The Veterans Entrepreneurship and Small Business Development Act (PL 106-50), passed in 1999, was the culmination of decades of the hard work of the pioneers of the veteran-owned business movement. The end result of those efforts mandates 3 percent of all federal prime contract dollars as well as an additional 3 percent of subcontract awards to go to small businesses owned by service-disabled veterans.
VET-Force Chairman Rick Weidman, plank owner of the veteran business movement, said the spirit of the law was to give both successful SDVOBs, as well as small, start-up SDVOBs, an equal opportunity to share in the federal contracting marketplace.
“The subcontract goal helps small businesses get to the organizational capacity where they can compete for and win straight-up contracts,” Weidman said. “It was intended to let more veterans have an opportunity to get their piece of the American dream.”
A big buffet with a handful of guests
Numerous problems inhibit the realization of the original vision of the federal SDVOSB program including “rent-a-vet” scams, double and triple counting of awards to small businesses in other diverse business categories, and a considerable portion of the money that is being spent with SDVOBs only going to a small number of firms. In fact, the top 25 service-disabled, veteran-owned firms were awarded nearly a quarter of all federal SDVOB spending in Fiscal Year 2008 (see chart 1). Editor’s note: Fiscal Year 2008 is the latest complete year of data available.
“This a great place for a quote from Chris Hale,” NaVOBA President Chris Hale said. “Something along the lines of ‘there needs to be a larger number of firms competing for their slice of the pie.”
During the conceptualization of the legislation that would become PL 106-50, Weidman, Jim Talent, a Republican from Missouri, who served as the chairman of the House Small Business Committee from 1997 to 2001, John Lopez and others analyzed the U.S. Small Business Administration’s socially and economically disadvantaged, or 8(a) program, as a model.
Learning From Others’ Mistakes
The overwhelming majority of 8(a) firms are never awarded a contract, and the authors of PL 106-50 wanted to avoid this lack of equal distribution in the SDVOB program.
“I raised these issues in the very beginning,” said John Lopez, NaVOBA’s Director of Policy. “The intent of the program was to increase the number of participants in the economy – not to make individuals rich.”
Scott Denniston, NaVOBA’s Director of Programs, said the distribution isn’t perfect, but the original idea of steering clear of repeating of the shortcomings of the 8(a) program has been moderately successful.
“I think there’s always room to distribute it better,” Dennistion said. “But, it isn’t as bad as the bunching up in the 8(a) program. Even though it’s a problem, it’s not as bad as it is in other small business programs.”
Weidman insisted that spirit of the law urges vetrepreneurs who have seen their businesses grow as a result of PL 106-50 share their success with other VOBs.
“It’s not that we decry those who are dong well,” Weidman said. “What frustrates us is when people don’t give back. In other words, they’re not helping other service-disabled, veteran-owned businesses as mentors, or they’re awarding subcontracts to small businesses other than SDVOBs.”
What is a ‘Small Business’ Anyway?
After reviewing chart #1, you’ll notice that the top company received more than $200 million in federal contracts alone. Have you ever wondered how big a company can get before it no longer counts as a small business?
The SBA established size standards for all for-profit industries. These standards represent the largest size that a business can reach and still be a “small business concern” eligible for financial assistance through the SBA, as well as federal small business procurement programs. The SBA takes the average of “latest three completed fiscal years to determine its average annual receipts. If a concern has not been in business for three years, the average weekly revenue for the number of weeks the concern has been in business is multiplied by 52 to determine its average annual receipts.”
The two most widely used size standards include 500 employees for most manufacturing and mining industries and $7 million in average annual revenues for most nonmanufacturing industries. Computer programming, data processing and systems design have a size standard of $25 million. However, there are numerous exceptions, which is why companies can receive $200 million in federal contracts and still count as a small business. For more information about SBA size standards visit www.navoba.com/sizestandards
Double Dipping
Businesses that qualify for multiple federal government small business programs also skew the validity of the SDVOB spending reports. For example, if a contracting officer issues a contract to a small business that qualifies for the HUBZone (Historically Underutilized Business Zone) program and the business also qualifies as a SDVOB, the government can claim credit toward spending money to achieve its goals in both categories.
In FY 2008, the SBA reported that the federal government spent 1.48 percent, or $6.45 billion, with SDVOBs. There is no way of knowing how much of this money was awarded to SDVOBs as a result of free and open competition, but it’s important to note that only 56 percent of this total went to businesses that qualified exclusively as SDVOBs (see chart 2). It’s difficult to speculate how much of this money was originally awarded in another small business category – but, theoretically, as much as 43 percent could have been awarded to another category and the government just took credit for the SDVOB spend as well.
The Central Contracting Registry lists 17,230 service-disabled, veteran-owned small businesses. XXX of these businesses do not qualify for any other small business category*.If the number is significantly more than 50%, this truly drives home the notion that the 43 percent spent with businesses in multiple categories was probably issued to the business for the other categories and the SDVOB qualification is coincidental.
There are 963 SDVOBs listed as vendors on General Services Administration (GSA) Multiple Award schedule. “Since we’re nowhere near the three percent anyway, the situation is a lot worse than it appears,” Weidman said. “If something’s put out on a set-aside for an 8(a) or a HUBZone and the company that wins the contract happens to be an SDVOB, since all service-disabled, veteran-owned businesses couldn’t bid on it, they (the federal government) shouldn’t get credit for it.”
Unfortunately, this “double dipping” is unlikely to go away any time soon. Weidman said many government procurement officials and contracting officers prefer to issue contracts to businesses that qualify for as many small business program goals as possible.
“Some of them have literally told us that their dream is to encounter a minority, woman, service-disabled, veteran-owned business that qualifies as 8(a) and lives in a HUBZone,” Weidman said.
“It’s been an issue forever,” Denniston said. “What we really have to measure is how many times contracting officers took a proactive approach to get to service-disabled vets, or when they used the SDVOB status as an evaluation factor for an award.”
Taking Credit Where no Credit is Due
What’s even more frustrating than the decade of the federal government’s failure to reach the 3 percent goal is the fact that much of the money the government takes credit for awarding to SDVOBs doesn’t really make its way to deserving vetrepreneurs.
In October, 2009, the General Accountability Office (GAO) released a report titled “SERVICE-DISABLED VETERAN-OWNED SMALL BUSINESS PROGRAM: Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts.” As its lengthy subhead would imply, the report listed examples of 10 firms that received approximately $100 million in SDVOB contracts.
The audit revealed that the owner of one company was not a service-disabled veteran and another company was owned by a service-disabled veteran, but he did not control the firm’s daily operations. There were also several companies that served as “pass-throughs” for large corporations.
“This is another great place for a quote from Chris Hale about the fraudulent activities in the SDVOB program and how they inaccurately portray the government’s success (or lack thereof) in distributing the money more evenly to deserving vetrepreneurs,” Hale said.
Weidman said while these incidents are not entirely uncommon, it isn’t as prevalent as the initial reaction to the report would suggest.
“I think there’s less of the ‘Rent-a-Vet’ than people have made out,” Weidman said. “But it is still a problem. The larger problem there is that they (the VA’s Center for Veterans Enterprise) have failed to do what needs to be done in terms of assisting veteran-owned small businesses in developing the organizational capacity to get stuff straight-up.”
Sub-par Reporting on Subcontracts
The lack of a government-wide subcontract reporting system challenges the validity of the federal SDVOB spending numbers as well.
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One of the provisions we wrote into PL 109-461 for the VA addresses that issue,” Denniston said. “Once DoD [the Department of Defense] embraces the electronic subcontract reporting system, all the primes [contractors] will be reporting and we’ll have a better handle on the numbers. Whether that actually pans out is anybody’s guess, but that’s what’s supposed to happen.”
Denniston said he thinks the government spends more money with SDVOBs than the numbers imply, but that’s difficult to confirm since there is no mechanism for tracking smaller subcontracts awarded at the lower tiers of the contract.
“The other problem with the numbers is that no one tracks second, third and fourth tier contracting,” Denniston said. “I would argue that on a lot of the big stuff that DoD and [the Department of] Energy and NASA do, if we can’t drill down to the lower tier of subcontracts, we’re not getting all the numbers anyway.”
Bundling and Insourcing
Contract bundling and insourcing are serious threats to federal government small business spending. Bundling occurs when large contracts, like the construction of a government building for instance, are “bundled” together, making small businesses ineligible. In these instances, all of the work that could go to small businesses, like painting, is doled out to a large prime contractor which is supposed to issue subcontracts to small businesses.
The lack of sufficient numbers of contracting officers remains the long-standing excuse for procurement officials who try to respond to criticism over these contracts not ending up as small business awards.
“Bundling is here to stay and nobody is going to stop it,” Denniston said. “The government needs to do a better job when it has a large bundle procurement to provide longer lead times that can allow small businesses to put together teams and joint ventures.”
“Insourcing” occurs when the government takes business away from the private sector by fulfilling what would have been a contract using government employees and resources. This recent trend is a response to the tremendous increase in federal government spending over the past decade.
“This is a great place for a quote from Chris Hale about how this is generally a stupid idea since the government is so inefficient at anything it tries to do and private industry, especially small business will be able to do many of these insourced jobs more effectively for less money than the government is spending in the first place,” Hale said. Weidman agreed.
“The focus of federal procurement needs to shift the emphasis toward small businesses so that you get innovation and a better bang for the buck,” Weidman said. “There’s so much administrative overhead in Fortune 100 and big companies, they almost mirror the inefficiencies of government.”
For more information about SBA size standards visit www.navoba.com/sizestandards
Lopez said the root of all problems in the federal SDVOB program lie with individual procurement officials and contracting officers.
“The problem is the will of the bureaucracy and the individual contracting officials and the procurement officials,” Lopez said. “We don’t need any new laws. We need to have the existing laws and executive orders enforced.”
“Under three successive administrations, we have not had the political will to enforce the law,” Weidman said. “There have been some gestures in that regard, but it’s still not happening the way it should. We’re not ready to give up, but we’re nowhere near where we want to be.”