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Government Contracts Update

On October 11, 2018, the U.S. Small Business Administration (SBA) Office of Inspector General (OIG) published its Report on the Most Serious Management and Performance Challenges Facing the Small Business Administration in Fiscal Year 2019. The report, which SBA has published variations of annually since 2000, represents the agency's current assessment of SBA's programs and activities that pose significant risks, including those that are particularly vulnerable to fraud, waste, error, mismanagement, or inefficiencies. For government contractors—and particularly small business concerns and companies that have recently outgrown their small business status—this report highlights key areas to watch for policy updates in the coming year. This article summarizes key findings in the OIG's report and identifies practical takeaways for government contractors' consideration.

Overview of the Report

The OIG's report examines eight unique challenges facing the SBA, which are summarized as follows:
  1. Weaknesses in Small Business Contracting Programs and Inaccurate Procurement Data Undermine the Reliability of Contract Goal Achievements
  2. SBA Needs to Continue to Improve Information Technology Controls to Address Operational Risks
  3. SBA Needs Effective Human Capital Strategies to Carry Out Its Mission Successfully and Become a High-Performing Organization
  4. SBA Needs to Improve Its Risk Management and Oversight Practices to Ensure Its Loan Programs Operate Effectively and Will Continue to Benefit Small Businesses
  5. SBA Needs to Ensure That the Section 8(a) Business Development Program Identifies and Addresses the Needs of Program Participants, Only Eligible Firms Are Admitted into the Program, and Standards for Determining Economic Disadvantage Are Justifiable
  6. SBA Can Improve Its Loan Programs by Ensuring Quality Deliverables and Reducing Improper Payments at SBA Loan Operation Centers
  7. SBA's Disaster Assistance Program Must Balance Competing Priorities to Deliver Timely Assistance and Reduce Improper Payments
  8. SBA Needs Robust Oversight of Its Grant Management

Among the various challenges detailed in the OIG's report, perhaps one of the most widely discussed in the industry is the methods for tracking procurement data to reliably measure agencies' achievement of small business contract goals in accordance with the Small Business Act (Challenge 1). In particular, while the SBA has reported since FY 2013 that the federal government met or exceeded its goal of awarding 23 percent of federal contracting dollars to small businesses, agencies have consistently overstated small business achievements. One reason for this overstatement is the exclusion of certain types of procurements from the small business goal baseline, including, in particular, U.S. Department of Defense (DoD) work awarded and/or performed overseas. Aside from this skewed baseline, however, the report notes that audits conducted by the OIG and Government Accountability Office (GAO) have identified widespread misreporting by procurement agencies, which frequently report and take credit for making contract awards to small firms despite the fact that large companies substantially perform the effort. The report suggests that while agencies may, consistent with the SBA's rules, receive credit for awarding contracts to businesses that are no longer small (such as, for example, in situations where a small business grows to be other than small during performance of a long-term contract), such practices hinder the agency's ability to accurately measure progress toward achieving the benchmarks set by Congress. The report concludes that "[a]lthough procuring agencies can award these long-term contracts, OIG contends that more transparent reporting of those awards is necessary to aid stakeholders and portray a true picture of the small business goaling achievements."

Along these same lines, the OIG report identifies challenges SBA faces in ensuring that it provides effective business development assistance to 8(a) firms, and certifying that only eligible firms are admitted into and remain part of the program (Challenge 5). The report notes that SBA continues to address its ability to deliver an effective 8(a) program, which has seen a steady decline in participants since 2010. SBA aims to implement a more streamlined application process to increase participation in the coming years, shortening the review period and eliminating other burdensome requirements. Despite these perceived benefits, the OIG anticipates that relaxing application requirements "may erode core safeguards that prevented questionable firms from entering the 8(a) program," noting that the OIG found, in a FY 2016 investigation, that SBA had not adequately documented the eligibility of more than 60 percent of firms making up the sample tested. Similarly, in a 2018 investigation, the OIG found that 20 of 25 firms reviewed should have been removed from the 8(a) program, but had instead received more than $125 million in new 8(a) set-aside contract obligations. Although SBA has continued to work toward improving safeguards, the OIG's report concluded that SBA's oversight in FY 2018 was nevertheless insufficient to ensure 8(a) Business Development Program participants met continuing eligibility requirements.

While most of the challenges the OIG examines in its report have carried over from previous years and are already the subject of SBA's reform efforts, the report identifies for the first time challenges facing SBA with regard to oversight of its grants management (Challenge 8). Citing OIG audits, the report notes "significant systemic deficiencies in SBA's grant management, including inaccurate financial and performance information, ineffective grantee and program oversight, and inefficient decentralized grant management functions." The OIG's report raises serious concerns regarding the accuracy of SBA's grant program data and the ability of SBA to report timely, complete, and accurate information as required by the Digital Accountability and Transparency Act of 2014. For example, independent investigations conducted in 2018 reported that SBA had a 32 percent error rate for data reported on USASpending.gov, and SBA's own internal auditors found that 100 percent of sampled transactions contained inaccuracies. The report concludes that "[a]s stewards of taxpayer funds, SBA needs to make substantial improvements to its grant management processes and procedures to ensure the funds are used for allocable, allowable, and reasonable expenditures."

Practical Implications for Federal Government Contractors

Federal contractors should continue to monitor changes in policy and regulations concerning small businesses, and understand how reforms may impact their potential procurement rights and remedies. For example, with respect to the items discussed above, contractors and grant recipients should be mindful that the SBA may:

  • Take steps to address its shortcomings in determining its small business spending calculations. This could include foisting additional obligations on contractors in the form of greater scrutiny, additional representations, and increased enforcement in small business size representations. Contractors may also see an increase in the number of area office-initiated size protests, SBA audits, or even increased reporting obligations. One area in particular that contractors should look out for is possible greater inquiries into the impact of specific mergers and acquisitions on small businesses' size, and the accuracy of re-representations.
  • Revisit how it plans to streamline the 8(a) program's application process, which could result in changes in policies and procedures to address the OIG's concerns. Such changes may have unintended consequences for the simplification and/or burden of the process.
  • Result in efforts to strengthen the SBA's grants management to the detriment of grant recipients, both slowing the distribution of federal assistance funds and/or overlaying such funds with unnecessary and burdensome requirements.

At this juncture, it is difficult to predict how the SBA will respond to the OIG's report. Nevertheless, it is a near certainty that the SBA will aim to address these findings, as it has attempted to do so in the past, and such efforts will undoubtedly have direct and perhaps indirect—and unanticipated—impacts on small contractors and grant recipients going forward. Thus, small businesses would be mindful to keep a close watch on the SBA's reaction and related initiatives, guidance, rulemakings, and actions arising out of this report. We certainly will monitor SBA's response as well, and will bring our clients and subscribers up to date as things develop.