SBA Inspector General Identifies “Challenges” with Multiple SBA Programs

The SBA Office of the Inspector General has taken it upon itself to look at the SBA’s programs and activities in order to determine what risks the SBA may face in the 2020 Fiscal Year. It appears that the OIG did not like what it found.

The examination found multiple risks and problems associated with SBA programs, including the 8(a) program, the WOSB program, and SBA’s small business contract goaling methods.

The SBA OIG report focused on many aspects of the SBA, but the portions of the report directly affecting Federal Contracting were related to the SBA’s administration of the 8(a) program, the WOSB program, and the SBA’s small business goaling. I’ll talk about each of them in turn.

8(a) Program

SBA OIG conducted a deep dive on the SBA’s administration of the 8(a) program.

The SBA OIG found that since last year, the SBA had made no progress in enhancing the functionality of the process, despite spending upwards of $27 million on the portal. Currently the SBA has no system in place to assist program officials in monitoring 8(a) participants’ business development or to assess the effectiveness of the program itself.

Additionally, the OIG noted that since 2010 there has been a steady decline in the number of firms participating in the 8(a) program. In fact, from April 2018 to August 2019 alone there was a 10% decline in 8(a) participants.

To increase participation in the 8(a) program, the SBA had created a streamlined 8(a) application process in which certain documents such as IRS tax verification forms and business structure documents are no longer required. The OIG found that this streamlined process may lead to an erosion of core safeguards that prevent “questionable firms” from entering the 8(a) program. In response to this potential issue, the SBA has issued proposed procedures to help prevent ineligible firms from joining the 8(a) program. However, the OIG asserted that a fully functional informational system may be needed to assist in monitoring the 8(a) program.

The OIG also found problems with monitoring continued eligibility in the 8(a) program. The OIG writes that the SBA did not consistently identify ineligible firms in the 8(a). As evidence of this, the OIG examined 25 different firms within the 8(a) program and found that 20 of the 25 firms examined should not have continued eligibility in the 8(a) program. Yes, you read that right, 80% of 8(a) firms the OIG looked at “should have been removed from the 8(a) program.” Supposedly, the SBA’s proposed procedures also address this issue, but the OIG states that until more improvements are made, ineligible firms will likely continue to receive 8(a) contracts.

Finally, the OIG takes aim at the dollar threshold for an individual to qualify as “economically disadvantaged.” Currently, the threshold is $275,000 and, according to the report, a study requested by the SBA found that $375,000 would be more appropriate. Despite this, the SBA believed that the $375,000 threshold did not consider economic disadvantage as an element of continued eligibility in the 8(a) program and has suggested that $750,000 may be a better threshold. The OIG voiced its concern towards all three thresholds, current and proposed.

The OIG’s concern was that all the thresholds were arbitrary. The OIG suggested that the SBA develop objective criteria based on “quantitative research” and implement criteria for the threshold that would address “where socially disadvantaged individuals face economic disadvantage due to diminished credit and capital opportunities.”

WOSB Program

SBA OIG also looked at the upcoming changes to the WOSB program. The OIG explicitly noted weaknesses in the SBA’s controls to ensure only eligible firms receive WOSB program set-asides.

The 2015 Fiscal Year NDAA granted COs the authority to award sole-source awards to firms in the WOSB program, and required WOSB firms to be certified. The SBA implemented the sole-source authority without first implementing the certification requirement. The OIG found that the delay in certification caused approximately $52.2 million in WOSB sole-source awards to be made without necessary certification or documentation. In addition, the SBA OIG found that the proposed certification process for WOSB firms was too limited in scope.

Small Business Goaling

Finally, the OIG took issue with some aspects of small business goaling calculation methods.

For small business contracting, the goal is for 23% of all government contracts to be awarded to small businesses. The SBA takes data from all agencies and determines whether this goal was met every fiscal year (for an examination of recent SBA goaling, check out this article). However, the SBA has exclusions that prevent certain contracts from being counted in this calculation. According to the SBA some of the contracts excluded from goaling calculations are contracts funded predominately with agency generated sources (i.e., non-appropriated funds), acquisitions with a statutorily mandated source, and acquisitions on behalf of foreign governments.

The OIG took issue with SBA excluding contracts from the goaling calculation and stated that exclusions invariably lead to an overstatement of goaling percentages met by agencies. The report recommends the SBA include all contracts, regardless of exclusion, in its small business goaling calculations.

We’ve discussed issues with the SBA’s scorecard in the past. Now, the SBA OIG itself has found that SBA is overstating how agencies are doing. This is a serious problem because it goes to the heart of whether agencies are awarding contracts to small businesses, including under the socioeconomic designations, at the proper clip. SBA should not allow agencies to inflate the numbers.

In addition to this, the SBA OIG has recommended that if a small business changes from “small” to “other than small” after contract award or during contract performance, then the SBA should not count that specific business towards the small business goaling calculations or at least indicate which firms have graduated from small status as part of the goaling summaries.

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Overall, the SBA OIG did not pull any punches in its report, and found the SBA lacking in multiple areas. However, it’s important to mention that the OIG did note overall progress in many areas; this report focused only on the negative areas. But the OIG is clearly not satisfied with the type of progress made by the SBA in the 2019 Fiscal Year.

Going into the 2020 Fiscal Year, look for the SBA to implement procedures and take a deeper examination of goaling and the 8(a) program. If not, the SBA OIG may have another rough report for the SBA next year.

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