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TITLE VIII--ACQUISITION POLICY, ACQUISITION MANAGEMENT, AND RELATED MATTERS

Subtitle E—Other Matters

JWNDAA Section

House Conference Report 109-702

(a) Comptroller General Report on Excessive Pass-Through Charges-

(1) IN GENERAL- Not later than 180 days after the date of the enactment of this Act, the Comptroller General shall issue a report on pass-through charges on contracts or subcontracts (or task or delivery orders) that are entered into for or on behalf of the Department of Defense.

(2) MATTERS COVERED- The report issued under this subsection--

(A) shall assess the extent to which the Department of Defense has paid excessive pass-through charges to contractors who provided little or no value to the performance of the contract;

(B) shall assess the extent to which the Department has been particularly vulnerable to excessive pass-through charges on any specific category of contracts or by any specific category of contractors (including any category of small business); and

(C) shall determine the extent to which any prohibition on excessive pass-through charges would be inconsistent with existing commercial practices for any specific category of contracts or have an unjustified adverse effect on any specific category of contractors (including any category of small business).

(b) Regulations Required-

(1) IN GENERAL- Not later than May 1, 2007, the Secretary of Defense shall prescribe regulations to ensure that pass-through charges on contracts or subcontracts (or task or delivery orders) that are entered into for or on behalf of the Department of Defense are not excessive in relation to the cost of work performed by the relevant contractor or subcontractor.

(2) SCOPE OF REGULATIONS- The regulations prescribed under this subsection--

(A) shall not apply to any firm, fixed-price contract or subcontract (or task or delivery order) that is--

(i) awarded on the basis of adequate price competition; or

(ii) for the acquisition of a commercial item, as defined in section 4(12) of the Office of Federal Procurement Policy Act (41 U.S.C. 403(12)); and

(B) may include such additional exceptions as the Secretary determines to be necessary in the interest of the national defense.

(3) DEFINITION- In this section, the term `excessive pass-through charge', with respect to a contractor or subcontractor that adds no, or negligible, value to a contract or subcontract, means a charge to the Government by the contractor or subcontractor that is for overhead or profit on work performed by a lower-tier contractor or subcontractor (other than charges for the direct costs of managing lower-tier contracts and subcontracts and overhead and profit based on such direct costs).

(4) REPORT- Not later than one year after the date of the enactment of this Act, the Secretary of Defense shall submit to the congressional defense committees a report on the steps taken to implement the requirements of this subsection, including--

(A) any standards for determining when no, or negligible, value has been added to a contract by a contractor or subcontractor;

(B) any procedures established for preventing excessive pass-through charges; and

(C) any exceptions determined by the Secretary to be necessary in the interest of the national defense.

(5) EFFECTIVE DATE- The regulations prescribed under this subsection shall apply to contracts awarded for or on behalf of the Department of Defense on or after May 1, 2007.

The Senate amendment contained a provision (sec. 844) that would require the Secretary of Defense to modify Department of Defense regulations to prohibit excessive pass-through charges on contracts or subcontracts that are entered into, for or on the behalf of the Department.

The House bill contained no similar provision.

The House recedes with an amendment that would require the Comptroller General to submit a report to the congressional defense committees, not later than 180 days after the date of the enactment of this Act, on pass-through charges on contracts or subcontracts (or task or delivery orders) that are entered into, for or on the behalf of the Department. The amendment would also require that the Secretary modify Department regulations, not later than May 1, 2007, to prohibit excessive pass-through charges on contracts or subcontracts that are entered into, for or on the behalf of the Department.

The conferees agree that an assessment of the impact of pass-through charges is required in order to understand the magnitude of the problem the Department may have with pass-through charges. However, the conferees also agree that the Department should not be paying excessive pass-through charges to those contractors or subcontractors that have little or no value added to a particular contract.

The conferees expect the Secretary to provide an interim report to the congressional defense committees on the progress made towards completing the regulations required by this section.

Senate Armed Services Committee Report 109-254

The committee recommends a provision that would require the Secretary of Defense to modify Department of Defense regulations to prohibit excessive pass-through charges on contracts or subcontracts that are entered into, for or on the behalf of the Department. The provision would exempt contracts that are not in excess of the simplified acquisition threshold and fixed-price contracts that awarded on the basis of adequate price competition or are for the purchase of commercial items.

The Subcommittee on Airland of the Committee on Armed Services has identified a potential problem with pass-through charges by contractors responsible for major defense acquisition programs. The subcommittee is particularly concerned by the possibility that the Department could be paying unnecessary pass-through charges to lead-system integrators on major weapon systems for which the integrator provides no value added, but that are acquired as a part of a system-of-systems.

In addition, recent press articles have described a process in which work was passed down from the Army Corps of Engineers to a prime contractor, then to a subcontractor, and then to another subcontractor--with each company charging the government for profit and overhead--before finally reaching the company that would actually do the work. In one case, the Army Corps of Engineers reportedly paid a prime contractor $1.75 per square foot to nail plastic tarps onto damaged roofs in Louisiana. The prime contractor paid another company 75 cents per square foot to do the work; that subcontractor paid a third company 35 cents per square foot to do the work; and that subcontractor paid yet another company 10 cents per square foot to do the work. In a second case, the Army Corps of Engineers reportedly paid prime contractors $28 to $30 per cubic yard to remove debris. The companies that actually performed the work were paid only $6 to $10 per cubic yard. A representative from one of the companies was quoted as saying: `Every time it passes through another layer, $4 or $5 is taken off the top. These others are taking out money, and some of them aren't doing anything.' In testimony before the Subcommittee on Readiness and Management Support of the Committee on Armed Services on April 5, 2006, the Comptroller General, when asked his view on pass-through charges, stated that `* * * one of the things that we need more visibility over is: How many layers, how many players, how many margins are in here?'.

The committee believes that the Department needs a regulation that addresses excessive pass-through fees to ensure that authorized and appropriated funds are spent on developing and procuring capabilities, rather than paying for layers of contractors who provide no value-added.