Government officials aren’t enforcing small business contracting rules, probe shows

September 18

Contracting officers across a number of federal departments are failing to ensure that work awarded to small businesses under special set-aside contracts is actually performed by those small companies, rather than, for example, being passed through — along with most of the payments — to large corporations, according to a federal investigation.

Conducted by the Government Accountability Office, the probe centered around the Small Business Administration’s 8(a) program, under which certain contracts are reserved for competition among small firms owned by what the agency considers socially and economically disadvantaged individuals, including, in many cases, minority business owners. Contracts worth up to $6.5 million can be awarded under the program, which has been lauded as an important small-business development tool.

However, large and small contractors have in the past exploited the program, often through schemes in which a small 8(a) company uses its preferential treatment to win set-aside contracts, but then passes most of the work and much of the profits through to a large corporation.

Hoping to put a stop to that, regulators have set limits on the share of work 8(a) contractors can pass along to subcontractors. In the case of services contracts, for instance, the small prime contractor must assume at least half of the personnel costs. On supplies contracts, at least half of the manufacturing must be conducted by the 8(a) contractor.

Under legislation approved by Congress last year, violating those limits now carries a minimum penalty of $500,000. Apparently, though, those limits are rarely being enforced.

In conducting the investigation, GAO officials selected a sample of 10 8(a) contracts awarded by the three agencies that represent about three-fourths of all contracts awarded under the program — the Departments of Defense, Homeland Security and Health and Human Services. In several cases, a new 8(a) prime contractor was subcontracting to a large firm that had previously been the prime on the project — raising a red flag for investigators.

Of the 10 contracting officers in charge of overseeing each of the selected contracts, only two were found to have monitored the amount conducted by subcontractors to ensure the prime was not exceeding the cap.

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