Veterans First Program: VA Needs to Address Implementation Challenges and Strengthen Oversight of Subcontracting Limitations

VA spends billions every year to procure goods and services and is required to give preference to veteran-owned small businesses when awarding contracts—a program known as Veterans First. In turn, those firms must comply with limitations on the use of subcontracting. A 2006 statute established Veterans First, and a 2016 Supreme Court decision clarified conflicting interpretations, resulting in changes to how VA must now implement the program.

GAO was asked to review VA's implementation of Veterans First since the Supreme Court decision. Among other things, this report assesses the extent to which (1) changes occurred in procurement obligations to veteran-owned small businesses from fiscal years 2014 through 2017; (2) VA has encountered any challenges in implementing Veterans First policies; and (3) VA has mechanisms to oversee contractor compliance with subcontracting limitations.

GAO analyzed VA regulations, policies, and contracting data; conducted three site visits; and reviewed a non-generalizable sample, selected based on factors such as high dollar value, of 35 contracts and orders, 29 of which VA awarded under Veterans First.

GAO found that the percentage of Department of Veterans Affairs (VA) obligations set aside for veteran-owned small businesses under its Veterans First program was higher in 2017—the first full year following the 2016 Supreme Court decision—than in previous years. In its decision, the court clarified that VA contract competitions must be restricted to these businesses if they meet two criteria: (1) the contracting officer reasonably expects that at least two such businesses will submit offers, and (2) the award can be made at a fair and reasonable price and best value to the government. This has become known as the “VA Rule of Two.” VA created a new policy for implementing Veterans First following the 2016 decision. The percentage of obligations set aside for veteran-owned small businesses increased from fiscal years 2014 to 2017 (see figure).

Contracting officers face challenges implementing aspects of Veterans First, some of which VA has addressed through policy and optional training. However, 12 of the 30 contracting officers GAO interviewed cited difficulty in assessing the second criterion of the VA Rule of Two when making a set-aside decision. Eight of them stated that they sometimes lacked confidence in their fair and reasonable price determinations. VA's training, however, does not fully address these more challenging aspects of implementing the Veterans First policy. More targeted training would provide VA with greater assurance that its contracting officers have the knowledge and skills necessary to implement the policy. Additionally, assessing whether training on this policy should be mandatory would allow VA to determine if it would be beneficial for all contracting officers.

GAO found that VA conducts limited oversight of contractor compliance with limitations on subcontracting and has few mechanisms for ensuring compliance. For example, GAO found that the required clause for ensuring that veteran-owned small business contractors perform the required portion of work was either missing entirely or an outdated version was used in 11 of the 29 set-aside contract actions GAO reviewed. Without better oversight, VA is limited in its ability to detect violations and ensure that the goal of Veterans First—to promote opportunities for veteran-owned small businesses—is not undermined.

GAO is making six recommendations, including that VA provide more targeted training for contracting officers, assess whether training should be mandatory, ensure required clauses are included in contracts, and improve oversight of compliance with subcontracting limitations. VA agreed with GAO's recommendations.

The Department of Veterans Affairs (VA) spent $26.2 billion in fiscal year  2017 to procure a wide range of goods and services—including  construction, information technology, medical supplies, and many  others—to meet veterans’ needs. In 2006, in order to increase  opportunities for veterans to do business with VA, Congress directed the  department to apply a preference to Veteran-Owned Small Businesses  (VOSB) and Service-Disabled Veteran-Owned Small Businesses  (SDVOSB) before awarding competitive contracts. VA created what it  calls its Veterans First Contracting Program (referred to in this report as  Veterans First) to implement the statute.

In June 2016, the Supreme Court’s decision in Kingdomware  Technologies, Inc. v. United States clarified conflicting interpretations of  the requirement for the preference, concluding that VA must restrict  competition to veteran-owned small businesses if the contracting officer  reasonably expects that at least two such businesses will submit offers  and the award can be made at a fair and reasonable price that offers best  value to the United States. VA’s prior practice had been to consider this  preference mandatory only until it met its annual goals for contracting with  veteran-owned small businesses. Prior VA practice was also not to apply  it to orders placed against the Federal Supply Schedules (FSS). The  Court held that VA must apply the preference—often referred to as a “set- aside”—before contracting under competitive procedures, regardless of  whether VA has met goals, and to orders placed against FSS. In  response, VA made a number of changes to the policies and regulations  implementing its Veterans First program to ensure appropriate application  across all of the department’s contracts. Firms that receive contracts  through this preference must also comply with a number of requirements,  which generally includes the Small Business Administration’s (SBA)  Limitations on Subcontracting requirement. The purpose of the  subcontracting limitations is to ensure that firms that receive awards on a  set-aside basis perform a material portion of the contract themselves,  rather than subcontracting a majority of the work to firms that would have  been ineligible for the award.

You requested that we examine changes to how VA implements the  Veterans First program as a result of the Supreme Court’s decision. This  report assesses: (1) how VA procurement obligations to veteran-owned  small businesses changed in the period from fiscal years 2014 through  2017; (2) what actions VA has taken to update Veterans First policies and  regulations and provide training following the Supreme Court’s decision;  (3) what challenges, if any, VA is encountering in applying Veterans First  policies; and (4) the extent to which VA has mechanisms in place to  monitor compliance with subcontracting limitations by veteran-owned  small businesses, and the effectiveness of such mechanisms.

To assess how VA procurement obligations to veteran-owned small  businesses changed in the period from fiscal years 2014 through 2017,  we obtained data from VA’s Electronic Contract Management System  (eCMS) on all contracts from fiscal years 2014 through 2017, chosen to  provide data before and after the Supreme Court decision. We analyzed  these data to determine changes in the use of set-asides for SDVOSB  and VOSB firms relative to overall VA contracting obligations during this  period, to identify patterns across VA contracting organizations, and to  determine the number of individual SDVOSB and VOSB firms that  received awards for set-aside contracts from fiscal years 2014 through  2017. We analyzed VA’s Office of Small and Disadvantaged Business  Utilization’s (OSDBU) Vendor Information Pages (VIP) database to  determine the change in the total number of businesses that were  certified during this same period. To assess the reliability of the data, we  reviewed documentation and interviewed officials responsible for  maintaining eCMS data to gather information on processes, accuracy,  and completeness of the data; we chose to exclude actions reported in  Express Reports—summaries of multiple orders placed on existing  contracts—from our analysis because they were only consistently  reported in eCMS starting in 2017. We determined that the eCMS and  VIP data were sufficiently reliable for the purposes of this reporting  objective.

To assess what actions VA has taken to update Veterans First policies  and regulations following the Supreme Court’s decision, we analyzed  policies, regulations, guidance, and training materials related to the  program, and compared these to what VA had in place prior to the  decision. We met with leadership at VA’s national contracting  organizations to discuss the implementation of the Veterans First policy  within their organizations, and interviewed senior officials in VA’s Office of  Acquisition and Logistics, OSDBU, Office of General Counsel, and  Veterans Health Administration’s (VHA) Procurement and Logistics Office  regarding the program.

To assess what challenges, if any, VA is encountering in applying the  Veterans First policy, we gathered documentation from six contracting  organizations across the VA. We conducted site visits at a non- generalizable selection of three VHA regional offices, known as Veterans  Integrated Service Networks (VISN). We focused our site visits on VHA  because it is the largest contracting organization in the Department. We  selected these VISNs primarily based on changes in total contract  obligations to SDVOSBs and VOSBs from fiscal year 2015 to fiscal year  2017—the first full fiscal years before and after the Supreme Court  decision—selecting two with among the largest percentage changes, and  one with the lowest. At the selected VISNs, we interviewed leadership at  their respective Network Contracting Offices, and selected a non- generalizable sample of 35 total contracts and orders—29 of which were  set aside for SDVOSBs or VOSBs—selected based on high dollar value,  and for procurements of construction, services, or supplies. For each of  the selected contracts and orders, we reviewed the contract files and  interviewed both the contracting officer and the customer—in most cases  the contracting officer’s representative. We held roundtable discussions of  Veterans First implementation, training, and other matters with 8 to 11  contracting officers at each location, randomly selected from the  construction, services, and supply teams. We also interviewed leaders at  three VA national contracting organizations—the National Acquisition  Center, the Technology Acquisition Center, and the Strategic Acquisition  Center.

To assess the extent to which VA has mechanisms in place to monitor  compliance with subcontracting limitations, we analyzed VA and SBA  policies and regulations. To assess the effectiveness of VA’s  mechanisms, we evaluated the extent to which VA applied these  mechanisms in the 29 selected contracts set aside for SDVOSBs and  VOSBs. We reviewed the internal policies of VA’s Subcontracting  Compliance Review Program and analyzed the program’s audit results.  We interviewed senior VA procurement officials responsible for  developing and/or implementing these mechanisms. We also reviewed  our prior work and SBA and VA Inspector General reports on VA and  other agencies’ compliance with subcontracting limitations. See  appendix I for a more detailed scope and methodology.

We conducted this performance audit from October 2017 to September  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

VA serves veterans of the U.S. armed forces and provides health,  pension, burial, and other benefits. The department’s three operational  administrations—VHA, Veterans Benefits Administration, and National  Cemetery Administration—operate largely independently from one  another. Each has its own contracting organization, though all three  administrations also work with national contracting offices under the  Office of Acquisition, Logistics, and Construction for certain types of  purchases, such as medical equipment and information technology. VHA,  which provides medical care to about 9 million veterans at 172 medical  centers, is by far the largest of the three administrations and, as such, is  the primary focus of our review. These VHA medical centers are  organized into 18 VISNs, organizations that manage medical centers and  associated clinics across a given geographic area. Each VISN is served  by a corresponding Network Contracting Office, which awards contracts  for goods and services needed by the VISN. VA’s Office of Procurement  Policy and Warrant Management (referred to in this report as the Office of  Procurement Policy), within the Office of Acquisition and Logistics, is  responsible for all procurement policy matters at the VA. Figure 1 shows  the organizational structure of the procurement function at VA.

Preferences for Veteran- Owned Small Businesses in Awards of VA Contracts

The 2006 Veterans Benefits, Health Care, and Information Technology  Act established a requirement that VA contract competitions must be  restricted to SDVOSBs and VOSBs if: 1) the contracting officer  reasonably expects that at least two such businesses will submit offers,  and 2) the award can be made at a fair and reasonable price that offers  the best value to the government. (In this report, we refer to these two  elements of the law as criteria.) This determination is known as the “VA  Rule of Two.” The statute also establishes an order of priority for the  contracting preferences, with the highest preference for SDVOSBs,  followed by VOSBs. (In this report, we refer to these businesses  collectively as SD/VOSBs.)

There are a number of socio-economic programs implemented in the  Federal Acquisition Regulation (FAR) that provide contracting  preferences or special contracting authorities for specific groups. These  include contracting preferences for small businesses overall as well as  more targeted preferences such as SBA’s 8(a) Business Development  Program, which assists disadvantaged small businesses. Unlike these  other socioeconomic preference programs that generally apply to  agencies across the federal government, the 2006 statute created a  preference for SD/VOSBs that applies only to VA.

In June 2016, the Supreme Court decision in Kingdomware Technologies,  Inc. v. United States found that the manner in which VA had been  applying the preference for SD/VOSBs was not consistent with the 2006  statute. This case arose because VA was not applying the statute’s  preference in competitions for orders under the FSS, which VA uses to  order medical supplies, among other things. The Supreme Court ruled  that VA’s FSS orders are subject to the 2006 statute, and that the VA  Rule of Two must be applied because the statute mandates its use before  contracting under competitive procedures.

Previously, VA considered FSS a mandatory source of supplies and  services that must be used when possible, but did not require that  contracting officers apply the Rule of Two when placing FSS orders. An  example of a mandatory source used across the federal government is  the AbilityOne procurement list. AbilityOne is a program to employ the  blind and people with severe disabilities to provide supplies and services  to federal customers. Federal agencies that need the specific products  and services on AbilityOne’s procurement list are generally required to  purchase them through the program.

Contracting officers, who are authorized to commit the government to  contracts, are ultimately responsible for awarding and administering  contracts, including ensuring compliance with the VA Rule of Two. Within  the VA contracting organizations we reviewed, the contracting officer  typically designates a representative of the customer office—the  organization that has requested the purchase of a good or service for its  use—as the contracting officer’s representative. This individual assists  with tasks that support the work of the contracting officer, such as market  research, developing independent government cost estimates, and  monitoring contractor performance.

The 2006 statute also required VA to maintain a database of verified  SD/VOSBs, and required that only firms appearing in the database may  qualify for VA awards set aside for SD/VOSBs. VA’s Office of Small and  Disadvantaged Business Utilization (OSDBU) maintains this database  through its Center for Verification and Evaluation, which assesses  whether small businesses meet the criteria for being veteran-owned and  controlled by verifying self-certifications provided by the SD/VOSBs. A  separate federal agency, SBA, is responsible for setting size standards  (by revenue and employees) for what constitutes a small business; the  threshold varies by industry. Certified SD/VOSBs—which VA has verified  as owned and controlled by veterans—are listed in VA’s Vendor  Information Pages (VIP). This is an online database accessible to VA’s  contracting workforce and the public that includes basic information about  each firm. Firms listed in this database select numerical codes based on  the North American Industry Classification System to identify the types of  goods and services they seek to provide to the VA; firms can do business  under a variety of these codes.

While SD/VOSBs that receive awards through set-asides may  subcontract with firms that do not have small business status, the  SD/VOSBs generally must perform a certain percentage of the work on a  contract themselves. The SBA establishes regulations that govern these  subcontracting limitations, which were most recently revised in May  2016. These regulations place limits on the percentage of the overall  contract value that firms in particular socio-economic categories, including  SD/VOSBs, may pay to subcontractors that do not belong to the same  category.

The purpose of the subcontracting limitations is to ensure that firms that  receive awards on a set-aside basis perform a material portion of the  contract themselves, rather than subcontracting a majority of the work to  firms that would have been ineligible for the award. Under SBA’s revised  regulations, subcontracted work performed by “similarly situated”  entities—those in the same socio-economic category as the firm awarded  the set-aside contract—does not count against the subcontracting  limitation. Table 1 lists the maximum percentage a firm that is awarded a  set-aside contract may subcontract to firms that are not in the same  socio-economic category under SBA’s 2016 Subcontracting Limitations  regulations.

If a firm violates the subcontracting limitations, SBA’s subcontracting  limitation regulation would allow the government to impose a penalty of  $500,000 or, if it is greater, the dollar amount spent on subcontracted  work in excess of the permitted level. Contracting officers are  responsible for ensuring compliance with the terms of the contract, and,  as discussed in more detail below, the terms of a contract may include a  requirement to comply with SBA’s limitations on subcontracting  regulation. In addition, we have reported that contracting officers were not  clear who was responsible for the monitoring, and uncertain about how to  conduct the monitoring. The VA’s Inspector General and SBA  compliance reviews have reported similar findings.

Obligations to and Number of SD/VOSBs Receiving Awards Were Higher Following the Supreme Court Decision Obligations and Awards to SD/VOSBs Increased Since the Supreme Court Decision

VA’s set-asides to SD/VOSBs increased following the 2016 Supreme  Court decision, particularly among non-construction contract actions. The  change in percentage of obligations made under set-aside contracts  varied across VA contracting organizations, in part because of differences  in the types of goods and services they bought. The number of  SD/VOSBs certified by VA also increased, as did the number of those  firms that received contract awards.

VA obligations and awards for SD/VOSB set-asides increased in fiscal  years 2016 and 2017, particularly fiscal year 2017, which was the first full  fiscal year following the 2016 Supreme Court decision. VA obligations  for SD/VOSB set-asides have increased as a percentage of total VA  obligations over this period, while the percentage of obligations through  other set-aside types—mostly non-veteran-owned small business set- asides—remained almost steady. VA obligated about $3.9 billion through  SD/VOSB set-asides in fiscal year 2017, and VA’s overall obligations also  increased. Figure 2 depicts this information.

The number of individual awards—new contracts and orders—made by  VA through SD/VOSB set-asides has also increased as a percentage of  total VA awards from fiscal years 2014 through 2017, particularly in fiscal  year 2017 following the Supreme Court decision, as shown in figure 3.

SD/VOSB Non- Construction Set Asides Increased

VA has consistently set aside a much greater percentage of construction  contracts and orders for SD/VOSBs than for other types of goods and  services, according to our analysis of VA eCMS data from fiscal years  2014 through 2017. Construction accounted for about 51 percent of  obligations under SD/VOSB set-asides, despite construction representing  only about 15 percent of VA’s overall contract obligations during this  period. VA contracting officials we spoke with stated that the market for  firms performing construction services generally has a greater percentage  of capable SD/VOSBs than the market for firms providing non- construction goods and services. VA contracting officers working on  construction contracts told us that they experienced little effect from the  policy changes related to the 2016 Supreme Court decision because they  had already been setting aside most construction contract actions for  SD/VOSBs. Nonetheless, there was an increase in the percentage of total  obligations for construction set-asides to SD/VOSBs in fiscal year 2017,  while total obligations for construction contracts declined. Figure 4 shows  total and set-aside obligations for construction and non-construction  contract actions in fiscal years 2014 through 2017.

As depicted in figure 4, obligations for non-construction SD/VOSB set- asides increased in fiscal year 2017 both in total dollars and as a  percentage of total obligations. Among obligations for non-construction  SD/VOSB set-asides, the top five categories of goods and services by  obligations across fiscal years 2014 through 2017 included:  1.  Automatic data processing and telecommunications.  2.  Information technology equipment, software, supplies, and support  equipment.  3.  Medical/dental equipment and supplies.  4.  Professional services.  5.  Housekeeping services.

Obligations for SD/VOSB Set-Asides Varied across VA Contracting Organizations

The percentage of obligations for SD/VOSB set-asides varied across VA  contracting organizations. Among the contracting offices for VHA’s 18  VISNs—which together accounted for about 47 percent of total  obligations—the percentage for SD/VOSB set-asides ranged from  approximately 17 percent to 40 percent in fiscal year 2017, as shown in  figure 5.

Total obligations and SD/VOSB set-aside obligations also varied across  VA’s three national contracting offices—the National Acquisition Center,  Strategic Acquisition Center, and Technology Acquisition Center—in part  because of differences in the types of goods and services they procure.  The Technology Acquisition Center had a larger increase in SD/VOSB  set-aside obligations than other contracting organizations in fiscal year  2017. This increase is consistent with our finding that IT-related  categories were among the types of goods and services that had the  highest increase in SD/VOSB obligations following the Supreme Court  decision. The National Acquisition Center consistently had the lowest  volume and percentage of obligations for SD/VOSB set-asides; officials  noted that its areas of focus in pharmaceuticals and high tech medical  equipment are markets that have little participation from small businesses  and SD/VOSBs. Figure 6 shows obligations on set-aside and non-set- aside contracts and orders in these three national contracting offices over  fiscal years 2014 through 2017.

The Number of Veteran- Owned Small Businesses Receiving Set-Aside Awards Has Increased Since the Supreme Court Decision

Data from VA’s OSDBU shows consistent increases over the last several  years in the number of certified firms listed in its VIP database, with a  noticeable spike following the Supreme Court decision. While the number  of certified SD/VOSBs in VIP increased annually from fiscal years 2014  through 2017, the largest increase—from 8,925 to 11,926 firms— occurred in the last year of this time frame.

The number of SD/VOSBs that received set-aside contracts or orders  also increased over fiscal years 2015 through 2017. The largest year-to- year increase during this period was in the last year of this time frame,  when the number increased from 1,174 to 1,663, as shown in figure 7.

VA Updated Policy for the Veterans First Program and Provided Training to Contracting Officers to Address Confusion

VA Updated Veterans First Program Policy

In response to the Supreme Court’s 2016 decision in the case of  Kingdomware Technologies, Inc. v. United States, VA released a July  2016 policy for the Veterans First program, a revision to its 2007 policy.  To develop this revised policy, officials from VA’s Office of Procurement  Policy said they created an integrated project team that consisted of  representatives from VA procurement leadership, the Office of General  Counsel, OSDBU, and others. VA’s Office of Procurement Policy also  subsequently issued a “class deviation” to the VA Acquisition Regulation  to implement changes VA viewed as necessary for consistency with the  Supreme Court’s decision. VA’s Deputy Senior Procurement Executive  issues class deviations when necessary to allow VA’s contracting  organizations to deviate from the FAR or VA Acquisition Regulation.  According to VA officials, these deviations effectively replace existing  policy. The Office of Procurement Policy also issued guidance to provide  clarifications on certain issues. Among the guidance VA issued was a  decision tree that summarized how to apply the VA Rule of Two under the  new 2016 Veterans First policy. Figure 8 presents our analysis of VA’s  process.

VA’s Office of Acquisition and Logistics had issued an Information Letter  in June 2007 that established procedures for the Veterans First program,  to comply with the 2006 federal statute that directed VA to prioritize  SD/VOSBs in their contracting decisions. While the basic principle of the  VA Rule of Two was the same across the 2007 and 2016 policies, the  2007 policy did not provide contracting officers as many details for  applying the VA Rule of Two. In contrast, the 2016 policy provides more  detail on how contracting officers must implement set-asides for  SD/VOSBs across different types of procurements and various steps in  the contracting process, including market research and use of existing  contract vehicles—such as FSS and agency-wide indefinite delivery  contracts. These changes had implications for how VA contracting  officers make contracting decisions and document their work. Table 2  summarizes key differences in emphasis between the 2007 and 2016  policies and the work that contracting officers must perform.

VA Provided Training on Updated Veterans First Program Policy

VA has conducted training for its workforce on the 2016 Veterans First  policy and subsequent updates and guidance. VA’s Office of Procurement  Policy collaborated with the VA Acquisition Academy to provide several  installments of online training to contracting officers. The academy offered  initial training to contracting officers in July 2016, just after the policy was  issued. Supplemental training was offered to supervisors in December  2016. In March 2018, the academy offered follow-up training for all  contracting officers to provide further clarification on the Veterans First  policy. These trainings focused on specific areas of frequent questions  that the Office of Procurement Policy received from contracting officers,  including market research, fair and reasonable price determinations, and  limitations on subcontracting, among other things. These trainings were  highly encouraged but not mandatory. Figure 9 details the training  provided to contracting officers.

VA Took Steps to Clarify Certain Aspects of Veterans First Policy to Help Address Contracting Officer Confusion and Concerns

VA’s Office of Procurement Policy addressed some aspects of the 2016  Veterans First policy that had caused confusion and concerns among  contracting officers by providing additional guidance and policy.  Contracting officers we met with told us of their initial uncertainty about  whether they could use existing contract vehicles and whether they must  apply the VA Rule of Two before using these vehicles under the Veterans  First policy. In response to such concerns, the Office of Procurement  Policy gathered frequently asked questions, and created guidance by  posting answers on its website as another mechanism for providing  clarification to contracting officers.

VA also issued new policy and guidance to address contracting officers’  concerns about the additional work and delays associated with cases  where they set-aside a solicitation for SD/VOSBs but did not receive any  offers. Specifically, 28 of the contracting officers we interviewed  individually and in roundtable discussions told us they sometimes had to  cancel SD/VOSB solicitations for this reason and then reopen  procurements without the SD/VOSB set-aside, resulting in delays in the  contract award process. Other contracting officials we spoke with told us  that since the implementation of the 2016 Veterans First policy, individual  contract actions take longer to award on average due to the need to re- solicit in cases where they set aside solicitations for SD/VOSBs but do  not receive acceptable offers, as well as due to expectations for  increased documentation of the rationale for issuing a solicitation without  an SD/VOSB set-aside restriction. For instance, a contracting officer at  one of the VISN contracting offices we visited stated that a majority of his  contract actions have involved multiple rounds of solicitations, which has  increased his workload and procurement lead times.

In response to such concerns, VA’s Office of Procurement Policy  provided informal guidance in early 2017, followed by policy in February  2018 that contracting officers could use “tiered” or “cascading”  solicitations. Under VA’s current policy, VA issues a solicitation that  requests offers from multiple types of firms, or “tiers,” including  SD/VOSBs, other small business types, and, potentially, large  businesses. The solicitation establishes an order of preference among the  different tiers. The contracting officer separates the offers based on the  firms’ size or socioeconomic status, and then evaluates them in the order  of preference established by the solicitation. If the award cannot be made  at the first tier, the evaluation moves to the succeeding tier or tiers until an  award can be made.

Contracting Officers Face Several Challenges in Applying Aspects of the Veterans First Policy

Applying the 2016 Veterans First policy has presented challenges for  contracting officers. First, the VA system that contracting officers are  required to use for the initial step of market research was not designed for  this purpose, and contracting officers we interviewed expressed  dissatisfaction with it. Second, contracting officers we spoke with  expressed confusion about conducting market research and applying the  VA Rule of Two criteria—determining whether there is a reasonable  expectation that two or more SD/VOSBs will submit offers and that award  can be made at a fair and reasonable price that offers best value to the  government. Further, contracting officers also expressed confusion on  how to determine whether the prices offered by SD/VOSBs in response to  a set-aside solicitation are fair and reasonable. Finally, continuing  workload issues, real and perceived pressure to set aside contracts, and  training not reaching all VA contracting officers are other factors that  continue to contribute to the challenges.

Contracting Officers Cited Barriers in Using VA’s Vendor Information Pages System to Conduct Market Research

VA’s 2016 Veterans First policy requires contracting officers to use VIP as  the first step in market research to identify SD/VOSBs capable of  performing the work. While the use of VIP and documentation of its use  had been required by the VA Acquisition Regulation since 2009,  presenting it as the first step for all market research was a key change in  how contracting officers use this system. Forty-one out of 60 contracting  officers we interviewed individually and in roundtable discussions  expressed dissatisfaction with VIP as the starting point for market  research, citing difficulty in using it and lack of usefulness to conduct  market research. Specifically, several of these contracting officers stated  that while VIP can be used to determine whether firms are certified as  SD/VOSBs, it does not contain much information to help them determine  whether these SD/VOSBs will be capable of performing the contract.  They also stated, and OSDBU officials confirmed, that each SD/VOSB  self-selects the codes that indicate the types of goods and services it can  provide, and many list a large number. As a result, a search can return  hundreds of results. Twenty-six contracting officers we interviewed— either individually or in roundtable discussions—stated that they have had  instances where they issued an SD/VOSB set-aside solicitation based on  a VIP search returning a high number of SD/VOSB contractors that  provide the desired goods or services, but no SD/VOSBs submitted  offers. Many of these contracting officers stated that, because they feel  they cannot rely on the VIP results, they have taken subsequent steps  such as using public “sources sought” notices to gauge interest from  SD/VOSBs. While this step requires additional time, they said they found  it to be a better source of information for making a VA Rule of Two  decision.

VA OSDBU officials stated that they would like to provide contracting  officers with enhanced utility for conducting and documenting market  research. They acknowledged that VIP is not designed to be used as a  market research tool and that the challenges contracting officers noted  were not surprising. The director of OSDBU stated that VA is planning to  make some improvements to its VIP database to provide better  information on SD/VOSB capability, but, according to these officials,  these improvements are not yet available for use.

The 2016 Veterans First policy requires contracting officers to document  their VIP searches in the contract file, but this requirement is being  implemented inconsistently. Specifically, 29 of the 35 contract files we  reviewed did not contain such documentation. The cognizant contracting  officers for most of these contracts told us they conducted the VIP  searches; some stated they forgot to print and attach the results to the  contract file, while others stated they had difficulty printing the results.  According to VA’s Veterans First policy, documenting the results of the  VIP search is required to establish the contracting officer’s basis for the  VA Rule of Two decision, regardless of whether the contract is set aside  or not. Documenting this information in the case files, as required,  provides VA with assurance that contracting officers have performed this  search to support their overall market research efforts.

Contracting Officers Face Challenges in Determining Whether to Set Aside for SD/VOSBs Under VA Rule of Two

There are a large number of certified SD/VOSBs offering various goods  and services—about 12,000 as of fiscal year 2017, according to VIP data  provided by the OSDBU. A number of contracting officers we met with  stated that this can result in VIP searches that return a lengthy list of  SD/VOSBs. As a result, the decision of whether to set aside a solicitation  is often based on the second criterion of the VA Rule of Two—whether  there is a reasonable expectation that the award can be made at a price  that is fair and reasonable and offers the best value to VA. To meet this  criterion, the contracting officer combines research and professional  judgment to make a decision whether to set aside or not, according to VA  officials.

While these VA Rule of Two criteria have not changed since 2007,  contracting officers told us that their perception of the rule’s application  has changed following the Supreme Court decision and VA’s 2016  Veterans First policy. Several contracting officers we met with stated that  sometimes, when they identified that there were two or more SD/VOSBs  that they expected to submit offers, they set aside a solicitation without  providing full consideration of this second criterion. These contracting  officers told us it is difficult in some cases to make a prospective  determination that they can reasonably expect to be able to make an  award at a fair and reasonable price without any actual offers in-hand.  Contracting officers told us that prior to the Supreme Court decision their  understanding was that they had the option to set aside contract actions  for SD/VOSBs when they expected that the price would be fair and  reasonable. They stated that after the decision, management relayed an  expectation that contracting officers must set aside contract actions to  SD/VOSBs unless they can prove that they cannot reasonably expect to  make an award at a fair and reasonable price.

Contracting officers also told us of instances where they identified  multiple SD/VOSBs likely to submit proposals, but, based on their market  research, it was unlikely that an award could be made at a fair and  reasonable price that offered best value to VA. Many of these contracting  officers stated that, despite those findings, they focused only on the  number of SD/VOSBs, in part because they felt pressure to do so from  local or headquarters’ management, OSDBU, or feared protests from  SD/VOSBs, which would delay the award.

In two specific areas of contracting we found examples of differing  approaches to addressing the challenges faced by contracting officers  when applying the VA Rule of Two criteria. Prior to the Supreme Court  decision, there was little use of SD/VOSB set-asides in real property  leasing or for high-tech medical equipment, according to officials from  contracting offices responsible for these procurements. After the decision,  there was uncertainty about whether and how to apply the Veterans First  policy to these areas of contracting. As illustrated in the examples below,  real property officials continue to face challenges applying the VA Rule of  Two to leasing, whereas high-tech medical equipment contracting officials  addressed this challenge by preparing a business case and used it to  apply the VA Rule of Two consistently across their contracts:

Officials in VA’s headquarters Construction and Facilities  Management office—responsible for planning, designing, and  constructing VA facilities—told us that prior to the Supreme Court  decision they did not apply the VA Rule of Two to its real property  leases. These officials stated that they have found the Rule of Two to  be difficult to apply. According to the officials, VHA facilities have  requirements for specific size, space, and location, and there are few  SD/VOSBs in this industry, so it is rare that an SD/VOSB can meet  these requirements. These officials further told us that, since the  Supreme Court decision, they have often set aside lease solicitations  for SD/VOSBs as long as there were two firms available despite  uncertainty that these firms could compete for the work at a fair and  reasonable price at best value to the VA.

According to these VA officials, based on guidance they received from  OGC and others, they felt compelled to conduct the procurements as  SD/VOSB set-asides even when they were unsure that the second  criterion of the VA Rule of Two would be met. These officials stated  they are often unable to make awards to those firms—either because  their proposals were not acceptable, or the SD/VOSBs did not submit  proposals at all. They expressed concern that the Veterans First  program is being applied to leasing when, from their perspective, it is  impractical to do so. They stated that these challenges in applying  VA’s Rule of Two criteria have added an average of 3 to 6 months to  the process of awarding a new lease, resulting in delays in developing  new facilities. Similarly, officials responsible for awarding leases at  one VISN contracting office we visited told us they set aside a  solicitation to an SDVOSB even though only one SDVOSB responded  to a sources sought notice. This action was taken, according to the  contracting officials, because they were concerned that their decision  would be challenged by OSDBU if they did not set it aside. They  stated they had been without a broker—a firm that helps to negotiate  leases—for more than a year due to challenges in applying the VA  Rule of Two, making it difficult for them to move forward with any new  leases.

In both cases, VA officials stated that they decided to solicit on an  SD/VOSB set-aside basis even though they lacked confidence that  there was a reasonable expectation that two or more SD/VOSBs  would submit offers and that award could be made at a fair and  reasonable price that offered the best value to the government. Also,  in both cases, VA had to reissue solicitations without the SD/VOSB  set-aside restriction, which lengthened the time that VA procurement  staff were required to spend on the acquisition and delayed the  fulfillment of VA’s leasing requirements.

In contrast, another VA contracting organization determined that  SD/VOSB set-asides were not feasible because there was no  reasonable expectation that two or more SD/VOSBs would submit  offers and that award could be made at a fair and reasonable price.

The National Acquisition Center’s program to procure high-tech  medical equipment—such as magnetic resonance imaging and X-ray  machines—historically had little participation from SD/VOSBs.  Following the release of the 2016 Veterans First policy, contracting  officials responsible for the program halted all non-emergency  purchases for over a year while they conducted an analysis of how to  apply the VA Rule of Two to purchases of high-tech medical  equipment. These officials analyzed the marketplace and concluded  that no SD/VOSBs manufacture such equipment, and that purchasing  this equipment from SD/VOSB resellers would greatly increase costs  and not present the best value to VA.

The results of this analysis were summarized in an internal report that  was used as documentation to support the contracting officers’  decision not to set-aside high-tech medical equipment purchases for  SD/VOSBs. As a result, they continued to meet medical centers’  equipment needs through existing purchasing arrangements. The  contracting officers told us they also periodically revisit their analysis  to identify any opportunities to set aside specific solicitations for  SD/VOSBs.

Determining Whether the Price Offered by an SD/VOSB Is Fair and Reasonable Poses Challenges for Contracting Officers

Contracting officers must determine whether the price proposed by an  SD/VOSB is fair and reasonable and offers the best value to VA before  awarding the contract. The 2016 Veterans First policy did not change this  requirement, and contracting officers are generally required to make this  determination for every contract award. However, we found that many of  the contracting officers we interviewed were uncertain how to balance the  Veterans First preference with the determination of fair and reasonable  price when lower prices were available on the open market. Twelve of the  30 contracting officers we interviewed for selected contract actions stated  that it is difficult to assess whether the SD/VOSB’s offered price is fair  and reasonable, and 8 stated that, in some cases, they lacked confidence  in their determinations that prices were fair and reasonable. In many of  these cases, contracting officers told us that they determined that a  higher price was fair and reasonable in order to effectuate the Veterans  First preference. For instance, a branch chief we interviewed provided  five examples of purchases under $16,000 where, in recent, separate  procurements, non-SD/VOSB small businesses had proposed prices for  the same or substantially similar items that were about $400 to $3,000  less than those proposed by SD/VOSBs. These procurements were  conducted as SD/VOSB set-asides, and awards were made to  SD/VOSBs on the basis of the Veterans First preference.

The FAR establishes that adequate price competition normally  establishes a fair and reasonable price, and it provides methods for  determining fair and reasonable pricing, such as comparing proposed  prices to each other, previous prices paid for the same or similar items,  published prices, or the independent government cost estimate.  However, a few of these contracting officers told us that some of these  comparison methods may not be reliable for offers received under  SD/VOSB set-asides. They stated that they lacked the confidence that  using these methods consistently provided robust and well-documented  support for their decision to not award to an SD/VOSB. For example, they  stated that in some instances, the independent government cost estimate  is outdated, and the customer responsible for preparing it conducts  limited market research. This issue is not unique to VA; in 2017, we  reported on shortcomings in the usefulness and documentation of  independent government cost estimates across several agencies.

VA Procurement Policy officials emphasized that contracting officers must  apply professional judgment and that no across-the-board standard  exists—a higher price compared to non-SD/VOSBs might be  appropriately found reasonable in some cases but not others, depending  on many variables, including the degree of difference between the prices  and the size and complexity of the requirement. However, in response to  requests for clarification from contracting officers, VA officials provided  conflicting informal guidance. For example, a contracting officer stated  that, during a webinar training on the implementation of the Veterans First  policy in late 2016, VHA’s Acting Chief Procurement and Logistics Officer  said that, as a general rule, he would be hesitant to pay 5 percent more  than any recent prices identified in contracting officers’ market research  for the same or similar supplies or services from non-SD/VOSBs, a view  he repeated when we interviewed him in spring of 2018.

In contrast, the Executive Director for the Office of Acquisition and  Logistics said he would not advocate paying any amount above recent  prices identified in contracting officers’ market research for the same or  similar goods or services from non-SD/VOSBs for any requirement. He  stated that the Veterans First statute and policy did not authorize higher  prices for goods and services from SD/VOSBs. According to a contracting  officer we met with, he shared this view in a training session at a VA  conference in March 2017, as well as when meeting with us in spring of  2018. A consistent message from senior management would provide VA  greater assurance that its contracting officers have confidence when  making fair and reasonable price determinations in set-aside acquisitions.

In one of VA’s national contracting offices, the Strategic Acquisition  Center, the Director told us that contracting officers were confused about  how to implement the Veterans First policy in their work, particularly in  making VA Rule of Two decisions and fair and reasonable price  determinations. In order to address confusion and provide guidance to  contracting officers, the Director stated that he provided a series of case  studies to contracting officers that demonstrated effective application of  these aspects of the Veterans First policy. Separately, other senior VA  procurement officials stated that contracting office managers have a  responsibility to address confusion and serve as a source of information  for their contracting workforce.

Contracting Officers Faced Challenges in Implementing Veterans First Policy, in Part, Due to Training Shortfalls, Pressures, and Workload Issues

The judgments that VA contracting officers are asked to make—in  conducting market research, making VA Rule of Two decisions, and  determining whether proposed prices are fair and reasonable—can in  some cases be inherently complex, and there are additional challenges  that VA has faced in implementing Veterans First. There are several  factors that contribute to these challenges.

Training Did Not Reach All Contracting Officers, and Did Not Fully Address the More Challenging Components of the Veterans First Policy

While VA provided training concurrently with the issuance of its 2016  Veterans First policy, the training did not reach all staff. According to VA  Acquisition Academy officials, 81 percent of all VA contracting officers  completed the initial training on the 2016 Veterans First policy in the  summer of 2016. We reviewed academy training records for the 60  contracting officers we interviewed, and these records show that 14 of  them did not take the initial training in 2016. In addition, only 52 percent  of VA contacting officers completed the follow-up training on the Veterans  First policy in the spring of 2018. According to the academy, the feedback  provided by those that attended these training sessions was favorable,  with ratings of 4.59 out of 5 and 4.75 out of 5, respectively.

In communicating about the training to contracting officers, VA sent an  announcement to all contracting officers, describing the training as  “strongly encouraged” but not mandatory. According to VA Acquisition  Academy and Office of Acquisition and Logistics officials, this is because  neither of these organizations has the authority to designate training as  mandatory—only VA’s Office of Human Resources and Administration  has the ability to do so.

GAO’s Standards for Internal Control in the Federal Government states  that management should design control activities to achieve objectives  and respond to risks. In doing so, management should ensure that  training is aimed at developing and retaining employee knowledge, skills,  and abilities to meet changing organizational needs—such as those that  occurred after the 2016 Supreme Court decision. Based on our review of  the training, it does not fully address the more challenging aspects of  implementing the Veterans First policy, such as making fair and  reasonable price determinations when acquisitions have been set aside.  Establishing more targeted training on the Veterans First policy and  providing this training to all contracting officers would provide the VA with  greater assurance that contracting officers have the knowledge and skills  necessary to implement the more challenging components of this policy.  Further, without establishing the importance of training on the Veterans  First policy by assessing whether to make its attendance mandatory,  management is not fully communicating its importance, and contracting  officers may lack the tools needed to implement this policy.

Contracting Officers Perceive Pressure to Apply Veterans First Preferences

As previously stated, contracting officers told us they were not always  confident in applying the Veterans First policy, in part because of  pressure—real or perceived—from others. Contracting officers cited  perceived negative scrutiny from leadership, OSDBU, Office of General  Counsel reviewers, or potential protests from SD/VOSBs as reasons for  their reluctance to not set aside requirements for SD/VOSBs, or to deem  prices proposed by SD/VOSBs not fair and reasonable. Contracting  officers explained that objections raised from any of these parties would  add time to the procurement process, and a decision to cancel a set- aside because the prices were found not fair and reasonable would  require yet more time to start the solicitation process again. Some  contracting officers stated that they could not risk delays in awarding  contracts by pursuing an approach other than setting aside for  SD/VOSBs. We noted that training slides from a 2016 conference for VA  contracting officials included a statement that, “contracting officers may  not know if they have properly applied the VA Rule of Two standard until  a court rules on the facts of a given case.” VA’s Acting Chief Acquisition  Officer stated that he is aware of these perceived pressures and stated  that some of these pressures are long-standing. He stated that VA had an  initial effort to communicate the Veterans First policy immediately after  the 2016 Supreme Court decision, but he acknowledged that contracting  officers’ confusion remains, especially regarding fair and reasonable price  determinations. VHA contracting officers also noted that because their  customers are hospitals, there is an inherent need to avoid delays in the  procurement process to prevent an adverse effect on patient care. The  effect of these pressures was exacerbated by a concern we noted among  contracting officers of whether their management would fully support a  decision not to set-aside a contract.

The struggles that contracting officers are facing in making VA Rule of  Two and fair and reasonable price determinations, as discussed above,  are exacerbated by continuing workload stresses they have faced for  years. In September 2016, we reported that managing workload is a  challenge for VA’s contracting officers. For example, one medical center  official stated that his local contracting office had at times turned away  some purchase requests because it could not staff them. In November  2017, we also reported on contracting inefficiencies that affected  contracting officers’ ability to provide goods and services in a timely  manner and at best value to medical centers. Results from a recent  survey of VA staff also illustrate existing workload stress within VA  contracting. Specifically, in the Office of Personnel Management’s  Federal Employee Viewpoint Survey, federal employees are asked if they  believe their workload is reasonable; according to VA’s analysis of this  data in 2017, 54.2 percent of the contracting officers at VA who  responded said their workload was not reasonable.

VA Conducts Limited Oversight of Compliance with Subcontracting Limitations

In many cases, clauses that require compliance with and enable  monitoring of subcontracting limitations are not included in VA contracts  and orders with SD/VOSBs. Contracting officers are generally aware of  subcontracting limitations, but they told us they do not have sufficient time  or knowledge to conduct oversight. VA conducts some audits of  compliance through a separate program. While the scale of that effort has  been limited, these audits have identified a number of violations. VA,  however, has not shared subcontracting limitation compliance risks or  practices to improve monitoring efforts.

Contract Clauses Are VA’s Primary Preventive Monitoring Mechanism, but Many Contracts We Reviewed Lacked Them

VA contracting officers are required to include two different clauses when  issuing solicitations for SD/VOSB set-asides:

One clause requires contractors to comply with SBA’s subcontracting  limitations regulation.

Another enables the VA to obtain access to the SD/VOSB prime  contractor’s records to monitor compliance with subcontracting  limitations.

SD/VOSB Set-Aside Clause Establishing Subcontracting Limitations Missing from Some Contract Actions

Under the first clause, an SD/VOSB must comply with the SBA regulation  that limits the percentage of the amount paid by the government under  the contract that may be subcontracted to firms that are not in the same  socio-economic category—that is, firms that are not also SD/VOSBs. This  is known as the subcontracting limitations requirement. For example,  under a services contract set aside for SD/VOSB contractors, an  SD/VOSB prime contractor may only subcontract to non-SD/VOSBs a  maximum of 50 percent of the amount paid by the government under the  contract.

The purpose of the subcontracting limitations requirement is to ensure  that the SD/VOSBs that are awarded set-aside contracts do not  subcontract the work beyond prescribed levels, and ensure that the goal  of Veterans First—to promote opportunities for veteran-owned small  businesses—is not undermined. In July 2016, VA updated its standard  SDVOSB and VOSB set-aside clauses to refer to SBA’s revised  subcontracting limitations regulation. For example, the SD/VOSB clause  defines the criteria that firms contracting with VA must meet to be eligible  for SD/VOSB set-asides and requires SD/VOSBs to agree to comply with  SBA’s subcontracting limitations regulation in the performance of set- aside contracts. VA’s acquisition regulations require contracting officers to  include the clause in all SD/VOSB set-aside contracts.

We selected 35 VHA contracts and orders for review, 29 of which were  set-aside to SD/VOSBs, to determine whether they contained the July  2016 (current) version of the SD/VOSB set-aside clause. All of our  selected contract actions occurred after the 2016 Veterans First policy  was issued, and after VA adopted SBA’s 2016 update of its  subcontracting limitation regulation, which made the prior clause  obsolete. We found that 11 of the 29 contract actions did not contain the  current version of the clause—it was either missing entirely or an  outdated version of the clause was used (see figure 10).

The contracts and orders that contained the outdated version of the  clause did not reference the significantly changed version of the SBA  limitations on subcontracting regulation that is currently in effect, and  therefore did not reference the version of the regulation that includes the  penalty provision establishing that contractors that do not comply with  subcontracting limitations may be subject to a $500,000 fine.  Contracting officials told us the contracting officers likely forgot to include  the clause or included an outdated version of the clause by mistake.  Without including the mandatory clause in the contract actions as  required, VA lacks assurance that SD/VOSBs are aware of  subcontracting limitations.

Monitoring Clause Missing from Most Contract Actions

For the second clause, establishing VA’s right to access information from  SD/VOSBs to monitor their compliance with the subcontracting limitations  requirement, we found that 22 of the 29 contracts and orders we reviewed  did not contain this clause. VA contracting officials told us the clause was  not included in the contract in some cases because the contracting  officers were unaware of the requirement, which was established in a  June 2011 Information Letter policy memorandum. The policy  memorandum directed contracting officers to include the clause in  solicitations, which the Division Chief at one VISN contracting office  identified as the reason it was not included in the contracts. However, the  clause would not be in effect if not contained in the contract, and a VA  procurement policy official confirmed that the intent was for this clause to  be included in both solicitations and contracts. Without this clause, VA  could face challenges in attempting to obtain information needed from the  SD/VOSBs to determine their compliance with subcontracting limitations.  Omission of this clause also poses a risk to VA by hindering its ability to  detect violations, enforce the subcontracting limitations requirement, and  ensure that the goal of Veterans First—to promote opportunities for  veteran-owned small businesses—is not undermined.

In June 2018, the VA rescinded the 2011 policy memorandum and issued  a class deviation to the VA Acquisition Regulation. The class deviation  revised the second clause—limitations on subcontracting monitoring and  compliance—and required the clause to be included in solicitations and  contracts. This is an important step to communicate that this clause is  required in the contract. However, as noted above, the first clause—VA’s  notice of set-aside clause that requires compliance with SBA’s limitations  on subcontracting regulation—is already required by a previous class  deviation and was missing from 8 of 29 contracts we reviewed. Given  this, it is uncertain whether this VA Acquisition Regulation update alone  will ensure that the monitoring clause is included in all contracts.

VA Contracting Officers Conduct Limited Oversight to Assess Contractor Compliance with Subcontracting Limitations

VA contracting officers conduct little oversight to ensure that SD/VOSBs  comply with SBA’s subcontracting limitations regulations. According to the  FAR, contracting officers are responsible for ensuring that the contractor  complies with the terms of the contract, and, as discussed above, the  terms of the contract may include subcontracting limitations. For the 29  SD/VOSB set-aside contracts and orders we reviewed, we found little  evidence that contracting officers were monitoring compliance with SBA’s  regulatory limitations on subcontracting requirements, which includes  ensuring the VA clause that requires compliance with the subcontracting  limitation is in the contract. Contracting officers we spoke with were  aware of these responsibilities but cited several barriers to executing  them, including high workload, a focus on awarding over administering  contracts, and uncertainty of what steps to take. Senior VA procurement  officials stated that monitoring the subcontracting limitations requirement  has not been a high priority and that contracting officers have competing  priorities and, thus, limited time available to conduct this monitoring.

The VA’s limited oversight of subcontracting limitations has been a long- standing problem. In September 2016, SBA conducted a surveillance  review of one of VA’s VISN contracting offices. In its review of 29 contract  files, SBA found no evidence that the subcontracting limitations  requirement was being monitored by contracting officers and  recommended that VA take measures to ensure it conducts active  monitoring. In July 2017, SBA followed up to determine what steps the  VISN contracting office had taken to implement its recommendation to  improve monitoring of the subcontracting limitations requirement. The  SBA concluded that the VISN contracting office needed to take additional  steps in order to close the recommendation.

Some of the VA contracting officers we met with told us they rely on  contracting officers’ representatives (COR) to monitor compliance with the  subcontracting limitations and identify possible violations. CORs are  generally at the location where the goods are being delivered or the  services are performed to observe whether the SD/VOSB contractor is  accomplishing the required work as specified in the contract. VA  procurement officials told us that monitoring subcontracting limitations is  the responsibility of contracting officers.

VA’s Program to Assist Contracting Officers in Reviewing Subcontracting Limitations Is Limited in Scope

In June 2011, VA’s Office of Acquisition and Logistics established the  Subcontracting Compliance Review Program (SCRP) within the Risk  Management and Compliance Service (RMCS) to assist contracting  officers in conducting subcontracting limitations reviews. RMCS conducts  its own reviews of compliance with subcontracting limitations, but the  scale is limited. Specifically, RMCS conducted reviews of 95 SD/VOSB  and other set-aside contracts out of thousands that were awarded since  2011, and the office is in the process of reviewing another 24 contract  actions. The office selects a sample of contract actions awarded each  fiscal year to review and may review other contract actions if contracting  officers or other VA officials contact it with referrals of instances that  warrant a review. RMCS officials told us they have received very few  referrals to date. Many of the contracting officers we met with were  unaware that SCRP existed, or that they could refer potential  subcontracting limitations violations to it for review. However, VA’s  manual describing the SCRP is housed on a portal accessible to  contracting officers, and, in March 2018, VA’s Acquisition Academy  training included information on the SCRP.

RMCS’s subcontracting limitations reviews have identified a number of  instances of non-compliance. Specifically, since 2011, the office has  identified 25 instances of non-compliance with subcontracting limitations  among the 95 reviews it has completed, or 26 percent of selected  contract actions. For example, one review found that a VOSB contractor  responsible for providing project management services paid more than  the allowable percentage (50 percent) of the contract’s value to non- VOSB firms. In another example, the review found an SDVOSB  contractor responsible for providing courier services paid more than 88  percent of the contract’s value to non-SDVOSB firms at about the halfway  point in the contract’s period of performance. If VA’s mechanisms for  monitoring and enforcing subcontracting limitations are not robust, the  department exposes itself to increased risk of not detecting  noncompliance.

RMCS’s SCRP manual states that the evidence RMCS collects is to be  provided to the contracting officer so that he or she can make a  determination about whether the contractor is in compliance. The manual  also outlines the various remedies available to contracting officers if an  SD/VOSB is suspected of being or is found to be in noncompliance with  the subcontracting limitations. A RMCS official told us that remedial  actions taken with respect to noncompliant contractors are determined on  a case-by-case basis and that contractors are generally provided an  opportunity to correct the deficiency, if the contractor submits a viable  plan. In several of the cases where the RMCS office identified non- compliance, contracting officers requested that SD/VOSBs develop a plan  for becoming compliant with the subcontracting limitations requirement.  For example, one plan specified additional oversight steps that the VOSB  would take to ensure compliance with the subcontracting limitations, such  as having the project manager provide a compliance plan to senior  management for any instance of subcontracting with a non-VOSB that  was anticipated to exceed a significant percentage of the total value of  the contract award.

RMCS officials said they had anticipated receiving additional resources to  conduct the planned reviews when the SCRP was initially created but  have yet to receive them. Officials stated they currently rely on three  support contractor staff to conduct the reviews but are exploring the  possibility of hiring additional staff to increase the number of reviews they  can complete each year. In addition, the Acting Director also told us that  the office has created a database that will ultimately allow contracting  officers and CORs to identify contracts with which they have  subcontracting limitations concerns. They have only implemented some  of the database’s capabilities due to resource limitations. RMCS’s Acting  Director stated she would like to grow the office and establish  mechanisms to better facilitate communication between contracting  officers and RMCS. She noted, however, that the lack of a permanent  Director for RMCS, as well as competing funding priorities have made it  difficult to establish these mechanisms. The Acting Director said she is  the office’s sixth one in the past 2 and 1/2 years, and each person in this  role has had other duties in addition to the position.

VA Has Not Communicated Subcontracting Limitation Risks or Useful Monitoring Practices to Stakeholders

Because VA has few mechanisms for monitoring subcontracting  limitations and RMCS reviews are limited in scope, VA may not be able to  detect the risk of fraud for the Veterans First program. Proactive fraud  risk management is meant to facilitate a program’s mission and strategic  goals by ensuring that taxpayer dollars and government services serve  their intended purposes. To help agencies better address fraud, GAO’s  2015 report, A Framework for Managing Fraud Risks in Federal Programs  (Fraud Risk Framework), includes a comprehensive set of leading  practices that serve as a guide when developing or enhancing efforts to  combat fraud in a strategic, risk-based manner. These practices include:  Identifying and assessing risks.

Collaborating and communicating with stakeholders—in this case,  contracting officials— to share information on fraud risks.

Applying lessons learned to improve the design and  implementation of control mechanisms and communicating those  changes to stakeholders.

The Fraud Reduction and Data Analytics Act of 2015, and Office of  Management and Budget guidance implementing its provisions, affirm  that agencies should adhere to the leading practices identified in the  Fraud Risk Framework.

In our review of VA’s mechanisms for monitoring subcontracting  limitations, we found that VA’s Office of Acquisition and Logistics as well  as the RMCS perform some identification and assessment of risks, but  that this assessment is not comprehensive. In addition, VA is not  collaborating with and communicating these risks to stakeholders, as  called for in GAO’s Fraud Risk Framework. By conducting a  comprehensive assessment of fraud risk, VA would be better positioned  to detect potential fraud related to subcontracting limitations for the  Veterans First program.

VA Has Taken Some Steps to Identify and Assess Risks, but Has Not Communicated These Risks to Stakeholders

RMCS officials told us they were unable to comprehensively identify and  assess the risks related to subcontracting limitations due to limited staff  and resources. Nonetheless, they told us that they have identified certain  situations—based on the reviews they have conducted to date and  discussions with contracting officers—that may pose a higher risk of non- compliance with subcontracting limitations. These situations include:  contracts for certain types of services, such as grounds maintenance,  van transportation, and specialty trade construction; where a SD/VOSB has multiple contracts across several VISNs for  the same services; and where a SD/VOSB does not have a business presence in the same  geographical area where the services are being performed.

They said these were higher risk situations because the SD/VOSBs have  had difficulty completing the required work on their own, or the lack of a  local business presence increases the likelihood that the SD/VOSB might  rely on a local, non-SD/VOSB contractor to do more than the permissible  portion of the work. According to RMCS officials, they have not shared  information on subcontracting limitation risks with stakeholders, such as  contracting officers and their management, but they agreed this could be  a helpful step. By sharing information on higher risk situations, contracting  officers would have a better understanding of when to refer cases to  RMCS.

Our prior work on subcontracting limitations, in the context of SBA’s 8(a)  program, also identified situations presenting an increased risk that  subcontracting limitations may be exceeded. These situations included  instances when the 8(a) prime contractor proposed subcontractors that  were the agency’s incumbent contractor or that had more experience in  meeting the agency’s current requirement than the small business. It also  included situations where the subcontractor, rather than the prime  contractor, submitted documents to or corresponded directly with  government officials. These situations highlight the importance of  monitoring the extent of subcontracting. SBA has also identified risk  factors to consider prior to contract award, such as the incumbent  contractor working as a subcontractor or if the prime contractor lacks  relevant experience and must rely upon its more experienced  subcontractor to win the contract.

In our review, contracting officers cited several contracts where  subcontracting risk factors were present. In one case we reviewed, the  contracting officer reported that a large business was the prime contractor  on a previous water treatment services contract. After the 2016 Supreme  Court decision, the contract was re-competed on a SDVOSB set-aside  basis; a SDVOSB won the award and the incumbent contractor served as  a subcontractor. According to the contracting officer, he suspected that  the subcontractor was performing more than 50 percent of the work  based on the SDVOSB’s limited capacity, but he said he did not have the  authority to request information on payments from the SDVOSB prime  contractor to the subcontractor. We found that neither the set-aside  clause that limits subcontracting nor the monitoring clause were included  in this contract, limiting the contracting officer’s ability to ensure the  SDVOSB was meeting the appropriate subcontracting limitation  requirement. The COR told us that the subcontractor performed most of  the water treatment services work—the primary requirement under the  contract—while the SDVOSB prime contractor sent invoices and  conducted oversight.

VA Has Identified Some Useful Monitoring Practices, but Has Not Communicated Them to Stakeholders

RMCS officials told us they have identified some helpful practices that  could improve compliance with subcontracting limitations. They said they  have encouraged some contracting officers to require SD/VOSBs to  explain in their proposals how they planned to comply with the  subcontracting limitations requirement and said that some contracting  officers have also used a worksheet to collect data on the work the  SD/VOSB planned to complete themselves versus subcontract.

Other VA contracting officials we met with also told us about additional  practices they had implemented to facilitate monitoring of compliance with  subcontracting limitations. These practices included the following:  require the SD/VOSB contractors to submit quarterly reports during  contract performance that indicate the percentage of the work  completed by the SD/VOSB contractor and any subcontractors; hold pre-award discussions between the contracting officer and the  SD/VOSB about the need to comply with subcontracting limitations;  and  convene post-award conferences between the contracting officer and  COR to discuss whether the SD/VOSB is in compliance or not.

Standards for Internal Control in the Federal Government state that  management should internally communicate the necessary quality  information to achieve the entity’s objectives. Although RMCS provides  information to contracting officers and their management through the  SCRP manual and related training, RMCS officials told us that they have  not included these monitoring practices among the information they have  shared. Having this information could improve contracting officers’ ability  to ensure compliance with subcontracting limitations.

The basic premise of the Veterans First Contracting Program has not  changed in the 12 years since its implementation began. However, the  2016 Supreme Court decision prompted VA to refocus and refine its  policy, and implementing the refined policy and the associated VA Rule of  Two across the entire enterprise of VA contracting has been challenging  due to inherent complexities, perceived and real pressures to award  contracts to SD/VOSBs, and inconsistent and sometimes conflicting  management guidance. This environment created mixed messages and  lessened some contracting officers’ confidence about how to  appropriately apply the VA Rule of Two criteria, particularly in making a  determination that there is a reasonable expectation that award could be  made at fair and reasonable prices.

Most of the contracting officers for the selected contracts we reviewed  expressed dissatisfaction with VIP as the starting point for market  research, citing difficulty in using it. While documentation of the VIP  search results is required by the Veterans First policy, over three-quarters  of the contract files we reviewed lacked such documentation. Such  documentation, combined with support for overall market research efforts,  provides VA with assurance that contracting officers have performed this  search as part of the basis for their Rule of Two decision. These  contracting officers also had some difficulty applying the VA Rule of Two,  particularly in the more challenging component, determining whether they  can reasonably expect prices offered by SD/VOSBs to be fair and  reasonable—issues that could be mitigated by establishing more targeted  training that would provide the VA with greater assurance that its  contracting officers have the knowledge and skills necessary to  implement this policy. Further, assessing whether training on the  Veterans First policy should be designated as mandatory would provide  VA with information necessary to determine if such training would be  beneficial for all contracting officers.

Monitoring of subcontracting limitations is an important oversight tool to  ensure effective implementation of VA’s Veterans First program. Without  ensuring that required contract clauses regarding subcontracting  limitations are included in all SD/VOSB set-aside contracts, VA lacks  assurance that SD/VOSBs are aware of subcontracting limitations.  Additionally, VA’s Subcontracting Compliance Review Program has found  subcontracting limitation violations and has identified some risk factors  and practices for monitoring compliance with subcontracting limitations.  Conducting a comprehensive assessment of fraud risk, using GAO’s  Fraud Risk Framework, would help better position VA to detect potential  fraud related to subcontracting limitations for the Veterans First program.  Further, VA has not communicated identified risk factors and monitoring  practices to stakeholders as called for in GAO’s Framework.

We are making the following six recommendations to VA.

The Secretary of Veterans Affairs should ensure that VA’s Director of the  Office of Acquisition and Logistics, in consultation with OSDBU, takes  measures to ensure that VA contracting staff adhere to the requirements  for documenting the required Vendor Information Pages searches in  contract files. (Recommendation 1)

The Secretary of Veterans Affairs should ensure that the Director of VA’s  Office of Acquisition and Logistics directs the VA Acquisition Academy to  provide more targeted training for the more challenging components of  implementing the Veterans First policy, such as making fair and  reasonable price determinations. (Recommendation 2)

The Secretary of Veterans Affairs should, in consultation with VA’s Office  of Human Resources and Administration, and the Director of VA’s Office  of Acquisition and Logistics, assess whether training on the Veterans First  policy should be designated as mandatory and take appropriate action  based on the assessment results. (Recommendation 3)

The Secretary of Veterans Affairs should ensure that the Director of the  Office of Acquisition and Logistics establishes a mechanism to ensure  that mandatory clauses relating to subcontracting limitations are  consistently incorporated in all contracts that are set aside for SD/VOSBs.  (Recommendation 4)

The Secretary of Veterans Affairs should ensure that the Director of the  Office of Acquisition and Logistics conducts a fraud risk assessment for  the Veterans First program. (Recommendation 5)

The Secretary of Veterans Affairs should ensure that the Director of the  Office of Acquisition and Logistics directs the Risk Management and  Compliance Service to share, through guidance, training, or other  methods, subcontracting limitation risks and monitoring practices with  contracting officers and their management. (Recommendation 6)

We provided a draft of this report to the Department of Veterans Affairs  and the Small Business Administration for review and comment. VA  provided written comments on the draft report. In its comments, which are  reprinted in appendix II, VA concurred with all of our 6 recommendations.  SBA provided technical comments, which were incorporated as  appropriate.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of Veterans Affairs, the  Administrator of the Small Business Administration, and other interested  parties. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841 or by email at oakleys@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. GAO staff who made key  contributions to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

You requested that we examine changes to how the Department of  Veterans Affairs (VA) implements the Veterans First program as a result  of the Supreme Court’s decision. In June 2016, the Supreme Court’s  decision in Kingdomware Technologies, Inc. v. United States clarified  conflicting interpretations of the requirement for the preference,  concluding that VA must restrict competition to veteran-owned small  businesses if the contracting officer reasonably expects that at least two  such businesses will submit offers and the award can be made at a fair  and reasonable price that offers best value to the United States. This  report assesses: (1) how VA procurement obligations to veteran-owned  small businesses changed in the period from fiscal years 2014 through  2017; (2) what actions VA has taken to update Veterans First policies and  regulations and provide training following the Supreme Court’s decision;  (3) what challenges, if any, VA is encountering in applying Veterans First  policies; and (4) the extent to which VA has mechanisms in place to  monitor compliance with subcontracting limitations by veteran-owned  small businesses, and the effectiveness of such mechanisms.

To assess how VA procurement obligations to veteran-owned small  businesses changed in the period from fiscal years 2014 through 2017,  we obtained data from VA’s Electronic Contract Management System  (eCMS) on all contracts from fiscal years 2014 through 2017, chosen to  provide data before and after the Supreme Court decision. We chose to  exclude orders reported in Express Reports—summaries of multiple  orders placed on existing contracts—from our analysis. These actions  were only consistently reported in eCMS starting in 2017; because they  represent billions of dollars of obligations with relatively little set-asides to  service-disabled veteran-owned small businesses and veteran-owned  small businesses (SD/VOSB), including them would have distorted year- to-year comparisons of percentages set aside for SD/VOSBs. We  analyzed these eCMS data to determine changes in the use of set-asides  for SD/VOSBs relative to overall VA contracting obligations during this  period. We used this analysis to determine the extent to which VA set- aside contract obligations to SD/VOSBs in the period after the  Kingdomware decision compared to the period before the decision. We  adjusted obligations for inflation to fiscal year 2017 dollars using the fiscal  year gross domestic product price index. We also analyzed the data to  identify patterns of set-asides as a percentage of obligations among  different contracting activities and across VA contracting organizations.  To determine the extent to which new businesses are obtaining SD/VOSB  certification, we obtained Vendor Information Pages (VIP) data from VA’s  Office of Small and Disadvantaged Business Utilization (OSDBU) for  fiscal years 2014 through 2017. We used these data to identify the  change in the total number of certified SD/VOSBs in VIP during this  period. We also analyzed VA’s eCMS data to determine the number of  unique, individual SD/VOSBs that received awards for set-asides during  the same period. With these data from VIP and eCMS, we compared the  number of certified SD/VOSBs to the number of businesses awarded set- asides for each year during this period. To assess reliability of these data,  we also reviewed available eCMS documentation and interviewed officials  responsible for maintaining eCMS data to gather information on  processes, accuracy, and completeness of these data. We determined  that these eCMS and VIP data were sufficiently reliable for the purpose of  describing changes in VA’s use of SD/VOSB set-asides over this period.

To assess what actions VA has taken to update Veterans First policies  and regulations and provide training following the Supreme Court’s  decision, we analyzed policies, regulations, guidance, and training  materials related to the program, and compared these to what VA had in  place prior to the decision. We obtained and analyzed the program’s  initial Information Letter, policy memorandum, and revisions to VA’s  Acquisition Regulations, which detailed the Department’s intention to  comply with federal statute. We also obtained and reviewed additional  program documentation, including briefings, presentations, and training  provided to contracting officers. We met with leadership at VA’s national  contracting organizations to discuss implementation of the Veterans First  policy within their organizations, and interviewed senior officials in VA’s  Office of Acquisition and Logistics—including Office of Procurement  Policy and VA Acquisition Academy—OSDBU, Office of General Counsel,  and the Veterans Health Administration’s (VHA) Procurement and  Logistics Office to discuss policies, guidance and training regarding the  Veterans First program.

To assess what challenges, if any, VA is encountering in applying the  Veterans First policy, we gathered documentation from six contracting  organizations across the VA. We conducted reviews of eCMS data to  determine VA’s use of set-asides and the increase in the use of set- asides for all VA contracting organizations. Based on our analysis of  these data, we determined that VHA had the greatest use of set-asides in  fiscal year 2017. As such, we conducted site visits at a non-generalizable  selection of three VHA regional offices, known as Veterans Integrated  Service Networks (VISN).

The three VISNs we selected are as follows:

Network Contracting Office 16  Jackson, Mississippi VA Medical Center

New Orleans, Louisiana VA Medical Center  We focused our site visits on VHA, because it is the largest contracting  organization in the Department. We selected these VISNs primarily based  on changes in total contract obligations to SDVOSBs and VOSBs from  fiscal year 2015 to fiscal year 2017—the first full fiscal years before and  after the Supreme Court decision—selecting two with among the largest  percentage changes, and one with the lowest. The first site visit to VISN 8  was chosen because it had a high change in the percent of obligations on  SD/VOSB set-asides from fiscal years 2015 through 2017 and high total  obligations in fiscal year 2017. After completing the first site visit, we  decided to exclude obligations for construction-related contracts, as our  analysis of VA’s eCMS data found that construction had not been affected  much by the 2016 Veterans First policy because the majority of  construction contracts have always been—and continue to be—awarded  to SD/VOSBs. The second site visit to VISN 12 was chosen because it  had a low change in the percent of non-construction obligations on  SD/VOSB set-asides from fiscal years 2015 through 2017 with high total  non-construction obligations in fiscal year 2017. The final site visit to  VISN 16 was chosen because it had a high change in the percent of non- construction obligations on SD/VOSB set-asides from fiscal years 2015 to  2017 with high total non-construction obligations in fiscal year 2017. At  each selected VISN, we interviewed the VISN Deputy Network Director.  We also obtained documentation from and interviewed leadership at the  National Acquisition Center, Strategic Acquisition Center, and the  Technology Acquisition Center.

At the selected VISNs, we interviewed leadership at their respective  Network Contracting Offices, and selected a non-generalizable sample of  35 total contracts and orders—29 of which were set aside for SDVOSBs  or VOSBs—selected based on high dollar value, and for procurements of  construction, services, or supplies. For each of the selected contracts and  orders, we reviewed the contract files and interviewed both the  contracting officer and the customer—in most cases the contracting  officer’s representative. We also held roundtable discussions of Veterans  First implementation, training, and other matters with 8 to 11 contracting  officers at each location, randomly selected from the construction,  services, and supply teams.

We selected a non-generalizable sample of 12 contract actions from  VISN 8, 11 contract actions from VISN 12, and 12 contract actions from  VISN 16. The selection was based primarily on:  contracts and orders that were set-aside to SD/VOSBs; product and service codes for services and supplies; and awards with a total value above $1 million as well as those between  $150,000 and $1 million.

We obtained and reviewed the contract files for each of the selected  contract actions, which are also stored in eCMS, including signed awards,  solicitations, market research reports, fair and reasonable price  determinations, independent government cost estimates, statements of  work, and other documents. We visited each of the Network Contracting  Offices and interviewed the contracting officer for each of the selected  contract actions and discussed the set-aside determination and their  experiences with the Veterans First policy; because some were  responsible for more than one, we interviewed 30 contracting officers for  the 35 selected contracts and orders. We interviewed leadership at each  location, and held 5 roundtable discussions with contracting officers from  various product lines—supplies, services, construction, and leasing— whose contracts were not included in our non-generalizable sample. We  also interviewed the customer—in most cases the contracting officer’s  representative or subject matter expert—for each of the selected contract  actions. Finally, we met with leadership at VA’s national contracting  organizations—including the National Acquisition Center, Strategic  Acquisition Center, Technology Acquisition Center, and Construction and  Facilities Management—to discuss the implementation of the 2016  Veterans First policy within their organizations.

To assess the extent to which VA has mechanisms in place to monitor  compliance with subcontracting limitations by veteran-owned small  businesses and the effectiveness of such mechanisms, we analyzed VA  and Small Business Administration (SBA) acquisition policies and  regulations to identify the monitoring mechanisms in place to ensure  compliance with subcontracting limitations. To assess the effectiveness of  VA’s mechanisms, we leveraged our reviews of files for the 29 selected  contracts that were set aside, and we assessed whether the required set- aside and monitoring clauses were included. In cases where we selected  an order, we reviewed the overarching indefinite delivery contract if it was  awarded by VA. We also assessed the extent to which the files reflected  evidence of monitoring. We reviewed VA’s Information Letter that  established the Risk Management and Compliance Service’s  Subcontracting Compliance Review Program and the program’s manual  for conducting subcontracting limitations compliance audits and analyzed  the audit results. We also assessed the extent to which these  mechanisms met GAO internal control and fraud framework criteria. We  interviewed senior VA procurement officials responsible for developing  and/or implementing these mechanisms and providing training to  contracting officers and contracting officers’ representatives. We also  reviewed our prior work and SBA and VA Inspector General reports on  VA and other agencies’ compliance with subcontracting limitations.

We conducted this performance audit from October 2017 to September  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: Comments from the Department of Veterans Affairs

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Lisa Gardner, Assistant  Director; Pete Anderson; Matthew T. Crosby; Susan Ditto; Jeff Hartnett;  Alexandra Jeszeck; Teague Lyons; Lorraine Ettaro; Suellen Foth; Ashley  Rawson; Eric Schwab; Roxanna Sun; and Alyssa Weir made key  contributions to this report.

VA is required to give preference to veteran-owned small businesses when awarding contracts, which it does using the Veterans First program. VA changed some aspects of this program following a 2016 Supreme Court decision.

We found that VA increased obligations and awards set aside for veteran-owned small businesses following the Supreme Court decision. We also found that contracting officers faced challenges implementing some aspects of the Veterans First program.

We made six recommendations, including that VA provide more training for contracting officers on implementing this program.