Proposed rule increases oversight of program aiding disadvantaged businesses

A proposed governmentwide rule could tighten regulations and monitoring of a fraud-riddled contracting program designed to benefit small businesses in low-income neighborhoods.

The rule, published on April 13 in the Federal Register, would amend the Federal Acquisition Regulation by requiring small businesses claiming eligibility in the Historically Underutilized Business Zone category to register their status twice, at the time of their initial bid offer and just prior to the contract award. If a company's eligibility changes before winning the contract, the procurement officer would award the business to another bidder, the notice said.

According to SBA attorney Laura Mann Eyester, the certification requirement, along with other regulatory changes included in Monday's notice, have been on the books since 2005, but not incorporated into the FAR -- the central repository for contracting rules.

Until now, the FAR only required firms bidding on set-aside awards to represent their HUBZone status when a contract was opened for competition. But it can take several months to issue an award, at which point the firm's status in the program could change either through transfer of ownership or relocation outside a HUBZone.

"This will result in those HUBZone concerns that are still eligible to compete having to compete only among other eligible HUBZone concerns, thus increasing their chances for award," the draft rule stated.

The rule appears to rely on voluntary disclosure from the contractor -- a recurring problem with the HUBZone program.

In March the Government Accountability Office found that 19 ineligible firms had received $30 million in contracts through the HUBZone program in fiscal 2006 and fiscal 2007 combined.

The watchdog also reported that SBA conducted only a minimal number of site visits to HUBZone companies and required little documentation from firms to prove residency. The proposed FAR rule is unrelated to GAO's investigation, Eyester said.

House lawmakers have threatened to shut down the program if it is not reformed immediately.

To qualify for the program, firms must be located in an economically distressed region, and at least 35 percent of their full-time employees must live in the zone.

The proposed rule also requires:

• Program participants to purchase materials manufactured or produced in HUBZones. This rule excludes construction and service contracts or awards less than $25,000
• Prime contractors to confirm that their subcontractor is certified as a HUBZone small business by accessing the Central Contractor Registration database or by contacting SBA
• The protester of a company's HUBZone status to be an "interested party" directly involved in the contract competition.