Small Business Administration changes rules for set-aside contracting program

After the attacks of Sept. 11, 2001, the Pentagon and other agencies awarded thousands of contracts without competition or proper oversight. In that rush, billions went to entities known as Alaska native corporations. Then the problems began.
Washington Post Staff Writer
Friday, February 11, 2011; 8:11 PM

The Small Business Administration has overhauled the rules for its main set-aside contracting program, a reform effort that agency officials said is aimed at reducing fraud and ensuring that money and other benefits flow to the right people.

Dozens of changes will address issues including minor administrative matters and substantial particulars such as defining for the first time how much money an individual can have and still be considered economically disadvantaged.

The changes also clarify the rules for joint ventures between small and large businesses, requiring the small firms to do at least 40 percent of the work. Until now, the government did not specify how much work had to be done.

For years, the SBA's 8(a) Business Development program has been vulnerable to abuses as large companies and non-disadvantaged entrepreneurs have taken advantage of the rules.

The government sometimes has done little to enforce the rules, in part because the contracting workforce across it has been depleted and many procurement workers in other agencies do not understand their oversight responsibilities.

"The regulations, first and foremost, help ensure the benefits flow to the intended recipients," SBA Administrator Karen Mills said in a statement. "By tightening the regulations, along with unprecedented oversight over the past two years, SBA is demonstrating its commitment to preventing waste, fraud and abuse."

The changes have been in the works for nearly two years. They were published Friday and will take effect in 30 days.

The rules remain complex, and, under the current system, it will be up to procurement officials at other agencies to enforce them. Government audits have found that procurement officials often do not understand the rules or choose to ignore them.

The release of the rules comes as the SBA has mounted unprecedented enforcement actions.

In October, after a Washington Post investigation, the agency temporarily suspended a large business contractor from all government business. The SBA said it had evidence that Herndon-based GTSI, a technology firm, had used two small companies to improperly get work from a $3 billion contracting program at the Department of Homeland Security.

The Post had detailed the companies' relationship in a series of articles that began in September. The series has focused on abuses in the government's small-business programs for Alaska native corporations, subsidiaries of which have received more than $29 billion in contracts over the past decade.

The SBA has also suspended the two small firms, one of them an Alaska native corporation. In the suspension letters, the SBA said it had "adequate evidence" that the firms had "committed fraud or a criminal offense" by passing on too much of the work and profits to the large firm.

SBA officials said the new rules will make it harder for large companies to take advantage of the agency's mentor-protege and joint venture programs. The rules also will prohibit consultants and non-disadvantaged managers of 8(a) companies from receiving pay based on a percentage of gross revenue.

Such pay "must be reasonable in light of services provided," said an SBA announcement about the rules.

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