According to SBA, the total dollar value of contracts awarded to the firms initially not recommended for participation in the program is at least $2.9 billion. In its report, it cited findings wherein individuals in the program had overcome their economic disadvantage but remained in the program by understating their net worth;
SBA officials had miscalculated the net worth; high personal income was also not considered in the evaluation of net worth; and individuals remained in the program because either the firm’s equity, the owner’s personal residence, and/or the spouse’s net worth were not considered factors in determining the owners’ net worth. (U.S. citizenship is a requirement for acceptance into the 8(a) program.) I-NET submitted financial statements to SBA that misrepresented its size by excluding certain revenues from the total sales, which allowed it to meet size standards for contracts in 1991 and 1992. During this same time period, however, I-NET did not portray itself as a company at risk when it sought outside investors. SBA Allowed I-NET to Remain in the 8(a) Program After It Exceeded Size Limits

Although SBA officials responsible for monitoring I-NET’s progress had become aware that I-NET had grown too large for continued program participation, SBA allowed the company to remain enrolled for almost 2 additional years. Both the court and the Comptroller General determined that an 8(a) firm that has exceeded size limitations must have its 8(a) contracts suspended. The Coast Guard changed the original SIC code so that TAMSCO would be eligible for the award; used the IDIQ contracting option; and lowered the labor hours to avoid competition. Thus, the minimum contract value dropped below the $3-million competition threshold, from $4.6 million to $2.1 million. A draft of an internal Coast Guard memorandum, written to justify the contract award to TAMSCO, sheds light on Coast Guard attitudes about the use of competition and 8(a) sole source contracts. 1.) IDIQ Contract to TAMSCO Was Referred to as a “Graduation Present”

Notes that the COTR took during Coast Guard/TAMSCO discussions also referred to suggestions that the contract be awarded to TAMSCO as a “graduation present” before the end of TAMSCO’s 8(a) program participation. The files for two firms were unavailable for review. To date, according to SBA, no 8(a) firm has graduated.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Small Business Administration's (SBA) 8(a) program, focusing on whether: (1) ineligible 8(a) firms have received contracts through their improper participation in the program; (2) 8(a) firms have misrepresented themselves to enter and stay in the program; (3) firms exceeding the size standard have inappropriately received 8(a) awards; (4) SBA has allowed ineligible firms to remain in the program after they exceeded the size limitations; and (5) federal contracting authorities have improperly used indefinite delivery, indefinite quantity (IDIQ) contracts to avoid competition.

What GAO Found

GAO found that: (1) the two firms studied were initially recommended for nonacceptance into the 8(a) program because of eligibility questions about who actually controlled the firms; (2) SBA justification for accepting the firms was questionable, since the questions about the firms' ownership were never fully answered; (3) one firm's owner misrepresented her personal qualifications, her equity in the firm, and ownership changes, but SBA took no action when it found out about the misrepresentations; (4) the firm received millions of dollars worth of 8(a) contracts after it had grown too large to participate in the program; (5) although the firm hid its size by excluding items from its financial statements, understating its total revenue, and representing itself as a company at financial risk, it had considerable access to credit; (6) SBA allowed the firm to remain in the program and receive new 8(a) contracts even after it had determined that the firm had grown too large for continued program participation; (7) the Coast Guard awarded a sole-source IDIQ contract to the second firm by changing the contract's classification code to one for which the firm was eligible and altering the contract's original minimum value below the minimum threshold for mandatory 8(a) competitive procurements; and (8) the Coast Guard believed that competitive 8(a) procurements hindered its mission and viewed the contract as a graduation present to the firm.