Report | March 7, 2022

Audit of Department of Defense Small Business Subcontracting Requirements (DODIG-2022-069)

Audit

Publicly Released: March 9, 2022

 

Objective

The objective of this audit was to determine whether DoD contracting officials conducted oversight to ensure that contractors awarded small business set-aside and sole-source contracts complied with small business subcontracting limitations in accordance with applicable laws and regulations.

 

Background

The Federal Acquisition Regulation (FAR) states that contracting officers may set aside solicitations to allow only small businesses to compete.

According to the Code of Federal Regulations (CFR), small business prime contractors are subject to limitations on subcontracting. The limitations require that small business prime contractors must not pay more than between 50 and 85 percent of the amount paid by the Government to subcontractors that do not have the same small business program status, based on whether the contract is for services (except construction), supplies, general construction, or special trade. Costs of materials are excluded and not considered subcontracted amounts for supply, general construction, and special trade contracts. Any small business prime contractors that violate the subcontracting limitations are subject to a fine of $500,000, or the dollar amount spent by the prime on subcontractors in excess of permitted levels, whichever is greater.

 

Finding

DoD contracting personnel awarded small business set-aside and sole-source contracts to contractors that complied with established contracting limitations for 21 of the 31 contracts that were subject to subcontracting limitations. However, DoD contracting personnel actions for ensuring compliance with established subcontracting limitations and subcontract award reporting requirements for small business set-aside and sole-source contracts were not effective. Specifically, of the 49 small business contracts we reviewed, we identified that DoD contracting personnel did not:

  • Ensure compliance with subcontracting limitations by tracking and monitoring the amounts prime contractors paid to subcontractors for 27 contracts, valued at $514.1 million. In addition, DoD contracting personnel could not provide documentation to support compliance with subcontracting limitations for 10 of those contracts, valued at $26.5 million. This occurred because specific procedures or guidance for tracking and monitoring small business prime contractor compliance with subcontracting limitations did not exist to supplement the FAR requirements. Furthermore, DoD contracting personnel stated that they did not believe they were responsible for overseeing and monitoring subcontracts awarded by small business prime contractors.
  • Confirm whether prime contractors for 34 contracts, valued at $497.9 million, reported first-tier subcontract award information in the Federal Funding Accountability and Transparency Act (FFATA) Subaward Reporting System (FSRS), and did not review first-tier subcontract reports for 35 contracts, valued at $522.0 million, on a quarterly basis. Additionally, for the 34 contracts in which prime contractors did not comply with first‑tier subcontract award reporting requirements, DoD contracting personnel did not include contractors’ non‑compliance in the contractors’ performance information. DoD contracting personnel stated that they did not confirm whether prime contractors reported first‑tier subcontract awards because they were not aware of the FAR requirements for contractors, including small businesses, to report first-tier subcontracts. DoD contracting personnel also stated that they did not review subcontractor reports quarterly, or report contractor non‑compliance with the reporting requirements because they were not aware of their own requirements related to first‑tier subcontract reporting.

As a result, the funds the DoD awarded through contracts set aside for small businesses may not have provided the intended benefit to the programs established to support socially and economically disadvantaged individuals when adequate documentation did not exist to support contractors’ compliance with subcontracting limitations. We consider the 10 contracts for which documentation was not available to support compliance with subcontracting limitations, valued at $26.5 million, as unsupported questioned costs. Those contractors may also be subject to at least $5 million in penalties if they exceeded the applicable subcontracting limitations. Furthermore, when small business prime contractors did not report first-tier subcontract award information in FSRS, contractors and DoD contracting personnel did not uphold the intent of the FFATA to empower the public to hold the Government accountable for spending decisions. Without adequate controls in place, DoD contracting activities will continue to be unable to ensure that small business contractors are complying with the subcontracting limitations or subcontract award reporting requirements, which hinders accountability and transparency over DoD spending.

 

Recommendations

We recommended that the Director of the DoD Office of Small Business Programs issue supplemental guidance to increase contracting personnel understanding of the FAR requirements related to determining small business prime contractor compliance with subcontracting limitations and compliance with first-tier subcontract award reporting requirements. In addition, we recommended that the Director issue supplemental guidance to implement procedures for DoD contracting personnel to pursue the collection of penalties from contractors that do not comply with subcontracting limitations. Finally, we recommended that the Director require training for all DoD contracting personnel who monitor contract performance and are responsible for ensuring compliance with subcontracting requirements, in order to increase understanding of small business subcontracting requirements.

We also recommended that DoD contracting leadership from multiple offices perform reviews of the contracts for which adequate documentation related to subcontracting amounts was not maintained and determine whether the small business prime contractors complied with subcontracting limitations, pursue collection of penalties for any contractors that exceeded established limitations, and report any instances of non‑compliance in contractor performance information.

 

Management Comments and Our Response

The Office of Small Business Programs Director did not respond to four recommendations in the report; therefore, the recommendations are unresolved. We request that the Director provide comments on the final report.

DoD contracting leadership agreed with our recommendations and stated that they had either completed the contract reviews and determined that the prime contractors did not exceed established subcontracting limitations, or would perform the reviews and initiate appropriate action if the prime contractors exceeded the limitations. Based on the completed reviews, we closed two recommendations and we no longer consider $10 million related to three contracts as unsupported questioned costs. Comments also addressed the other six recommendations; therefore, we consider those recommendations resolved but will remain open. We will close the recommendations once we verify that the information provided and actions taken by management fully address the recommendations.

 

This report is the result of Project No. D2021-D000AX-075.000.