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New Complications for SBA Regulations

sba-logoLast week, President Obama signed an executive order requiring Federal CIO Vivek Kundra and Federal CTO Aneesh Chopra to create a website to track agency progress in meeting goals for small business opportunities.  The order also authorized the creation of a task force to increase the effectiveness of small-business set-asides.

As anyone who has worked in government contracting knows, mandated set-asides for small businesses, women-owned, minority-owned, veteran-owned and service-disabled veteran-owned companies make up 25% of the federal budget for contracts, with over $75 billion in awards in 2010 (according to the Small Business Administration).  However, there have been a few major changes to the way 8(a) programs are administered in the past few weeks.

First, a March court ruling overturned OMB’s 2009 policy memo directing agencies to treat all disadvantaged businesses equally, observing SBA’s “parity” regulations.  The court case started when Mission Critical Solutions, a Historically Underutilized Business Zone (HUBZone) qualified 8(a) contractor, lost a $10 million IT sole-source award to an Alaskan Native Contractor, Copper River IT.

The case hinged on the interpretation of a specific phrase, “notwithstanding any other provision of law.”  The court noted a past case from the 9th Circuit Court, Oregon Natural Resources Council v. Thomas, which concerned a natural resources law that superseded “[a]ll other applicable [f]ederal environmental and natural resource laws” to give priority to disadvantaged timber contractors.  Basically, the SBA provides specific set-asides for HUBZone contracts and statutorily requires HUBZone contractors to be treated preferentially.

Essentially, the complex process of meeting sourcing requirements for “disadvantaged” contractors just got more complicated.  Whereas under last year’s OMB guidance, firms could lump all small or disadvantaged contractors together, with this new court decision, companies will have to further subdivide their subcontracting to give every type of small or disadvantaged contractor their “fair share” of business.

To make matters worse, GAO just released a report outlining serious flaws in the 8(a) program.  GAO created four bogus firms to test SBA’s 8(a) certification safeguards, and, using falsified documentation, was able to obtain 8(a) certification for a firm that didn’t exist, in addition to identifying $325 million in set-aside and sole-source contracts given to firms not eligible for the 8(a) program.

In 14 cases investigated by GAO, the agency found numerous examples of false statements and misrepresentation of data to gain or retain 8(a) status, like under-reporting of income or assets. For example, “one firm president who is not socially disadvantaged misrepresented her ethnicity to SBA.”  This is possible because of vulnerabilities in the certification process “such as the lack of any face to face contact that could allow ineligible individuals or pass through companies to enter the program,” according to the report.

GAO also found cases where ineligible companies used certified firms to secure 8(a) work. From the report, “a West Virginia company that graduated from the program in 2001 used a series of three certified companies as pass-throughs to continue obtaining set-aside and sole-source contracts. In some cases, SBA did not detect the false statements and misrepresentations made by certified firms. In others, SBA became aware of the firms’ ineligibility but failed to take action.”

So while many people are in favor of providing additional opportunities to businesses owned by “socially or economically disadvantaged persons,” flaws in the system and byzantine regulatory requirements conspire to make these programs a serious headache for already over-worked acquisition personnel.

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