SBA OIG Issues Report Questioning 8(a) Non-Manufacturer Rule Waiver

The SBA’s waiver of the non-manufacturer rule in connection with an 8(a) sole source contract resulted in a “pass through” award to a large business, according to a report by the SBA Office of Inspector General.  As a result, the 8(a) contractor in question received only $153,000 for “minimal” oversight, while the remainder of the $7.78 million 8(a) set-aside contract went to large companies.

The SBA OIG was quick to point out that the arrangement was legal, but questioned whether the pass-through provided appropriate developmental opportunities to the 8(a) contractor–as well as whether taxpayers are well-served by such large percentages of “small business” contracting dollars flowing to large companies.

In its investigation, the SBA OIG examined a $7.78 million 8(a) sole source contract awarded to TKC Global Solutions, LLC (as an Alaska Native Corporation, TKC was not bound by the typical 8(a) sole source limits).  The contract called for TKC to provide personal computers and monitors to the Department of Labor.

Under the non-manufacturer rule, to qualify as a small business for an 8(a) set-aside contract for manufactured products, a company must either be the manufacturer of the product itself, or provide the product of a domestic small business.  However, the SBA can waive the requirement to use a domestic small business manufacturer under certain circumstances.

In this case, TKC was not the manufacturer.  Because the DOL desired Dell computers, the SBA issued a waiver allowing TKC to provide the products of a large business, Dell.

After obtaining the waiver, TKC subcontracted the vast majority of the contract to another large business, World Wide Technologies, Inc.  WWT procured the products from Dell, and TKC merely monitored delivery.  Of the $7.78 million contract value, TKC kept only $153,000, while the rest flowed to WWT, and presumably, to Dell.

The SBA OIG found that “this pass through contract did not fulfill the purpose of the 8(a) program.”  The SBA OIG stated that, “although authorized under statute,” a pass-through of this type “may not provide the developmental opportunities intended through participation in the 8(a) program.”  In addition, procurements like this “funnel taxpayer funds to large businesses instead of developing small businesses to compete in the American economy.”

The SBA OIG stated that it intends to perform additional 8(a) contract audits–presumably to see whether practices of this sort are widespread.  I will keep you posted.

Follow-up: Nov. 5, 2012.  In a recent conference call, a leading advocate for tribal and Alaska Native 8(a) companies expressed his frustration that the SBA OIG had published this report, given that SBA OIG itself agreed that TKC had done nothing illegal.  While I found the report interesting, I do share this advocate’s concern that reports like this one could be seen as unfair to businesses that have played by the rules as written, only to see their actions publicly questioned nonetheless.

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