Prime contractors are responsible for oversight of their subcontracts. That is a well grounded and established principle of Government contracting. The Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) dedicate a significant number of resources to ensuring the propriety of subcontract costs passed along to the Government through prime contractor billings. These include pre-award policies and procedures involving purchasing systems and consent to subcontract requests all the way to incurred cost audit procedures.
The GAO was asked to review contracting at DOE, the largest civilian contracting agency where 90 percent of their appropriations are spent on contracts. The review focused on (i) the parties that participated in DOE's largest prime contracts and the extent to which they subcontracted their work, (ii) the extent to which DOE ensured that those contractors audited subcontractors' costs, as required, and (iii) the extent to which DOE ensured the contractors met other subcontract oversight requirements.
GAO reviewed the 24 largest prime contracts which totaled $23.6 billion in fiscal year 2016 obligations. Of that $23.6 billion, prime contractors subcontracted about $6.9 billion (30 percent) to thousands of subcontractors.
GAO found that DOE did not always ensure that contractors audited subcontractors' incurred costs as required in their contracts. GAO's review of 43 incurred cost assessment and audit reports identified more than $3.4 billion in subcontract costs that had not been audited and some subcontractors remained unaudited or unassessed form more than six years (important due to the six year statute of limitations).
GAO blamed this lax oversight on DOE headquarters lack of procedures or guidance that requires local offices to monitor contractors to ensure that required subcontract audits are completed in a timely manner, consistent with federal standards for internal control. Without such procedures or guidance, unallowable costs may go unidentified beyond the six year statute of imitation period preventing DOE from recovering those costs.
GAO made several recommendations that DOE develop procedures that require local offices to monitor contractors to ensure timely completion of required subcontract audits. DOE concurred with most of the recommendations.
You can read the full GAO report here.