When a contractor intends to subcontract 70% or more of the total cost of the work to be performed on a certain contract or order this is considered a pass-through contract. Concerns that contractors are being overpaid for no, or negligible, added value for work performed by lower-tier subcontractors is one of the biggest issues in pass-through contracts. Section 802 of the NDAA for FY 2013 mandated the Department of Defense (DOD), the Department of State (State) and the United States Agency for International Development (USAID) to issue guidance and regulations to ensure contracting officers take additional steps prior to awarding pass-through contracts. Specifically, contracting officers must consider alternative contracting arrangements and make a written determination that the contracting approach selected is in the best interest of the government prior to awarding pass-through contracts. GAO recently conducted an audit on these three agencies to evaluate progress of the implementation of these requirements.

In its report, GAO found that the three agencies’ review and justification of pass-through contracts is incomplete. While USAID and State have taken some action to implement Section 802, DOD has yet to take any action. Moreover, none of the agencies were found to have provided guidance to assist contracting officers in performing these additional tasks. Thus, contracting officers have been left with little to no direction on how to perform the required analysis of alternate acquisition approaches or determine the feasibility of contracting directly with the proposed subcontractors. Furthermore, contracting officers have not been advised as to what type of documentation is necessary or where to record their determinations.

Furthermore, GAO found that oversight processes have not been properly updated to monitor contracting officers’ implementation of Section 802. DOD, State and USAID officials indicated they were relying on existing procurement management reviews to ensure compliance. However, these existing reviews were found to have been insufficient because these procurement management review instructions and checklists were not reflective of all of the new Section 802 requirements. Overall, GAO concluded that without explicit incorporation of the specific Section 802 requirements into their procurement system reviews, agencies may not be effectively overseeing compliance.

Based on their report, in order to carry out the requirements of Section 802, GAO provided two recommendations. First, agencies should issue guidance to assist contracting officers by identifying approaches for or examples of how to asses alternative contracting approaches to include the feasibility of contracting directly with proposed subcontractors and documenting a determination that the approach selected is in the best interests of the government. Second, GAO suggested the agencies revise their processes and guidance governing management reviews of procurements to ensure that such reviews assess whether contracting officers are complying with the provisions of Section 802.

While Section 802 has good intentions it will be up to the agencies to actually carry out these regulations and ensure sufficient oversight of these pass-through contracts. Without effective guidance or oversight, agencies have increased the risk that their contracting personnel are not acting in compliance with the law and lost possible opportunities to establish more advantageous contracting arrangements.