+Bourne, Marko, Director, Office of Policy & Program Analysis, Department of Homeland Security (DHS), Office of Inspector General (OIG), Hurricaine Katrina Multitier Contracts (June 2008) (OIG 08-81) (PDF — 603K)
"We initiated this audit in response to Congressional concerns that, in the wake of hurricanes Katrina and Rita, multitier subcontracting (1) increased costs to the government, (2) limited opportunities for small and local businesses to participate in response and recovery efforts, and (3) resulted in layers of subcontractors being paid profit and overhead while adding little or no value to the work performed under the contract. Our objectives were to determine the validity of these concerns, as well as to determine the potential effect Section 692 of the Post-Katrina Emergency Management Reform Act of 2006 could have on future disaster contracting.
"It does not appear that multitier subcontracting, as an isolated factor, caused significant increases in costs to the government, nor did it reduce subcontracting opportunities for small and local businesses. The prime contractors subcontracted a significant amount of the value of their contracts to small and local businesses.
"Although FEMA relied on large national prime contractors, initially preventing small and local businesses from participating as prime contractors themselves, the national prime contractors generally did well hiring small and local subcontractors. However, because subcontractor invoices generally do not include specific information on lower tier subcontractors, we could not determine how many layers of subcontracting existed on contracts or whether any layers involved contractors charging profit without contributing substantially to the work being performed on the contract.
"Although Section 692 of the Post-Katrina Emergency Management Reform Act of 2006 would limit subcontracting to 65% of total contract costs, nothing in this legislation specifically restricts the number of tiers of subcontractors. Further, by limiting subcontracting, Section 692 could restrict funding available to small and local businesses while potentially impairing FEMA's ability to respond quickly to future catastrophic disasters. The Department of Defense has promulgated less restrictive rules to control multitiering that reduce the risks inherent in Section 692. Therefore, we recommend FEMA officials work with DHS officials, the Office of Federal Procurement Policy and Congress to promulgate less restrictive rules over multitier contracting." —Executive Summary.