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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Although GAO failed to tell the Committee, the contract in question was thoroughly
reviewed by the Coast Guard prior to award, including the allegations described by GAO.
The Coast Guard's review was extremely thorough, months-long, and relied on sworn
statements from all relevant personnel. Testimony was heard from sixteen individual
witnesses and 123 documentary exhibits were considered.

The Coast Guard's inquiry concluded that there was no wrong-doing or improper conduct
of the part of the Coast Guard or TAMSCO and that the procurement was entirely proper.
Incredibly, GAO's report also failed to indicate that the contract was not awarded to
TAMSCO until (1) completion of the review by the Coast Guard, (2) full exoneration of
TAMSCO, (3) detailed findings that award of the contract to TAMSCO in fact complied
with all procurement laws and regulations, and (4) detailed findings that there was no
conspiracy or improper conduct on the part of TAMSCO or Coast Guard officials. That
GAO did not even refer to the extensive Coast Guard pre-award inquiry is clear proof
either of bias or ignorance - neither of which speaks well for the report.

As regards the issues raised by GAO concerning the Coast Guard contract, the facts are as
follows:

Indefinite Delivery Indefinite Quantity (IDIQ) Contract . Early on in its requirements
planning, the Coast Guard concluded that its needs for project integration dictated the
selection of an IDIQ contract as the only contract type that would allow the necessary
flexibility to accommodate the anticipated changes in the specific project requirements as
they evolved. The IDIQ contract type was selected by the Coast Guard to afford the
Government vital flexibility in progressing the subject telecommunications work through
sensible increments when and if TAMSCO performed adequately. Frankly, in the
circumstances of the subject contract, it made no sense to commit the Government by way
of guarantee to pay for tasks until the detailed requirements and the need for such tasks
were firmly established. In fact, those detailed requirements defied adequate definition at
the time of award, hence the need for an IDIQ type contract.

Minimum Value of the Contract . Similarly, there is also no reasonable basis for GAO's
suggestion that the minimum value and guaranteed commitment of the contract was
manipulated to avoid competition. GAO is flatly wrong to suggest manipulation in the
careful and conservative estimates prepared by the Coast Guard for the work that they were
prepared to guarantee to TAMSCO under the subject contract. Rather, as the Coast Guard
determined in its formal findings, "the actual guaranteed minimum value of the contract.



The IDIQ contract by definition recognizes that projects with anticipated changing
requirements should be incrementally funded. In many, if not most, instances, IDIQ
contracts never realize anything close to their maximum possible value. For example,
TAMSCO has been able to exercise, perform and bill on less than 41% of the aggregate
ceiling value of its IDIQ contracts.



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$2. 1 million, was developed properly and without the intent to ensure sole source award to
TAMSCO." (Coast Guard Convening Authority's Action, page 7)

SIC Code . In contrast to GAO's suggestion that Coast Guard officials and TAMSCO
manipulated the SIC code for the work so that TAMSCO would qualify, the SIC code for
the work was actually determined by the SBA, independent of TAMSCO and the Coast
Guard. The Coast Guard was unable to sort out internal disagreement about the central
character of the work (and thus, the most appropriate SIC code assignment) and referred
that decision to the SBA. In fact, the responsible contracting personnel did not disclose
to the SBA the competing SIC codes under consideration. Upon their review of the
statement of work of the integration effort, the SBA, not the Coast Guard, identified SIC
Code 48 1 3 for the requirement. Subsequently, Coast Guard officials assigned the SIC code
recommended by SBA to the work. Any suggestion by GAO of manipulation in this matter
is in error and irresponsible.

"Graduation Present" . The GAO report suggests that the Coast Guard contract in
question was a "graduation present" to TAMSCO. Contrary to the popular belief by
detractors of the 8(a) Program, the Federal marketplace gives no presents, even under the
8(a) Program. TAMSCO has self-marketed, aggressively worked for and earned each of
its contract awards. The proximity in time of the contract award to TAMSCO's graduation
date was mainly the result of the time required for thorough review by the Coast Guard of
the unsubstantiated allegations referenced above and was the culmination of appropriate and
extensive self-marketing efforts.



HI. CONCLUSION



TAMSCO has always been straightforward and honest in its dealings with its
Government customers, has scrupulously abided by all procurement laws and regulations
and has strictly adhered to all eligibility requirements of the SBA's 8(a) Program.
TAMSCO remains mystified as to the veiled suggestions in the GAO report that
TAMSCO's conduct in some way indicated abuse of the 8(a) Program. As heretofore
addressed, TAMSCO is confident that SBA's files relating to our participation in the 8(a)
Program and the Coast Guard's formal review record will substantiate TAMSCO's
assertions.

In conclusion, we are extremely disappointed with GAO's report. When TAMSCO learned
of GAO's interest, we agreed to cooperate fully. As a practical matter, all GAO ever asked
of TAMSCO was that we allow them interviews that, in total, did not exceed two hours.
Following each interview. GAO's investigators went out of their way to assure us that,
although they had come to question the wisdom or value of certain 8(a) Program rules,
TAMSCO should be relieved to know that they had found absolutely no indication that



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TAMSCO did anything other than follow the established rules and regulations. As you
might expect, we are not at all relieved. Our valued reputation and our hard working
employees have suffered unfairly from publicity spawned by GAO's poor work and its lack
of integrity.

Madame Chairman, this concludes my formal statement. TAMSCO appreciates the
opportunity to address the GAO report before the Small Business Committee.



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U.S. Small Business Administration

Washington, D.C. 20416



fey*



STATEMENT OF

CALVIN JENKINS

ASSOCIATE ADMINISTRATOR

FOR MINORITY SMALL BUSINESS

AND CAPITAL OWNERSHIP DEVELOPMENT

U.S. SMALL BUSINESS ADMINISTRATION

BEFORE THE

UNITED STATES HOUSE OF REPRESENTATIVES

COMMITTEE ON SMALL BUSINESS



December 13, 1995



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Madam Chairman and Members of the Committee, I welcome this opportunity to appear
before you today to discuss the future of U.S. Small Business Administration's (SBA's) Minority
Enterprise Development Program (MED). I am Calvin Jenkins. Associate Administrator for Minority
Small Business and Capital Ownership Development. I have served in this capacity since September
3. 1995. 1 am accompanied by Michael McHale, Deputy Associate Administrator for Minority Small
Business and Capital Ownership Development.

President Clinton in his July address on affirmative action and release of the White House's
affirmative action review, directed the Department of Justice to work with the agencies in reviewing
Federal 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.

Let me begin by emphasizing a fundamental point, namely that the essence of the SBA'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.

Contracting by minorities still represents a small piece of total federal contracting. In 1986.
minority owned businesses received only 2.7% ($5 billion) of the $185 billion of total Federal
procurement. This percentage participation in Federal procurement is not representative of the
minority population or business ownership in this country. This finding was substantiated in 1988.
when Congress enacted P.L. 100-656. It determined that the need for the 8(a) Program was just as



77



valid then as it was at its inception. In fact, it was noted that little progress had been made
overcoming discriminating barriers to minority business success. SBA believes there is evidence that
the 8(a) Program has indeed fostered business ownership by socially and economically
disadvantaged persons, as intended by Congress. But the participation of minority-owned firms in
federal procurement still is comparatively smail. Fiscal Year 1994 data indicates that if 8(a) contract
awards were not made, the minority-owned business percentage of total Federal contracting would
be just over $5 billion, representing only 3% of total procurement. Therefore, except for the growth
in contract awards through the 8(a) Program, there has been minimal expansion in Federal contract
awards to minority businesses during the last ten years (0.3%).

Current Federal procurement data further indicates that minority owned businesses have
difficulty entering the Federal procurement market. From 1 989 through ' ^94, total minority business
contracting in the Federal sector (including SDB set asides and 8(a) contracts) has increased only
1 .6%, up to 6.2%. Based on the most recent data available from the Department of Commerce's
Census Bureau, minority owned businesses comprise 8.8% of the total business population, while
minorities comprise 26.3% of the general population.

At this juncture in the history of the 8(a) and other minority small business assistance
programs, the question can be asked whether the purposes of the programs have been fulfilled. The
mere existence of the 8(a) Program has increased die business ownership aspirations of members of
designated minority groups. Knowing that the 8(a) Program is available to mitigate the impact of
social and economic disadvantage has caused some minority individuals to go into business when



78



they might not have otherwise. At a time when the demographics of our Nation are changing
dramatically in terms of minority groups representing a larger percentage of the overall population,
there is a need to empower and provide real economic development opportunity 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. We must provide the infrastructure and
support mechanism to ensure that this potential is realized.

While SBA believes that the 8(a) Program is necessary, it does not condone the past or
present abuses that have occurred, and we recognize the need to correct and prevent them from
happening in the future. During the past two years the SBA has moved aggressively to correct abuses
of the past, and to integrate better management controls into the program. However. SBA recognizes
that more must be done to ensure equitable access to the benefits of the 8(a) Program — to provide
more opportunities to more Americans.

HISTORICAL PERSPECTIVE

The 8(a) Program that is at issue today before this Committee was originally fashioned out
of Section 8(a) of the Small Business Act. near the end of the .lohnson Administration, in response
to civil disturbances in the late 1%0's. Its intent was to assist minorities to enter the "business
mainstream of the American economy."

Further impetus for contracts programs was provide by a series of Executive Orders issued
during the Nixon Administration which sought to encourage the growth of minority business



79



enterprise (Executive Orders 1 1458. 11518. and 1 1625). The 8(a) Program has been fostered and
encouraged by even administration since then, including the Reagan Administration. Under
President Reagan, a number of important reforms were undertaken.

On November 15. 1988. President Reagan signed into law the "Business Opportunitv
Development Reform Act of 1988." P.L. 100-656. This law provided for, among other things,
competition in the 8(a) Program above certain contract dollar thresholds, a nine-year participation
term, and attainment of non-8(a) revenue at certain levels during program years 5 through 9.

With P.L. 100-656. Congress and President Reagan reaffirmed that the 8(a) Program was a
primary tool for improving opportunities in the Federal procurement process for small business
concerns owned and controlled by socially and economically disadvantaged individuals, and for
bringing such concerns into the nation's economic mainstream. Yet Congress also found that, while
some business success could be demonstrated as a result of the program, the enduring principal
objectives of the program had not been fully achieved. However, a key finding of Congress was that
the program objectives remained as valid as when the program was initiated in 1967.

Since its first 8(a) contract award in 1969. the 8(a) Program has awarded approximately
101.000 contracts valued at approximately $53 billion. At present, there are approximately 5.700
certified 8(a) firms. During FY 1994. 8(a) Program participants received approximately 6,056
contracts. The total of all contract actions, including contracts and modifications, was valued at
approximately $5.5 billion which represented 3.2% of total procurement dollars awarded.



80



Preliminary internal data indicates that during FY 1995. program participants received over 6,000
contracts. When final data is available, it is expected that the dollar value of 8(a) contract awards will
be consistent with the value for FY 1994. Also, during FY 1995. 2.162 program participants received
contract awards. It is notable that in FY 1995. the number of firms receiving contracts increased 3%
over the number of firms receiving contracts in FY 1994. and 35% over the number of firms
receiving contracts in FY 1991.

The 8(a) Program has made it possible for many minority entrepreneurs to enter the Federal
marketplace. The program is not a government "handout" or "giveaway." It is a means by which
qualified businesses have produced goods and services which have met or exceeded market
standards and agencies' needs. Historically, the contract default rate of 8(a) Program participants
is less than the default rate of firms in general. This program has demonstrated that given the
opportunity, disadvantaged firms can perform effectively and efficiently.



81



MAJOR ISSUES FACING THE 8(a) PROGRAM

In spite of a number of significant efforts undertaken by SBA during the past eighteen
months to address issues raised by the Congress, it is recognized that the SBA has taken only the
first steps in a continuing process of program reassessment and re-invention.

Concentration of Contacts

The General Accounting Office (GAO) and SBA's Office of the Inspector General (IG) have
criticized the 8(a) Program because a limited number of companies have received the majority of
8(a) contracts. SBA believes that a number of factors contribute to the inequitable distribution of 8(a)
contracts This is a problem that must be solved for the 8(a) Program to be even more successful. A
number of options are being discussed at the staff level. As the review ordered by the President
proceeds, resolution of this problem will be foremost among the issues that the SBA and the Justice
Department will address in improving the program.

It is important to realize that in Federal contracting at large, a small percentage of firms
receive the majority of Federal procurement dollars. For example, in FY 1994, 100 firms
(representing the largest suppliers of federal goods and services) received approximately 57 percent
of all contract dollars awarded for contracts over $25,000 ($100 billion out of $175 billion). At the
Department of Defense, the top 100 firms received approximately 61% of all contract dollars. Within
this group, the top ten firms received approximately 36%. The concentration of contracts within the
8(a) Program is not unique, but is actually consistent with the overall Federal marketplace.



82



8(a) firms are no different from other small businesses — some will be more successful than
others. Clearly, some 8(a) participants are more aggressive in marketing their firms than others,
some have identified and developed a unique market niche, some provide outstanding customer
service and contract performance, and some have the entrepreneurial spirit and tenacity that is
necessary for effective market development and growth. Further, under the law. procuring agencies
can nominate specific 8(a) firms for specific requirements. These factors make a difference and often
determine what firm will receive a particular contract award.

Among the factors which define an 8(a) participants' success in obtaining contracts are firm
proximity to Federal agencies, firm capabilities, access to credit and capital, effective marketing, and
the level of 8(a) support contributed by each Federal agency. In addition, the current goaling process,
which focuses only on total contract dollar awards, provides very little incentive for procuring
agencies to utilize a larger number of firms or to consider identifying contract opportunities in
different industries. Dollar goals can be met by awarding a few large 8(a) contracts to a few firms.

SBA has taken several steps to broaden the distribution of 8(a) sole source contracts. One of
the major priorities of SBA's Office of Government Contracting is to identify contracting
opportunities for the 8(a) Program. The Administrator has issued a memorandum lo all district
directors requiring districts to develop, in cooperation with the Office of Government Contracting
staff, strategic plans to increase the number of contract opportunities for a greater percentage of its
portfolio.



83



SBA's Office of Government Contracting also continues to take an active role in marketing
and promoting the 8(a) Program by working with SBA District Offices and 8(a) concerns to identify
additional contracting opportunities. SBA has also executed a Memorandum of Understanding
(MOL>) with the Department of Defense (DOD) to increase DOD awards to small disadvantaged
businesses by five percent, with emphasis on the utilization of firms participating in the 8(a)
Program. A key feature of this initiative is a commitment by DOD to give special attention to firms
that have never received an 8(a) contract. In this way, SBA is working to increase the number of
participants who actually receive contracts. Ongoing negotiations with other Federal agencies are
expected to result in similar MOUs.

In addition, on Jun 7. 1995. SBA promulgated a final regulation to ensure that 8(a) contracts
were distributed more widely on a geographical basis. This regulation is summarized as follows:

The distinctions between "local buy" and "national buy" offerings were eliminated, except
for the construction industry, which is required by statute to be awarded within the county or State
where the work is to be performed. Prior to this change, contracts classified as local buys, a service
or product purchased to meet the specific needs of one user in one location, could be performed only
by firms iocated within the jurisdiction of the District Office where the work was to be performed.
This change allo.vs 8(a) firms to market their services or products to the Federal government without
geographical restrictions.



84



To increase the number of contracts available for competition, the "indefinite delivery,
indefinite quantity" (IDIQ) contract "loophole" has been closed. Previously. IDIQ contracts with
a minimum (not estimated) value below the competitive threshold were offered to SBA on a sole
source basis. SBA relied on the minimum value in accepting these requirements into the 8(a)
Program. Subsequently, many of these contracts were allowed to grow, through issuance of task
orders by contracting officers of agencies other than SBA. to amounts far in excess of the
competitive threshold. As a result. SBA found that the estimates of contract quantities by contracting
offices were unreliable. To remedy this problem, on June 7. 1995. SBA published regulations that
used the estimated value of the contract as the basis for determining if the contract should be let as
an 8(a) competitive award, thus creating more opportunities for competition.

While SBA feels that these steps will assist in providing better distribution of 8(a) contracts,
it does not believe they will guarantee equitable distribution of all 8(a) contracts, because it is up to
each participant to market and seek out contract opportunities. The 8(a) Program can only provide
assistance necessary for participating firms to become competitive, it does not guarantee the award
of contracts or economic viability. It does, however, in collaboration with other Federal agencies,
offer management and technical assistance, and access to capital that will assist a company in its
efforts to grow.

An additional problem that contributes to contract concentration is the failure of 8(a)
participants to meet required business activity targets standards (competitive business mix). These
targets refer to the percentage of non-8(a) business a program participant must attain while in the



85



transitional stage (last five years) of program participation. Stricter enforcement of this requirement
will also promote wider contract distribution. SBA has historically had difficulty in enforcing
contract targets. Instead of a rigid enforcement of these targets, which would result in the Agency
withholding 8(a) contract awards until a firm is in compliance. SBA has allowed a lesser standard
of compliance. Firms have been allowed to develop remedial measures which have, in some areas.
proven to be effective in bringing them into compliance with business activity targets. Again, this
illustrates the need to strengthen SBA's regulations.

Eligibility

The Small Business Act defines "economically disadvantaged individuals" as "socially
disadvantaged individuals whose ability to compete in the free enterprise system has been impaired
due to diminished capital and credit opportunities as compared to others in the same or similar line
of business who are not socially disadvantaged, and such diminished opportunities have precluded
or are likely to preclude such individuals from successfully competing in the open market."

The Agency's regulations state that the 8(a) program is not intended to assist concerns
owned and controlled by socially disadvantaged individuals, who have accumulated substantial
wealth, or have unlimited growth potential, or who have not experienced or have overcome
impediments to obtaining access to financing, markets and resources. In determining economic
disadvantage. SBA has attempted to follow Congressional intent as expressed in several reports, and
the statute b\ exempting equity in personal residence, and in the 8(a) firm in calculating personal
net worth.



86



While SBA considers factors relating both to the individual claiming disadvantaged status
and to the applicant concern, the most important factor for determining eligibility for entrance into
the program has been the individual's personal net worth. SBA regulations state that an individual
whose net worth exceeds $250,000. after excluding the individual's ownership interest in the
applicant concern and the equity in his/her primary personal residence, will not be considered
economically disadvantaged for the purposes of the 8(a) Program.

In addition to considering the net worth of the applicant. SBA also considers the individual's
personal income for the past two years and the total fair market value of all assets. SBA is currently
considering standards to provide further program guidance to address this issue.

Once a firm has been accepted into the 8(a) Program, it is subject to an annual assessment
of its eligibility to continue in the program. This assessment is part of the annual review and
addresses both continuing eligibility and a review of the company's business plan. At the completion
of the annual review, a decision is made to recommend continuance, graduation or termination of
the firm from the program. As indicated elsewhere. SBA has made comprehensive completion of
annual reviews a goal for all District Offices.

According to current statutory authority, a participant firm may be recommended for


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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 8 of 20)