United States. Congress. House. Committee on Small.

The abuses in the SBA's 8(a) Procurement Program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, December 13, 1995 online

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nies, out of 5,700 in the program, commanded 50.4 percent of the
contracts in terms of dollar value. These contracts total over $14
billion, or an average of $70 million for each of the 200 companies.
Over half of the 5,700 companies have no active contracts.

More objective criteria must be instituted to make the program
easier to administer, especially in light of current budget cutting,



8

and more difficult to circumvent. More objective criteria would also
help to foster broader participation in Federal contracts by compa-
nies in the 8(a) Program.

We believe that the single most important measure that could be
taken to minimize abuse, simplify program administration, and re-
duce concentration, would be the establishment of a ceiling on the
dollar amount of contracts that a participating company could re-
ceive. The current exclusions in determining net worth should also
be eliminated.

Turning now to competitive procurements, the SBA has closed
one major loophole, the use of IDIQ contracts. Another loophole
permitted splitting of one proposed $9 million contract into three,
each with a value under $3 million at which competitive, rather
than sole source, procurement is required.

The 1988 amendments also required 8(a) companies to obtain
certain levels of non8(a) business. This requirement is known as
competitive mix. In a recent audit we found that this requirement
has not been effectively enforced and many companies are not in
compliance. The program officials have agreed with our rec-
ommendations that mandatory limits be placed on the dollar value
of 8(a) contracts awarded when 8(a) companies do not meet the
competitive mix requirement.

The final issue is excessive sub-contracting and brokering. Audits
have disclosed a number of instances in which 8(a) contractors pro-
vided significant amounts of equipment on contracts awarded
under SIC codes for services. These 8(a) contractors, however, were
not manufacturers or regular dealers in the equipment as required
by SBA's regulations. These audits also disclosed that much of the
equipment was obtained from large manufacturers, a violation of
the nonmanufacturer regulations. This improper subcontracting oc-
curred because SBA did not apply the subcontracting, brokering, or
nonmanufacturing requirements to contracts which are classified
as service contracts.

We believe a cap on the dollar amount of contracts that an 8(a)
company could receive would alleviate many of the subcontracting
problems as well, because a cap would serve as a disincentive to
passing through contract funding to subcontractors.

That concludes my formal remarks, Madame Chair. I would be
happy to answer any questions the Committee may have.

Chair Meyers. Thank you Ms. Lee. Our next witness is Mr. Cal
Jenkins, Associate Administrator, Minority Small Business and
Capital Ownership Development, U.S. Small Business Administra-
tion.

[Mrs. Lee's statement may be found in the appendix.!

TESTIMONY OF CALVIN JENKINS, ASSOCIATE ADMINIS-
TRATOR, MINORITY SMALL BUSINESS AND CAPITAL OWNER-
SHD? DEVELOPMENT, U.S. SMALL BUSINESS ADMINISTRA-
TION

Mr. Jenkins. Madame Chair I would like to summarize my state-
ment and include my entire written statement in the record.

Madame Chair and members of the Committee, I welcome the
opportunity to appear before you today to discuss the future of the



Small Business Administration's Minority Enterprise Development
Program.

Let me begin by emphasizing a fundamental point. The essence
of the Small Business Administration's 8(a) Program is to provide
business development opportunity to disadvantaged firms through
structured access to Federal procurement contracts. This is widely
recognized as both a necessary and fitting goal of Government.

President Clinton, in his July address on affirmative action and
release of the White House Affirmative Action Review, directed the
Department of Justice to work with the agencies in reviewing Fed-
eral affirmative action programs to ensure that such programs are
consistent with the law. We are working with the Department of
Justice in examining the 8(a) Program as part of this review and
in seeking to improve the program.

At a time when the demographics of our Nation are changing
dramatically in terms of minority groups presenting a larger per-
centage of the overall population, there is a need to empower and
provide real economic opportunities to these individuals. It is these
business owners who will play a major role in carrying the spirit
of entrepreneurship, business formation, and capitalism into the
21st century.

In our written testimony, we have highlighted and expanded on
two issues that we need to address: Concentration of contracts and
eligibility.

GAO in its report has called into question two firms that are no
longer in the 8(a) Program, I-NET and TAMSCO. SBA has care-
fully reviewed the case files of these firms and agrees in part with
the GAO report. SBA is aware of and concerned with the GAO find-
ings. SBA regulations are adequate to deal with these situations,
but can be further refined.

SBA has reviewed the original files on I-NET and believe that
SBA initial eligibility review was consistent with program policy.
Had our review indicated that firm had given us false statements,
this matter would have been immediately forwarded to the SBA in-
spector general for a full investigation. This was SBA policy at the
time and it is our policy today.

The GAO also found that SBA failed to recognize that I-NET
had submitted financial statements that excluded revenues from
the firm's total sales. These exclusions permitted I-NET to receive
contracts for which it was not eligible. SBA regulations concerning
representation of company size are clear, and in fact, are the cor-
nerstone of all SBA Programs. The firm's financial statements to
the SBA were misleading as they excluded certain revenue items.

Further, the firm improperly self-certified as a small business on
a number of contract awards. The district office failed to catch this
misleading statement, and to properly evaluate and verify the com-
pany's representations concerning size.

With regard to I-NETs graduation from the program, SBA initi-
ated proceedings on September 28, 1992 and the firm agreed to
graduate on June 16, 1994. From a business standpoint, there is
no incentive for a firm to graduate early from the program. This
highlights the need to strengthen the SBA regulations concerning
the evaluation and processing of companies for early graduation.



10

SBA review of TAMSCO indicated the following: District and re-
gional offices recommended decline of the firm's application for
technical reasons. Regarding control of the board of directors, this
recommendation was overturned by the Headquarters Eligibility
Specialist and the firm was approved by the Associate Adminis-
trator for Minority Small Business and Capital Ownership and De-
velopment. We find no reason to disagree with this decision.

Abuse of competitive thresholds and abuse of Indefinite Delivery
Indefinite Quality (IDIQ) contracts is an issue that has been ad-
dressed. SBA thought it could rely on the contract value certified
by a U.S. Government contracting officer. We could not. Con-
sequently, to prevent abuse, on June 7, 1995 the SBA published a
regulation that required competitive thresholds of $3 million for
services, $5 million for manufacturing, to be applied to the total
Government estimate, including all options, for all Government
contracts including IDIQ's.

The GAO reported that this firm received at least 22 contract
awards within 2 weeks of its graduation from the 8(a) Program.
The report was critical of the fact that 13 of the awards were IDIQ
contracts from a number of Government agencies. There is no regu-
latory prohibition against 8(a) contract award under these cir-
cumstances. Even during the week prior to graduation. Firms that
are in compliance with 8(a) eligibility requirements and business
activity targets or remedial measures, can receive contracts under
the program right up until the time of the program term of comple-
tion. The firm was not in compliance with its competitive business
activity targets, but in compliance with its remedial measures.
Consequently, the firm was eligible for the contract awards.

SBA has successfully addressed many concerns raised by past
GAO and IG reports. For example, application processing. Cur-
rently the average processing time for initial applications is 93
days. Over the last 3 years, the average processing time has been
reduced from 208 days to the current level.

Management Information Systems. In 1995 the Agency imple-
mented the MEDCOR Data Tracking System. It is now fully oper-
ational. Annual portfolio reviews; 84 percent of all 8(a) firms were
reviewed during fiscal year 1995, compared to 57 percent in fiscal
year 1994. It is expected that the review will be completed for all
8(a) firms this fiscal year.

Terminations of ineligible firms. In the last 18 months 334 ineli-
gible firms were removed from the program. SBA processed more
termination actions in that period than it had processed in all prior
years accumulatively.

In conclusion, SBA's 8(a) Program has done much to assist dis-
advantaged entrepreneurs and to bring the benefits of diversity,
creativity and innovation to the American economy. For this reason
every President from Richard Nixon to Bill Clinton has supported
the program. This concludes my testimony and I will be happy to
answer any questions you may have.

Chair Meyers. Thank you Mr. Jenkins. Our next witness is Mr.
William Campbell, Chief Financial Officer, U.S. Coast Guard.

[Mr. Jenkins' statement may be found in the appendix.]



11

TESTIMONY OF WILLIAM CAMPBELL, CHIEF FINANCIAL
OFFICER, U.S. COAST GUARD

Mr. Campbell. Good Morning Mrs. Meyers. I'd like to thank the
Committee for the opportunity to come here and represent the
Coast Guard on this issue.

I'd like to make three points. First, we took the anonymous alle-
gations regarding TAMSCO very seriously. We are very concerned
about any allegation or appearance of impropriety in contracting.
We immediately contacted the Department of Transportation, Of-
fice of Inspector General, and reported the allegations, and we con-
vened a formal investigation.

The investigative officer was a captain with 23 years commis-
sioned service, 8 years as a contracting officer, and in various times
had, had an unlimited contracting officer warrant, so he was an ex-
pert in procurement.

The investigation took over 5 days with sworn testimony involv-
ing 16 individuals and 123 exhibits. The report of investigation had
an extensive review within the Coast Guard including our Chief
Council, Chief of Staff, and the Commandant of the Coast Guard.

Our report came to the conclusion that there was no wrongdoing.
However, we are always concerned of, as I said, even the appear-
ance of a conflict of interest, and we took additional steps on our
own to prevent any misuses of the 8(a) Contracting Program.

We have gone to a single Head of Contracting A (HCA) activity
to ensure that there's consistent execution of contracting policies
across the Coast Guard, I am that head of contracting activity. We
have provided additional training to both technical and contracting
personnel on the 8(a) Program. Some of the training for the con-
tracting personnel is mandatory. We did an extensive review of our
small business standard operating procedure to make improve-
ments to it, and we developed a small business marketing guide
that we thought would make for more appropriate behavior by 8(a)
firms when marketing our personnel.

These Coast Guard initiatives are now in a pilot program being
done at Coast Guard headquarters and we intend to migrate those
changes into the field at a later date.

Second, I'd like to point out that the Coast Guard has an exten-
sive organizational system of checks and balances within contract-
ing. This prevents collusion or inappropriate behavior, we believe.
We have separated operational contracting functions from policy
and oversight. All contracting decisions are made by the contract-
ing officers, and we try to ensure that no undue influence is per-
mitted from technical personnel or program personnel, and we have
periodic procurement management reviews to insure full compli-
ance with all statutes, regulations and policies.

I am concerned after reading the GAO report that we have
looked at the same thing and come to different conclusions. So, I
am not completely sanguine and I would welcome the opportunity
to sit down with the General Accounting Office, go over whatever
evidence they may have that was not available to us, and answer
any questions they may have.

I do believe after reading the GAO report that we covered all of
those issues and more in our investigation, but as I said since we



12

weren't privy to their working papers, I am still uncomfortable that
there might be something that hasn't been addressed.

There were some issues that GAO raised that I believe were in-
correct. We have provided the Committee staff with documentation
that shows that the Coast Guard did not change the Standard In-
dustrial Classification code, the SIC code. We provided information
on the description of the duties to be done to the Small Business
Administration. They recommended the SIC code and gave us jus-
tification why that was the appropriate SIC code.

As far as the 8(a) Program being a way around competition, I
don't know where that statement came from. I am the Coast
Guard's Senior Competition Advocate and I can assure you that it
is not our policy to avoid competition using 8(a) or any other meth-
od, and we do not view competition as an impediment to our oper-
ations. In fact, the Coast Guard has an admirable record. I was un-
able to, because of short notice of being able to testify, pull together
statistics, but historically the majority of all of our procurements
are full and open competition.

In looking back at information that is available, the sole source
award was appropriate and fully complied with the SBA regula-
tions at the time, and I can assure you there was no violation of
the Competition in Contracting Act. It was not pertinent to this
case. The reason that the award was made so close to the gradua-
tion date is that I stopped the award that would have been made
in the Spring until we could perform a full, formal investigation
and determine if the allegations were correct. Not being able to
prove that the allegations were correct, I felt that justice delayed
was justice denied, and we went forward and awarded the contract.

As I said, I'd be happy to meet with the General Accounting Of-
fice and their representatives to go over any differences we may
have, and I'd be happy to answer any questions that the Commit-
tee might have.

Chair Meyers. Thank you Mr. Campbell. Our next witness is
Mr. Nicholas Innerbichler who is the CEO of TAMSCO.

[The information may be found in the appendix.]

TESTIMONY OF NICHOLAS R. INNERBICHLER, CEO, TAMSCO.

Mr. Innerbichler. Good morning Madame Chair. I would like to
summarize my testimony. I would like the actual testimony to be
included as part of the record.

Chair Meyers. Without objection.

Mr. Innerbichler. I would like to take the opportunity to thank
you for allowing me to provide a full and factual record regarding
the GAO, September 1995, report. I am humbled to be here to give
my opinion regarding the 8(a) Program to those of you who hold
the power to bring new life into or extinguish this program, a pro-
gram that has meant and continues to mean so much to so many
minority business men and women.

If some members of this Committee were in my place, you would
feel outraged at the demeanor of the GAO report, but as a minority
I have grown up experiencing bias and prejudice every day of my
life. As regards to TAMSCO in the GAO, the GAO report is less
than full presentation of the facts. It is fraught with misrepresen-
tation, it's prejudicial and exploitive of TAMSCO and its employees.



13

The GAO would lead you to believe that if minority individuals
and companies are successful under the 8(a) Program, it must be
done under illegal and improper means. On the contrary, our suc-
cess at TAMSCO is rooted in hard work, the entrepreneurial spirit
of our employees, and delivering quality products on time and with-
in contract costs.

In brief GAO has not been fair or accurate in suggesting that
SBA failed to properly address 8(a) Program eligibility with regard
to TAMSCO. TAMSCO scrupulously abided by all and any require-
ments in the application process and throughout the company's
program term. With regard to the IDIQ sole source contract award-
ed by Coast Guard, GAO's report misleads by failing to mention
the Coast Guard extensively reviewed charges described in GAO's
report almost 2V2 years ago and found charges without any merit.
As GAO well should have known, the facts do not even remotely
support or justify concern that rules concerning competition were
violated in award to TAMSCO.

By way of introduction, I was born in Magdalena, New Mexico.
I'm of Hispanic heritage. Before I started TAMSCO, I had spent 20
years in the Aerospace business, starting as a file clerk and moving
my way up into middle management. My career had stalled and it
had stalled for two reasons: First, I did not have a college degree,
and my ethnic background was going to limit my professional ca-
reer. So, I decided to start my own company.

When I formed TAMSCO, I anticipated applying for the 8(a) Pro-
gram. From the onset, TAMSCO paid careful attention to SBA
rules and regulations. The company was expressly structured to in-
sure that at all times I owned 51 percent of outstanding stock and
retained complete control of the company.

What have we achieved at TAMSCO? We have 557 employees of
which 48 percent are minorities. We are a systems integration and
manufacturing business. We develop complex software for air traf-
fic control systems. In fact, if you fly the Atlantic or the Pacific
routes, you'll be flying on routes that have been generated by our
software that we have developed.

Our company pays $6.87 million annually in Federal and State
income and benefit withholding taxes and we subcontract in excess
of $12 million annually. That's a significant tax base and a signifi-
cant repayment to the Government. We are an active participant
or a major financial contributor to minority business coalitions in
advocacy of minority business rights and equality.

We also pay back the minority business community by helping
8(a) startup firms in small business with developmental assistance
and subcontracts. We support minority universities. We are in our
third year of our scholarship program at TAMSCO. We award two
scholarships yearly, and one of those scholarships goes to a minor-
ity child or one of our minority employees.

I'd like to look at the GAO report and its inaccuracies. First of
all with regard to our program participation term, our program
term ran from September 18, 1984 until September 18, 1993. The
reason for that is that at that time your term started when you
were awarded your first 8(a) contract.

With respect to the negative control or eligibility issues, as part
of our application, we provided to the SBA our bylaws which pro-



14

vides that there is one vote for each share of stock outstanding.
There are 5,000 shares. I hold 2,550. Mr. Bilawa holds 2,450.
That's in compliance with the code of Federal regulations and SBA
regs. The bylaws expressly describe powers and duties of the presi-
dent as chief executive officer with charge and control of all its
business affairs and properties.

Further, as part of our application, we provided a board of direc-
tors June 23, 1983 resolution which said that I was the only cor-
poration official empowered to sign checks. In our height, I have
total control of day to day operation and final approval on all cor-
porate matters.

Much is made about the fact that Mr. Bilawa and I had a pre-
vious working relationship. We did not falsify that. We provided
that as part of our resumes that were part of the application proc-
ess. Much ado was done about where our first office location was,
that it was located in Mr. Bilawa's home. Well we had our office
in his kitchen. We had our word processing in his dining room, we
had our files and our supplies in the basement. Quite frankly, I
lived in an apartment, a one-bedroom apartment, not much place
to have an office. However, by the time we started 8(a) Program
participation in August 1984, we had established our corporate of-
fice in Beltsville, Maryland and have had our office there or in
Calverton ever since then.

The report would lead you to believe that we were denied entry
into the 8(a) Program on two occasions. Contrary to the report, we
were never denied entry into the 8(a) Program. The only letter that
we ever received concerning our application was a letter approving
us for participation in the 8(a) Program.

Because this meant so much to me to get into the 8(a) Program,
I statused the application on a weekly basis while it was at the dis-
trict office, the regional office, and the central office. We are aware
because of persistent inquiries, that two of many SBA officials did
not favor admission on issues of negative control and financial sta-
bility. We provided briefings to the SBA national office personnel
to ensure decisionmakers understood the company structure and
all the steps we had taken to ensure that I had day-to-day control
of the company.

We addressed the financial stability issue by providing SBA with
updated information on awarded contracts, banking and savings
balances, and showed within the original application package a
bank commitment for an asset based line of credit.

Now I would like to address the Coast Guard sole source con-
tract. The criticism of the Coast Guard contract is based on con-
tract type, minimum value, SIC code, and that it was a graduation
present to TAMSCO.

The Coast Guard thoroughly investigated this contract award.
The investigation was triggered by an anonymous letter that was
received in the Spring of 1993. It was extremely thorough; it was
months-long; there were sworn statements from 16 individual wit-
ness; 123 documentary exhibits were considered. In fact, the three
volumes of the formal board of inquiry was provided by the Coast
Guard to TAMSCO.

What was the result of the Coast Guard's inquiry? No wrong
doing or improper conduct by Coast Guard, TAMSCO or SBA. Pro-



15

curement was entirely proper. The contract was not awarded until
completion of the review by the Coast Guard, full exoneration of
TAMSCO, detailed findings that the contract awarded TAMSCO
complied with all procurement laws and regulations, and that there
was no conspiracy or improper conduct on the part of TAMSCO,
the Coast Guard or the SBA.

I'd like you to note, that the GAO did not even refer to the exten-
sive Coast Guard preaward inquiry as clear proof either of bias or
ignorance, neither of which speaks well for the report.

The specifics on the Coast Guard contract вАФ the Indefinite Deliv-
ery Indefinite Quantity type contract was the only contract type to
afford the Coast Guard vital flexibility in sensible increments when
and if TAMSCO performed adequately. It made no sense to commit
the Coast Guard to guarantee to pay for tasks until detailed re-
quirements and needs for such tasks were firmly established.

To use an example, of the total aggregate ceiling of all
TAMSCO's awarded IDIQ's, TAMSCO has been able to perform
and bill less than 41 percent over the life of our existence, whether
those are 8(a) or competitive IDIQ's.

With respect to the minimum value and guarantee commitment
to the contract, careful and conservative estimates were prepared
by the Coast Guard. The Coast Guard formal findings determined
the actual guaranteed minimum value of the contract, $2.1 million,
was developed properly and without the intent to insure sole source
award to TAMSCO.

As regard to the SIC code, there was a disagreement at Coast
Guard over the SIC code between the acquisition people and the
program people. To overcome that, they delivered the statement of
work to the SBA, for the SBA to determine what the proper SIC
code should be. Upon statement review of the work statement by
SBA, SIC code 4813, telecommunications, for the requirement that
was identified.

As regard to graduation presents, no presents, there are no pre-


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Online LibraryUnited States. Congress. House. Committee on SmallThe abuses in the SBA's 8(a) Procurement Program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, December 13, 1995 → online text (page 2 of 20)