Small business program relies too heavily on honesty and self-reporting, some say.
The investigation of AEY Inc., the Miami-based weapons distributor accused of delivering faulty Chinese ammunition to Afghan security forces, has brought renewed attention to the federal government's small disadvantaged business program. AEY was awarded a $298 million Defense Department contract in March 2007 to supply munitions to the Afghan Army and police forces. The company, owned by 22-year-old Efraim Diveroli, was listed as disadvantaged on the award.
Some procurement analysts suggest that overburdened and understaffed federal acquisition offices might not be performing due diligence in verifying the status of companies claiming disadvantage, while others say agencies have an incentive to miscode firms to boost their numbers to meet small business contracting goals. No matter what the motivation, the existing system might not be sufficient to discourage misuse.
Exactly how AEY became listed as a small dis-advantaged business in numerous federal databases, despite never having been certified by the Small Business Administration, remains a mystery. While it is unclear whether AEY declared disadvantaged status on its bids, many say the case reveals federal agencies' excessive reliance on contractor self-designation. Companies that are certified by SBA are responsible for designating themselves as small and disadvantaged during contract bids and proposals.
"This information is supposed to be truthfully represented and matched against the central contractor registry," says Paul Murphy, president of Fairfax, Va.-based Eagle Eye Publishers Inc., which conducts government contracting market research. Misrepresentation would be very easy, he says, because contracting officers often fail to confirm the companies' claims.
Accountability is enforced through the bid protest process, says Joe Hornyak, a partner in the government contracts group at the Washington law firm Holland & Knight. If a company lies about its disadvantaged status, competitors might take notice and file a protest. "That is a really easy protest-do you have the certificate or not?" he says. "If not, and you checked that box, you defrauded the government. You just made a false representation and you're in big trouble." It would be up to the prime contractor to look into the SDB status of a subcontractor, Hornyak says, but he doubts they often do.
The AEY case has many people wondering who is eligible for the small disadvantaged program. Even those who are familiar with the complex world of federal procurement are asking how this designation is being used during the award process.
SDB is closely related to the 8(a) program; both aim to improve economic opportunities for socially and economically disadvantaged businesses, particularly in the federal marketplace. While all 8(a) firms automatically qualify for SDB status, the reverse is not true. The SDB program relates strictly to federal contracting opportunities.
Under both programs, a certified firm must be at least 51 percent owned and operated by a socially and economically disadvantaged individual. Most applicants are in one of the racial categories statutorily presumed to be disadvantaged: African-American, Native American, Hispanic American, Asian-Pacific American or Subcontinent-Asian American. Others must prove that ethnic origin, gender, physical handicap or isolated residence has contributed to "substantial and chronic social disadvantage in American society," according to the Small Business Administration's criteria.
Many say it is difficult for companies that are not in the presumed disadvantaged groups to receive 8(a) or SDB certification. SBA reports that only 10 percent of SDB certified firms fall outside those categories. "I have almost never, in almost 20 years of doing this, come across an 8(a) contractor where the owner did not fit in one of the designated groups presumed disadvantaged," says Hornyak.
Mariana Pardo, assistant administrator for program certification and eligibility office, says applicants often submit documents, such as a ruling from the Equal Employment Opportunity Commission, sworn affidavits corroborating instances of discrimination and contact information of people who can verify the applicant's circumstances.
"If [the application] is simply a narrative saying, 'I'm a woman, I've encountered the glass ceiling and these are some statistics in my profession,' that is not sufficient," Pardo says. "Because just the mere fact that I'm an architect and, statistically speaking, there are not many female architects who specialize in, say, building high rises, that doesn't say for sure that I have experienced that."
Dick Otero, president of EZCertify, a Gainesville, Va.-based company providing software and services to companies applying for 8(a) and SDB status, says the process is extremely rigorous and applications can include as many as 1,000 pages of corroborating evidence of prejudice. "SBA really does act as a tremendous magnifying glass on this," Otero says. "Applicants have a heck of a time proving disadvantage. Even if you're in one of the presumed racial categories, you can flunk the economic test."
Applicants for 8(a) status must have a net worth of no more than $250,000 to be certified, excluding their interest in the business and their primary residence. The net worth limit for SDB applicants is less strident at $750,000. Additionally, 8(a) firms must have a record of performance and have been in business for at least two years, with a few exceptions. SDB firms have no such requirement.
Firms with 8(a) status can compete for prime contracts set aside for 8(a) contractors or be awarded sole source contracts. There are no prime contract set-asides for SDBs, though prime contractors are encouraged to subcontract with disadvantaged businesses. Some agencies give SDBs a price advantage on their proposals, usually about 10 percent, by raising the prices of competing offers by that amount. NASA and the Coast Guard offer these adjustments, as did the Defense Department until recently, when they met the SBA goals for contracting with SDBs.
Joe Loddo, the Small Business Ad-ministration's associate administrator for business development, says other benefits might be more intangible. "Agencies are looking to ensure they meet the governmentwide goals . . . so it's an advantage in terms of competing," he says. The SBA target for contracting with small disadvantaged businesses is 2.5 percent.
Procurement specialists largely agree that while AEY's link, or lack thereof, to the SDB program has increased scrutiny, the scandal likely will not tarnish the reputation of SBA or contracting officers. Nevertheless, Loddo says, "any time anybody misuses federal programs, it's not good for the taxpayers and not good for government. We provide the oversight we do to ensure that doesn't happen and we act when it does."
No contracting officer has referred AEY's case to SBA as an instance of fraud, Loddo says, but the Defense Department is looking into AEY's disadvantaged designation as part of its investigation into the company's contract awards.