Small businesses that win special set-aside contracts are supposed to handle the majority of the work themselves, and reap most of the reward. But rules meant to ensure that happens aren’t being followed by government officials. (Mark Wilson/Getty Images)

Contracting officers across a number of federal departments are failing to ensure that work awarded to small businesses under special set-aside contracts is actually performed by those small companies, rather than, for example, being passed through — along with most of the payments — to large corporations, according to a federal investigation.

Conducted by the Government Accountability Office, the probe centered around the Small Business Administration’s 8(a) program, under which certain contracts are reserved for competition among small firms owned by what the agency considers socially and economically disadvantaged individuals, including, in many cases, minority business owners. Contracts worth up to $6.5 million can be awarded under the program, which has been lauded as an important small-business development tool.

However, large and small contractors have in the past exploited the program, often through schemes in which a small 8(a) company uses its preferential treatment to win set-aside contracts, but then passes most of the work and much of the profits through to a large corporation.

Hoping to put a stop to that, regulators have set limits on the share of work 8(a) contractors can pass along to subcontractors. In the case of services contracts, for instance, the small prime contractor must assume at least half of the personnel costs. On supplies contracts, at least half of the manufacturing must be conducted by the 8(a) contractor.

Under legislation approved by Congress last year, violating those limits now carries a minimum penalty of $500,000. Apparently, though, those limits are rarely being enforced.

In conducting the investigation, GAO officials selected a sample of 10 8(a) contracts awarded by the three agencies that represent about three-fourths of all contracts awarded under the program — the Departments of Defense, Homeland Security and Health and Human Services. In several cases, a new 8(a) prime contractor was subcontracting to a large firm that had previously been the prime on the project — raising a red flag for investigators.

Of the 10 contracting officers in charge of overseeing each of the selected contracts, only two were found to have monitored the amount conducted by subcontractors to ensure the prime was not exceeding the cap.

When the investigators later sat down with the 8(a) contractors who won the awards, they confirmed that department officials rarely ask for or require information concerning their subcontractors.

Contracting officers “are responsible for monitoring whether 8(a) contractors are in compliance with subcontracting limitations,” Michele Mackin, GAO’s director of acquisition and sourcing management, wrote in a letter sent to several federal departments as well as members of Congress. However, she noted, the report shows they “generally do not do so.”

Question is, why not?

Macklin later noted that the SBA, DOD, DHS and HHS officials have stated that they know the onus for monitoring compliance falls on the contracting officers. However, that information does not appear to have trickled down to the officers, as half of those interviewed by GAO were not aware of their responsibilities outlined in their respective agency’s agreements with the SBA.

Macklin also pointed out that this isn’t the first time the GAO has uncovered scant compliance with the rules in the 8(a) program. Similar investigations in 2006 and then again in 2012 found that contracting officers weren’t keeping tabs on subcontracting limits then, either, and in both cases, many contracting officers weren’t aware that monitoring subcontracting limits was their responsibility.

“These findings are even more troubling when there are situations with an increased risk that a contractor may not be able to complete the required amount of work, such as when the prior contractor becomes a major subcontractor for the same requirement,” Macklin wrote.

Some of the confusion, she added, may stem from the fact that the rules requiring contracting officers to monitor compliance are generally found in each agency’s agreements with the SBA, not in the federal government’s general contracting rulebook, known as the Federal Acquisition Regulation, or FAR. In its report, the GAO therefore advised the White House Office of Federal Procurement Policy, which maintains and updates the FAR, to add those contracting officer duties to the rulebook.

An OFPP official has already responded to the letter agreeing with the office’s recommendations, according to the GAO. However, due to the lengthy rule-making and comment period required for an update to the FAR, a change would likely take years, Macklin said.

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