GAO: VA’s Compliance Oversight of Subcontracting Limitations Needs Improvement

Recently, the GAO issued a report discussing the VA’s Veterans First Program, made at the request of several members of Congress. The report focused on addressing ongoing implementation challenges regarding compliance with the Rule of Two following the Kingdomware decision.

One of the key challenges facing the VA is ensuring that SDVOSBs comply with the limitations on subcontracting. According to the GAO, the VA’s oversight needs improvement.

Many of our readers are familiar with the VA’s Veterans First Program, which was established in 2006 to ensure the VA gives preference to SDVOSBs when awarding contracts. Each SDVOSB must, in turn, comply with a number of regulations, including the SBA’s limitations on subcontracting.

The limitations on subcontracting are defined by statute and implemented in SBA regulations and various FAR provisions. While differences between the SBA regulations and outdated FAR provisions have led to some frustrations, the purpose of the limits–whether set forth in SBA regulations or a FAR provision–is the same: to ensure that awardees of  set-aside contracts don’t subcontract out a majority of the work to otherwise ineligible firms.

In May 2016, we talked about the SBA’s enactment of important updates to the underlying limitations. These updates allowed prime contractors to take credit for work performed by “similarly situated” subcontractors, restructured certain calculations for services and supply contracts, and, perhaps most importantly, imposed a general $500,000 fine on businesses violating the limitations.

The limitations on subcontracting updates went into effect at the end of June 2016, and the VA updated its own regulations to reflect the changes, at least with respect to SDVOSB and VOSB contracts. (Most other agencies, though, are still using outdated FAR clauses.)

Upon review in 2018, however, the GAO first discovered that more than one-third of the contracts reviewed were missing clauses referencing these regulations, or included outdated references which excluded the updates. In response to the GAO’s findings, contracting officials informed the GAO “the contracting officers likely forgot to include the clause or included an outdated version of the clause by mistake.”

In addition to missing clauses addressing the 2016 updates, more than 75% of the contracts GAO reviewed didn’t contain the clause establishing the VA’s right to monitor SDVOSBs’ compliance with the limitations on subcontracting. The VA held that “the clause was not included in the contract in some cases because the contracting officers were unaware of the requirement,” though it was established in 2011.

As if missing or outdated clauses ensuring subcontracting limitations wasn’t enough, the GAO also determined the VA offered little other oversight regarding compliance with the limitations on subcontracting. Though the VA does have a Subcontracting Compliance Review Program (“SCRP”) within its Risk Management and Compliance Service, its scope is minimal. Since 2011, the SCRP has only “conducted reviews of 95 SD/VOSB and other set-aside contracts out of thousands.” Further, “[m]any of the contracting officers [the GAO] met with were unaware that SCRP existed, or that they could refer potential subcontracting limitations violations to it for review.”

In this report, the GAO has recognized what contractors have known for a while: that SBA regulations regarding limitations on subcontracting and VA contract provisions often don’t line up, and Contracting Officers don’t always take steps to ensure compliance.

This ultimately creates problems for contractors, who may be uncertain which subcontracting limitation formula applies, or whether they are allowed to avail themselves of the “similarly situated entity” portion of the newer rule. And lax monitoring can create an environment in which non-compliant companies “get away with it,” causing major frustration and discouragement when rule-abiding SDVOSBs see contracts going to those companies.

The report ultimately recommended the VA establish “a mechanism to ensure that mandatory clauses relating to subcontracting limitations are consistently incorporated in all contracts that are set aside for SD/VOSBs,” and recommended more extensive training for VA contracting officers pursuant to subcontracting limitations risks and monitoring practices. We will keep readers posted on the VA’s steps to implement these recommendations.