United States GAQ General Accounting Washington, Office D.C. 20548 National Security and International Affairs Division B-276026 June 13, 1997 ’ The Honorable Ted Stevens Chairman 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. RESULTS IN BRIEF 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. 1 GAOMSIAD 97-166R Defense Advisory and Assistance Services B-276026 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. CONTRACTOR MANAGEMENT FEES ON SELECTED CONTRACTS 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 . 2 B-276026 ADVISORY AND ASSISTANCE COSTS MAY BE UNDERREPORTED 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 services. 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 system. GAOLNSIAD 97-166R Defense Advisory and Assistance Services 3 B-276026 AGENCY COMMENTS AND OUR EVALUATION 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 Enclosure GAOkNSIAD 97-166R Defense Advisory and Assistance Services 4 ENCLOSURE ENCLOSURE UNDER SECRETARY OF DEFENSE 1100 DEFENSE PENTAGON WASHINGTON. DC 20301-l 100 Mr. David E. Cooper AssociateDirector.DefenseAcquisitionsIssues NationalSarity andInternationalAffairs Division U.S.GeneralAccountingOffice 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 (707223) GAOINSIAD 97-166R Defense Advisory and Assistance Services 5 Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and Mastercard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 or visiti Boom 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 2534066, or TDD (301) 413-6006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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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)