DoD SDVOSB Contracts: OIG Reports Major Problems

The Department of Defense Office of Inspector General (OIG) recently released an audit report about Service-Disabled Veteran-Owned Small Business Contract Awards at DoD . The report noted major concerns with how DoD is confirming eligibility for SDVOSB contract awards as well as monitoring subcontracting limitations. These concerns could lead to increased monitoring and enforcement, so SDVOSB contractors should be keen to see what the report unearthed.

The report is based on a review of 29 contractors, looking at eligibility for contract awards and limitations on subcontracting. There were two big conclusions in the report.

First, out of 29 contractors, 16 contractors received contracts even though the contractors did not meet SDVOSB requirements. These 16 contractors received 27 contracts, valued at $827.8 million. “This occurred because the DoD relied on contractors to self-certify as an SDVOSB and did not have additional controls in place for DoD contracting activities to verify the accuracy of those representations.”

The contractors in questions “did not have a service-disabled veteran as the owner and highest ranking officer of the company or whose publically available information and contract documentation did not support that the contractor met the requirements for SDVOSB status.”

As one example, VA could not verify that the president of a business that won an SDVOSB set-aside contract was a service-disabled veteran. In another example, a state business license showed multiple owners as equal partners, even though only one of them was a service-disabled veteran, and that individual lived 2,000 miles away from the company office.

Interestingly, 17 of the 29 contractors that OIG reviewed had been denied SDVOSB verification by VA. But DoD undertook no additional review of these 17 contractors that had previously been found noncompliant through VA’s verification process. The report recommends that DoD independently review these contractors that VA found ineligible and potentially protest their status through SBA.

Second, the report found that DoD did not verify subcontracting limitations for 6 contracts awarded to 3 contractors, valued at $164.7 million, because there were no procedures to track compliance. One contracting officer “stated that it was not possible to verify subcontracting limitations for SDVOSB contracts because they generally do not track these amounts.” And in that case, the project manager was an employee of the non-SDVSOSB subcontractor, which raises red flags about who was doing the primary work for the contract.

The OIG concluded that “the DoD awarded $876.8 million in contracts to contractors that are not eligible for the SDVOSB set-aside program.” Not good.

Recommendations

The OIG recommended a few fixes for this problem that that DoD’s Office of Small Business Programs (OSBP) should take.

  • “[R]eview contractors we determined to be ineligible and contractors that were denied SDVOSB status by the VA Center for Verification and Evaluation, and take action, through the SBA, as necessary”
  • “[R]equire contractors to submit documentation to support their SDVOSB status, as well as other socio‑economic statuses, prior to contract award, and perform periodic reviews of SDVOSB contractors”
  • Create procedures for tracking subcontracting limitations
  • Coordinate with GSA and SBA to “implement procedures to ensure that contractors update their SAM status if the SBA determines the contractors are ineligible” and to make sure protest results are communicated to contracting personnel

These recommendations make some sense–DoD should take some additional responsibility for ensuring it is contracting with compliant SDVOSBs. Interestingly, the OSBP disagreed with the report and would not address the specific recommendations in the report. The OSBP responded that requiring additional documentation from contractors may violate other statutes, such as the Administrative Procedures Act; a claim the DoD OIG disagreed with. Plus, although not raised by the OSBP, I’m not aware of any statute or regulation specifically requiring DoD to do this sort of investigation, which may also explain why DoD hasn’t agreed to the recommendations (why agree to to do something you’re not required to?).

If taken, these steps would definitely result in increased oversight of SDVOSB contractors at DoD. They are a reminder that DoD could increase its oversight of SDVOSB programs if it decided to. Because of this risk (and because it’s required) SDVOSB contractors should stay vigilant in making sure they are compliant with SDVOSB regulations.

Even though the DoD small business office is not jumping at the chance to start investigating all SDVOSB contractors, there could still be an uptick in investigation by DoD. We’ll continue to update you here at SmallGovCon on developments in how DoD and other agencies enforce SDVOSB eligibility and subcontracting requirements.

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