The SBA Inspector General recently determined that over $400 million in small business awards were awarded to firms that were not eligible small businesses at the time of award. These awards were apparently issued in error by various agencies, but were used to inflate the federal government's overall small business award results.
Further, the SBA found that more than $1.5 billion in contracts were awarded to firms that were no longer 8(a) or HUBZone small businesses at some point during contract performance. While this can be explained by the SBA's "grandfather rule" that determines a firm to be small as of the date a firm submits its proposal for a contract award, even if the firm grows to be a large business during the course of the contract, it demonstrates that contract awards are being issued and performed by entities that are not small businesses at some point during the life of the contract. Again, these awards were used to inflate the government's small business award results.
These findings show a disturbing trend that awards being counted by the SBA as being given to small businesses tend to end up being performed, at least partially, by businesses that are not small. While the federal procurement regulations prohibit a large business from receiving or performing a small business set-aside as a prime contractor, the enforcement of these regulations is inconsistent at best.
The investigations conducted by the SBA Inspector General only looked at a small fraction of overall small business contract awards. Accordingly, it is likely that the inflated numbers are more prevalent in the federal arena than currently known. A link to the SBA's press release on the issue is – http://www.sba.gov/oig/audit-report-14-18-evaluation-select-8a-business-development-and-hubzone-contract-awards.
It is clear that the federal government, especially the SBA, must do a better job in certifying and tracking which entities are small businesses and which entities are not. Only by affirmatively certifying businesses as small prior to issuing a contract award will an agency ever truly be certain that the business is small. Relying on small businesses to self-certify as small will always result in large businesses claiming to be small if there is no in-depth review of whether they truly are small. Legitimate small businesses would welcome increased measures by the SBA to identify truly small businesses prior to a contract award.
Doug Hibshman is a partner in Fox Rothschild LLP's Federal Government Contracts and Procurement, Construction, and Infrastructure Practice Groups in Washington, DC, and routinely represents federal contractors on small business and fraud matters.
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