Federal Contracting: Monitoring and Oversight of Tribal 8(a) Firms Need Attention
Highlights
What GAO Found
Federal dollars obligated to tribal 8(a) firms grew from $2.1 billion in fiscal year 2005 to $5.5 billion in 2010, a greater percentage increase than non-tribal 8(a) obligations (160 percent versus 45 percent). Obligations to 8(a) firms owned by Alaska Native Corporations (ANC) represented the majority of tribal obligationsevery year during the period, rising to $4.7 billion in 2010. While tribal 8(a) firms comprised 6.2 percent of total 8(a) firms, their obligations accounted for almost a third of total 8(a) obligations in fiscal year 2010. Over the 6 years, the percentage of competitively awarded obligations to tribal 8(a) firms rose; however, solesource contracts remained the primary source of growth, representing at least 75 percent of all tribal 8(a) obligations in a given year.
Consistent with GAO’s 2006 review of ANC 8(a) contracting, contracting officials said that awarding contracts to tribal firms under the 8(a) program allows officials to award sole-source contracts for any value quickly, easily, and legally, and helps agencies meet their small business goals. However, the officials added that the program offices’ push for awarding follow-on contracts to the same firm also plays a role. GAO’s review of noncompetitive tribal 8(a) contracts shows the methods used to determine price reasonableness in a sole-source environment. In some cases, when agencies moved away from sole-source tribal 8(a) contracts toward competition, agency officials estimated savings as a result.
To ensure that 8(a) firms do not pass along the benefits of their contracts to their subcontractors, regulations limit the amount of work that can be performed by the subcontractors. Of the 87 contracts in GAO’s review, 71 had subcontractors. GAO found that required monitoring of limitations on subcontracting by procuring agencies was not routinely occurring. Similar to what GAO reported in 2006, some contracting officers do not understand that ensuring compliance is their responsibility under partnership agreements with SBA, and the regulations do not make this clear. Further, agency officials did not know how to monitor subcontracting limitations, particularly for indefinite-quantity contracts, as the data are not readily available. Not monitoring the limits on subcontracting can pose a major risk that an improper amount of work is being done by large firms.
In March 2011, SBA revised 8(a) regulations to clarify program rules, correct misinterpretations, and address program issues. Although a positive step, SBA will have difficulty enforcing new regulations pertaining to tribal 8(a) follow-on contracts and joint ventures given the information currently available. SBA told GAO it is currently in the process of developing the requirements for a new 8(a) tracking database. Further, the new regulations do not address some issues GAO has previously raised, such as ANC 8(a) firms under the same parent corporation generating a majority of revenue in the same line of business. SBA regulations do not allow a tribal organization to have more than one 8(a) subsidiary perform most of its work under the same primary business line. GAO also discusses practices that highlight how some tribal 8(a) firms operate, in effect, as large businesses because of their parent corporation’s backing and interconnectedness with sister subsidiaries. SBA has not reviewed these practices to determine whether they are congruent with the business development purpose of the 8(a) program.
Why GAO Did This Study
Tribal firms—those owned by Alaska Native Corporations, Native Hawaiian Organizations, and Indian tribes—are afforded special advantages within the Small Business Administration’s (SBA) 8(a) business development program. GAO was asked to (1) identify trends in government 8(a) contracting with tribal firms; (2) determine why the government awarded sole-source contracts to tribal 8(a) firms and the methods used to make price determinations; (3) assess the procuring agencies’ oversight of contracts for compliance with subcontracting requirements; and (4)examine SBA’s new 8(a) regulation, intended to clarify program rules, to determine how the changes could affect oversight of tribal 8(a) firms. GAO reviewed non-generalizable samples of 87 contracts (based on dollar value and location) and 62 tribal 8(a) firms’ SBA files and spoke with SBA headquarters and district officials as well as officials from 9 agencies.
Recommendations
GAO recommends that the Office of Federal Procurement Policy (OFPP) amend acquisition regulations and provide guidance (including data collection) on monitoring the limits on subcontracting. OFPP generally agreed with the recommendations. GAOs recommendations also include that SBA include specific capabilities in its 8(a) database to improve tribal 8(a) tracking and that it examine tribal participation to determine whether certain practices align with the 8(a) programs business development goal. SBA questioned GAOs methodology, which GAO continues to believe is appropriate, but did not address GAOs recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
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| Office of Federal Procurement Policy | To improve oversight of the limitations on subcontracting clause and to clarify who has responsibility for monitoring compliance with the clause, the Administrator of the Office of Federal Procurement Policy, in consultation with the Administrator of SBA, should provide specific guidance (including data collection options) to agency officials, including to contracting officers, about how to monitor the extent of subcontracting under 8(a) contracts, including for orders under indefinite quantity contracts. |
The Office of Federal Procurement Policy (OFPP) agreed with the recommendation. In the years that we have followed up on this recommendation, OFPP has consistently responded that it is waiting for the Small Business Administration (SBA) to take steps to implement other provisions related to subcontracting before taking action. In November 2019, SBA issued a final rule to implement several provisions of the National Defense Authorization Acts (NDAA) for fiscal years 2016 and 2017, which confirmed that contracting officers have the authority to request information in connection with a contractor's compliance with limitations on subcontracting. In addition, the FAR Council is completing its work on FAR case 2016-011, Revision of Limitations on Subcontracting, which implements a provision in the NDAA for Fiscal Year 2013 pertaining to performance requirements applicable to small business and socioeconomic program set-aside contracts and small business subcontracting. In September 2020, OFPP told us that it would not initiate follow-on work to SBA's final rule prior to completion of this FAR case. We recognize that SBA's November 2019 final rule, while it did not fully implement our recommendation, helped draw attention to the issues we identified in our report. However, due to the amount of time that has passed since we made this recommendation and the lack of progress to fully implement it, we decided to close this recommendation as not implemented.
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| Office of Federal Procurement Policy | To improve oversight of the limitations on subcontracting clause and to clarify who has responsibility for monitoring compliance with the clause, the Administrator of the Office of Federal Procurement Policy, in consultation with the Administrator of SBA, should take actions to amend the Federal Acquisition Regulation (FAR) to (1) direct contracting officers at agencies that have been delegated responsibility for ensuring compliance with the limitations on subcontracting clause to document in the contract file the steps they have taken to ensure compliance and (2) clarify the percentage of work required by an 8(a) participant under indefinite quantity contracts. |
The Office of Federal Procurement Policy (OFPP) agreed with the recommendation. In the years that we have followed up on this recommendation, OFPP has consistently responded that it is waiting for the Small Business Administration (SBA) to take steps to implement other provisions related to subcontracting before taking action. In November 2019, SBA issued a final rule to implement several provisions of the National Defense Authorization Acts (NDAA) for fiscal years 2016 and 2017, which confirmed that contracting officers have the authority to request information in connection with a contractor's compliance with limitations on subcontracting. In addition, the FAR Council is completing its work on FAR case 2016-011, Revision of Limitations on Subcontracting, which implements a provision in the NDAA for Fiscal Year 2013 pertaining to performance requirements applicable to small business and socioeconomic program set-aside contracts and small business subcontracting. In September 2020, OFPP told us that it would not initiate follow-on work to SBA's final rule prior to completion of this FAR case. We recognize that SBA's November 2019 final rule, while it did not fully implement our recommendation, helped draw attention to the issues we identified in our report. However, due to the amount of time that has passed since we made this recommendation and the lack of progress to fully implement it, we decided to close this recommendation as not implemented.
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| Small Business Administration | To improve oversight of tribal firms' participation in the 8(a) program, the Administrator of SBA should, as the new 8(a) tracking database is being developed, take steps toensure that it has the capability to (1) provide visibility to district offices into all tribal 8(a) firms' activity by tribal entity to ensure compliance with new prohibition to award sole-source 8(a) follow-on contracts to sister subsidiaries; (2) track revenue from tribal 8(a) firms' primary and secondary industry codes to ensure that subsidiaries under the same parent company are not generating the majority of their revenue from the same primary industry; and (3) track information on 8(a) contracts and task or delivery orders,including orders awarded under basic ordering agreements, tohelp ensure that district officials have information necessary toenforce the 8(a) program regulations. |
The Small Business Administration (SBA) neither agreed nor disagreed with this recommendation. In June 2015, SBA officials told GAO that they will use a high risk model of random surveillance to track revenue in primary and secondary codes for entity-owned firms, such as tribal 8(a) firms. SBA will include this as a part of the continuing eligibility process, and will randomly select entity-owned firms and subsidiaries for the deep dive. As part of this effort, SBA will pull data from the Federal Procurement Data System to determine what industry codes the subsidiaries are earning revenues. SBA will look for firms generating revenue in another industry code that exceeds the revenue in their primary industry code when the revenue also aligns under the primary industry code of another subsidiary firm for two consecutive years. These firms will be notified of SBA's concern in writing during their continuing eligibility review to be vigilant to avoid further action by the SBA. In February 2016, SBA informed us that it had delayed plans for the random surveillance, and had taken steps in the interim to begin monitoring the revenue generated under a subsidiary's primary and secondary NAICS codes by tracking award obligations for all entity-owned firms in a spreadsheet. SBA officials told us that the spreadsheet is a stop gap measure until the database can be developed. In August 2018, SBA officials explained that at a conference in July 2018 for business opportunity specialists, the requirement to obtain the acquisition history for a procurement offered to the 8(a) program was emphasized, and SBA will continue to collect and closely review a requirement's acquisition history to enforce the regulations restricting the Agency's ability to accept a procurement for award as an 8(a) contract. SBA officials further pointed out that regulations promulgated in 2016 now allow SBA to change a firm's primary NAICS code if the greatest portion of a participant's revenues evolved from one NAICS code to another, which is reviewed annually for 8(a) participants. SBA officials also noted that they are testing an analytics tool that will allow them to track revenues for 8(a) participants owned by ANCs, Tribes, NHOs, and CDCs. The tool is currently being evaluated to determine whether it will provide district offices with the necessary capabilities to enforce the ownership and sole source follow-on contract restrictions applicable to entity-owned 8(a) participants. SBA estimates completion date for the evaluation and implementation of this system is December 31, 2018. All of the actions taken since we made this recommendation are positive steps toward increasing oversight of tribal 8(a) firms' participation in the 8(a) program, but do not fully implement this recommendation. Given the efforts to date and the time that has passed since we made the recommendation, we decided to close this recommendation as not implemented.
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| Small Business Administration | To improve oversight of tribal firms' participation in the 8(a) program, the Administrator of SBA should, in light of the new prohibition on awarding 8(a) sole-source follow-oncontracts to sister subsidiaries, reinforce to procuring agencies therequirement to provide the full acquisition history of the procurement in the offer letter, when available, and direct district office business development specialists to focus on this issue when they review offer letters for tribal 8(a) firms. |
In June 2015, SBA provided a copy of updated training materials used to train their Business Opportunity Specialists. The training materials emphasize the requirement that the agency provide the full acquisition history in their offer letter.
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| Small Business Administration | To improve oversight of tribal firms' participation in the 8(a) program, the Administrator of SBA should establish procedures to enforce new joint venture rules, including how SBA district officials will ascertain that the 8(a) partner performs the required percentage of the joint venture's work and, for populated jointventures, that the non-8(a) partner and its affiliates do not receivesubcontracts under the 8(a) contract. |
In June 2015, SBA provided a copy of the revised 8(a) annual update form (SBA form 1450), which is completed annually by all 8(a) firms. The revised form collects information on the amount of work performed by the 8(a) firm in a joint venture, and for populated joint ventures, confirms whether the non-8(a) firm and its affiliates received any subcontracts under the 8(a) contract. This new form establishes the procedures for district officials to enforce the new joint venture rules.
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| Small Business Administration | To improve oversight of tribal firms' participation in the 8(a) program, the Administrator of SBA should examine relationships between subsidiaries under tribal entities to determine whether practices such as subcontracting to a sister subsidiary or using the past performance of a sister subsidiary to show capability to perform on an 8(a) contract are in line with the business development purposes of the 8(a) program and should beallowed under program rules. If SBA determines that these practices are not in line with the 8(a) program purposes-and to the extent that Congress has not authorized a practice in law-SBA should address them in its regulations. |
In June 2015, SBA made a determination that these practices are not contrary to the 8(a) program purposes. SBA pointed out that currently, the practices of subcontracting to a sister subsidiary or using the past performance of a sister subsidiary to show capability to perform on an 8(a) contract are allowed by the program. SBA also noted that in updating the regulations in 2011 and submitting the regulations for continued comment, it has examined these relationships between subsidiaries under tribal entities and believes such practices are in line with the business development purposes of the 8(a) program. As part of the determination, SBA emphasized that per 121.103.(b)(3) - Business concerns owned and controlled by Indian Tribes, Alaska Native Corporations (ANCs) organized pursuant to the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq. ), Native Hawaiian Organizations (NHOs), Community Development Corporations (CDCs) authorized by 42 U.S.C. 9805, or wholly-owned entities of Indian Tribes, ANCs, NHOs, or CDCs are not considered affiliates of such entities. SBA also emphasized that pursuant to Section 602(s) of the Business Opportunity Development Reform Act of 1998. P.L. 101-656, tribal entities are allowed to have more than one company (subsidiary) in the 8(a) program at the same time and to be able to create new 8a) companies as others graduate from the program. Business concerns owned and controlled by tribal entities will not be found to be affiliated because of common management or ownership. In light of this determination, we closed this recommendation as implemented.
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| Small Business Administration | To improve oversight of tribal firms' participation in the 8(a) program, the Administrator of SBA should establish and communicate to Congress the time frame for developing and implementing SBA's new, planned policy regarding determination of substantial unfair competitive advantage in an industry, and when the policy will be incorporated into the regulations. |
SBA proposed a new rule regarding relating to Substantial Unfair Competitive Advantage Within an Industry Category as published in Federal Register on February 5, 2015. This proposed rule provides guidance as to how SBA will determine whether a firm has obtained or is likely to obtain a substantial unfair competitive advantage within an industry category, and includes information on how it defines industry category and what would constitute an unfair competitive advantage. For example, it states that SBA will consider a firm?s percentage share of the national market and other relevant factors to determine whether a firm is dominant in a specific six-digit NAICS code with a particular size standard. In July 2016, this rule was finalized. Therefore, we are closing this recommendation as implemented.
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