A Virginia-based aerospace contractor faced $18.6 million in questioned costs after DCAA auditors discovered systematic failures to document make-or-buy decisions for subcontracted work exceeding the $2 million threshold during their fiscal year 2024 proposal audit. The contractor’s practice of subcontracting manufacturing operations historically performed in-house without documented economic analysis, capacity utilization assessment, or government notification violated Federal Acquisition Regulation requirements for make-or-buy program administration. The audit revealed 23 subcontracting decisions over 31 months lacking required documentation demonstrating cost comparisons, technical capability evaluations, or business justification supporting outsourcing determinations. Additionally, the contractor’s failure to submit make-or-buy programs for government review before proposal submission created automatic cost allowability challenges requiring comprehensive reconstruction of decision rationale and immediate contract modification procedures. This enforcement action demonstrates how contractors systematically treat make-or-buy decisions as internal business judgments rather than mandatory compliance requirements triggering detailed documentation obligations when subcontracting thresholds are exceeded.
Legal Foundation and Make-or-Buy Documentation Requirements
Federal Acquisition Regulation 15.407-2, codified at 48 CFR 15.407-2, establishes mandatory make-or-buy program requirements for contractors proposing subcontracts exceeding $2 million or requiring make-or-buy programs under specific contract clauses. The regulation mandates that contractors submit comprehensive make-or-buy programs identifying proposed subcontracting work, documenting capacity to perform work internally, providing economic analysis supporting subcontracting decisions, and demonstrating compliance with socioeconomic requirements. FAR 15.407-2(d) specifically requires make-or-buy program submission before proposal evaluation, creating temporal compliance obligations that cannot be satisfied through post-submission documentation reconstruction.
48 CFR 52.215-9, the Changes or Additions to Make-or-Buy Program clause, implements ongoing compliance requirements mandating contractor notification and government approval before modifying approved make-or-buy programs. The clause requires contractors to obtain contracting officer consent before changing subcontracting decisions affecting items designated for internal performance or altering make-or-buy program scope. Violations of clause requirements create technical contract breaches potentially triggering termination for default, cost disallowance, and suspension from federal contracting eligibility.
48 CFR 31.205-36, governing rental costs allowability, reinforces make-or-buy analysis requirements through its lease-versus-purchase evaluation provisions requiring documented economic analysis supporting equipment acquisition decisions. While focused on equipment rather than subcontracting, this regulation establishes broader principle that contractors must document economic rationale supporting significant procurement decisions affecting government contract costs. DCAA compliance requirements mandate comprehensive make-or-buy documentation supporting all material outsourcing determinations regardless of specific regulatory threshold applicability.
Systematic Make-or-Buy Documentation Failures
DCAA’s enhanced enforcement protocols have identified seven recurring make-or-buy documentation violations that contractors consistently commit when evaluating subcontracting decisions exceeding the $2 million threshold. Missing economic analysis represents the most prevalent violation where contractors fail to document cost comparisons between internal performance and subcontracting alternatives. DCAA auditors systematically reject make-or-buy decisions lacking detailed cost breakdowns comparing direct labor, material, overhead, and general and administrative expenses for internal performance versus subcontractor quoted prices with reasonable profit margins.
Capacity utilization assessment inadequacies emerge when contractors fail to document internal capability evaluations demonstrating whether existing facilities, equipment, and workforce possess technical ability and available capacity to perform proposed subcontracted work. FAR 15.407-2 requires contractors to demonstrate either lack of internal capability or insufficient capacity justifying subcontracting decisions. Contractors routinely violate this requirement by subcontracting work without documented capacity analysis or business justification for outsourcing work historically performed internally.
Government submission timing violations occur when contractors develop make-or-buy programs after proposal submission rather than concurrent with proposal preparation as required by FAR temporal compliance provisions. Contractors frequently attempt to reconstruct make-or-buy documentation during audit processes rather than maintaining contemporaneous decision records, creating systematic compliance failures and presumptive cost disallowance requiring extensive remediation efforts.
Historical performance pattern inadequacies emerge when contractors fail to document analysis comparing proposed subcontracting decisions to historical make-or-buy patterns without adequate business justification for strategic shifts. Contractors historically performing manufacturing operations in-house face enhanced scrutiny when proposing significant subcontracting without documented analysis supporting strategic change rationale including capacity constraints, technical capability limitations, or economic efficiency improvements.
Socioeconomic compliance verification failures occur when contractors fail to demonstrate make-or-buy program compliance with small business subcontracting requirements, historically underutilized business zone goals, and other socioeconomic objectives. 48 CFR 19.704 requires contractors to evaluate subcontracting plans against make-or-buy decisions ensuring consistency with socioeconomic commitments. Contractors developing make-or-buy programs without integrated socioeconomic analysis face systematic compliance challenges requiring comprehensive program reconstruction.
Make-or-buy program modification consent inadequacies round out common violations where contractors alter approved make-or-buy programs without obtaining required government consent under clause provisions. Contractors routinely shift work between internal performance and subcontracting or modify subcontractor scopes without formal government notification creating technical contract breaches. Comprehensive documentation systems must track all make-or-buy program changes with proper government consent procedures before implementation.
Subcontractor selection justification deficiencies occur when contractors document make-or-buy decisions supporting subcontracting but fail to provide adequate analysis justifying specific subcontractor selection from competitive alternatives. Make-or-buy programs must integrate with subcontractor price analysis requirements under FAR 44.202-2 demonstrating both outsourcing economic justification and selected subcontractor price reasonableness through comprehensive procurement documentation.
Step-by-Step Compliance Requirements for Make-or-Buy Program Administration
Step 1: Implement Prospective Make-or-Buy Threshold Monitoring Systems Deploy comprehensive proposal development systems tracking all proposed subcontracts against the $2 million make-or-buy program threshold with automatic flagging procedures initiating mandatory documentation requirements. Configure systems to identify historical performance patterns comparing proposed subcontracting decisions to prior contract execution methodologies with automatic alerts when significant strategic shifts are proposed. Establish systematic procedures ensuring make-or-buy program development occurs contemporaneously with proposal preparation rather than post-submission reconstruction efforts.
Step 2: Establish Comprehensive Economic Analysis Documentation Procedures Create standardized make-or-buy analysis templates requiring detailed cost comparisons between internal performance and subcontracting alternatives including direct labor rates, material costs, overhead allocation, general and administrative expenses, and reasonable profit margins. Implement systematic procedures ensuring cost comparison accuracy through independent cost estimating validation and management review certification. Maintain comprehensive audit trails demonstrating economic analysis methodology application and business judgment supporting final make-or-buy determinations.
Step 3: Deploy Capacity Utilization Assessment Controls Develop systematic procedures for evaluating internal technical capability and available capacity to perform proposed subcontracted work including facility assessment, equipment availability analysis, workforce skill evaluation, and production schedule capacity verification. Create documented capacity utilization models demonstrating whether internal resources can accommodate proposed work requirements within contract performance schedules. Establish quarterly capacity reassessment procedures ensuring make-or-buy decisions remain valid as organizational capabilities and capacity constraints evolve throughout contract performance periods.
Step 4: Create Government Submission and Consent Management Systems Implement automated systems ensuring timely make-or-buy program submission to government contracting officers concurrent with proposal delivery with comprehensive documentation supporting all subcontracting decisions. Deploy tracking systems monitoring all approved make-or-buy programs with mandatory government consent procedures before implementing any program modifications affecting work allocation between internal performance and subcontracting. Maintain comprehensive correspondence files documenting all government submissions, consent requests, and approval notifications supporting regulatory compliance verification.
Step 5: Establish Integrated Socioeconomic Compliance Verification Procedures Develop comprehensive procedures integrating make-or-buy program development with small business subcontracting plan administration ensuring consistency between proposed work allocation decisions and socioeconomic commitments. Create systematic verification procedures confirming make-or-buy decisions support rather than undermine small business utilization goals, historically underutilized business zone objectives, and other socioeconomic requirements. Conduct quarterly reconciliation procedures comparing actual subcontracting performance to approved make-or-buy programs with immediate corrective action for identified variances requiring government notification and consent modification.
Financial Impact Analysis: Compliant Make-or-Buy Programs vs. Violation Consequences
The financial analysis for compliant make-or-buy program administration demonstrates significant advantages for systematic documentation procedures over violation remediation costs. Comprehensive make-or-buy program systems including economic analysis templates, capacity assessment procedures, and government submission tracking capabilities typically cost $195,000 to $335,000 for initial implementation with ongoing annual maintenance costs of $55,000 to $85,000 for system updates and quarterly compliance reviews.
Make-or-buy program documentation violations create substantial financial exposure through questioned cost assessments and contract modification requirements. The Virginia contractor case demonstrates typical consequences where $18.6 million in questioned costs resulted from systematic make-or-buy documentation failures affecting 23 subcontracting decisions over 31-month periods. These findings trigger automatic cost allowability challenges requiring comprehensive decision rationale reconstruction and potential contract price adjustments when economic analysis cannot support historical subcontracting determinations.
Technical contract breach liability emerges when contractors violate make-or-buy program clause requirements through unauthorized program modifications or failure to obtain required government consent before implementation. Breach findings create termination for default exposure potentially resulting in excess reprocurement costs, contract completion financial responsibility, and suspension from federal contracting eligibility. A typical termination for default case generates contractor liability exceeding $12 million including excess costs, liquidated damages, and professional services expenses for legal representation and dispute resolution.
False Claims Act liability occurs when contractors submit invoices including costs from subcontracts lacking adequate make-or-buy documentation or implemented without required government consent. Civil monetary penalties under 31 USC 3729 range from $13,508 to $27,018 per violation with treble damages applied to all questioned costs. Each invoice submission containing inadequately documented subcontractor costs constitutes separate violation, creating cumulative exposure frequently exceeding $35 million for systematic make-or-buy compliance failures spanning multiple fiscal years.
Professional services costs for violation remediation including legal representation, forensic economic analysis reconstruction, and make-or-buy program development typically exceed $975,000 for major findings requiring comprehensive documentation of historical subcontracting decision rationale. Contract modification administrative costs average $115,000 per affected agreement creating additional burden during challenging audit periods. These costs are unallowable and must be absorbed by contractors creating severe financial stress during cash flow disruption periods.
Long-term competitive disadvantage from make-or-buy program violations affects contractor proposal evaluation scoring in future procurements. Government agencies systematically apply past performance deductions for contractors with documented make-or-buy compliance deficiencies, creating competitive disadvantages worth hundreds of millions in lost contract awards over 5-7 year periods following violation resolution.
Multi-Jurisdictional Application and Federal Coordination
Make-or-buy program requirements apply uniformly across all federal agencies and geographic jurisdictions regardless of contractor location or subcontractor performance sites. Federal procurement regulations supersede state procurement laws creating consistent national compliance obligations eliminating contractor ability to leverage favorable state-specific make-or-buy practices. This uniform application extends to international operations where prime contractors must demonstrate make-or-buy program compliance regardless of foreign subcontractor locations or international business practices.
Contractors operating multi-state facilities face coordinated DCAA enforcement where regional audit offices share make-or-buy program information and coordinate violation assessments maximizing disallowance across all prime contractor locations. The make-or-buy compliance determination applies contractor-wide rather than contract-by-contract, creating aggregate exposure increasing with proposal volume and subcontracting portfolio complexity.
Multi-agency coordination occurs through standardized contracting officer evaluation procedures ensuring consistent make-or-buy program assessment across Department of Defense, civilian agencies, and NASA contracts. Contractors with diversified federal portfolios face simultaneous violation assessment across all agencies when make-or-buy documentation deficiencies are discovered, eliminating contractor ability to segment compliance by customer or contract type.
International operations require make-or-buy program documentation demonstrating compliance with FAR requirements regardless of foreign business practices or international trade agreements. Contractors with international subcontractor portfolios must implement systematic procedures ensuring foreign subcontracting decisions satisfy federal make-or-buy analysis standards despite potential conflicts with local business customs or international procurement regulations.
DCAA’s Strategic Make-or-Buy Program Enforcement Focus
DCAA’s 2025 enforcement strategy explicitly identifies make-or-buy program compliance as critical audit focus area requiring comprehensive documentation review and economic analysis verification. This strategic focus reflects agency recognition that inadequate make-or-buy documentation enables contractors to shift work to subcontractors without demonstrating economic efficiency or proper cost analysis, creating systematic government overcharging through inflated subcontractor markups and inappropriate outsourcing decisions.
Current enforcement data demonstrates 68% make-or-buy documentation deficiency rates for contractors lacking systematic program administration procedures compared to 12% deficiency rates for contractors with comprehensive economic analysis systems and government submission tracking controls. This performance differential reflects critical importance of prevention-focused strategies over remediation-based approaches that have proven inadequate under current enforcement intensity.
The agency’s automated proposal analysis systems identify subcontracting pattern anomalies triggering immediate make-or-buy program verification including economic analysis review, capacity assessment validation, and historical performance comparison. DCAA auditors receive specialized training emphasizing make-or-buy program evaluation with specific focus on the $2 million threshold compliance, economic analysis adequacy, and government submission timing verification.
Contractors maintaining proactive make-or-buy compliance systems demonstrate proposal evaluation completion timelines 71% faster than organizations requiring make-or-buy documentation reconstruction during government review processes. The compliance investment generates immediate returns through accelerated contract award timelines, sustained cost allowability, and maintained competitive positioning avoiding past performance deductions eliminating future opportunities.
The make-or-buy program enforcement landscape represents permanent intensification in government procurement oversight requiring immediate contractor adaptation to systematic documentation procedures and comprehensive economic analysis verification systems. Contractors failing to implement compliant make-or-buy program methodologies face inevitable questioned costs, contract breach liability, and competitive disadvantage threatening market share and federal revenue sustainability.
