Defense Advisory and Assistance Service Contracts

Published by the Government Accountability Office on 1997-06-13.

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

      United States
GAQ   General Accounting
                    D.C. 20548

      National Security and
      International Affairs Division


      June 13, 1997         ’

      The Honorable Ted Stevens
      The Honorable Daniel K Inouye
      Ranking Minority Member
      Subcommittee on Defense
      Committee on Appropriations
      United States Senate

      Subject: Defense Advisory and Assistance Service Contracts

      In response to your request, we have reviewed selected aspects of the
      Department of Defense’s (DOD) use of contracts for advisory and assistance
      services where subcontractors perform a substantial portion of the work.’ This
      addresses your concerns and issues raised by your staff that prune contractors
      tasked with providing advisory and assistance services may be functioning
      principally as “clearinghouses” and may be performing little or no direct work
      while still charging up to 30 percent for managing subcontractor efforts. You
      also expressed concern about whether DOD has been providing the Congress
      accurate information on contracts for advisory and assistance services. For this
      review, we judgmentally selected a sample of five prime contracts, where
      subcontractors performed a significant potion of the work.


      The five prime contractors in our sample were providing advisory and
      assistance services and did not function principally as intermediaries, but rather

      ‘As defined in 31 U.S.C. 1105 (g), advisory and assistance services include
      management and professional support services; studies, analyses, and
      evaluations; and engineering and techr@al support services.

                           GAOMSIAD 97-166R Defense Advisory and Assistance Services
performed substantial portions of the contracts’ direct work.’ The five prime
contractors’ costs and fees for managing subcontractors’ efforts ranged from
2 to 8 percent of subcontract costs. Regarding your concern about whether
DOD has been providing the Congress accurate information on advisory and
assistance services, indications exist that DOD may have significantly
underreported the amount of such costs.


The value of the five prime contracts we reviewed ranged from about
$51 million to $113 million. For each contract, we reviewed documents
covering a number of years, including payment vouchers, negotiation
memoranda, and cost and price proposals. We focused our review on the
amount that the prime contractors include in their general and administrative
expenses, overhead costs, and profit for managing subcontractors’ efforts. Our
analysis showed that the prune contractors’ indirect costs and fees for
managing the subcontracted efforts ranged from about 2 percent to 8 percent of
the subcontracts’ costs. While subcontractors performed a substantial portion
of the work, prime contractors also performed significant direct work and
consequently did not function principally as nonvalue-added intermediaries.

The five contracts were funded from research, development, test and evaluation
appropriations; procurement appropriations; and operations and maintenance
appropriations. The statement of work for each contract was broad and
provided for a range of technical and management services to assist selected
procuring organizations.3 Because the detailed work requirements, timing, and
definite cost of work could not be reasonably known when the basic contracts
were awarded, the contracts were structured as task order or delivery order
contracts. Detailed work requirements were established when separate task
orders or delivery orders were issued.

’ We contacted military organizations that administer contracts for technical
services and they identified the five selected contracts for advisory and
assistance services where subcontractors did a substantial portion of the work.
Our analysis of the costs of administering subcontractor efforts is not
generalizable to the entire population of advisory and assistance contracts.
3The statement of work is that portion of the contract that describes the actual
work to be done by the contractor by means of (1) specifications, (2) quantities,
(3) performance dates, (4) t@e and place of performance of services, and
(5) quality requirements. It serves as a baseline against which progress and
subsequent contractual changes are measured during contract performance.
                 GAO/NSIAD 97-166R Defense Advisory and Assistance Services

Our analysis of DOD’s reporting for advisory and assistance services indicates
that the amounts shown in the President’s budget submission may not reflect
the total amount spent for management and professional support services;
analyses, and evaluations; and for relevant engineering and technical support

Title 31 U.S.C. 1105 requires annual budgetary reporting to the Congress of
obligations for advisory and assistance services for the prior year and
anticipated obligations through the current budget year. The Administration
fuliihs this requirement by including this information in the President’s annual
budget submission. The President’s budget submission reported fiscal year 1996
obligations for DOD of about $3 billion for advisory and assistance services
contracts. Our analysis of data &om DOD’s contract action reporting system,
however, indicated fiscal year 1996 obligations of almost $12 billion for selected
categories of services.* Although the limited information obtained does not
allow us to reconcile these amounts, our review indicates there may be
substantial underreporting to the Congress.

The underreporting may be due to difficulties in accurately identifying advisory
and assistance task. Several officials observed that the definition of advisory
and assistance services was ambiguous, particularly for services related to
research and development. At one location, an agency’s review of contracts for
advisory and assistance services revealed that inaccurate reporting was related
to inadequate uaining of responsible staff

Because congressional concern stems from both the cost and nature of advisory
and assistance services, the Congress has, on occasion, imposed expenditure
ceilings for such contracts. According to Office of Management and Budget
guidance, when contractors provide advice and assistance that may affect
decision-making, influence policy development, or provide support to project or
program management, it is essential to ensure that the contractors’ performance
is free of potential conflicts of interest and does not impinge on the
performance of inherently governmental functions by government employees.
As such, advisory and assistance services require an appropriate degree of
enhanced management and oversight. We plan to conduct a review to more
fully examine the reasons for the possible underreporting on advisory and
assistance services.

4We did not independently validate the data in DOD’s contract action reporting
                 GAOLNSIAD 97-166R Defense Advisory and Assistance Services

In commenting on a draft of this letter, DOD concurred with our observations
regarding costs to manage subcontractors, but disagreed that it had understated
the cost of advisory and assistance services. DOD believes that in fiscal year
1996, the total cost for advisory and assistance services captured by its contract
action reporting system was about $1 billion below the $3 billion reported to
the Congress. However, DOD stated that such a variance was, undoubtedly, the
result of legitimate differences in reporting criteria.

We based our observation on a comparison of costs reported under various
categories of services in DOD’s contract action reporting system and the costs
reported to the Congress as part of the President’s budget. We carefully
examined the service categories included in DOD’s contract action reporting
system and conservatively selected 141 federal supply classes or service codes
that could be advisory and assistance services. These totaled approximately
$12 billion. DOD’s calculation does not include the majority of the dollars in
the 141 federal supply classes or service codes that could be advisory and
assistance services.

We have just initiated a follow-on review ti examine the reasons for the
variances between the amounts in DOD’s contract action reporting system and
the amounts reported to the Congress. DOD indicated that it stood ready to
assist us in our planned review to examine the reporting of these costs.

As we arranged with your office, unless you publicly announce this letter’s
contents earlier, we plan no further distribution of the letter until 7 days from
its issue date. We will then send copies to the Chairmen and Ranking Minority
Members of the House Committee on Appropriations, the Senate Committee on
Armed Services, and the House Committee on National Security; the Director,
Oflice of Management and Budget; and the Secretary of Defense. We will also
make copies available to others on request.

Please contact me at (202) 512-84 2 if you or your staB have any questions
cs;7&.                     iw

David E. Cooper
Associate Director, Defense Acquisition Issues


                  GAOkNSIAD 97-166R Defense Advisory and Assistance Services
ENCLOSURE                                                                              ENCLOSURE

                          UNDER      SECRETARY        OF   DEFENSE
                                 1100  DEFENSE    PENTAGON
                               WASHINGTON.     DC   20301-l   100

  Mr. David E. Cooper
  NationalSarity andInternationalAffairs Division
  Washington,DC 20548

  DearMr. Cooper:

      This is the Departmentof Defense(DoD) responseto the GeneralAccountingOffice
  (GAO) draft letser,“DefenseAdvisory andAssistanceServices,”datedMay 27,1997(GAO
  Code7072231,OSD CaseI37 1. ?he DoD partiallyconcurswith the draft letter.

       Overall,DODagreeswith GAO that primeconuactorsfor advisoryand assistanceservices
  performvalueaddedadministmtiveand ovenightefforts on contractsinvolving subcontractors.
  The DOD.however,doesnot agreethat the costof advisoryand assistanceservicesare under-
  reponedto the Congress.For the President’sFY 98199budget.the Departmentmade a
  concerted effort to ensurethat the costsfor advisory and assistanceservicesreponedto Congress
  via OMB werecompleteandaccumte.This extraeffort resultedin the identificationand
  reponingof an additional%.8billion of advisoryand assistanceservicesfor FY 1996to 1999.

        The GAO claiied thatunderreporting   of costsmay exist becauseDoD’s contractaction
  reportingsystemindicatedhighertotals for categoriesof servicesinvolving advisingor assisting
  DoD management.For FY %. however.thetotal cost for Advisory andAssistantServicescoded
  in the contractactionreportingsystem wasactuallyabout$1.Obillion below the S3.0billion total
  reportedto Congressin thePresident’sN 9869 budget. Sucha varianceis, undoubtedly,the
  resultof legitimatedifferencesin reportingcriteria. The offkial insuuctionsandcriteriafor
  classifyingandreportingadvisoryand assistance   servicesare containedin DOD7000.14-R.DOD
  FinancialManagement    Regulation.Chapter19. Theseinstructionswereusedto repon suchcosts
  to ConFess.

        The DODbelievesthereis no reasonto concludethat the Departmentunderreportedthe
  costsof advisoryandassistanceservicesto Congress.The DoD standsreadyto assistthe GAO
  in their plannedreviewto examinethe possibilityof misreportingsuchcosts.

                                                wJo   J. Hamre


                     GAOINSIAD 97-166R Defense Advisory and Assistance Services
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