Probe Shows Government is not Following Small Business Contracting Rules

September 22, 2014

The Small Business Administration (SBA) has a seemingly wonderful program under which certain federal contracts are supposed to be reserved for competitions among small businesses, called the "8(a) Business Development Program." The SBA describes the program as "a business assistance program for small disadvantaged businesses" and states that the program "offers a broad scope of assistance to firms that are owned and controlled by at least 51% by socially and economically disadvantaged individuals." The program is supposed to provide business for startups run by members of various racial minorities who have suffered from economic disadvantage. It does this in part by setting aside certain government contracts for small firms to compete over without having to compete against larger corporations. However, it turns out, the government contracts that are supposed to be handled by these small businesses are actually being handled by large corporations.

The Washington Post reports that contracting officers from various federal departments are not ensuring that work awarded to small businesses under the 8(a) program is being performed by those small businesses. Historically the program has been abused, usually by the small business getting the contract and then passing much of the work (and a portion of the profits) along to a large corporation that did not have the right to bid on the contract. To stop this abuse, regulators put strict limits in place on how much of the work the small business awarded the contract can subcontract out. If the limits are violated, the small business can be fined $500,000.

However, as strictly as those new regulations are written, they are not being fully enforced. The Government Accountability Office (GAO) investigated the program recently and found troubling results. The GAO picked ten contracts awarded under the program by three federal agencies: the Department of Defense, the Department of Homeland Security, and the Department of Health and Human Services. Those three agencies alone represent about 75% of the total contracts that are awarded under the program. What the GAO found was that of the ten contracting officers in charge of monitoring those ten contracts, only two monitored the amount of work conducted by subcontractors. In fact, while the agencies in question all told the GAO that the responsibility fell on the contracting officers, when asked, half of the contracting officers themselves did not know that this sort of monitoring was their responsibility.

Later in the investigation, the GAO went straight to the small businesses who had been awarded the contracts. Those small business owners confirmed what the investigation showed-the awarding agencies very rarely ask for information regarding subcontractors hired by the small businesses. What this means is that the abuse that existed before the new regulations could very well be continuing, but because no one from the awarding agencies asks, the abuse goes unpunished. And it means that work that should be done by small businesses is instead being done by large corporations.