Panel told of abuse in small-business set-asides

October 6, 2011

Small government contractors often violate regulations by passing on most of the work and profits to large businesses, a practice that crowds out legitimate small businesses from the federal market, according to a House oversight panel Thursday.

“When a prime contract is set aside for a small business, the government wants to make sure that the small business is not simply a front for a large business, so the Small Business Act requires that the small business perform a certain percentage of the work,” said Rep. Mick Mulvaney (R-S.C.), chairman of the subcommittee on contracting and workforce.

The hearing focused on contracts in which government investigators have concluded that subsidiaries of Alaskan native corporations passed on the bulk of more than $1 billion worth of work to subcontractors.

Those native corporations can receive contracts of any size without competition through a special set-aside program, even if they do not have the experience or resources to perform the contracts themselves.

A Washington Post investigation last year found that some of the native corporations, including one called United Services and Solutions, did not do a proper share of work.

United Services and Solutions, or US2, had only three employees and little federal revenue the year before it was awarded a $250 million contract from the Army without competition in 2008.

According to testimony at Thursday’s hearing, US2 did not come close to doing half of the work under contract. “US2, an Alaskan native corporation, had been noncompliant . . . for more than 2 1/2 years,” Mary Kendall, the acting inspector general at the Department of the Interior, testified during the hearing.

In an internal document, independently obtained by The Post, Kendall told senior Interior Department officials that her investigators had determined that US2 did just $16 million worth of more than $101 million invoiced to the government.

Representatives of US2 have previously said that they thought the company was following all government regulations.

The hearing came one day after federal authorities announced what they called “one of the most brazen corruption schemes in the history of federal contracting.” The alleged scheme involved a senior contracting executive at another Alaska native corporation, Eyaktek, who worked with government contracting employees to file inflated invoices for services.

The men allegedly fleeced the government for more than $20 million, using the money to buy BMWs, Cartier watches, first-class airfare and other luxury goods and services.

In her testimony Thursday, Kendall said evidence shows that subcontracting problems are not restricted to Alaska native corporations. She said that government contracting officials often do not know the rules or their roles in enforcing them. In some cases, the small businesses obscure matters by providing incomplete or misleading data.

US2’s contract was awarded by officials at Interior working on behalf of the Army. Kendall said the Interior contracting official assigned to the deal knew little about it or her obligations to ensure that US2 actually did the work.

Joseph Jordan, associate administrator for contracting and business development at the SBA, told the committee that the agency has been working to improve oversight while also expanding business opportunities for small businesses.

Though the SBA has delegated direct oversight of contracts to the agencies that award them, Jordan said the SBA was prepared to help train contracting officers to better understand and enforce the rules.

“We are highly focused on being more proactive and effective than ever before in protecting our programs and the legitimate small businesses that benefit from them,” Jordan testified. “In the last two years, SBA has initiated more government-wide suspension and debarment actions than it had in the previous 10 years.”

Robert O’Harrow Jr. is a reporter with the investigative unit of The Washington Post who has focused on privacy, national security, federal contracting and the financial world.
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