oversight

Defense Contracting: Improved Policies and Tools Could Help Increase Competition on DOD's National Security Exception Procurements

Published by the Government Accountability Office on 2012-01-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States Government Accountability Office

GAO            Report to Congressional Committees




January 2012
               DEFENSE
               CONTRACTING
               Improved Policies and
               Tools Could Help
               Increase Competition
               on DOD’s National
               Security Exception
               Procurements




GAO-12-263
                                            January 2012

                                            DEFENSE CONTRACTING
                                            Improved Policies and Tools Could Help Increase
                                            Competition on DOD’s National Security Exception
                                            Procurements
Highlights of GAO-12-263, a report to
congressional committees




Why GAO Did This Study                      What GAO Found
Competition is a critical tool for          DOD’s use of the national security exception is small—about 2 percent of the
achieving the best return on the            dollar value of its total use of exceptions to full and open competition, but gaps in
government’s investment. Federal            federal procurement data limit GAO’s ability to determine the full extent of DOD’s
agencies are generally required to          use. DOD procures a range of goods and services under this exception, and
award contracts competitively, but they     according to federal procurement data, the Air Force accounted for about 74
are permitted to use other than full and    percent of DOD’s use during fiscal years 2007 through 2010. However, DOD
open competition in certain situations,     intelligence agencies and special access programs frequently use the exception,
such as when open competition would         but are generally excluded from reporting procurement data. While an Office of
reveal information that would harm
                                            the Secretary of Defense memorandum exempts three of the intelligence
national security. GAO examined
                                            agencies from reporting such data, DOD policy on reporting sensitive
DOD’s use of this provision, known as
the national security exception. It
                                            procurements for other military department programs is not clear.
requires the use of competition to the      For most national security exception contract actions GAO reviewed, DOD used
greatest extent practicable. GAO            a single justification and approval document that applies to multiple contracts—
assessed (1) the pattern of DOD’s use       known as a class justification. Among those reviewed, $3.3 billion of $3.4 billion
of the national security exception;         was obligated under contracts that used class justifications, which reduce the
(2) DOD’s processes for using the           steps required to proceed with individual contract actions that do not use full and
exception; and (3) the extent to which      open competition. According to contracting officials, the increased flexibility of
DOD achieved competition under the
                                            national security exception class justifications helps meet mission needs.
exception. GAO analyzed federal
                                            However, in the Air Force, concerns about the reduced management review of
procurement data; reviewed a
selection of 27 contract files and          these contracts have led to changes in the process for approving individual
justifications citing the exception from    contract actions using class justifications. Nevertheless, all of the justifications
the Army, Navy, and Air Force, based        GAO reviewed met Federal Acquisition Regulation requirements.
on largest obligations, frequent users,     GAO’s analysis of federal procurement data on about 11,300 contract actions
and a range of procurement types, as        found that, from fiscal years 2007 through 2010, only 16 percent of all obligations
well as five contracts from DOD             under those actions by the military departments under the national security
intelligence agencies; and interviewed
                                            exception received more than one proposal, as shown in the figure below.
DOD contracting and program officials.
                                            Contract files and contracting officials cited a limited pool of companies with the
What GAO Recommends                         right capabilities, the difficulty of changing from an established vendor, and
                                            limited tools for soliciting competitive bids as reasons for their inability to obtain
GAO recommends that DOD issue               more competition. Twelve of the 27 military department contract files GAO
guidance clarifying when security           reviewed did not include a record of market research, and others included few
sensitive contracting data must be          details on the results. Two intelligence agencies that reported using the national
reported, monitor the impact of new Air
                                            security exception for all contracting reported achieving comparatively high levels
Force class justification processes, and
                                            of competition. Both have systems that catalogue firms, capabilities, and
consider using tools that facilitate
market research in a secure                 solicitations that are used to facilitate security sensitive market research.
environment. DOD concurred with two         Number of Offers Received on Armed Service National Security Exception Contracts by
recommendations and partially               Percentage of Dollars Obligated, Fiscal Years 2007 through 2010
concurred with the recommendation on
clarifying guidance, citing pending
revisions to regulations. GAO
continues to believe that clarifying
guidance is needed.

View GAO-12-263. For more information,
contact Belva Martin at (202) 512-4841 or
martinb@gao.gov.

                                                                                       United States Government Accountability Office
Contents


Letter                                                                                     1
               Background                                                                  3
               DOD’s Use of the National Security Exception Covers a Range of
                 Goods and Services, but Gaps in Data Limit Ability to Determine
                 Full Extent of Use                                                        6
               DOD Often Uses a Single Document to Justify Multiple Actions
                 under the National Security Exception, and All Justifications
                 Met Requirements                                                        12
               Level of Competition under the National Security Exception Varied
                 Greatly Within DOD                                                      20
               Conclusions                                                               25
               Recommendations for Executive Action                                      26
               Agency Comments and Our Evaluation                                        26

Appendix I     Scope and Methodology                                                     29



Appendix II    Comments from the Department of Defense                                   35



Appendix III   GAO Contact and Staff Acknowledgments                                     38



Table
               Table 1: Elements of a Justification for Other Than Full and Open
                        Competition Required by the FAR                                    4


Figures
               Figure 1: Percentage of Total DOD Obligations Based on Other
                        Than Full and Open Competition, by FAR Exceptions to
                        Competition, Fiscal Years 2007 through 2010                        7
               Figure 2: Percentage of National Security Exception Obligations by
                        DOD Component, Fiscal Years 2007 through 2010                      8
               Figure 3: Types of Procurements under the National Security
                        Exception, Fiscal Years 2007 through 2010                          9
               Figure 4: Types of Procurements under the National Security
                        Exception, by Military Department, Fiscal Years 2007
                        through 2010                                                     10


               Page i                                          GAO-12-263 Defense Contracting
Figure 5: Relationship of Contracts Reviewed to Type of
         Justifications Used by the Military Departments and
         Associated Obligations for Fiscal Years 2007 - 2010             14
Figure 6: Review Process Required by FAR for Approval of Other-
         Than-Full-and-Open Competition Contract Award over
         $85.5 Million under a Class or Individual Justification         17
Figure 7: Percentage of total DOD National Security Exception
         Obligations by Number of Proposals Received, Fiscal
         Years 2007 through 2010                                         21
Figure 8: Reported Percentage of Contract Obligations Awarded
         Competitively                                                   24




Page ii                                        GAO-12-263 Defense Contracting
Abbreviations

ACC                        Army Contracting Command
AFMC                       Air Force Materiel Command
AMC                        Army Materiel Command
ARC                        Acquisition Research Center or Acquisition
                           Resource Center
CICA                       Competition in Contracting Act
DIA                        Defense Intelligence Agency
DOD                        Department of Defense
DPAP                       Defense Procurement and Acquisition Policy
FAR                        Federal Acquisition Regulation
FPDS-NG                    Federal Procurement Data System-Next
                           Generation
IG                         Inspector General
NGA                        National Geospatial-Intelligence Agency
NRO                        National Reconnaissance Office
NSA                        National Security Agency
NSE                        National Security Exception
OSD                        Office of the Secretary of Defense
SAP                        Special Access Programs
SMDC                       Space and Missile Defense Command
SPAWAR                     Space and Naval Warfare Systems Command


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Page iii                                                  GAO-12-263 Defense Contracting
United States Government Accountability Office
Washington, DC 20548




                                   January 13, 2012

                                   Congressional Committees

                                   The Department of Defense (DOD) spent an average of $370 billion per
                                   year buying goods and services during fiscal years 2007 through 2010.
                                   The Federal Acquisition Regulation (FAR) requires, with limited
                                   exceptions, that contracting officers promote and provide for full and open
                                   competition in soliciting offers and awarding contracts. One exception—
                                   the national security exception—allows agencies to limit potential offerors
                                   on a contract solicitation in instances when disclosure of the agency’s
                                   needs would compromise national security, but still requires agencies to
                                   request offers from as many potential sources as practicable. DOD’s
                                   Better Buying Power initiative, launched in September 2010, recognized
                                   that DOD has not taken full advantage of opportunities for competition to
                                   achieve the best possible return on its investments.

                                   The National Defense Authorization Act for Fiscal Year 2011 mandated
                                   that we review DOD’s use of the national security exception. The
                                   mandate required us to review (1) the pattern of usage of such exception
                                   by acquisition organizations within the department to determine which
                                   organizations are commonly using the exception and the frequency of
                                   such usage; (2) the range of items or services being acquired through the
                                   use of such exception; (3) the process for reviewing and approving
                                   justifications involving such exception; (4) whether the justifications for
                                   use of such exception typically meet the requirements of the FAR
                                   applicable to the use of such exception; (5) issues associated with follow-
                                   on procurements for items or services acquired using such exception; and
                                   (6) potential additional instances where such exception could be applied
                                   and any authorities available to the department other than such exception
                                   that could be applied in such instances. 1 To answer the mandate, we (1)
                                   identified the pattern of DOD’s use of the national security exception to
                                   full and open competition, including the range of goods and services
                                   acquired; (2) assessed DOD’s process for using this exception; and (3)
                                   determined the extent to which DOD obtained competition on selected
                                   contracts when using the national security exception. To determine



                                   1
                                    Ike Skelton National Defense Authorization Act for Fiscal Year 2011, Pub. L. No. 111-
                                   383, § 844 (b).




                                   Page 1                                                   GAO-12-263 Defense Contracting
DOD’s pattern of use of the national security exception, we analyzed data
from the Federal Procurement Data System – Next Generation (FPDS-
NG) for fiscal years 2007 through 2010, and obtained data on competition
and use of this exception from the DOD intelligence agencies. We
determined that the federal procurement data for these fiscal years were
sufficiently reliable to identify DOD’s use of the national security
exception, in part by verifying a non-generalizable random sample of the
data from the Army, Navy, and Air Force (referred to throughout this
report as the military departments). To determine DOD’s processes for
using this exception, we used federal procurement data to select a non-
generalizable sample of 27 contract files at the military departments
based on largest obligations, frequent users, and a range of procurement
types. In addition, we reviewed five contracts provided by DOD
intelligence agencies, for a total of 32 contracts across DOD as a whole. 2
We did not include other DOD entities in our sample that reported little or
no use of the exception in federal procurement data. We analyzed the
documents the military departments and intelligence agencies used to
seek approval to limit competition on the selected contracts and
determined whether they met the requirements of the FAR. We
conducted legal research and interviewed DOD officials on other uses of
the exception and alternative authorities. Furthermore, we analyzed
policies and guidance, federal procurement data, and met with DOD
officials at the Office of the Secretary of Defense (OSD), the three military
departments, and four DOD intelligence agencies. To determine the
extent to which DOD obtained competition under the national security
exception, we reviewed the 32 selected military department and
intelligence agency contract files, and analyzed FPDS-NG data on the
number of proposals received for contracts awarded using this exception.
With military department and intelligence agency officials, we also
discussed efforts DOD makes to obtain competition when using the
national security exception as its authority to limit competition.

A more detailed description of our scope and methodology is presented in
appendix I. We conducted this performance audit from March 2011 to
January 2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for



2
 Because we did not have a list of intelligence agency contract numbers from which to
choose, we relied on the agencies to select the contracts for review.




Page 2                                                   GAO-12-263 Defense Contracting
             our findings and conclusions based on our audit objectives. We believe
             that the evidence obtained provides a reasonable basis for our findings
             and conclusions based on our audit objectives.

             The FAR requires that contracting officers provide for full and open
Background   competition in soliciting proposals and awarding government contracts.
             However, the FAR also recognizes that full and open competition is not
             always feasible, and authorizes contracting without full and open
             competition under certain conditions. Situations for which the FAR
             provides exceptions include 3

             •   only one responsible source and no other supplies or services will
                 satisfy agency requirements;
             •   unusual and compelling urgency;
             •   industrial mobilization; engineering, developmental, or research
                 capability; or expert services;
             •   international agreement;
             •   authorized or required by statute;
             •   national security; and
             •   public interest.

             The national security exception allows agencies to limit competition for a
             contract when the disclosure of the agency’s needs would compromise
             national security—not merely because the acquisition is classified or
             because access to classified materials is necessary. Further, the national
             security exception requires that agencies request offers from as many
             potential sources as practicable, although sole-source awards are
             permitted. DOD is the largest user of the national security exception, and
             a variety of entities within the department use the exception.

             In September 2010, DOD launched its Better Buying Power initiative,
             which among other goals, aims to promote effective competition in
             government contracting. As a result, promoting competition is a focus at
             DOD, according to a Defense Procurement and Acquisition Policy
             (DPAP) official, the office within OSD responsible for tracking DOD-wide
             procurement and competition metrics. As part of these efforts, DPAP



             3
               The Competition in Contracting Act of 1984 (CICA), Pub. L. 98-369, established these
             seven exceptions to competition, which are often referred to as CICA exceptions. Subpart
             6.3 of the FAR implements the CICA exceptions.




             Page 3                                                  GAO-12-263 Defense Contracting
holds quarterly meetings with competition advocates, who are officials
designated to promote competition within DOD components.

Generally, noncompetitive contracts must be supported by written
justification and approval documents that contain sufficient facts and
rationale to justify the use of the specific exception to full and open
competition that is being applied to the procurement. These justifications
must include, at a minimum, 12 elements specified by the FAR, as shown
in table 1. 4

Table 1: Elements of a Justification for Other Than Full and Open Competition
Required by the FAR

 Required justification elements
 Identification of the agency and the contracting activity, and specific identification of the
 document as a “justification for other than full and open competition”
 Nature and/or description of the action being approved
 Description of the supplies or services required to meet the agency’s needs, including
 the estimated value
 Identification of the statutory authority permitting other than full and open competition
 Demonstration that the proposed contractor’s unique qualifications or the nature of the
 acquisition requires use of the authority cited
 Description of efforts made to ensure that offers are solicited from as many potential
 sources as is practicable, including whether a synopsis of the contract was or will be
 publicized and, if not, which exception under 5.202 applies
 Determination by the contracting officer that the anticipated cost to the government will
 be fair and reasonable
 Description of the market research conducted and the results of the research or a
 statement as to why market research was not conducted
 Any other facts supporting the use of other than full and open competition, such as an
 explanation why technical data packages, engineering descriptions, statements of work
 suitable for full and open competition have not been developed or are not available
 A listing of the sources, if any, that expressed, in writing, an interest in the acquisition
 Statement of the actions, if any, the agency may take to remove or overcome any
 barriers to competition before subsequent acquisitions for the supplies or services are
 required
 Contracting officer certification that the justification is accurate and complete to the best
 of the officer’s knowledge and belief
Source: FAR § 6.303-2(b).




4
    See FAR § 6.303-2 (b) and FAR Subpart 6.304 for approval levels.




Page 4                                                         GAO-12-263 Defense Contracting
The level of the official who must approve a justification is determined by
the estimated total dollar value of the contract or contracts to which it will
apply, as outlined in the FAR. The approval levels range from the local
contracting officer for relatively small contract actions up to the
agencywide senior procurement executive for contracts worth more than
$85.5 million. The justifications can be made on an individual or class
basis; a class justification generally covers programs or sets of programs
and has a dollar limit and time period for all actions taken under the
authority. The approval levels for the class justification are the same as
those for an individual justification and are determined by the total
estimated value of the class. Approval of individual contract actions under
a class justification requires the contracting officer to ensure that each
action taken under it is within the scope of the class justification.




Page 5                                            GAO-12-263 Defense Contracting
DOD’s Use of the
National Security
Exception Covers a
Range of Goods and
Services, but Gaps in
Data Limit Ability to
Determine Full Extent
of Use
DOD Military              Based on data from FPDS-NG, DOD dollar obligations under the national
Departments’ Use of the   security exception during fiscal years 2007 through 2010 were small
National Security         relative to other exceptions to full and open competition. Out of the nearly
                          $1.5 trillion that DOD obligated for all contracts during this period, 41
Exception Is Small        percent ($606.3 billion), were based on other than full and open
Relative to Other         competition, primarily through the seven FAR exceptions. 5 However, only
Competition Exceptions    about $13 billion—or about 2 percent of DOD’s other than full and open
and Covers a Range of     competition obligations—were obligated under the national security
Goods and Services        exception. As figure 1 shows, the most common FAR exception used by
                          DOD is “only one responsible source,” while other exceptions are used
                          much less frequently.




                          5
                            The FAR allows for limited competition in some other instances beyond the seven CICA
                          exceptions, such as actions at or below the Micro-Purchase threshold (FAR Subpart 13.2)
                          or when simplified acquisition procedures are used (FAR Subpart 13.3). These make up
                          less than half a percent of all obligations based on other than full and open competition.




                          Page 6                                                    GAO-12-263 Defense Contracting
Figure 1: Percentage of Total DOD Obligations Based on Other Than Full and Open
Competition, by FAR Exceptions to Competition, Fiscal Years 2007 through 2010




The three military departments were the largest users of the national
security exception during fiscal years 2007 through 2010, according to the
data reported in FPDS-NG, obligating about $12.7 billion. The Air Force
made up 73.5 percent of all of DOD’s obligations under the exception,
despite only accounting for about 18 percent of DOD’s total contract
obligations during the same time period, as figure 2 illustrates. By
contrast, non-military-department components accounted for about 4
percent of DOD’s use under the exception.




Page 7                                             GAO-12-263 Defense Contracting
Figure 2: Percentage of National Security Exception Obligations by DOD
Component, Fiscal Years 2007 through 2010

                                                                                              4%
                                                                                         4%


  Percent of all DOD natio nal                         73%                    19%
security exception obligati ons


          Percent of total DO D       18%             38%              24%          19%
          contract obligati ons

                                  0    10   20   30     40   50   60   70    80     90        100




During the same 4-year period, over 40 percent of DOD’s total obligations
under the national security exception were for services, 37 percent for
supplies and equipment, and about 22 percent for research and
development, as shown in figure 3.




Page 8                                                        GAO-12-263 Defense Contracting
Figure 3: Types of Procurements under the National Security Exception, Fiscal
Years 2007 through 2010




                       22%                Research and development
                                          $2,950,019,510




    41%


                     37%                  Supplies and equipment
                                          $4,889,360,303




                                          Services
                                          $5,345,572,628



Based on our analysis of FPDS-NG data, the military departments’ use of
the exception varied both in the extent of use and the types of goods and
services acquired. During fiscal years 2007 through 2010, the Air Force
obligated $9.7 billion using the national security exception, nearly all by
the Air Force Materiel Command. About half of the Air Force’s obligations
under the national security exception were for services, such as logistical
support and professional services, and the other half was primarily for
supplies and equipment, such as communication equipment and aircraft
components. The second largest user, the Army, obligated $2.5 billion,
mostly by the Army Materiel Command and the Space and Missile
Defense Command. More than 80 percent of the Army’s obligations under
the exception were for research and development, mainly in space and
missile systems and electronics and communication equipment. Finally,
the Navy obligated almost $0.5 billion over the 4 fiscal years under the
exception, mostly under Space and Naval Warfare Systems Command
contracts. More than half of the Navy’s obligations under the exception
were to procure services, such as transportation and repair services.
Figure 4 shows the percent of obligations represented by each category
of procurement within the military departments.




Page 9                                                 GAO-12-263 Defense Contracting
                            Figure 4: Types of Procurements under the National Security Exception, by Military
                            Department, Fiscal Years 2007 through 2010

                            Percent of national security obligations
                            100

                                90

                                80

                                70

                                60

                                50

                                40

                                30

                                20

                                10

                                0
                                      Navy       Army      Air Force
                                     Military department


                                              Supplies and equipment

                                              Services

                                              Research and development




DOD Intelligence Agencies   DOD intelligence agencies often use the national security exception when
and Special Access          contracting for supplies and services, but generally do not report
Programs Use the            contracting data to the OSD or to FPDS-NG. Two of the four DOD
                            intelligence agencies—the National Reconnaissance Office (NRO) and
Exception but Generally     the National Security Agency (NSA)—report using the exception for all
Do Not Report Its Use       their contracting activities. The other two intelligence agencies—the
                            National Geospatial-Intelligence Agency (NGA) and the Defense
                            Intelligence Agency (DIA)—reported using the exception for less than 10
                            percent of their total contracted obligations. 6 Three of the intelligence



                            6
                             DOD intelligence agencies provided the percent of total obligations for their
                            organizations, rather than dollar amounts, as we did not have access to such information.
                            Three of these agencies reported their use for fiscal years 2007 through 2010, but due to
                            database limitations, DIA reported its use only for fiscal year 2010.




                            Page 10                                                   GAO-12-263 Defense Contracting
                            agencies, NGA, DIA, and NSA, are exempt from reporting to FPDS-NG
                            based on a memorandum from OSD. NRO is not covered by the
                            memorandum, but also does not appear in FPDS-NG data. However,
                            some of these agencies report overall competition statistics to OSD and
                            participate in DOD-wide competition advocate meetings. 7

                            In addition to the intelligence agencies, DOD Special Access Programs
                            (SAP) use the national security exception, but generally do not report
                            data to FPDS-NG. 8 These are specially classified programs within the
                            military departments and other DOD components that limit information to
                            individuals with an explicit need to know. These programs impose
                            safeguarding and access measures beyond those typically taken for
                            information with the same classification level, such as secret and top
                            secret. Most officials told us that, in general, these programs do not report
                            data to FPDS-NG. Therefore, determining the extent to which these
                            entities use the national security exception is not feasible due to the
                            limited access these programs allow. However, like the DOD intelligence
                            agencies, officials at one military department told us that they report
                            overall competition statistics for SAP contracts to DOD. Specifically, Army
                            Contracting Command officials who oversee SAP programs reported that
                            they use the national security exception for nearly all contracting activity
                            and they provide overall obligation totals and competition data to OSD.


DOD Lacks Clear Policy on   Classified data on contracts, agreements, and orders are excluded from
Reporting Sensitive         being reported in FPDS-NG. However, DOD does not have a clear policy
Contracting Activity        for excluding sensitive contracting data from being reported in FPDS-
                            NG. 9 While the memorandum from OSD exempts three of DOD’s
                            intelligence agencies (NGA, DIA, and NSA) from reporting procurement
                            data to FPDS-NG because of the sensitive nature of their procurement


                            7
                              OSD holds quarterly meetings with competition advocates from DOD’s 21 different
                            components to discuss ways to increase competition. The intelligence agencies are not
                            required to attend, but OSD officials told us that some participate in the discussions.
                            8
                              DOD distinguishes between two basic types of Special Access Programs—
                            acknowledged and unacknowledged. The unacknowledged programs limit the number of
                            people aware of the program’s existence, while acknowledged programs limit the specific
                            details of the programs not the knowledge of the program itself.
                            9
                              For purposes of this report, we define sensitive contract data as data that while not
                            classified, its release could have a negative impact on the agency’s ability to perform its
                            mission.




                            Page 11                                                     GAO-12-263 Defense Contracting
                              data, OSD and military department officials were not aware of a specific
                              policy basis for excluding sensitive programs outside of the intelligence
                              agencies. In addition to the exclusion of SAP procurement data, some
                              DOD officials told us that contracts outside of SAP do not appear in
                              FPDS-NG due to security concerns. Nevertheless, it appears based on
                              the contracts in our review that the information that is in FPDS-NG on
                              contracting activities using the national security exception is generally
                              from programs that are sensitive but not fully classified programs. Some
                              DOD officials, including at the OSD level, were unaware that some
                              individual contracts could be excluded from FPDS-NG. By contrast, other
                              officials expected all contracts using the national security exception to be
                              excluded from FPDS due to the sensitive nature of the procurements. As
                              a result, it is unclear the extent to which contracting information on SAPs
                              and other highly sensitive contracting activities in DOD are included in
                              FPDS-NG. Based on our review, it appears that most information on such
                              programs is excluded. Further, according to DOD officials, decisions are
                              made on a case-by-case basis to exclude individual contracts from
                              FPDS-NG, but they were unsure of the policy basis for these exclusions.



DOD Often Uses a
Single Document to
Justify Multiple
Actions under the
National Security
Exception, and All
Justifications Met
Requirements
DOD Makes Extensive Use       For most contracts we reviewed, DOD entities used a single justification
of Class Justifications for   and approval document that applies to multiple contracts—referred to in
the National Security         the FAR as a class justification—for national security exception contract
                              actions. Of the 27 contracts we reviewed at the military departments, all
Exception                     18 Air Force contracts cited class justifications, as did 4 of the 6 Army
                              contracts. The 2 remaining Army contracts and all 3 Navy contracts we
                              reviewed cited individual justifications. Among the contracts we reviewed,
                              $3.3 billion in obligations during the period of fiscal years 2007 through
                              2010 used class justifications, while less than $0.1 billion was obligated
                              during that period under individual justifications. Figure 5 shows the


                              Page 12                                          GAO-12-263 Defense Contracting
relationship between the individual contract files we reviewed and the
type of justification used to support the national security exception, as
well as the obligation amounts associated with each during this period. 10




10
   One Army contract originally awarded under the national security exception was
modified in 2004 to cite the “only one source” exception, and thus had no obligations
under the national security exception during the fiscal year 2007 through 2010 period.




Page 13                                                   GAO-12-263 Defense Contracting
Figure 5: Relationship of Contracts Reviewed to Type of Justifications Used by the
Military Departments and Associated Obligations for Fiscal Years 2007 - 2010




Note: Justifications are noted by generic identifiers, rather than program names.




Page 14                                                           GAO-12-263 Defense Contracting
The Air Force Materiel Command (AFMC) comprises the majority of the
Air Force’s use of the national security exception—about 72 percent of
DOD’s total contract obligations under the exception as reported in
FPDS-NG compared to 73.5 percent for the Air Force overall. Officials at
the two AFMC centers that make up the majority of the command’s
contracting under this exception reported that they cite class justifications
for the vast majority of their national security exception contracting. The
Air Force justifications we reviewed confirmed this, each covering
contracts related to multiple systems within a program office. For
example, one Air Force class justification had an obligation ceiling of
about $8.7 billion for a 7-year period. The Army’s class justifications also
covered multiple contracts, but were more focused on an individual
system within the program office, and two of the three we reviewed had
much lower obligation ceilings.

Some of the intelligence agencies also use class justifications for the
national security exception. NSA and NRO have class justifications that
cover all of their contracting activity. NGA and DIA, by contrast, reported
using individual justifications for contracts where they cite the national
security exception.

Class justifications reduce the steps required to proceed with individual
contract actions that are not fully competitive. Each justification, individual
or class, must be approved through the same process, with levels of
approval specified by the FAR based on dollar value. However, once a
class justification has been approved, the process for individual contract
actions changes—an individual contract within the scope of the class
justification can generally be approved for limited competition or sole-
source award by the local procuring activity, as long as the amount is
within the obligation ceiling of the justification. For instance, the Air Force
obligated $915 million under an indefinite delivery/indefinite quantity
contract for support and modification services on an existing aircraft and
its related systems. Because this procurement was within the scope of a
national security exception class justification, under the processes
established in the FAR, the program office did not have to obtain approval
for this noncompetitive acquisition from the Air Force’s senior
procurement executive.

According to contracting officials at an Air Force program office that has a
class justification in place under the national security exception, the
increased flexibility of their national security exception class justification
helps them meet mission needs. In the absence of a class justification,
approval of an individual justification for a noncompetitive contract award


Page 15                                           GAO-12-263 Defense Contracting
takes time; officials with one program office cited an instance of an
individual justification under a different FAR exception that was not yet
approved 7 months after it was initiated. Figure 6 illustrates the review
process for contract awards of $85.5 million or more under class and
individual justifications.




Page 16                                          GAO-12-263 Defense Contracting
Figure 6: Review Process Required by FAR for Approval of Other-Than-Full-and-Open Competition Contract Award over $85.5
Million under a Class or Individual Justification




                                       Note: Initial approval of class justifications is subject to the same process as individual justifications.




                                       Page 17                                                               GAO-12-263 Defense Contracting
In some cases, the class justifications we reviewed included a list of firms
authorized to participate, as well as anticipated obligation amounts for
each firm over the applicable time period. For instance, one of the Air
Force class justifications we reviewed listed about 40 firms, each with
anticipated contract obligations of several million to several billion dollars
during the 7-year time frame of the class justification. Despite the number
of firms listed in the class justification, competition among them for a
given contract award was rare—the contracts we reviewed under this
justification typically stated that only one of the firms was capable of
meeting the government’s requirements. Officials at one Air Force center
said that amending their existing class justification to add new firms had
proved difficult in the past, and noted that this can reduce competition by
limiting ability to work with new entrants to the market.

Some Air Force officials also noted that concerns about the level of
review of individual contracts that are awarded without full and open
competition under class justifications have led to efforts to revise the
review process for activity under class justifications. The Air Force revised
its process in a recently approved national security class justification for
an intelligence, surveillance, and reconnaissance program office,
requiring individual contract actions over $85.5 million be submitted to the
Air Force senior procurement executive for expedited review. 11 According
to an Air Force General Counsel official, the Air Force has not yet
determined what type of documentation will be required as part of that
review, but it believes the increased review may identify additional
opportunities for competition. This is the first Air Force class justification
to include this new process, and officials were not aware of any similar
processes at other DOD entities. According to Air Force officials, the new
class justification also includes a mechanism for adding new firms after
the initial approval of the justification. Officials in the affected program
office said that they anticipate an increase in competition rates as a result
of this new flexibility.

Regardless of whether the military departments used class or individual
justifications, all those we reviewed met FAR standards. We reviewed
justification and approval documents for the use of the exception for 27
different contracts awarded by the Army, Navy, and Air Force, and all met



11
   This new class justification is the successor to one of the Air Force justifications
included in our review.




Page 18                                                      GAO-12-263 Defense Contracting
                            the standards established in the Federal Acquisition Regulation for
                            approving the justification. In addition, we reviewed the justifications and
                            approval documents for one national security exception contract each at
                            NGA, NRO, and DIA, and two such contracts at NSA, and all generally
                            met the requirements of the FAR.


There Are No Alternative    According to officials from all DOD components we met with, the national
Authorities for National    security exception should be used in limited circumstances where full and
Security Sensitive          open competition would compromise national security. These officials
                            were not aware of other authorities that could be used in its place, nor
Procurements, but           were they aware of any such proposed authorities. In some justifications
Additional Exceptions May   and approval documents, DOD components may cite other exceptions in
Be Cited in Some Cases      addition to the national security exception. For example, the entities that
                            reported using the national security exception for all or nearly all
                            contracting—NSA, NRO, and some Air Force SAPs—reported citing
                            additional exceptions when making sole-source contract awards.
                            According to policy documents and officials with these organizations, it is
                            standard practice to list more than one exception when applicable. For
                            example, one NSA contract for computer security equipment that we
                            reviewed cited the “only one responsible source and no other supplies or
                            services will satisfy agency requirements” FAR exception alongside the
                            national security exception, because contracting officials had determined
                            that only one firm was capable of meeting the government’s
                            requirements. Likewise, in awarding a satellite contract, NRO used the
                            “only one responsible source” exception in addition to the national
                            security exception. The military departments generally do not cite
                            additional exceptions when using the national security exception.




                            Page 19                                           GAO-12-263 Defense Contracting
Level of Competition
under the National
Security Exception
Varied Greatly Within
DOD
Few Military Department   According to federal procurement data, the military departments typically
Contracts Achieved        did not achieve competition on national security exception contracts. Of
Competition under         the more than 11,300 DOD military department contract actions citing the
                          national security exception from fiscal years 2007 through 2010, DOD
National Security         received only one proposal for $10.6 billion of its obligations—about 84
Exception                 percent of the total $12.7 billion in obligations under this exception. 12
                          About 4 percent of contract actions, which account for 16 percent of the
                          military departments’ obligations, received two or more proposals, as
                          shown in figure 7 below. By department, nearly 100 percent of Air Force
                          and 95 percent of Navy contract obligations received only one proposal,
                          whereas about 80 percent of Army obligations were made under
                          contracts that received more than one proposal. 13




                          12
                            FPDS-NG indicated that about 70 actions accounting for 0.02 percent of obligations
                          (about $3.16 million) under the national security exception at the military departments
                          received no proposals, which are likely data entry errors.
                          13
                             About 87 percent of Army contract actions received only one proposal, but the actions
                          that did receive multiple proposals had much larger obligation amounts, on average.




                          Page 20                                                   GAO-12-263 Defense Contracting
Figure 7: Percentage of total DOD National Security Exception Obligations by
Number of Proposals Received, Fiscal Years 2007 through 2010




DOD’s Better Buying Power Initiative includes a goal of decreasing
instances where only one proposal is received, which DOD has noted
fails to provide the full benefits of competition. We have previously
reported that about 13 percent of all contract obligations governmentwide
were made on contracts awarded with competitive procedures that only
received one proposal. 14

Contracts receiving only one proposal are considered competitively
awarded if the solicitation was open to multiple potential offerors, so
contracts reported in FPDS-NG that received only one proposal may have
been awarded using competitive procedures. While data on the extent
that national security exception contracts were awarded competitively
were not sufficiently reliable, the available data confirmed that competition
is infrequent—indicating that less than a quarter of military department
obligations under this exception were competitively awarded.
Furthermore, our data reliability assessment indicated that the errors in


14
   GAO, Federal Contracting: Opportunities Exist to Increase Competition and Assess
Reasons When Only One Offer Is Received, GAO-10-833 (Washington, D.C.: July 26,
2010).




Page 21                                                 GAO-12-263 Defense Contracting
these data tend to overstate the level of competition, so the actual level
may be lower.

Likewise, few of the military department national security exception
contracts we reviewed achieved competition. Of the 27 contracts we
reviewed for the Air Force, Army, and Navy, only one received multiple
proposals. For the remaining 26 contracts, only one proposal for each
was received.

Military department officials said that they make efforts to provide
competition to the greatest extent practicable, as required by the FAR.
However, they reported three obstacles to obtaining more competition in
contract awards:

•   the existence of a small number of firms able to meet the security
    requirements for the goods and services being procured;
•   constraints on soliciting new vendors, including proprietary data and
    reliance on incumbent contractor expertise; and
•   not having tools to increase market research and solicit vendors in a
    secure environment.

For example, Air Force contracting officials reported that restrictions on
time and expertise make it difficult for many new vendors to meet
requirements. A senior Air Force contracting official told us that not
having access to technical data—such as engineering drawings and other
information needed to have another vendor meet the eligibility
requirements—is a major barrier to competition. According to this official,
one vendor often controls the data as proprietary information, and buying
or recreating it would be cost-prohibitive for potential new vendors.

The military departments generally continue to use the same exception
for follow-on contract actions to national security exception contracts, as
well as the same vendor, based on our analysis of the contracts in our
sample. Contracting officials noted that these contracts must go through
the same approval process as the initial contract, requiring justification for
the national security exception. Of the 27 contracts in our sample, we
identified 14 follow-on contracts, 12 of which were awarded to the
incumbent contractor. Contracting officials confirmed that follow-on
contracts typically are not competed and are usually awarded to the same
vendor due to proprietary data rights and expertise of the incumbent




Page 22                                           GAO-12-263 Defense Contracting
contractors, as well as the time required to initiate work with a new
vendor. We have previously reported that incumbent contractors have
important advantages in follow-on contract awards. 15

Contracting officials told us that the tools that are used to solicit
competition generally cannot be used in a security sensitive contracting
environment. FedBizOpps.com is the military departments’ primary tool
for soliciting potential offerors. 16 The site allows agencies to upload
unclassified solicitations for goods and services, but it cannot accept
classified material. 17 Even though national security exception contract
documents are often unclassified, synopsizing the requirements may
pose a security risk. Instead, contracting officials identify potential
sources based on market research and provide the solicitations to those
firms directly.

For the 27 contracts in our sample, the market research reflected in the
contract files frequently did not have adequate documentation on how it
was used to identify potential offerors. 18 Specifically, no evidence of
market research was present in 12 of the 27 contract files we reviewed; it
was present in 15 of the files we reviewed. The market research in those
15 contracts often broadly outlined the means by which the contracting
office conducted the market research, but in some cases did not include
details and evidence to document the research. In some cases, the
contracting officials relied upon their own collective experience with, and
knowledge of, vendors capable of delivering goods and services in
accordance with sensitive contract requirements. Nevertheless, even in
cases in which market research identified multiple firms that could meet
requirements, it did not always result in multiple proposals on a given
contract.




15
     GAO-10-833.
16
   The FAR requires contracting officers to synopsize proposed contract actions expected
to exceed $25,000 in the Government Point of Entry (GPE), FedBizOpps.com. FAR §
5.101(a)(1) The GPE may be accessed via the Internet at https://www.fbo.gov/. FAR §
5.201(d).
17
  Contract awards involving classified materials may be announced publicly on
FedBizOpps.com in instances where the solicitation itself is unclassified.
18
  The FAR requires that agencies conduct market research to arrive at the most suitable
approach to acquiring, distributing, and supporting supplies and services. FAR § 10.000.




Page 23                                                  GAO-12-263 Defense Contracting
DOD Intelligence Agencies   NSA and NRO, which reported that they use the national security
Reported High Levels of     exception for all or nearly all contracting, showed high levels of
Competition by              competition compared to the DOD military departments. As illustrated in
                            figure 8 below, according to data provided by the agencies, annual
Conducting Market           competition rates ranged from 27 percent to nearly 70 percent of total
Research and Soliciting     obligations at NSA and NRO. Because data on contracting at intelligence
Proposals within a Secure   agencies are typically classified at highly restrictive levels, we did not
Environment                 have sufficient access to independently validate the data provided.

                            Figure 8: Reported Percentage of Contract Obligations Awarded Competitively
                            Percentage of contract obligations awarded competitively
                            90

                            80

                                                                                          67.9               69.4
                            70                                                                   66
                                                62
                                                                        60
                            60
                                                            50
                            50

                            40      38


                            30                                                   27

                            20

                            10

                             0
                                         2007                    2008                  2009           2010
                                 Fiscal year


                                           NRO

                                           NSA

                            Source: GAO analysis of FPDS-NG data.


                            NRO and NSA have both developed tools to help increase competition in
                            procuring sensitive goods and services and have made these tools
                            available for other intelligence agencies. These tools bring together a
                            large number of potential offerors and help the agencies solicit and
                            evaluate vendors, and competitively award the contract, while taking
                            measures to limit the risk to national security. The NRO Acquisition
                            Research Center, developed for intelligence community procurements,
                            limits potential contractors to about 1,200 registered firms that are already
                            cleared to perform in a secure environment and have a workforce with
                            security clearances. An NRO senior procurement official described this



                            Page 24                                                              GAO-12-263 Defense Contracting
              system as a proprietary classified version of FedBizOpps. The NSA’s
              Acquisition Resource Center is the NSA’s business registry database that
              provides industry with a central source for acquisition information. This
              system also serves as a market research tool for NSA personnel, as well
              as a means for distribution of acquisition documents to its industry
              partners. All companies that wish to do business with NSA must be
              registered in the system. As of October 2010, the database included
              about 9,300 companies. 19

              An NSA Inspector General report found that this system improved the
              agency’s ability to conduct market research and solicit competition. The
              inspector general found that it improved competition by making the
              process more systematic. The other two DOD intelligence agencies, DIA
              and NGA, have made arrangements to use one or both of the NSA and
              NRO systems. For example, our review of a DIA contract under the
              national security exception showed that the agency solicited 11
              companies and received five proposals by using NSA’s Acquisition
              Resource Center. Additionally, NGA has a memorandum of agreement
              with NRO to use its Acquisition Research Center. None of the 27 military
              department contracts we reviewed used the NSA or NRO systems to
              conduct market research. However, contracting officials at one Air Force
              center said that they were aware of NRO’s system, and although they do
              not currently have access, they would like the opportunity to use it for
              their procurements.


              DOD’s use of the national security exception is necessary in certain
Conclusions   situations when disclosing the government’s needs in a full and open
              competition would reveal information that would harm national security.
              The exception requires that agencies pursue limited competition by
              requesting proposals from as many potential sources as is feasible. DOD
              departments may not have a complete understanding of the extent of
              competition, given that DOD lacks clear policy on when sensitive contract
              actions should be excluded from the FPDS-NG, the database it uses to
              track this information. However, the available data show that the military
              departments have achieved relatively little competition in their national
              security exception procurements. Obtaining competition on new



              19
                The database includes companies with existing security clearances, as well as
              companies without clearances.




              Page 25                                                 GAO-12-263 Defense Contracting
                      procurements is especially important, because our findings and previous
                      reports have shown that once a contractor receives an award, historically
                      that contractor is likely to receive any follow-on contract. There are
                      obstacles to competition in sensitive procurements, including a limited
                      number of firms that can meet security requirements. Because of these
                      obstacles, program offices may find it easier to forego competition when a
                      class justification is already in place. However, more competition is
                      possible. The recent changes that Air Force made to its process, which
                      introduced a new high-level review of contract actions under a class
                      justification, may help increase the extent of competition. Further, while
                      the military departments face challenges in conducting market research
                      for sensitive contracts, the DOD intelligence agencies, which face similar
                      challenges, have created tools to increase their ability to identify multiple
                      potential sources and obtain competition when using the national security
                      exception. The use of such tools could enhance the ability of the military
                      departments to obtain competition on their national security exception
                      procurements.


                      We recommend that the Secretary of Defense take the following three
Recommendations for   actions:
Executive Action
                      •   Issue guidance establishing the circumstances under which security
                          sensitive contracting data are required to be reported to OSD and in
                          FPDS-NG, including the decision authority for excluding a given
                          program or contract from the database.
                      •   Evaluate the effect of the Air Force’s new review process on
                          competition and management oversight of national security exception
                          actions under a class justification; if the changes are found to be
                          beneficial, consider implementing similar changes across DOD.
                      •   Assess the feasibility of providing contracting officials in military
                          department programs that routinely use the national security
                          exception with access to tools that facilitate market research and
                          competitive solicitation in a secure environment, either through
                          development of new tools or access to existing intelligence community
                          systems.


                      We provided a draft of this report to DOD. In written comments, DOD
Agency Comments       concurred with the report’s last two recommendations and partially
and Our Evaluation    concurred with the first recommendation. DOD also provided technical
                      comments, which we incorporated as appropriate. DOD’s comments are
                      reprinted in appendix II.



                      Page 26                                          GAO-12-263 Defense Contracting
In commenting on the draft report, DOD agreed to evaluate the Air
Force’s new review process for national security exception actions under
class justifications and implement a similar process across the
department if it found it beneficial. DOD also agreed to explore deploying
existing intelligence community market research and solicitation tools to
organizations in the military departments that frequently use the national
security exception. DOD partially concurred with our recommendation to
clarify guidance on the exclusion of data from FPDS-NG citing a pending
revision to the FAR that will clarify that classified data should not be
reported to FPDS-NG. We did not encounter any ambiguity on this
point—contracting officials we met with were clear that classified data
should not be entered into the system. However, we found that DOD
policy was not clear on if and when sensitive, but unclassified, contract
data should be excluded from FPDS-NG. We continue to believe that
additional guidance is needed to clarify if and when any such data should
be excluded (outside the existing intelligence agency waiver), and if so,
outline the criteria and decision authority for doing so.


We are sending copies of this report to interested congressional
committees and the Secretary of Defense. This report will also be
available at no charge on GAO’s website at http://www.gao.gov.

If you or your staff have any questions about this report or need additional
information, please contact me at (202) 512-4841 or martinb@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. Staff
acknowledgments are provided in appendix III.




Belva M. Martin
Director
Acquisition and Sourcing Management




Page 27                                          GAO-12-263 Defense Contracting
List of Committees

The Honorable Carl Levin
Chairman
The Honorable John McCain
Ranking Member
Committee on Armed Services
United States Senate

The Honorable Howard P. “Buck” McKeon
Chairman
The Honorable Adam Smith
Ranking Member
Committee on Armed Services
House of Representatives




Page 28                                 GAO-12-263 Defense Contracting
Appendix I: Scope and Methodology
                 Appendix I: Scope and Methodology




                 Our mandate required us to review (1) the pattern of usage of the national
                 security exception by acquisition organizations within the Department of
                 Defense to determine which organizations are commonly using the
                 exception and the frequency of such usage; (2) the range of items or
                 services being acquired through the use of such exception; (3) the
                 process for reviewing and approving justifications involving such
                 exception; 4) whether the justifications for use of such exception typically
                 meet the requirements of the Federal Acquisition Regulation applicable to
                 the use of such exception; (5) issues associated with follow-on
                 procurements for items or services acquired using such exception; and
                 (6) potential additional instances where such exception could be applied
                 and any authorities available to DOD other than such exception that could
                 be applied in such instances. To respond to these objectives, this report
                 (1) identified the pattern of DOD’s use of the national security exception,
                 including the range of goods and services acquired; (2) assessed DOD’s
                 process for using this exception; and (3) determined the extent to which
                 DOD obtained competition on selected contracts using the national
                 security exception.

                 To conduct our work we met with DOD officials at the Office of the
                 Secretary of Defense (OSD), the three military departments, and DOD
                 intelligence agencies. Within OSD we met with Defense Procurement and
                 Acquisition Policy officials, including a Federal Procurement Data
                 System-Next Generation (FPDS-NG) subject-matter expert. We also met
                 with FPDS-NG experts in the three military departments. In addition,
                 across DOD we met with officials from the following offices:

U.S. Air Force   •   Office of the Deputy Assistant Secretary for Contracting and Policy
                 •   Air Force Materiel Command, Special Programs Division
                 •   Air Force Materiel Command, Implementation Branch
                 •   General Counsel

U.S. Army        •   Office of the Assistant Secretary of the Army for Acquisition, Logistics
                      and Technology
                 •   Army Materiel Command
                 •   Army Contracting Command
                 •   Army Space and Missile Defense Command
                 •   General Counsel




                 Page 29                                          GAO-12-263 Defense Contracting
                              Appendix I: Scope and Methodology




U.S. Navy                     •   Office of the Assistant Secretary of the Navy, Research, Development
                                   & Acquisition
                              •   Naval Sea Systems Command
                              •   Space and Naval Warfare Systems Command
                              •   General Counsel

Defense Intelligence Agency   •   Office of Contracting
                              •   Office of the Inspector General
                              •   General Counsel

National Geospatial-          •   Acquisition and Contracts Office
Intelligence Agency           •   Office of the Inspector General
                              •   General Counsel

National Security Agency      •   Acquisition Organization
                              •   Office of Contracting
                              •   Office of the Inspector General
                              •   General Counsel

National Reconnaissance       •   Office of Contracting
Office                        •   Office of the Inspector General
                              •   General Counsel

                              Based on discussions with FPDS-NG subject-matter experts at OSD and
                              the three military departments, we determined that the data available prior
                              to fiscal year 2006 were not sufficiently reliable for our purposes.
                              Therefore, our review focused on the most current reliable data from
                              FPDS-NG, fiscal years 2007 through 2010. We conducted legal research
                              and interviewed DOD officials to identify other uses of the exception and
                              alternative authorities. To identify the DOD components to include in our
                              review, we used FPDS-NG data to determine those with the most
                              obligations under the national security exception during fiscal years 2007
                              through 2010. These included the three military departments—the Air
                              Force, Army, and Navy. Within the departments, we identified the
                              commands with the highest obligations under the exception—the Air
                              Force Materiel Command (AFMC), Army Materiel Command / Army
                              Contracting Command (AMC/ACC), Army Space and Missile Defense
                              Command (SMDC), and Navy’s Space and Naval Warfare Systems
                              Command (SPAWAR). For entities that do not report data to FPDS-NG
                              we relied on knowledgeable DOD officials to identify the frequent users of
                              the national security exception. These included the four DOD intelligence
                              agencies—the Defense Intelligence Agency (DIA), National Geospatial-
                              Intelligence Agency (NGA), National Security Agency (NSA), and National



                              Page 30                                         GAO-12-263 Defense Contracting
                             Appendix I: Scope and Methodology




                             Reconnaissance Office (NRO), as well as Special Access Programs
                             within the DOD military departments. Due to the security limitations at the
                             intelligence agencies, we employed different methodological approaches
                             to assess the uses and processes at the intelligence agencies and the
                             military departments, as described below.


DOD Military Departments     To assess the pattern of use of the exception and the range of items or
                             services being acquired at the DOD military departments, we obtained
                             data from FPDS-NG. We included contracts and orders coded as using
                             the national security exception under the field “reason not competed” from
                             fiscal years 2007 through 2010. We analyzed obligations data and the
                             types of goods and services based on product code fields. To compare
                             use of the national security exception versus other FAR exceptions, we
                             conducted an analysis of the other values listed under the “reason not
                             competed” field.

                             To determine the processes the military departments employ when using
                             the national security exception and the extent to which they obtain
                             competition, we reviewed DOD policies and guidance and selected
                             contract files based on a non-generalizable sample of 27. The sample
                             included files from the three commands within the military departments
                             with the highest reported percentage of obligations under the exception in
                             fiscal years 2007 through 2010—AFMC, AMC, and SPAWAR. 1 Within
                             these three commands, we identified contracting offices with the highest
                             reported obligations under the national security exception as well as
                             contracting offices with a high percentage of overall contracting dollars
                             obligated under the national security exception. The components we
                             identified for the sample were:

Air Force Materiel Command   •   Air Logistics Center, Robins Air Force Base
                             •   Aeronautical Systems Center, Wright-Patterson Air Force Base

Army Materiel Command        •   Army Contracting Command, Aberdeen Proving Ground
                             •   Special Operations Command, Ground Application Program Office,
                                  Fort Belvoir
                             •   Soldier Systems Center, Natick Army Base


                             1
                               Two Army commands made up nearly equal shares of Army’s total obligations under
                             the National Security Exception. We selected AMC for review over SMDC for logistical
                             purposes.




                             Page 31                                                 GAO-12-263 Defense Contracting
                         Appendix I: Scope and Methodology




Navy Space and Warfare   •   Systems Center Charleston
Systems Command
                         Because the Air Force makes up 73.5 percent of all obligations under the
                         national security exception, we selected 18 contracts from the Air Force,
                         6 from the Army, and 3 from the Navy. We selected the individual
                         contracts based on several criteria. First, we selected high-dollar
                         contracts. Based on our analysis of commonly procured goods and
                         services from FPDS-NG data, we selected contracts with a mix of these
                         types of purchases. FPDS-NG data do not indicate whether a contract is
                         a follow-on procurement, therefore we selected both older and newer
                         contracts. DOD officials also identified contracts to select to capture
                         follow-on activities. However, based on other selection criteria, these
                         contracts had already been included. The 27 contracts we reviewed
                         represented about $3.4 billion—about 27 percent—of the $12.7 billion in
                         obligations under the national security exception across the military
                         departments in fiscal years 2007 through 2010.

                         We analyzed the justification and authorization documents for these
                         selected contracts and determined whether they met the requirements of
                         the FAR Sections 6.302-6 and 6.303-2. In addition, we reviewed pre-
                         award documentation to determine the extent to which the services
                         obtained competition under the exception and to review market research
                         documents. Further, we reviewed the contract files to determine whether
                         the contract was a follow-on contract. We met with officials to discuss
                         efforts the military departments make to obtain competition when using
                         the national security exception to limit competition.

                         We conducted assessments of both the completeness and the reliability
                         of the FPDS-NG data. To assess how complete the FPDS-NG data are,
                         we interviewed agency officials at OSD and the three military
                         departments to identify instances when individual contracts or entire
                         programs are excluded from FPDS-NG to protect classification or security
                         sensitive information. OSD officials provided us with the directive from the
                         Director of National Intelligence that exempts all DOD intelligence
                         agencies from FPDS-NG. We met with officials who oversee Special
                         Access Programs in the Army and Air Force to discuss any policies and
                         procedures related to the inclusion or exclusion of contract information
                         from FPDS-NG.

                         Our assessment of the reliability of FPDS-NG data involved several
                         stages. First, we interviewed FPDS-NG subject-matter experts at OSD
                         and the three military departments. We discussed issues with miscoding
                         and results of any anomaly reports. After identifying the sample for our file


                         Page 32                                          GAO-12-263 Defense Contracting
                            Appendix I: Scope and Methodology




                            review, we asked officials at the contracting offices to verify if the
                            contracts did use the national security exception as they were coded in
                            the “Reason not Competed” field in FPDS-NG. After identifying coding
                            errors in that field for five of the contracts, we compared the “Extent
                            Competed” and “Number of Bids” (proposals) fields with the
                            documentation in the contract files for the 27 contracts in our review. We
                            found four errors in the “Extent Competed” field and one error in the
                            numbers of proposals. We also drew upon prior GAO findings regarding
                            FPDS-NG data reliability.

                            Based on this initial data reliability assessment, we selected a second
                            random, non-generalizable stratified sample of 36 contracts to assess the
                            same three fields in FPDS-NG. We stratified based on the military
                            department (Air Force, Army, and Navy); whether it was identified as an
                            indefinite delivery, indefinite quantity contract in FPDS-NG; and whether it
                            was listed as not competed or competed after exclusion of sources in
                            FPDS-NG. We asked DOD officials to review contract files to determine
                            1) if the contract cited the national security exception, 2) whether the
                            contract was competed, and 3) how many proposals the contract
                            received. In addition, in discussions with the Navy, they identified
                            contracts that were incorrectly coded as using the national security
                            exception. After three Air Force contracts fell out of our sample due to
                            nonresponse, we found errors in the “Extent Competed” field for about a
                            third of the contracts. However, we found only two of the contracts (6
                            percent) had errors in the “Reason not Competed” field and only one
                            contract (3 percent) with an error in the number of proposals. These data
                            reliability assessments indicate that the “Reason not Competed” and
                            “Number of Offers” fields in FPDS-NG are sufficiently reliable for our
                            analyses.


DOD Intelligence Agencies   To assess the extent of DOD intelligence agencies’ use of the national
and Special Access          security exception, we obtained data from the four agencies, as these
Programs                    agencies do not report data to FPDS-NG. Specifically, we obtained data
                            on the percentage of total obligations under the national security
                            exception and the percentage of total obligations competed at the four
                            agencies.

                            We reviewed five contract files at four DOD intelligence agencies. We
                            analyzed the justification and authorization documents for these selected
                            contracts and determined whether they met the requirements of the FAR
                            Sections 6.302-6 and 6.303-2. Because we did not have a list of contract
                            numbers from which to choose, we relied on the agencies to select the


                            Page 33                                          GAO-12-263 Defense Contracting
Appendix I: Scope and Methodology




contracts for review. In addition, we reviewed pre-award documentation to
determine the extent to which the agencies obtained competition under
the exception and to review market research documents. Further, we
reviewed the contract files to determine whether the contract was a
follow-on contract. We met with officials to discuss efforts the intelligence
agencies make to obtain competition when using the national security
exception to limit competition.

DOD entities for which little or no use of the exception appeared in federal
procurement data were not included in our file review. To assess the use
of the exception at these entities, we met with officials at OSD, as well as
officials knowledgeable about Special Access Programs at the Army, Air
Force, and Navy. We obtained information from an Air Force official on
the extent of use and competition within the Air Force Materiel
Command’s Special Programs Division.

To assess the reliability of data received from the DOD intelligence
agencies, we solicited information from officials on the data. Specifically,
we asked cognizant officials about the type of database systems used to
track contracting activity; how these systems are used; what procedures
are in place to ensure consistency and accuracy; if there have been
issues with the system that may compromise data; what limitations exist
in tracking CICA exceptions; and what data reliability assessments have
been conducted on these systems.

We conducted this performance audit from March 2011 to January 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 34                                          GAO-12-263 Defense Contracting
Appendix II: Comments from the Department
             Appendix II: Comments from the Department
             of Defense



of Defense




             Page 35                                     GAO-12-263 Defense Contracting
Appendix II: Comments from the Department
of Defense




Page 36                                     GAO-12-263 Defense Contracting
Appendix II: Comments from the Department
of Defense




Page 37                                     GAO-12-263 Defense Contracting
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Belva M. Martin, (202) 512-4841 or martinb@gao.gov
GAO Contact
                  In addition to the contact named above, John Neumann, Assistant
Staff             Director; Laura Greifner; Julia M. Kennon; John A. Krump; Caryn E.
Acknowledgments   Kuebler; Teague Lyons; Jean McSween; Kenneth Patton; Roxanna T.
                  Sun; Sonya Vartivarian; and C. Patrick Washington made key
                  contributions to this report.




(120965)
                  Page 38                                     GAO-12-263 Defense Contracting
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