Based on reports released after the end of FY14, for the first time, the Pentagon has exceeded departmental goals for small-business contracting. Small businesses made up 23 percent of the Department of Defense’s (DOD’s) prime contracts in fiscal year 2014, receiving about $53 billion in work. In fact, DOD not only exceeded its goal, but is on course to exceed the federal-wide goal.
So what’s the bad news?
Recently, I’ve been hearing from Contracting Officers at multiple locations that more small businesses are failing to perform.
As COs are driven to set-aside awards to small businesses (even when market research suggests there are NO capable small businesses to do the work), those small businesses contractors turn out to lack the capability or financial resources to take on the huge projects and ultimately fail. It has happened across the spectrum of supplies and services.
I myself had a case where the Small Business Office at the base determined there was a small disadvantaged business that could perform a window washing service I was planning to compete among all small businesses. Market research had not shown that there were two or more capable small disadvantaged businesses in one socioeconomic category that could perform the work. However, the local Small Business Office wanted the work directed to this contractor. As the CO, I had a hard time agreeing with this but acquiesced to the company coming out to do a site visit so they fully understood the requirement. Why make such a big deal, you may ask. It was ONLY window washing, right? Well, actually, it was specialized window washing. The building to be serviced has a variety of very unique “windows”. They had a glassed-in atrium where the entire ceiling was glass and the only way to perform the interior washing was on elevated platforms with the window washers lying on their backs. The exterior washing required a complicated set of scaffolding spanning across the top of the atrium for the window washers to be able to do their jobs. Additionally, about half the building had floor to ceiling windows (as high as 20 feet). Finally, the environment where the building was located was very corrosive from the sea salt and it required special cleaning solutions to keep the outside clean. So the contractor came out and looked around and said they could do the work and we awarded them the contract. Within the first week, they had failed to perform because they had neither the interior elevated platforms nor the exterior scaffolding. They did not have the required safety equipment. I met with the contractor and the Small Business Office and we agreed to allow them 6 weeks to get the required equipment. Before the six weeks was up, the contractor called me and said they did not have the financial resources to buy or rent the equipment and were not going to be able to perform the contract. I asked why they didn’t say anything at the site visit, and the answer was “We needed the work.”
So are we awarding contracts to small businesses and then driving them into bankruptcy? It’s a false economy to meet or exceed a goal when ultimately the contract was not completed by the small business it was awarded to.
Another issue may be that the statistics being used to report the small business goal successes are wrong.
On September 24, 2014, the Office of the Inspector General (OIG) issued Evaluation Report 14-18, Agencies are Overstating Small Disadvantaged Business and HUBZone Goal Credit by Including Contracts Performed by Ineligible Firms (https://www.sba.gov/sites/default/files/oig/Agencies%20Are%20Overstating%20SDB%20and%20HUBZone%20Goaling%20Credit.pdf). This report presents the results of their evaluation of select Section 8(a) Business Development Program and Historically Underutilized Business Zones (HUBZone) contract awards.
The Small Business Administration’s inspector general’s office identified $400 million worth of contracts that were given to ineligible firms but the agencies still counted the awards toward their targets.
The OIG also identified over $1.5 billion in contract actions where the firms were in the programs at the time of contract award, but in FY 2013 were no longer in the 8(a) or HUBZone programs. SBA regulations allow agencies to claim Small Disadvantaged Business and HUBZone goal credit on certain contract actions even after firms have left the program. The amount of dollars the SBA reports to Congress and the public as being performed by 8(a) and HUBZone firms in the Small Business Goaling Report is significantly impacted by including contract actions performed by program participants no longer in the programs
The findings are noteworthy because 2013 was the first year that the Obama administration claimed to have met the federal government’s small-business contracting goals. The incorrect numbers led to inaccurate reports to Congress and the American taxpayers.
Under current law, the federal government tries to award 23 percent of its contracts to small businesses, with 3 percent to firms located in economically struggling areas (Historically Underutilized Business Zones) and 5 percent for companies that are either socially or economically disadvantaged.
Auditors found that COs erroneously claimed $208 million in HUBZone contracts and $219 million for economically and socially disadvantaged firms.
According to the report, some contracts went to firms that were not even participating in the SBA programs their awards were reported against. Auditors also found that some agencies changed awards to sole-source contracts to help meet their goals.
While this issue was related to FY13 statistics, the underlying causes of the skewed data may well have carried over into FY14 data.
If you are a glass half full person – a historically significant event occurred this year – DOD exceeded its goals for small business contracting! And that IS good. It is definitely a step in the right direction.
But it is unclear whether the underlying information used to gather these data were skewed and made the actual percentage look better. With the proliferation of watchdog agencies (especially those within the SBA itself), we can be sure to hear whether this is good news or bad news in the near future.
Fret not, in the next post, I’ll give you the “good news” half of this 23%.