Index


Defense Trade: Weaknesses Exist in DOD Foreign Subcontract Data (Letter
Report, 11/13/98, GAO/NSIAD-99-8).

The Pentagon uses contracting data to make decisions on defense
procurement and defense industrial base issues.  To ensure that the
Defense Department (DOD) has sufficient contract data, Congress passed
legislation in 1993 requiring advance notification of contract
performance outside the United States. Since 1982, DOD has required
prime contractors and first-tier subcontractors to report subcontracts
placed overseas that meet certain thresholds.  In response to
congressional concerns about trends in foreign sourcing and whether
contractors are reporting their foreign subcontracts, this report
examines DOD's foreign procurement data.  GAO reviews DOD's reported
trends on contracts performed outside the United States.  GAO also
evaluates DOD's use of foreign subcontract information and the
completeness and accuracy of how DOD collects and manages its data.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-99-8
     TITLE:  Defense Trade: Weaknesses Exist in DOD Foreign Subcontract 
             Data
      DATE:  11/13/98
   SUBJECT:  Department of Defense contractors
             Defense procurement
             Reporting requirements
             Subcontracts
             Data integrity
             Data collection
             Contract performance
             International trade
             Data bases
IDENTIFIER:  NATO
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                    <info@www.gao.gov>                        **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Military Procurement,
Committee on National Security, House of Representatives

November 1998

DEFENSE TRADE - WEAKNESSES EXIST
IN DOD FOREIGN SUBCONTRACT DATA

GAO/NSIAD-99-8

Defense Trade

(707325)


Abbreviations
=============================================================== ABBREV

  DCMC - Defense Contract Management Command
  DCMDI - Defense Contract Management District International
  DOD - Department of Defense
  MOU - memorandum of understanding
  NATO - North Atlantic Treaty Organization

Letter
=============================================================== LETTER


B-279237

November 13, 1998

The Honorable Duncan Hunter
Chairman, Subcommittee on Military Procurement
Committee on National Security
House of Representatives

Dear Mr.  Chairman: 

The Department of Defense (DOD) uses contracting data in part to make
decisions on matters relating to defense procurement and defense
industrial base issues.  To ensure that DOD has sufficient contract
data available, Congress enacted legislation in fiscal year 1993
requiring advance notification of contract performance outside the
United States.  Since 1982, DOD has required prime contractors and
first-tier subcontractors to report subcontracts placed overseas that
meet certain thresholds.  In response to your concern about trends in
foreign sourcing and whether contractors are reporting their foreign
subcontracts, we examined DOD's foreign procurement data.\1
Specifically, we reviewed DOD's reported trends on contracts
performed outside the United States.  We also evaluated DOD's use of
foreign subcontract information and the completeness and accuracy of
how DOD collects and manages its data.  Details on our scope and
methodology are provided in appendix I. 


--------------------
\1 For report purposes, we defined foreign subcontracts as contracts
for materials manufactured or services performed outside the United
States in support of DOD contracts. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

For prime contracts, DOD purchases the majority of its defense
equipment and services from contractors operating in the United
States.  Though subject to annual fluctuations, DOD's prime contract
awards outside the United States remained about 5.5 percent of total
DOD contract awards from fiscal year 1987 to 1997.  Over this period,
the value of DOD prime contracts performed both in and out of the
United States declined.  Prime contracts performed outside the United
States tended to be concentrated in certain countries such as
Germany, Italy, Japan, South Korea, and the United Kingdom and in
certain sectors such as services, fuel, and construction.  At the
subcontract level, the value of DOD's reported foreign subcontract
awards ranged from almost $2 billion in fiscal year 1990 to almost
$1.1 billion in fiscal year 1997, but this data has its
limitations.\2

The Office of Foreign Contracting does not consider the data needs of
industrial base specialists in its efforts to collect foreign
subcontract data.  Industrial base specialists are often unaware that
data of this nature are available.  Furthermore, weaknesses in the
Office of Foreign Contracting's data collection and management
processes undermine DOD's ability to use the foreign subcontract data
for defense trade and industrial base decision-making.  The Office
has no mechanism for ensuring that contractors provide required
foreign subcontract information, which contributes to the
underrepresentation of foreign subcontract activity.  Our review of
selected subcontracts disclosed instances in which foreign
subcontracts were not reported to the Office because contractors were
unaware of the reporting requirement or misunderstood the criteria
for reporting a foreign subcontract.  The Office's poor database
management also compromises the credibility and usefulness of its
foreign subcontract data. 


--------------------
\2 The value of DOD's foreign subcontract awards is calculated using
the Office of Foreign Contracting's DD 2139 database on foreign
subcontracts. 


   BACKGROUND
------------------------------------------------------------ Letter :2

DOD collects information on the extent of foreign participation in
its contracts to assess matters related to defense trade balances and
domestic industrial base capabilities.  Toward this end, DOD uses
different sources of information.  For defense trade information, DOD
has one database for prime contract awards (DD 350 Individual
Contracting Action Report) and a second database for foreign
subcontract awards (DD 2139 Report of Contract Performance Outside
the United States).  For industrial base information, DOD
periodically conducts studies of specific industry sectors using
industrial base questionnaires.  These studies sometimes address the
level of foreign participation in a particular industry sector. 

The United States currently conducts defense trade with 21 countries
under the terms of reciprocal defense procurement memoranda of
understanding (MOU).\3

These agreements were designed in the late 1970s to promote
rationalization, standardization, and interoperability of defense
equipment within the North Atlantic Treaty Organization (NATO).\4
Consistent with relevant laws and regulations, these MOUs seek to
eliminate the application of nations' buy-national laws and tariffs
relating to defense procurements.  DOD's Office of Defense
Procurement (Foreign Contracting) monitors the level of two-way
defense procurement activity under MOUs by preparing summaries on the
annual defense trade procurement balances between the United States
and the 21 countries.  The Office uses these summaries internally and
exchanges the data with MOU countries that give the United States
their defense procurement statistics.  DOD has exchanged data with
six MOU countries:  Finland, Germany, Israel, Norway, Spain, and the
United Kingdom.  DOD does not compare the other countries' defense
trade information with its own because it does not know how the other
countries define and collect their defense trade information.\5

As part of its efforts to monitor foreign procurements, DOD
established in 1982 a reporting requirement to identify certain
subcontracts performed outside the United States.  In the fiscal year
1993 defense authorization legislation, Congress required any firm
performing a DOD contract exceeding $10 million, or submitting a bid
or proposal for such a contract, to notify DOD in advance if (1) the
firm or any of its first-tier subcontractors intends to perform work
exceeding $500,000 on that contract outside the United States and
Canada and (2) such work could be performed inside the United States
or Canada.\6 This information must be made available for preparing
required national defense technology and industrial base
assessments.\7 DOD regulations also require prime contractors to
submit notification of contracts exceeding $500,000 when any part of
the contract that exceeds $25,000 will be performed outside the
United States, unless a foreign place of performance (1) is the
principal place of performance and (2) is in the firm's offer.\8
Contracts for commercial items or identified exceptions need not be
reported.\9 First-tier subcontractors awarded subcontracts in excess
of $100,000 are also subject to the reporting requirement. 

Prime contractors and first-tier subcontractors are required on a
quarterly basis to submit information such as the type of supply or
service provided, the principal place of subcontract performance, and
the dollar value of the transaction.\10 The regulation states that
reports should be submitted to the Office of Foreign Contracting on
the standard form DD 2139 (Report of Contract Performance Outside the
United States) or in computer-generated reports.  The Office enters
the information into its DD 2139 database on foreign subcontracting. 


--------------------
\3 The 21 countries are Australia, Austria, Belgium, Canada, Denmark,
Egypt, Finland, France, Germany, Greece, Israel, Italy, Luxembourg,
the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland,
Turkey, and the United Kingdom. 

\4 The United States also has some reciprocal procurement MOUs with
countries outside NATO. 

\5 In June 1998, DOD initiated a dialogue with the other MOU
signatories to improve the quality of defense procurement data by
developing a joint approach for gathering and analyzing the data. 
According to a DOD official, this initiative may be a long-term
effort. 

\6 The National Defense Authorization Act for Fiscal Year 1993 (sec. 
840 of P.L.  102-484, 10 U.S.C.  2410g) required advance notification
of contract performance outside the United States and Canada. 

\7 Periodic national technology and industrial base assessments are
required by 10 U.S.C.  sec.  2505. 

\8 DOD raised the required threshold to $100,000 in the Defense
Federal Acquisition Regulation Supplement effective March 1998. 

\9 Exceptions are contracts for military construction, ores, natural
gas, utilities, petroleum products and crudes, timber, and
subsistence. 

\10 The regulation governing the reporting of contract performance
outside the United States further requires that for contracts
exceeding $10 million, contractors are to report such information at
least
30 days prior to the award of a first-tier subcontract valued at more
than $500,000 that is to be performed outside the United States or
Canada. 


   DOD PRIME AND SUBCONTRACT
   AWARDS PERFORMED OUTSIDE THE
   UNITED STATES
------------------------------------------------------------ Letter :3

Although DOD purchases the majority of its defense equipment and
services from contractors performing in the United States, it does
purchase some from firms performing outside the United States.\11
While subject to annual fluctuations, the value of DOD's prime
contract awards performed outside the United States remained about
5.5 percent of total DOD procurement awards from fiscal year 1987 to
1997 (see fig.  1).\12 These awards, as a percentage of total DOD
prime contract awards, ranged from a high of approximately 6.8
percent in 1991 to a low of 4.6 percent in 1995.  Though the value of
awards outside the United States increased during the last 2 fiscal
years, it represented only 5.8 percent of total DOD prime contract
award values by the end of 1997. 

   Figure 1:  DOD Prime Contract
   Awards by Place of Contract
   Performance For Fiscal Years
   1987-97

   (See figure in printed
   edition.)

Source:  GAO analysis of DOD's DD 350 data. 

From fiscal year 1987 through 1997, the value of DOD prime contracts
performed outside the United States declined, which was consistent
with the overall decline in the value of total DOD prime contract
awards.  As shown in figure 2, the value of DOD prime contracts
performed outside the United States declined from about $12.5 billion
to about $6.9 billion, while the total value of DOD prime contract
awards also declined from about $197 billion to $119 billion.  Data
were adjusted and shown in constant fiscal year 1998 dollars. 

   Figure 2:  Trends in DOD Prime
   Contract Award Values in Fiscal
   Years 1987-97 (in constant
   fiscal year 1998 dollars)

   (See figure in printed
   edition.)

Source:  GAO analysis of DOD's DD 350 data. 

Prime contracts performed outside the United States tended to be
concentrated in certain countries and products.  Although DOD's prime
contracts were performed in more than 100 different countries between
fiscal year 1987 and 1997, 5 countries--Germany, Italy, Japan, South
Korea, and the United Kingdom--accounted for about 61 percent of
total prime contract values performed outside the United States when
countries were identified.  While DOD awarded prime contracts outside
the United States for a wide variety of items, many of the awards
were concentrated in three sectors:  services, fuel, and
construction.  Services accounted for about 41 percent of all prime
contracts performed outside the United States in fiscal year 1997,
while petroleum and other fuel-related products accounted for about
19 percent and construction accounted for another 17 percent. 

DOD also tracks the award of subcontracts performed outside the
United States, but the subcontract data are limited.  According to
DOD's DD 2139 data, the value of annual foreign subcontract awards
ranged from a high of almost $2 billion in fiscal year 1990 to a low
of almost $1.1 billion in fiscal year 1997, averaging about $1.4
billion over this period.  As with prime contracts, DOD's foreign
subcontracts tended to be concentrated in only a few countries.  From
1990 to 1997, Canada, Israel, and the United Kingdom accounted for
about 65 percent of the subcontracts that appeared in DOD's foreign
subcontract database.\13 The foreign subcontracts that appear in
DOD's database cover a variety of equipment such as computers,
circuitry, and components for engines; aircraft; lenses; and optics
as well as services such as assembly, maintenance, and testing. 


--------------------
\11 For the purposes of this report, we did not consider issues of
ownership or control when determining whether a firm was performing
outside the United States. 

\12 To analyze DOD's prime contract awards, we used the DD 350
database, which includes information on contracting procedures,
competition, financing, statutory requirements, socioeconomic
programs, and other data relating to DOD acquisitions greater than
$25,000. 

\13 According to the law governing the reporting of foreign
subcontracts, contractors are not required to report subcontract
performance in Canada.  However, DOD's regulation requires that
subcontract performance in Canada be reported if it meets the
identified thresholds. 


   WEAKNESSES EXIST IN DOD'S USE,
   COLLECTION, AND MANAGEMENT OF
   FOREIGN SUBCONTRACT DATA
------------------------------------------------------------ Letter :4

DOD's Office of Foreign Contracting and DOD industrial base offices
both collect and use foreign subcontract data, but they do not
exchange their data with one another.  In addition, the Office of
Foreign Contracting has no safeguards for ensuring the accuracy and
completeness of its foreign subcontract award (DD 2139) database.  In
our review of selected subcontracts, we found instances in which
foreign subcontracts were not reported to DOD in accordance with the
reporting requirement, resulting in the underreporting of foreign
subcontract values.  Also, the Office lacks standards and procedures
for managing its database, which compromises the database's
usefulness.  An Office of Foreign Contracting official said the
Office does not have sufficient resources to validate the collection
and management of data but reviews the reported data for
inconsistencies. 


      DOD'S USE OF FOREIGN
      SUBCONTRACT DATA IS LIMITED
---------------------------------------------------------- Letter :4.1

DOD's Office of Foreign Contracting collects foreign subcontract
information from prime contractors and first-tier subcontractors as
required by law and regulation.  The Office uses the data to prepare
defense procurement trade balance reports on offshore activity with
the 21 countries with which the United States has reciprocal
procurement MOUs.  While the Office's foreign subcontract data are
used for a single, narrow purpose, similar data are sometimes
collected by other DOD offices and are used to prepare industrial
base assessments.  DOD's periodic industrial base assessments
sometimes entail evaluating reliance on foreign suppliers for
specific products.  DOD and military industrial base specialists rely
on their own industrial base questionnaires to obtain relevant
information to respond to specific requests from the military
services.  We spoke with numerous specialists who were not aware that
data collected by the Office of Foreign Contracting existed.  In
addition, officials from the Office of Foreign Contracting said they
have not been requested to furnish the foreign subcontract data for
industrial base assessments. 


      DATA COLLECTION DOES NOT
      CAPTURE COMPLETE FOREIGN
      SUBCONTRACT ACTIVITY
---------------------------------------------------------- Letter :4.2

DOD has no process or procedures to systematically ensure that
contractors are complying with the foreign subcontract reporting
requirement.  Furthermore, neither the law nor the regulation
provides penalties for noncompliance.  DOD officials said they
performed a limited follow-up with contractors and are certain that
contractors are reporting as required.  However, responsibility for
determining whether a foreign subcontract is to be reported lies with
the contractor.  We found that in several instances contractors had
not reported their foreign subcontracts. 

Among the 42 foreign subcontracts we examined, 11 subcontracts
totaling about $124 million did not have DD 2139 forms filed with the
Office of Foreign Contracting.  Contractors gave various reasons for
not filing the DD 2139 forms.  Some said they were unaware of the
requirement to report foreign subcontract awards; others had
apparently misinterpreted the law and regulation.  A few of them said
that the regulation was not clear and that a better understanding of
the intent of the law and regulation would help them determine if
they needed to report.  Examples of their rationale for not filing
included the following: 

  -- Two contractors stated that Defense Acquisition Circular 91-5
     rescinded the DD 2139 form.  However, the circular deleted only
     the form and not the reporting requirement.  Also, a subsequent
     circular reinstated the DD 2139 form. 

  -- One contractor interpreted the dollar thresholds in the
     reporting requirement as applying only to the foreign
     subcontracts, not to the value of the prime contract.  This
     contractor did not file a DD 2139 form, even though the value of
     the prime contract was above the $500,000 threshold, because the
     foreign subcontract was below this amount.  The regulation
     required a contractor to report foreign subcontracts greater
     than $25,000 for prime contracts exceeding $500,000. 

  -- One contractor awarded a foreign subcontract as part of a
     co-production program with Germany.  The contractor cited the
     existence of an MOU between the United States and Germany for a
     specific program as the justification for not filing a DD 2139
     form.  We found no support for the contractor's position in the
     MOU, which aims "to use industrial capabilities in both
     countries by providing both industries a fair chance to compete
     on a dual-source basis and by initiating co-production of
     components." The MOU is also subject to the respective
     countries' national laws, regulations, and policies. 

  -- One contractor said its foreign subcontract was for a component
     that had to be produced outside the United States because its
     design was solely owned by a foreign firm.  According to the
     contractor, no U.S.  or Canadian firm was licensed to produce
     it, although the U.S.  company had the manufacturing capability
     to produce this item.  Given this circumstance, a company
     official said that he believed that the company did not have to
     report this subcontract.  The official, however, expressed
     uncertainty about the reporting requirement and later indicated
     that the company would report this subcontract to the Office of
     Foreign Contracting. 

We also identified 12 subcontracts, which were valued at almost $67
million, that were not reported to the Office because of possible
weaknesses in the procedures used to collect foreign subcontract
data.  First, contracts should include the foreign subcontract
reporting requirement to ensure that contractors report their foreign
subcontracts to the Office.  We found one contractor that did not
file the DD 2139 forms for four subcontracts because the reporting
requirement was erroneously omitted from the prime contract.  Second,
we found three companies that did not file DD 2139 forms for eight
subcontracts because, consistent with the reporting requirement, this
information was reported in their initial offers and was submitted
either to the contracting officer or to the prime contractor. 
However, the information was not forwarded to the Office by the
contracting officers as stipulated by the regulation.  The
contracting officers we spoke with were not aware they were required
to send this information to the Office of Foreign Contracting for
inclusion in the
DD 2139 database. 

Although the law requires advance notification of contract
performance outside the United States, we spoke with several
contractors that regularly submitted DD 2139 information but used
different criteria for identifying a foreign subcontractor.  The
various criteria included (1) no U.S.  taxpayer identification
number, (2) incorporation outside the United States, (3) foreign
ownership, (4) place of contract performance, and (5) requirement of
an export license.  Sometimes this caused contractors to report
transactions differently, which would create inconsistent data.  For
example, one contractor said it would report subcontracts awarded to
a foreign subsidiary of a U.S.  company because the subsidiary would
be manufacturing overseas.  However, another contractor said it would
not report a subcontract awarded to a foreign subsidiary of a U.S. 
company because the subsidiary is domestically owned.  Contractors
also lack clear guidance about whether deobligations of foreign
subcontracts should be reported.\14 Currently, the Office of Foreign
Contracting enters any subcontract deobligations voluntarily reported
by contractors into its database, but there is no requirement that
contractors report these deobligations.  As such, deobligations are
being reported inconsistently. 


--------------------
\14 Deobligation refers to the cancellation or downward adjustment of
previously reported subcontract award data. 


      WEAKNESSES IN DATABASE
      MANAGEMENT MINIMIZE
      USEFULNESS OF THE FOREIGN
      SUBCONTRACT DATA
---------------------------------------------------------- Letter :4.3

The DD 2139 database lacks documentation defining the database's
structure, critical data fields, and procedures for data entry, all
of which makes the data highly questionable.  For example, no written
procedures exist for querying the database for the total dollar value
of foreign subcontracts awarded.  As a result, determining the dollar
value of these subcontracts can lead to varying values, depending on
the method used to query the database.  We queried the database using
two different methods and obtained a difference of $15.3 million in
the total dollar value of foreign subcontracts in fiscal year 1997
and a difference of $2.8 billion for fiscal year 1990 to 1997. 

The current DD 2139 database structure of 30 data fields is based on
a November 1985 version of the DD 2139 form (Subcontract Report of
Foreign Purchases).  However, some of the data no longer need to be
reported.  For example, the database contains six data fields of
dollar values, but only two of the six fields are needed to calculate
the value of foreign subcontracts awarded.  According to an agency
official, the remaining four data fields are irrelevant.  The DD 2139
database also contains two fields related to offsets, but contractors
are no longer required to submit this information.\15 The Office of
Foreign Contracting, however, continues to enter into its database
offset information when it is voluntarily provided by contractors. 

The lack of standards and procedures for data entry has caused
numerous data entry errors that compromise the database's usefulness. 
Data entry errors included blank critical fields; keypunch errors;
duplicate entries; contract values for U.S.  subcontractors; and
inconsistent entries of prime contract numbers, prime contractor
names, and weapon systems names.  In fiscal year 1997, we found that
2 prime contractors' names had been entered with 10 or more different
variations.  Inconsistent data entry makes it difficult to query the
DD 2139 database or use another database to validate its
completeness. 

Programming errors in the DD 2139 database resulted in some
underreporting of foreign source procurements.  We examined the
database structure for fiscal year 1997 and found some incorrectly
coded database records.  The miscoding of data for 1 year caused 13
out of 1,412 data records to be omitted from the total value of
foreign subcontracts.  As a result, the total value of foreign
subcontracts for fiscal year 1997 was understated by $1.15 million,
of which $802,249 was related to MOU countries. 

No error detection and correction procedures have been established to
ensure the integrity of the DD 2139 database.  As a result, the
database contained information that was inconsistent with the
reporting criteria specified in the statutory requirement.  For
example, the database should contain subcontracts awarded to foreign
sources only for DOD prime contracts.  For fiscal year 1997, the
database included 25 out of 1,412 subcontracts totaling $2.8 million
for the National Aeronautics and Space Administration, an independent
civilian agency.  We also found that one U.S.  defense contractor
reported its foreign subcontracts for sales to both DOD and foreign
governments (the latter sales are known as direct commercial sales). 
Although the contractor's submittal clearly distinguished between DOD
and direct commercial sale subcontracts, the Office included the data
on subcontract awards for direct commercial sales in the database. 


--------------------
\15 Offsets are all the industrial and commercial compensations
provided to foreign governments and firms as inducements or
conditions for the purchase of military goods and services.  The
Department of Commerce tracks offset activity. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

Data on DOD subcontracts performed outside the United States could
provide important information for making decisions on foreign
sourcing and industrial base issues.  The Office of Foreign
Contracting collects information on contracts performed outside the
United States to prepare defense trade reports.  DOD industrial base
specialists collect similar information for periodic industrial base
assessments but are unaware of the data the Office has collected.  In
addition, weaknesses in the Office's data collection process
significantly limit DOD's ability to use consistent data on foreign
subcontract-level procurements.  The Office has made no effort to
improve contractor compliance with the foreign subcontract reporting
requirement, resulting in underrepresentation of the level of foreign
subcontracting activity.  Poor database management also undermines
the credibility and usefulness of the Office's foreign subcontract
data. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

We recommend that the Secretary of Defense direct the Under Secretary
of Defense for Acquisition and Technology to review the existing
subcontract reporting requirement and amend it, as needed, to ensure
that data collected satisfy the common information needs of the
offices working on defense trade and industrial base issues, thus
also avoiding duplicative data collection efforts within DOD.  As
part of this effort, DOD should provide additional guidance
containing clear criteria and definitions for reporting foreign
subcontracts.  We also recommend that the Under Secretary of Defense
for Acquisition and Technology direct the Director of the Office of
Defense Procurement to

  -- develop and implement controls and procedures for periodically
     verifying compliance with the foreign subcontract reporting
     requirement and specify how to transmit the information to the
     Office of Foreign Contracting as a means of improving the
     completeness and consistency of its data and

  -- develop and implement procedures for entering data, verifying
     critical fields, documenting database programs, and querying the
     database to improve the Office's database management practices. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In commenting on a draft of this report, DOD did not agree with the
need for our first recommendation to ensure that data being collected
satisfy common user needs.  DOD stated that existing regulations and
procedures governing the generation of data needed to address defense
trade and industrial base issues are sufficient as it provides the
data it collects to other groups within DOD.  Our review, however,
demonstrated that similar data are being collected by other offices. 
Further, our recommendation is in accordance with DOD's policy that
states the Department will regularly review and evaluate
opportunities for improvements to increase the usefulness of
information and reduce the cost of information collection activities
for both DOD and contractors.  We have modified our recommendation to
clarify that we are referring to the existing data collection
requirement. 

DOD also stated that the reporting requirement is clear from the
language in the relevant Defense Federal Acquisition Regulation
Supplement clause.  However, the reporting requirement has been
interpreted differently by contractor and government officials.  The
varying interpretations indicate a lack of understanding about what
subcontracts should be reported, which detracts from the consistency
of information actually contained in the database. 

DOD did not fully concur with our second recommendation to improve
the collection and management of foreign subcontract data.  Our
findings relating to poor database management arose from our attempts
to use the database to determine the total value of DOD's foreign
subcontract awards.  We could not determine the total value from the
database.  First, some entries were coded so as not to be counted in
the totals.  Second, subcontracts for National Aeronautics and Space
Administration procurements and for direct commercial sales, which
should not be included in this database, were.  Third, subcontracts
performed in the United States, which should not be included in this
database, were.  Finally, in our attempt to match entries from the DD
2139 database with the subset of information on foreign subcontracts
found in the Defense Contract Management District International
database, we found subcontracts that should have been in the DD 2139
database but were not.  Taken together, these findings represent a
significant degradation of the value of the information.  If DOD
plans to use the data, and a recent directive by the Under Secretary
suggests that it will become more important, the integrity of the
data needs to be enhanced. 

Our analysis showed that these problems are directly attributable to
the lack of controls and procedures for periodically verifying
compliance with the reporting requirement and the lack of procedures
for managing and using the database.  DOD stated that it already
maintains the most complete database on foreign subcontracting and
that periodically verifying compliance would be too costly.  Having
the most complete database does not address the value of the data
contained in it.  In addition, periodically verifying compliance with
the reporting requirement could be accomplished as part of
contracting officers' routine oversight responsibilities. 

DOD agreed that there are no written procedures for managing and
using the DD 2139 database, but stated that none are needed.  DOD
guidance, however, states that database managers must have written
documentation to maintain their systems.  Having written procedures
for managing and using the database, such as controls for data entry
and verification, are important to ensuring the reliability,
accuracy, and usefulness of the information contained in the DD 2139
database. 

DOD's written comments and our evaluation of them are discussed in
appendix II. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Armed Services and the
House Committee on National Security; the Secretary of Defense; and
the Director, Office of Management and Budget.  We will also make
copies available to others upon request. 

Please contact me at (202) 512-4841 if you have any questions
concerning this report.  Major contributors to this report are listed
in appendix III. 

Sincerely yours,

Katherine V.  Schinasi
Associate Director
Defense Acquisitions Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To determine trends in the Department of Defense's (DOD) foreign
sourcing, we analyzed DOD's DD 350 data on prime contract awards,
which were adjusted to reflect constant 1998 dollars, from fiscal
year 1987 to 1997.  We examined the amounts DOD purchased at the
prime contractor level by country and by item.  We performed a
similar assessment of DOD's data on foreign subcontract awards. 
However, we did not include a trend analysis of DOD's foreign
subcontract procurements because of the data weaknesses described in
this report.  In addition, we reviewed DOD's annual reports to
Congress on purchases from foreign entities for fiscal year 1995 to
1997 and the laws and regulations requiring advance notification of
contract performance outside the United States.  We discussed the law
and regulations with DOD and industry officials.  We also examined
DOD's policy and the chronology of changes to regulations regarding
this reporting requirement. 

To determine the completeness of DOD data collection efforts, we
tried to compare the DD 2139 database to other government and
commercial databases.  We were unable to use many of the sources we
identified because they did not contain fields that could be readily
compared to the DD 2139 database.  We obtained foreign subcontract
data from the Defense Contract Management District International
(DCMDI) and the Defense Contract Management Command's (DCMC) customs
team.  Each of these data sources contained similar information to
the DD 2139 database, including prime and subcontract numbers,
transaction values, and subcontractor names.  However, the DCMC
import data were based on actual deliveries and not contract awards,
unlike the DD 2139 and DCMDI data.  Given the time difference between
contract award and delivery data, we concentrated on matching the DD
2139 database with the DCMDI database. 

DCMDI's database is used internally to track foreign subcontracts
administered by the district's field offices and is not
representative of the universe of foreign subcontracts.  We did not
perform a reliability assessment of the DCMDI database because we
only used it to identify possible unreported foreign subcontracts
that we could trace back to original source documentation. 

To compare the two databases, we performed an automated and manual
match of fiscal year 1997 DCMDI data with multiple years of the DD
2139 data to verify data entries.  We sampled data records from the
DCMDI database, which led us to examine 49 foreign subcontracts.  We
then eliminated all National Aeronautics and Space Administration and
fuel and subsistence contracts because these types of subcontracts
are excluded from the foreign subcontract reporting requirement.  By
comparing the two data sets, we found 7 subcontracts that matched and
42 subcontracts that did not appear in the DD 2139 database.  For the
42 subcontracts, we obtained contractual documentation from the DCMC
field offices and contractors to verify information about the prime
contracts and subcontracts and to ensure that the contracts contained
the foreign subcontract reporting requirement clause.  We interviewed
the contractors to determine whether they reported the foreign
subcontracts to the Office of Foreign Contracting and discussed
reasons for not reporting. 

We also interviewed officials from several defense companies, DCMC
representative offices, and program offices.  We discussed with
company officials their processes for tracking foreign subcontracts
and compliance with the DD 2139 reporting requirement.  We obtained
supplier lists for two defense programs and surveyed several
subcontractors about the DD 2139 reporting requirements and
corresponding regulations.  With DOD officials, we discussed their
procedures for monitoring subcontracts, including subcontractor
performance, and for reviewing and approving requests for duty-free
entry of foreign imports. 

To assess DOD's management of data on foreign subcontract
procurements, we reviewed DOD's DD 2139 database for fiscal years
1990 through 1997, which was the only automated data available during
our review.  We performed various programming queries to examine the
database structure and critical fields.  We discussed with Office of
Foreign Contracting officials the process for ensuring proper data
entry, including error detection and correction procedures,
reconciliation of output reports with input entries, and verification
of contractor compliance with the reporting requirement.  We
requested documentation describing or evaluating the data system, but
none was available.  We did not compare the DD 2139 data with
original source documents because no criteria, such as written
standards for data entry and management, exist. 

We performed our review between January and September 1998 in
accordance with generally accepted government auditing standards. 
Limitations of the DD 2139 database have been identified and
discussed in earlier sections of the report.  Where possible,
corroborating evidence was obtained from other databases and original
source documentation.  The DD 350 database provides the most commonly
used information on DOD procurements.  However, we did not assure the
reliability of the DD 350 data. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I

supplementing those in the report text appear at the end of this
appendix. 



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments to DOD's letter dated October 29,
1998. 

GAO COMMENTS

1.  We are not proposing the establishment of a new data collection
requirement.  Instead, we are recommending that the current data
collection efforts be enhanced to satisfy the information needs of
the offices working on defense trade and industrial base issues. 
Such action would be in compliance with DOD policy to regularly
review and evaluate opportunities for improvements to increase the
usefulness of information and reduce the cost of information
collection activities for both DOD and contractors.  If the
collection of foreign subcontracting award data
(DD 2139) were improved, the data could meet multiple information
needs.  To avoid further misunderstanding, we have clarified the
wording of our recommendation. 

2.  Prior to our review, the Office of Industrial Capabilities and
Assessments was unaware of the data collection efforts of the Office
of Foreign Contracting.  The Office of Industrial Capabilities and
Assessments has an industrial base questionnaire that, in part,
collects information on subcontractors similar to the information
collected by the Office of Foreign Contracting.  The two offices
would benefit from coordinating with each other to avoid some
duplication of effort and alleviate burdening industry for similar
information.  According to DOD policy, information should be
collected in a nonduplicative and cost-effective manner.  Moreover,
the Under Secretary of Defense for Acquisition and Technology
recently initiated reviews of the globalization of the defense
industrial base and its effects on national security.  Information on
suppliers located outside the United States, particularly those at
lower tiers, such as that collected by the Office of Foreign
Contracting, or owned by foreign entities, will be instrumental in
evaluating the extent and effects of this globalization. 

3.  The Office of Foreign Contracting has no mechanism for
systematically verifying contractor compliance with the foreign
subcontract reporting requirement.  Unless some verification is
performed, DOD has no assurance of the accuracy of the total value of
foreign subcontracts awards.  We recognize that the Office of Foreign
Contracting has limited resources for performing an extensive
verification of contractor compliance.  To assist in the verification
process, some follow-up could be performed by contracting officers
because defense companies are required to submit certain DD 2139
information to them.  However, the contracting officers that we spoke
with were often unaware of this reporting requirement and, therefore,
would need to be educated about the requirement so that they could
periodically check contractor compliance when performing routine
oversight functions such as certifying duty-free entry of imported
items. 

In 1989 we reported that the Office of Foreign Contracting sent a
letter to the top 100 prime contractors informing them of the foreign
subcontract reporting requirement and found that about one-third had
reported.\1 The Office of Foreign Contacting has not performed
another survey of defense companies since then.  Furthermore,
officials from defense companies told us that the Office of Foreign
Contracting had not contacted them to verify the data they had
submitted.  Periodic follow-up with the defense companies would help
ensure that erroneous information, such as subcontract awards for
nondefense contracts, would not be submitted. 

4.  For awarded contracts, the reporting requirement provides
instructions on when and how contractors are to report subcontract
performance outside the United States to the Office of Foreign
Contracting.  However, for offers exceeding $10 million, if the
company is aware at the time its offer is submitted that it or its
first-tier subcontractor intends to perform any part of the contract
that exceeds $500,000 outside the United States and Canada, and if
that part could be performed inside the United States or Canada, DD
2139 information must be submitted with the offer to the contracting
officer.  The regulation (Defense Federal Acquisition Regulation
Supplement 225.7202) then stipulates that contracting officers are to
forward a copy of reports submitted by successful offerors to the
Office of Foreign Contracting.  However, the contracting officers we
spoke with were not aware that the regulation instructed them to
forward any information to the Office of Foreign Contracting and had
never provided the Office with such information.  Consequently,
information provided in firms' offers is not being fully captured by
the Office's database. 

5.  Poor database management practices undermine the reliability of
DOD's foreign subcontract data.  The Office of Foreign Contracting
lacks appropriate written standards for entering and verifying data. 
Such standards are necessary to ensure the reliability and integrity
of the data.  Our example of a programming error that resulted in 13
miscoded data entries merely illustrates the problems that can arise
when no system controls are in place.  DOD's calculation of an error
rate based on these 13 entries is erroneous and misleading.  It is
erroneous because statistical inferences such as error rates must be
based on a random statistical sample assessed against defined
parameters such as written procedures for data entry, verification,
or database queries.  Without such documentation, we were unable to
assess data reliability fully.  It is also misleading because, as
detailed in our report, we found numerous other examples of problems
with the DD 2139 database that undermine its credibility.  Besides
the programming errors, we found data entry errors such as the
inclusion of National Aeronautics and Space Administration
subcontracts, direct commercial sales subcontracts, and U.S. 
subcontract awards.  Other problems included evidence of
noncompliance with the reporting requirement and inconsistent
treatment of data.  These problems support the need for written
standards explaining the DD 2139 database's structure, data fields,
and procedures for data entry and verification. 


--------------------
\1 See Industrial Base:  Adequacy of Information on the U.S.  Defense
Industrial Base (GAO/NSIAD-90-48, Nov.  15, 1989). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Johana Ayers
Catherine Baltzell
Arthur L.  James, Jr.
Matthew T.  Koehler
Anne-Marie Lasowski
Lillian I.  Slodkowski
Karen S.  Zuckerstein

OFFICE OF GENERAL COUNSEL,
WASHINGTON, D.C. 

Raymond J.  Wyrsch


*** End of document. ***