DHS IG: Subcontracting concerns unfounded

While Congress tries to minimize the tiers of subcontractors that often end up working on federal contracts, a report released last week suggests that under certain conditions, subcontracting does not raise the government’s costs.

The Homeland Security Department’s inspector general found that to be the case after studying the role of subcontractors in recovery work after Hurricane Katrina.

Federal Emergency Management Agency contractors might have needlessly subcontracted a lot of business, but the prime contracts had fixed prices, so FEMA’s costs were not affected, IG Richard Skinner said. “Once the federal government and the prime contractor agree on a price for a particular service and the prime contractor issues a fixed-price subcontract, the number of tiers of subcontractors has no effect on the cost to the government,” Skinner wrote.

In an attempt to curtail apparently excessive subcontracts, Congress in 2006 restricted DHS and its agencies from allowing contractors to outsource more than 65 percent of the work.

However, Skinner found the restrictions could adversely affect future responses to disasters. A large prime contractor often has the financial assets to take on a big recovery project but not the materials or employees to do all the work. Subcontracting to small and local businesses is the prime contractors’ principal means of matching surges in demand during disasters, Skinner wrote.

If FEMA had to react to the disasters with the subcontracting restriction, small businesses would have had less money available from prime contractors. He estimated that the law would have blocked approximately $300 million worth of subcontracting in the 2005 Katrina recovery. The restriction might have affected the ability of the prime contractors to handle their work, he wrote.

Skinner recommended that DHS officials work with regulators to limit DHS’ restrictions. However, FEMA officials noted that the restrictions are in a statute and impossible to work around without a new law. n