSA did not always ensure that contractors audited subcontractors’ incurred costs as required in their contracts. GAO’s review of 43 incurred-cost assessment and audit reports identified more than $3.4 billion in subcontract costs incurred over a 10-year period that had not been audited as required, and some subcontracts remained unaudited or unassessed for more than 6 years. Completing audits in a timely manner is important because of a 6-year statute of limitations to recover unallowable costs that could be identified through such audits. DOE headquarters has not issued procedures or guidance that requires local offices to monitor contractors to ensure that required subcontract audits are completed in a timely manner, consistent with federal standards for internal control. Without such procedures or guidance, unallowable costs may go unidentified beyond the 6-year limitation period of the Contract Disputes Act, preventing DOE from recovering those costs.
DOE and NNSA perform several reviews to ensure that contractors meet other subcontract oversight requirements. For example, DOE’s local offices review proposed subcontracts to ensure they are awarded consistent with policies related to potential conflicts of interest. However, local officials do not independently review information on subcontractor ownership because doing so is not required, although such information could alert officials to potential conflicts of interest. By requiring contracting officers to independently review subcontractor ownership information, DOE and NNSA would have better assurance that contractors are adequately identifying and mitigating organizational conflicts of interest.

What GAO Recommends

GAO is making six recommendations, including that DOE develop procedures that require local offices to monitor contractors to ensure timely completion of required subcontract audits, and require local DOE officials to independently review subcontractor ownership information to identify potential conflicts of interest. DOE partially concurred with five of GAO’s six recommendations but did not agree to independently review subcontractor ownership information. GAO maintains that the recommended actions are valid.